Successful trading is built on discipline and rules. That means following through on a stated plan, not leaving a job half-finished or letting things slide. With that in mind, I'd like to use this weekend's column to further discuss some subjects that have generated a steady stream of interest over the past few months.

BXM

Questions and comments abounded regarding covered calls and my recent column discussing the Chicago Board of Options Exchange's licensing of its BuyWrite Index, or BXM. Many readers wondered about ways to replicate the BXM. Here's an example:

Why wouldn't simply buying S&P Spyders (SPY) and selling near-the-money covered calls be an equivalent yet easy-to-implement vehicle for individuals?

The first thing you need to be aware of is there are no options on the Spyders. So in order to use this method to replicate the performance of the BXM, you would need to make the calculations necessary for adjusting the number of S&P 500 options sold to correlate with the number of long Spyders you hold.

Basically, the value ratio of the Spyders to the S&P 500 is 1:10. That means that for every 100 Spyder shares, you should only sell one-tenth of one S&P 500 call. This could prove problematic for anyone holding anything less than 1,000 shares of Spyders. Even then, the relative commissions involved in selling a single call each month would adversly impact your overall returns.

Another alternative might be to use an optionable proxy for the S&P 500 index. The iShares S&P 100 ( OEF) is an exchange-traded fund representing the S&P 100 index. The current price level is a very economical $47, and its options market is fairly liquid. The correlation between the S&P 500 and S&P 100 is tight enough that you should be able to generate comparable results. But again, this strategy will require constant monitoring and adjusting of the position, which can be both costly and labor intensive.

Unless you have the market savvy, capital and time, this endeavor might be better left to a professional money manager or a fund that uses the covered-call strategy. This brings us back to the real point of the article -- that the BXM (which isn't a fund but an index) provides a valuable benchmark to help separate the good funds from the bad.

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