S&P Covered Call Fund Likes Life On Wild Side

For buy-and-hold investors, the trend is your friend. For options traders, volatility is your friend.

Options sellers such as the S&P 500 Covered Call Fund (BEP) like turbulent markets because they're able to profit from it.

"High levels of volatility allow option income funds to shine because they can bring in higher levels of options premiums when they're selling puts and calls in the marketplace," said Bryan Perry. He manages $22 million in assets for the Alexander Perry Corp. in Reston, Va.

Option premiums, or the price of the contract, become more expensive in volatile markets because of the greater levels of risk.

Options give buyers the right, but not the obligation, to buy or sell a stock or ETF at a given price up to a certain date.

THE RIGHT TO BUY

For example, on Tuesday it cost $2.75 for an April 139 call on the Spdrs, (SPY) the S&P 500 index ETF. It was trading at $138.65.

That means the buyer pays the seller $2.75 a share for the right, but not the obligation, to buy Spdr for $139 a share up until the day the contact expires, which is always the third Friday of the month.

The call seller receives $2.65 a share, due to the spread, and he is obligated to sell Spdr at $139 at any time until expiration. The seller keeps the premium, no matter what.

That's basically what the S&P 500 Covered Call Fund fund does every month.

The closed-end fund owns the stocks in the index. Then it collects money from selling option premiums on the S&P 500 index every month. This strategy translates into a 9.8% annual dividend, in addition to any gain in value of the S&P 500.

"If you're selling options, then they're bringing in higher levels of income than (you) would in a dull market," Perry said.

ENHANCED FUND

IQ Investment Advisors, a subsidiary of Merrill Lynch, which developed the fund, also offers the Enhanced S&P 500 Covered Call Fund. (BEO) It offers a slightly higher yield of 10.7%. The dividends are distributed twice a year in June and December.

The main difference between the regular and enhanced is that the latter enters into swap contracts on the CBOE S&P 500 BuyWrite index. That's too complicated to explain here.

In the past 12 months, S&P 500 Covered Call returned 17% vs. 6% for the Spdr. And year to date, S&P 500 Covered Call is up 6%, while the Spdr is down 2%.

The Enhanced S&P 500 Covered Call Fund rose 12% in the past 12 months as of Tuesday. It's flat for the year.

The two funds have both found support at the 10-week moving average. The S&P 500, on the other hand, has broken below that key support line on heavy volume.

Contact: Darlene March - 949-975-1858, ext. 260
Email: darlene@changewave.com