For those who are familiar with writing covered calls, keep reading because if you’ve ever wanted to implement a disciplined covered call writing strategy you can do so with a new ETF that was launched in December.
If you are not familiar with covered calls (or the basics of options) then I *strongly* recommend you take a look at a series of guest posts I wrote for The Million Dollar Journey. Read the series by clicking here – then come back and read the rest of this post.
First, allow me to point you to the BXM – the BuyWrite Index on the S&P500. This index tracks holding the S&P500 index and writing a monthly call option on the index in perpetuity. Blindly writing covered calls like this trades a bit of upside potential for reduced portfolio volatility and some downside protection. For example, here is the performance and standard deviation data from June 1988 to December 2004 – just over 17 years:
S&P500 Index Annualized Return: 12.1%
S&P500 Index Standard Deviation: 14.6%
S&P500 BuyWrite Index Annualized Return: 12.2%
S&P500 BuyWrite Index Standard Deviation: 9.8%
For that data set, the return was basically the same as the underlying index (the S&P500) with dramatically reduced volatility. Click here for more information on the index.
But wait, there’s more!
Powershares is offering an Exchange Traded Fund that tracks the S&P500 BuyWrite Index. The ticker symbol is PBP and it trades on the NYSE Arca. Note that the MER is 0.75% (which is on the high side for ETF’s), but consider that instead of just buying securities, they do have the cost of selling the covered calls. So there will be some drag over the actual index performance, but the reduction in portfolio volatility might make that an acceptable tradeoff for many investors… Click here for information on the Powershares BuyWrite Portfolio.
If you like this blog, you might like my book:
RRSPs: The Definitive Book on Registered Retirement Savings Plans