PowerShares BuyWrite ETF is a 'Volatility Smoother'?: A Response to Tom Lydon

Tom Lydon at ETF Trends is a friend of mine. So I can fire a congenial shot across his bow. (Right, Tee? No hard feelings!)

In a recent piece, Tom discusses the increasing popularity of covered call writing. More specifically, investors may hold a basket of stocks and generate income from option-writing premiums. 

Covered call writing in sanguine markets are as easy as picking up a rent check from a perfect tenant. When the markets are flat, or slightly higher, or slightly lower, you get to keep your basket of stocks AND collect an income stream.

Yet Tom went on to talk about the PowerShares BuyWrite Fund (PBP) as a "volatility smoother" during periods of flat or negative returns. Ostensibly, this is a period of negative returns, and PBP has lost 30% YTD. That's not the kind of volatility smoothing that most investors would like to sign on for.

In fact, if prices go negative enough, your basket of stocks fall in value too. And no amount of option premium income makes this nose-dive worthy for buying-n-holding.

So now's the time for me to be fair. Because, well, that's what friends are for.

Tom Lydon of ETF Trends never buys-n-holds. Tom doesn't recommend buying anything that falls below a 200-day moving average and he sells investments when they hit respective stop-losses. What's more, he manages the risk of participating in markets by purchasing when an investment climbs above a 50-day or 200-day trendline.

(Here's a feature on Tom's approach. It's an exceptionally worthy read!)

Indeed, the PowerShares BuyWrite Fund (PBP) may help you diversify and profit in quieter times. In crazy times, with volatility off the charts, the "buy-stocks, write options" approach is still fallible. That's why neither Tom nor I would hold it when it falls 8%-10% from its high; moreover, Tom would not buy the fund unless it at least climbs above its 50-day.

 

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