Bond are offering nice yields for the first time in years. This options strategy could lead to even better returns.
Many investors are delighted to earn 5% or more in their money-market funds or short-term government bonds. Even the 10-year Treasury bond is yielding around 4.3%.
Here’s the plan: Put 80% or 90% of your cash into bonds and the remainder into whatever interest-bearing account your broker allows to be used to finance options strategies. You then will sell puts on a blue-chip stock worthy of long-term ownership. The upshot: Investors can benefit from attractive fixed-income yields while monetizing the rising fear-premiums in put options. The bulk of an investor’s money is invested in bonds, and money that is needed to finance cash-secured put sales is also in an account that pays attractive interest rates. The put premium is gravy.
We have seen, again and again, that stocks do not like 10-year yields of 4% or higher. At that level, yields disrupt popular valuation models used to value multiyear earnings.
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