Covered Calls for the Long Run

To be fair, it's important to note that the BXM's returns do not include any fees or transaction costs, both of which can be quite high for active funds, which must roll option positions on a monthly basis. As a frictionless or cost-free index, the BXM has about 1.5% per-year performance advantage over a real-world replication.

More Choice, More Decisions

Individuals can always try to replicate the BXM or covered-call strategy on their own by using S&P 500 Trust(SPY Quote) and its related options, for example. But costs in terms of both time and fees might result in inferior returns. It might be wise to consider some professionally managed funds. Just three years ago there were less than a handful of funds that fell into "covered-call" category, but there has been a veritable surge over the last year. Expanded choices mean one has to do more homework to understand the true cost and nature of each product, in order to determine which best meets your objectives.

A few longstanding covered-call funds include the (GATEX Quote)Gateway Covered Call fund, the (BRBPX Quote)Bridgeway Balanced fund and the (KSLAX Quote)Kelmoore Liberty fund. Each uses covered calls to a varying degree, but none tries to mimic the BXM. In fact, there are important distinctions, such as dividend distributions and focus of investments. Examples of deviations include the fact that Bridgeway keeps 25% of assets in fixed income, and the Kelmoore fund holds many tech names that may not be part of the S&P 500.

Recently, the CBOE has been aggressively marketing the BXM as a licensed benchmark, and that has spawned some new investment products. Shortly after the Ibbotson study was published, two closed-end funds benchmarked to the BXM were launched and met with great demand. The Madison Claymore Covered Call Fund (MCN Quote) fund raised $260 million, and in August, the First Trust/Fiduciary Asset Management Covered Call Fund (FFA Quote) fund raised $338 million. These are closed-end funds, meaning they will not be accepting new investors or even new money from existing investors. But one can buy (and sell) stakes in their publicly-traded shares.