Pension Funds Taking A Page Out of Our Income Playbook
A few weeks ago I wrote about how pension funds could be in danger. The problem is that pension fund investment returns have been declining. And if returns don’t get better, these funds will run out of money to pay your retirement checks.
Well, this week I read a Wall Street Journal article about how pension funds are using a “new” strategy to boost returns.
Of course, if you’re a savvy income investor, you should already be using this strategy in your account.
Pension Funds Sell Puts for Income
According to the WSJ, some pension funds are now selling put contracts to capture extra income.
This is a good strategy which gives the funds up-front income, along with the possibility of buying stocks for a discount.
Remember, a put contract is simply an agreement between two traders. And when you sell a put contract, you’re agreeing to buy shares of stock at a discount price. Also, when you sell a put contract, you’re immediately paid for entering this agreement (and the payment is yours to keep no matter what).
Today, pension funds are selling puts on the entire S&P 500 index. This means that the funds are agreeing to buy the entire index (via futures contracts or other securities), if the S&P 500 drops below a certain level.
The trade makes sense for pension funds that are bullish on the overall market.
But pension funds are missing out on one key area of potential profits. By selling puts on the entire market, these funds are missing out on profit they could be making from individual stocks.
Taking This Strategy One Step Further
Selling put contracts is an excellent way to sock away extra income in your investment account.
But rather than make a bet on the entire market, you could do better by focusing on individual stocks that you would like to own.
For instance, consider Corrections Corp (CXW). CXW is a timely income opportunity I wrote about earlier this week.
Traditional investors might consider buying CXW at today’s price near $18.50. But if you use our put selling strategy, you could do much better.
Let’s say you like CXW and would be willing to buy shares at $17 (well below today’s $18.50 price point). Instead of buying shares of CXW, you could sell a put contract. The October $17 put contract is currently bid near $1.00 per share.
So if you sold put contracts, you could receive $1.00 per share (or $100 per contract) for your agreement to buy shares at $17.
If CXW trades higher, you’ll get to keep your $100. That’s a great outcome.
And if CXW trades lower (below $17), you’ll get to buy shares at a discount. Plus, you’ll still get to keep the $100 you received when selling your put contract.
Income for Today, Insurance for Tomorrow
I love selling puts because the strategy has two key benefits.
- Selling puts gives you immediate income today.
- And selling puts gives you a buffer in case stocks pull back.
Seasoned investors know that markets don’t always move higher. There are periods when stocks trade higher and times when stocks pull back.
Thankfully our put strategy helps to insure your investments during those periods when stocks trade lower. That’s because you receive income right away from your put contracts. The income can help to offset losses you might incur when stocks trade lower. Plus, since you’re only agreeing to buy shares at a discount price, you’re already ahead of buy and hold investors who paid market prices for their shares.
If you’re serious about your building your families income, you owe it to yourself to learn how to use this income strategy. It’s one of the best ways I know to collect income from stocks you want to own. And it’s a stable investment strategy that helps protect your wealth.