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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



Dobson Covered Call Fund


Kelmoore Investment

, utilize options with varying degrees of success, but none execute the strategy as systematically as the BXM.

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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.

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.

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.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.