Covered Calls Move Closer to the Masses

Unfortunately, both professionals and individuals let emotion and short-term action lead them astray. This may come in the form of adjusting strikes and expirations or using puts to offset existing positions. A general notion in option trading is that adjustments are usually done for defensive reasons and convolute the initial investment thesis.

The BXM, by eliminating the stock-picking and market-timing elements of investing, drives home the strengths and weaknesses of covered-call writing. It also should help clarify expectations and remove second-guessing. (Note: In no way am I suggesting that 100% of your equity portfolio be covered calls. Understand that while the strategy is passive in the sense that it requires no qualitative research or decisions, it can be somewhat labor-intensive because of the necessary tracking and writing calls every month.)

The bigger obstacle to individuals will be in the replication of the BXM. This would entail assembling a portfolio to match the S&P 500 and adjusting the number of calls needed to be sold as the value of the index fluctuates, which can lead to increased costs in the form of trading fees.

That may be why Rampart intends to initially market its BXM Strategy managed accounts to institutional investors such as pension funds, foundations and endowments. But with nearly $4 trillion in investments benchmarked to the S&P 500 index, IRAs, 401(k)s and individual accounts are fertile areas for future consideration, says Rampart's Egalka.

While there are some arguments to be made for having a professional handle the transactions, tracking and accounting, the BXM shows covered calls can effectively be used by anyone. And you can bet that the CBOE, though declining to officially comment, would love to offer an exchange-traded fund-type product based on the BXM that would allow individuals to invest in a low-cost, one-stop covered-call program.

Given the track record of the BXM and the universal success of ETFs, I think this type of product, if we see it, could be a winner.