Covered Call Exchange Traded Funds
November 23rd, 2010 | Author: weissheiss
Selling covered calls on the stocks in your portfolio is a way to earn additional income. Many experts consider this strategy to be a low risk way to increase portfolio return.
However, options are complicated, much more so than they seem to be at first. Few people, even many experienced investors, don’t understand them fully. Besides, there are a huge number of possible options to choose from. You can sell in the money calls, close to the money calls and out of the money calls. You can sell them with expiration dates of tomorrow or three years in the future.
However, not all these options will produce the same return, and some are riskier than others. Therefore, many people prefer to have professionals implement this strategy on their behalf. They just don’t have the time, knowledge, confidence or willingness to implement their own covered call writing strategy.
When you write a covered call, you’re selling someone the right to buy 100 shares of that stock from you at a certain price (the strike) during a certain period (before the expiration date). Because you are selling something of value, you get paid some money from it. That money is called the premium.
If the stock’s market price never reaches the strike by the expiration date, you keep both the stock and the premium. That’s the ideal situation for a covered call writer, but life is not always ideal.
If the stock’s market price goes up to and past the strike price, then that stock will be sold out of your portfolio. You still kept the premium, and the sales price. Minus, of course, for the commission. This situation is not considered ideal, because you lost the difference between the actual market price and the strike price. But most covered call investors shrug their shoulders at this. They have still made a profit. And if they’d just bought and held the stock, they wouldn’t have realized the full profit anyway.
Exchange traded funds or ETFs are a form of closed-end mutual fund. Most of them follow some sort of index. Covered call writing ETFs are actively managed. That is, the fund managers are selecting which stocks to buy and which calls on those stocks to sell.
ETFs that somehow use covered calls to enhance their returns include:
BlackRock Global Opportunities Equity Trust (BOE), Dow 30 Premium & Dividend Fund (DPD),Eaton Vance Enhanced Equity Income Fund (EOI), Eaton Vance Enhanced Equity Income Fund (EOS), Eaton Vance Tax-Managed Buy-Write Income Fund (ETB), First Trust Fiduciary Asset Management Covered Call Fund (FFA), Gabelli Gold, Natural Resources and Income Trust (GGN), Fiduciary/Claymore Dynamic Equity Income Fund (HCE), ING Global Equity Dividend & Premium Fund (IGD), Nuveen Premium Equity Advantage Fund (JLA), Nuveen Premium Equity Income Fund (JPZ), Nuveen Premium Equity Opportunity Fund (JSN), Advent/Claymore Enahanced Growth & Income Fund (LCM), Madison/Claymore Covered Call Fund (MCN), Nicholas-Applegate International Premium & Strategy Fund (NAI), NFJ Dividend, Premium and Interest Strategy Fund (NFJ), and PImco Global Stocksplus & Income Fund (PGP).
These funds are different. Some sell covered calls on stocks in their portfolios. Some sell them on only a portion of their portfolio, some on their entire portfolios. Some of them sell only out of the money calls. Some also buy protective puts.
All of them pay monthly or quarterly dividends.
You should evaluate them several ways. First, what are their management fees? The lower a fund’s management fees, the higher its long term performance.
And how well does it track the Buy/Write Index (BMX)? BXM is the covered call index as calculated by the Chicago Board of Exchange.
Investors should also bear in mind that the option marketplace is extremely competitive. Making consistent profits without taking large risks is difficult even for professionals. And covered calls work better in some types of markets than others.
Posted in Exchange Traded Funds | 
Tags: Confidence, Covered Call Writing, Exchange Traded Funds, Portfolio Return, Risk, S Market, Selling Covered Calls, Stock