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Covered Calls Move Closer to the Masses

Covered-call strategies have always been one of the best known and most popular methods of investing with options. But despite its straightforward, conservative and compelling approach to investing, the use of covered calls still occupies a somewhat marginal space in the massive money management universe.

Now, the Chicago Board Options Exchange has granted a license to Rampart Investment Management to market managed accounts based on the CBOE's BuyWrite Index, or BXM, meaning covered-call writing will be gaining some high-profile exposure. While Rampart is the first firm to be officially licensed, the agreement isn't exclusive and should pave the way for a broader product roll out.

"Having a third-party benchmark, especially with the pedigree and expertise of the CBOE, is crucial in introducing a product," says Ron Egalka, Rampart's president and CEO. The BXM was created by the CBOE in April 2002, but provides market data going back to June 1,1988.

Earlier this month,'s Dagen McDowell profiled one fund that uses options to generate income, remove volatility and smooth out returns. Other mutual funds, such as Gateway, Dobson Covered Call Fund and Kelmoore Investment, utilize options with varying degrees of success, but none execute the strategy as systematically as the BXM.

The BXM is based on selling the near-term, near-the-money S&P 500 (SPX) call against the S&P 500. The call is held until expiration, with a new one-month call being written on the third Friday of the month. Since SPX options are cash settled, being assigned an in-the-money call won't result in your long S&P 500 portfolio position being called away.

The table below compares the annualized returns of the BXM and the S&P 500. The returns are based on a reinvestment of both stocks dividends paid and option premium collected.

Comparing Performance
Annualized BXM returns vs. the S&P 500
Period BXM S&P 500
Y-T-D ended 4/17/03 3.9% 1.1%
1 year ended 12/31/02 (7.64%) (22.09%)
3 years ended 12/31/02 (4.04%) (14.54%)
5 years ended 12/31/02 4.95% (0.58%)
6/88-12/31/02 12.02% 11.10%
Source: CBOE. Returns include reinvested dividends.

The performance of the BXM illustrates some important points. As a purely passive investment program, it has produced superior returns while simultaneously reducing the risk by one-third, according to a study by Rampart. I have nothing against active money managers, but I think this highlights the fact that many times a successful investment strategy rests on the discipline to not deviate from the defined program.
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