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Calm before the Storm ?

Last few weeks have been pretty calm with many folks enjoying their 50% gains with summer vacations just before the school starts. It is almost exact replica of last year's August. But then dreaded Sept 08 came when the whole financial (and along with that real) world around us turned upside-down starting with Fannie/Freddie takeover and Lehman BK. I am not predicting that coming Sept would be anywhere close to last year's events but it is very likely that volatility is going to increase significantly. Currently VIX index (also called as wall street fear gauge) is hovering around 25 which is very close to its yearly low. I call it as "Calm before the Storm". Most likely it would touch 40s sometime in Sept/Oct. So how do one makes some money from this volatility ? There are few ways:
  • Just stay away from market and cash in the gains you may have made in last 5 months since not losing money is equivalent to making money:-)
  • Sell "out-of-money" covered calls for Sept/Oct so you could make some money in form of premium (when market goes down) or gains when these calls become "in-money" in case market goes up
  • But dividend paying preferred shares of companies which you know are going to survive - there is much less volatility in preferred shares and you would get your dividends in Sept/Oct
  • Buy VIX ETF (VXX) at around $58. When VIX shoots up, this ETF would gain. Be cautious about this ETF since this is not a long-term investment. When ETF reaches above $80 or so, you should cash out the gains
  • Buy dividend paying REIT such as Pennsylvania REIT (PEI). This is my stock of week recommendation at $5.80 to $6. This is REIT in retail/mall sector and has unbroken record of paying dividends for last 129 quarters. At 60 cents per year dividend, it has yield of about 10%.
So one has multiple options to face this potential upcoming storm - choose wisely depending on your risk tolerance.

Now coming to my year-end forecast for DOW - it would close above 9500 and most likely would cross 10000.

Have a good weekend !

/Shyam

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