The global economy is holding onto most of its 2010 gains. Favorable conditions should provide support for the U.S. equity market in particular as we head into 2011.
According to the strategists at the Stutland Volatility Group, between the Fed and the expectation that the new Congress will be more business-friendly than the previous one, conditions should provide support for the U.S. economy — still the engine of much global output and demand — as we move into next year. The extension of the Bush-era tax cuts may only be the first step.
Stutland considers a buy/write strategy on the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) as a possible play on the blue-chip end of the U.S. market based on these conditions.
For example, an investor could buy 100 shares of the DIA for $114.89 and write (sell) a March $117 call for $2.28. This trade allows the investor to collect $2.28 or 2% on the sale of the call at March expiration while participating in the current trend.
If the ETF trades above $117 at March expiration, the investor is called away from the trade and the realized gain would be $4.39 or 3.8%.
This trade also lowers the break-even point on the purchase of the ETF to $112.61, thus reducing the investor’s overall downside risk.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.