Buy Write Funds

Buy-write strategies are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. They are also subject to the risks associated with writing (selling) call options, which limits the opportunity to profit from an increase in the market value of stocks in exchange for up-front cash at the time of selling the call option. In a rising market, the strategy could significantly underperform the market, and the options strategies may not fully protect it against declines in the value of the market. There may be additional risks that are not currently foreseen or considered.

buy write funds

The CBOE S&P 500 2% OTM BuyWrite Index (BXY) is a benchmark index designed to track the performance of a hypothetical 2% out-of-the-money buywrite strategy on the S&P 500 Index. The BXY is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) a near-term S&P 500 Index (SPXSM) "covered" call option, generally on the third Friday of each month. Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

These products seem appropriate for investors seeking high levels of income and a hedged exposure to large-cap U.S. equities. It is worth noting that the funds will lag significantly during a booming period but will be an appealing pick during flat or declining market conditions, especially for investors seeking extra income in a volatile environment.

The PowerShares S&P 500 BuyWrite Portfolio (NYSE Arca: PBP) writes at-the-money calls on its portfolio of S&P 500 securities. Launched in 2007, PBP is well established with $308 million in assets and an average daily volume of 109,000 shares.

First Trust Advisors runs two actively managed buy-write portfolios, one geared to maximize income, the other designed to minimize volatility. The First Trust High Income ETF (Nasdaq: FTHI) relies on a universe of large-cap stocks paying high dividends to underlie its call writing and rewards its investors with an attractive total return and dividend yield. The cost for this is higher risk, reflected in all three metrics: drawdown, VaR and M-squared.

A sibling fund, the First Trust Low Beta ETF (Nasdaq: FTLB) writes calls on the same portfolio as FTHI, but also buys put options to reduce volatility. The put premiums create a drag on performance, reducing both total return and dividend yield, but pay off with lower drawdowns and VaR compared to FTHI.

A fund[1] that writes puts rather than calls is a standout, but not in a good way. The ALPS US Equity High Volatility Put Write ETF (NYSE Arca: HVPW) selectively sells out-of-the-money puts on high-volatility large-cap stocks, aiming to maximize income. HVPW succeeds on that front. Its dividend yield is high, but volatility torpedoes the fund on a total return basis. HVPW, in fact, is the only ETF surveyed that produced a negative total return over the past two years.

Call-writing funds more often than not compensate for their relatively low returns with high dividends, making up for losses incurred over the past two years. Most of the funds, too, mute market volatility, providing higher risk-adjusted returns.

Investors looking for high levels of current income and hedged exposure to the equity market might very well find call writing funds attractive alternatives in a flat-to-slightly bearish market. If, however, an investor or advisor believes stocks are poised for another sustained upward surge, less costly and mechanically simpler exposures are more suitable.

One of the more popular income strategies is to use a buy-write option strategy to sell option premiums for income. This is simply owning 100 or more shares of stock, and selling a one covered call option per 100 shares of stock. While many investors use this strategy in their portfolios, others invest in closed-end funds that use this strategy and distribute the proceeds to shareholders. This is a great strategy in specific type of markets, such as sideway movements in the general stock markets. The biggest myth to this strategy is that covered call writing does not work and the CEFs are only returning the investors' capital disguised as distributions. This is incorrect, as return of capital by CEFs is based on accounting definitions when using option strategies like covered call trades.

Sustainability Characteristics provide investors with specific non-traditional metrics. Alongside other metrics and information, these enable investors to evaluate funds on certain environmental, social and governance characteristics. Sustainability Characteristics do not provide an indication of current or future performance nor do they represent the potential risk and reward profile of a fund. They are provided for transparency and for information purposes only. Sustainability Characteristics should not be considered solely or in isolation, but instead are one type of information that investors may wish to consider when assessing a fund. Learn more

iShares unlocks opportunity across markets to meet the evolving needs of investors. With more than twenty years of experience and a global line-up of 1,250+ ETFs, iShares continues to drive progress for the financial industry. iShares funds are powered by the expert portfolio and risk management of BlackRock.

These are managed distribution closed end funds that all now trade at a discount. The expense ratios vary from 66bp to 100bp, which may sound almost resonable if the funds did indeed perform as "expected" based on the white papers listed above.

Malkiel and Xu created a CEF equal weighted index and then studied the persistence of the discount. Here we have a shorter history, but it would be interesting to look at an index made of the funds listed above. Here we are at a net premium, and one suspects that the premium will go away.

The when the VIX is high you get a larger price for the call options that you write, so ceteres paribus, a Buy-Write strategy will have higher returns when the VIX is high. Right now (Feb 9, 2007) the VIX is near a historical low. This is interesting. First, the emergence of these funds has increased the supply of Calls, and perhaps this has led to the decline in the VIX that we have seen over the last two years. Second, these funds were engineered when the VIX was high, so it may well be that the realized returns to the Buy-Write will be less ex-post than it was estimated to be ex-ante. I don't see my way to a hypothesis that I know how to test, but this is an amusing speculation that I think one might be able to model.

Time of Last Trade. Trading of Global X funds generally takes place during normal trading hours (9:30 a.m. to 4:00 p.m. eastern time). However, it is important to note that the last trade - from which the closing price is determined - may not occur at exactly 4:00 p.m. eastern time. Therefore, changing market sentiment during the time difference may cause the NAV to deviate from the closing price.

International Holdings. The premiums and discounts for funds with significant holdings in international markets may be less accurate due to the different closing times of various international markets. Because the Funds trade during U.S. market hours while the underlying securities may not, the time lapse between the markets can result in differences between the NAV and the trading price.

XYLD engages in options trading. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset, in this case U.S. common equities, and writing a call option on that same asset with the goal of realizing additional income from the option premium. XYLD writes covered call index options on the S&P 500 Index. By selling covered call options, the fund limits its opportunity to profit from an increase in the price of the underlying index above the exercise price, but continues to bear the risk of a decline in the index. A liquid market may not exist for options held by the fund. While the fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below the indices current market price.

A "Buy-Write" strategy generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also writes covered call options that correspond to the stock or basket of stocks.

A - 7. Here is a three-part answer to this question: In March 2002 the Cboe began disseminating BXM prices as a general indication of a hypothetical S&P 500 buy-write strategy.The Cboe does not provide specific recommendations for investment funds, but interested investors might explore the possibility of doing some research on the returns and risks of investment funds that engage in covered call writing for at least a portion of their investment portfolios. Reports indicate that there now are investment products designed to track the BXM Index, including a structured product, closed-end fund, exchange-traded note (ETN), and exchange traded fund (ETF). Experienced investors also could ask their brokers about the possibility of directly engaging in an S&P 500 buy-write strategy by investing in stocks and SPX options. 041b061a72