Barron's wrote about the prospect of yields going down and offered a couple of very standard ideas including a 2 star global bond fund. And on a related note, Bloomberg covered the success that PIMCO has had this year making a very good call on yield curve steepening leading to a strong 2025 up to this point.
In terms of looking for yield, one of the comments (always read the comments) suggested selling put options. Selling puts is a bullish strategy where the person buying the put is protecting against or betting on a decline in the price of the underlying and the put seller wins the trade if the underlying doesn't drop below the strike price of the put. Winning in this context is getting to keep the premium without having the put assigned forcing the put seller to buy the stock at the strike price.
If a stock is trading around $310 and a two month put struck at $270 is sold for $2.87, the seller keeps the $2.87 as long as the stock stays above $270. The multiplier on all of this is 100. One option controls 100 shares so the strike price is 100 shares at $270 so $27,000 worth of stock potentially and the option premium taken in would be $2870.
Those numbers are JP Morgan (JPM) common stock and a put struck at $270 that expires on November 21. The reason I picked JPM as an example is that over the long term it has looked like the stock market so I am on the lookout for whether the stock has a lot of seriously negative divergences versus the market. In early 2005, the S&P 500 was going higher and JPM took a real turn lower. That was the only incidence I can find of a meaningful divergence. However, the stock very consistently goes down a lot more than the S&P 500 when the index turns down. So maybe anytime the market catches a cold, JPM tends to catch pneumonia and there have been a few instances where the index caught a cold and JPM caught tuberculosis.
Sticking with our example, selling a put would mean segregating enough cash to buy the 100 shares for each put sold. So there would need to be at least $27,000 in the money market to pay for the stock if assigned so the $2870 in premium could be thought of as the return. $2870/$27,000 is 10.6% for the two months. If, and it's a big if, that trade can be repeated six times, two months six times equals one year, and the return is compelling of course. If that is too close to the money, a lower struck put could be sold instead, the November $260 was bid at $1.93 late Friday for a two month return of 7.14%.
If between now and November 21, the stock crashes or the index crashes (expecting JPM would feel a crash worse), the put seller would be paying $270 per share for a stock that might be trading at $240 or $250 or whatever. Not a riskless trade by any means but reasonably a differentiated return.
There are funds that sell index puts targeting different types of outcomes that we've looked at many times before.
YSPY is a crazy high yielder on track to yield 50%. WTPI from WisdomTree used to be PUTW and it yields about 11% and looks similar to the types of covered call funds that are not crazy high yielders. Client and personal holding PPFIX as you can see is very absolute return-ish only selling puts very far out of the money. The yield is a round 4%, so similar to T-bills but is differentiated, and there might be some price appreciation along the way too.
The price only PPFIX has had the highest CAGR in the very short time sampled, the tortoise/hare analogy might fit here. The erosion to YSPY, the chart goes back to its inception, has been swift. At some point I'm sure it will reverse split. The index it tracks isn't going to zero so it won't go to zero but the percentage drop could resemble some of the VIX products. That could be fine for some sort of drawdown or depletion strategy but this is not one to misunderstand.
Back to the PIMCO trade about yield curve dynamics, great for them they got that right, there is some differentiation in doing that but that is not one I would ever attempt with client money, it seems like a binary bet akin to guessing what interest rates will do.
One of the other comments suggested closed end funds for yield. Yes there is yield there but there is also volatility.
Copilot says that for the last ten years, JPC's yield has averaged between 7-8%. Yahoo shows the yield now at 9.67%. It had 7and 8% yields back when treasury yields were sub-100 basis points so that much of a spread over riskless T-bills tells you there is risk and/or volatility. Again, according to Copilot the characterizations of the distributions has been mostly actual yield but there have been some periods where ROC was kind of high.
Looking at the backtest stats, the price only CAGR has only been a decline of 91 basis points, that's not so bad in exchange for that yield but...
...the drawdowns have been brutal. FWIW, the volatility profile is much lower than YieldMax funds or other crazy high yielders but JPC doesn't "yield" 50% either.
I haven't used CEFs for clients in ages but I am not dismissive of them. I think the volatility potential calls for small allocations for anyone interested. A small slice can create disproportionately high income to a portfolio and like with other very yieldy products, a normal allocation to equities has a good chance of more than overcoming any price erosion.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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