Difficult Times for The Income Investor
Let's face it. These are crazy times. The global economy has fallen off a cliff with the Corona Virus pandemic. As I write this, official unemployment is running around 12%, while real life unemployment - counting the severely underemployed gig economy workers - is probably far higher. The airlines have lost 90% of their business, probably for at least a year. Cruise lines are decimated and retail stores countrywide are reeling. The Fed has added $3.5 Trillion in debt since January, or 25% of GDP! This has literally doubled the Fed's debt in less than 1 year. In the process, the Fed has literally bankrolled any public corporation with a pulse, viability be damned. Before this crisis hit, the number of zombie companies was hovering right around 20%. Who knows how high that count is today?
Yet the stock market is trading close to all time highs, with the Nasdaq surpassing all time highs. Apparently, new small investors have opened brokerage accounts by the millions and have powered marketed to unheard of price-earnings fueled by pure Fed-induced "hopium". More and more real time hedge managers are holding their noses and investing based on Fear Of Missing Out...
If you are a conservative investor, you really don't like the miserable returns you can find on muni-bonds, long term treasuries or investment-grade corporate bonds. Given the enormous money printing of the Fed, you're right to think that that could eventually result in much higher inflation, which would decimate those bond investments.
"Milk The Cow" - An Options-Based Solution
There are a few paths that make sense, but the most attractive I have found I have labeled my "Milk The Cow" strategy. The analogy is to a dairy farmer who has to spend a few thousand to buy a decent milk producing cow, but then gets a secure and steady stream of income from the 3 gallons of milk it can produce a day for many years thereafter. In this strategy, my upfront investment in the "cow" is the purchase of a long term call option and a long term put option. These give me the set number of contracts at the strike price I determine, and conversely to sell the same number of contracts at the strike price I determine, for a period of at least one year.