Arnold Solof
Investing in PBP can provide modest returns in a flat, rising, or even slightly declining market. PBP is the symbol for the Powershares (by Invesco) S&P 500 BuyWrite Portfolio ETF. They classify it as an “Alternative – Hedged Equity”. So for those unfamiliar with stock options, let me explain how this works.
First of all, an ETF is an Exchange Traded Fund. It is something like a mutual fund. It includes a basket of individual investments, stocks, bonds, etc. , depending on the purpose/strategy of the particular ETF. This is like a mutual fund, except ETF’s trade like stocks; you can buy and sell shares of them during the regular stock trading sessions, not having to wait for the close of day for a buy or sell order to transact.
The Buy/Write strategy consists of buying shares of a stock and selling a call option on those shares at the same time.
A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. When you sell the call option, the buyer of that option pays you for it. The money is yours to pocket at that time. If the stock doesn’t rise, the owner of the call option generally will not use it and it will “time out” / expire. You keep the money. If the stock goes up and the option buyer calls in the stock , in addition to the money you made selling the call option (premium), you make a profit (The difference between the price you paid for the stock and the “strike price” specified in the call option you sold.
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