The Best Investment In The World Today?
- The site Philosophical Economics recently set out to determine the best way to invest $1 million today
- Bonds, real estate and stocks all failed to hold up to scrutiny
- After exploring all the potential options, selling covered calls is the best option
The site Philosophical Economics recently set out to answer the question that every investor is constantly asking: where is the best place to put my money right now? Philosophical Economics’ anonymous author explored several possible options before describing what he or she sees as the best investment today.
According to the author, the risk/reward related to Treasuries and high-yield corporate bonds is not particularly attractive at the moment. “Does the potential return that you might earn in a neutral or bearish economic scenario—say a 2% coupon plus a small gain from roll and possibly from falling rates—adequately compensate for that risk? No.”
While the author does believe that the post-crisis digestion in the U.S. housing market has made it one of the most attractive global markets right now, it’s difficult to find pure-play fixed income exposure to this market. Residential mortgage-backed securities (RMBS) offer lackluster pricing, and mortgage REITs’ extreme leverage is troublesome heading into a Fed tightening cycle.
Philisophical Economics believes that investors should not take comfort in the modest pullback on the S&P 500 in recent weeks. Consensus earnings estimates for the S&P 500 have fallen from $136 one year ago to only $111 at the present time. The author sees no reason why the index itself shouldn’t mirror that 20 percent decline.
After exploring all the options, the Philosophical Economics reveals that selling deep in the money covered calls is the best way to go in the current environment. Here’s what the author would do with $1 million:
“You take the $1,000,000 in the IRA and sell 60 September 2016 $SPY call contracts at Friday’s closing bid price of 33.55, simultaneously buying 6,000 shares of the $SPY ETF at Friday’s closing ask price of 192.59. If the S&P remains above 1650 at expiration, the calls will be executed, your shares will be sold away, and your one-year return will be 6.05%, or $60,500.”
The author adds that the risk to this strategy is any potential downside to the S&P 500 below 1650.
Disclosure: the author holds no position in the stocks mentioned.
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