A Better ETF Solution for Call-Writing Funds
The recent listing of the PowerShares S&P 500 Buy Write Portfolio (PBP) reminded me of how much of a nerd I am -- who else could get excited about the launch of another call-writing fund?
The reason I'm so thrilled is that, while call-writing strategies have been available for a while through closed-end funds and more recently through an exchange-traded note, this is the first time one has been offered through an exchange-traded fund. PBP has the potential to overcome some of the downside to investing in a "buy-write" strategy through those other investment vehicles. Buy write is a strategy that involves buying a stock and selling call options, which are rights to buy that stock at a predetermined price. The upside can be smoother returns, as the income generated by selling call options can help offset declines in any portfolio holdings. This is especially helpful in a down or flat market. The downside is that the strategy should lag when the market is up a lot and you are forced to sell stocks at below-market prices. For example the CBOE Buy Write Index (BXM), which is PBP's benchmark, lagged the S&P 500 by 9% in 2003.| A Smoother Ride A strategy's advantages |
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