A friend was lamenting about the difficulty he was having getting “look through” information on closed end funds and ETFs, specifically bond funds, and calling into his online brokerage firm for help didn’t yield much better results. Closed end funds not necessarily being transparent isn’t news and while I am surprised he had the same difficulty with ETFs. Perception is reality so perhaps he perceived a lack of information for the ETFs he was interested in.
A few weeks ago, Barron’s ETF column was titled Finding the Best Alternative ETFs with the context being what would help if both stocks and bonds crashed. One strategy the author liked in this scenario was funds that sell puts. Selling puts, if you’re worried about a crash is one of the worst things you can do… again, if you are worried about a large decline.
The best example of why this is, comes from the tech wreck. For a while, the options market appeared to be giving money away, you could sell a semi-deep out of the money put on a $300 stock and easily bring in a couple of thousand dollars. This worked for a time and then the crash came and put sellers were paying $250 for stock trading at $80 on their way to much lower prices. That’s permanent impairment of capital, Holmes. While I don’t expect that scenario to come around again (I don’t rule it out entirely) it paints a clear example of the risks inherent in the strategy. The time to sell puts would be after a crash not after the second longest bull market of the last hundred years.
I can only conclude that the author did not realize that put selling does not insulate from a crash, even if a 2001 redux is unlikely.
Long time readers might recall I am a big believer in alternatives (when I first started writing about them that term wasn’t in vogue and I called them diversifiers) but the Barron’s article is a great example of maybe not understanding what a given strategy can or cannot do for you.
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