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6. Reminiscences of a Convertible Operat... > Buying (Most) Bonds Is Like Selling ...

Buying (Most) Bonds Is Like Selling Puts...

Before we get back to my little narrative, let’s use this principle of selling options as a winning trade in a directionless market. What other trades do well in directionless markets?

Not stocks, certainly not stocks that don’t pay dividends. It’s true that in an environment where interest rates are low, you don’t really give up that much if your stocks go nowhere. But you don’t buy stocks to have them go nowhere.

Bonds are different. Buying a traditional bond is really a lot like selling an option. Most people don’t realize this, but it’s true. Bonds don’t have the upside of stocks. Basically, you buy them with the hope of collecting solid income for a period of time and then getting your original investment back. If you buy an out-of-favor bond, or buy bonds in a depressed market, you can make some nice capital gains as well, but the basic idea is generating income and the return of capital. If things go really wrong, you can lose a lot more than you stood to make.


  

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