Buy-Write: The Index, The Funds, The Analytics

The purpose of this page is to collect resources that will be useful for projects that explore the statistical features of investment strategies that use covered calls. Some questions for potential projects are collected at the bottom.

Characteristics of Buy-Write Strategies

Passive Options-based Investment Strategies: The Case of the CBOE S&P 500 Buy Write Index (Barry Feldman and Dhruv Roy)

Characteristics of the Buy Write Strategy On The Russell 2000 Index (Nikunj Kapadia and Edward Szado),

Closed End Funds That Implement Buy-Wirte Strategies

S&P 500 Covered Call Fund (BEP)

A Merrill vetted CEF that aims to track the BXM (so in essence it is 100% long SP500 and 1-month ATM calls are written on a rolling basis against the full long position). Naturally, the prospectus provides some wiggle room.

SP&500 Covered Call Fund (SEC Filings)

First Trust/Fiduciary Asset Management Covered Call Fund  (FFA)

ING Global Equity Dividend & Premium Opportunity Fund (IGD)

Nuveen has several funds that implement Buy-Write strategies in various flavors. (JPZ, JSN, JLA, and JPG) . We'll look at JPZ in some more detail.

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.

Madison/Claymore Covered Call Fund  (MCN)

NFJ Dividend, Interest & Premium Strategy Fund (NFJ)

NJF is managed by PEMCO, a firm with a strong institutional following. It also has a rational distribution policy (rather than a "managed" one). As a reward for being 'good guys', this fund is one of the only Buy-Write CEFs that is now trading at a discount to NAV. No good deed goes unpunished.

Questions for Projects

These CEFs are all reasonably recent. This is good news and bad news. It is good news in that new instruments (like the NJ Pick Three) will sometimes have interesting nuances. It is bad news in that we just barely have enough data to have our tools come into play. We'll have to rely in part on our good sense and barehanded EDA as much as on anything else. Anyway, here are some questions that can get you started.

Up-volatility vs Down-volatility

The assets of a fund like BEP are designed so that when the SP500 goes up, the assets of BEP go up --- but not as much. Also, when the SP500 goes down, BEP should go down --- but not as much. At the simplest level this is just he story of "beta" less than one, but the advisors pitch is that you get "85% of the up-side" and just "65% of the downside." Is this true when we look at daily returns, weekly returns, monthly returns?

Malkiel and Xu --- Their Story in This Context

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 VIX and Buy-Write Funds

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.


Related Material: Managed Distributions, Etc.

Closed End Fund Association's Explanation of "Managed Distribution Policies." (e.g. the Nuveen "trick"). There is a case for managed distributions if you find discounts to NAV to be a problem (which fund managers seem to do).

If you use the "interactive" version of BigCharts you can see the ex-dividend dates clearly marked. This is very instructive when applied to the CEFs given below.

Don't forget the modeling piece by Malkiel and Xu. It also provides a literature review that recalls all of the conventional wisdom about CEF empirics, though its main focus is on the time series dynamics of the discount to the NAV.


Navigation: 956 Home Page or Steele's Home Page or Some (not quite random) 956 Page