More Options on Covered Calls

This means the funds contain an element of market-timing or specific stock selection, which can lead to either outperformance or underperformance over any given time period or particular trading environment. Despite low option premiums, the current environment of range-bound trading is well suited for using a buy-write strategy in a portion of your portfolio.

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. Last month, I discussed using covered calls on core holdings as a means to secure profits or set price targets on particular stocks within a portfolio. But remember that this can be both labor-intensive, as it requires not only a considerable amount of time in selecting covered-call candidates but also maintaining and adjusting the positions. That, in turn, can lead to significant cost in the form of trading commissions and tax considerations. It would be a huge undertaking for an individual to replicate the BXM.

The recent launching of closed-end funds gives investors the ability to integrate the income, stability and reduced volatility of covered-call writing into their overall portfolio without incurring the monthly costs, in terms of both dollars and time, associated with maintaining an ongoing buy-write program in multiple names. Still, the above-mentioned funds do have higher costs than many traditional mutual funds; Madison Claymore charges an annual fee of 1% and First Trust's fee is 1.22% of assets under management.

And you can bet that the CBOE, though declining to officially comment, or some other financial firm such as Barclays or Standard & Poor's, 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, would prove a winner for both the issuer and investor.

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