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Covered Call Writing Exchange-Traded Funds

As covered call writers we strive to generate monthly cash flow by selling call options in a conservative, low-risk environment. This approach is quite appealing to many retail investors but many look to fund managers to take advantage of this great strategy. As a result there are now 31 closed-end funds that use covered call writing in a majority of their portfolios. Closed-end funds (CEFs) raise a prescribed amount of capital ONE TIME via an IPO by issuing a fixed number of shares which are purchased by investors as stock. Mutual funds which have no restrictions on the number of shares issued are called open-end funds. A covered-call CEF buys stocks and sells call options on some of those shares with the goal in mind of boosting income.

Strike Prices:

Most covered call writers write calls which are at-the-money or slightly out-of-the money. The same holds true for covered-call funds. Typically, the strikes are 1-3% above current market value of the securities. As stated in my books and DVDs, this approach works well in most market conditions: moderately bullish, moderately bearish and neutral markets.

Underlying securities:

About half the covered-call funds write options on individual equities while the other half write on indexes that reflect their underlying holdings. Since premiums on individual equities are higher than those on indexes some funds will overwrite a smaller portion of their portfolios stocks leaving the larger portion open to greater share appreciation. Funds that sell index call options receive a lower premium return but allow shares to appreciate as much as possible. The fund may have to deliver the underlying index, if exercised, as shares are sold in these cases.

Analysis of covered-call funds:

There is a huge variation in the strategies of covered-call CEFs:

  • Domestic, foreign, or sector-specific
  • Dividend-focused or value-focused
  • Strike selection varies
  • Some use put options for protection
  • Expense ratios (administrative fees-these funds average about 1%)

Here is a list of the 31 covered-call CEFs that overwrite at least 50% of their portfolios showing the type of option used, strike preferences and percentage of portfolio overwrite (as per Morningstar):

Covered-call funds

Covered call funds allow the investor to take advantage of an income-accelerating strategy without having to do the due-diligence. However, as with most actively-managed funds, an educated, motivated retail investor can outperform them and the extra effort will be well rewarded… in the view of this investor. Historically, the “market” outperforms 70-80% of actively-managed funds. In the case of these covered-call CEFs, 81% (25 out of 31) underperformed the S&P 500 over the past year. Here are the out-performers as compared to a market increase of 5%:
  • ETV: + 11%
  • GPM: + 10%
  • JPZ: + 8.5%
  • JLA: + 8%
  • ETB: + 7.5%
  • JPG: + 7%

Alan and Linda at the ING Direct Cafe for last week’s seminar (notice the blue collar!):

A team effort!

Market tone:

This week’s economic reports reflected a recovery still on shaky ground:

  • Business inventory rose 0.4% in April due to increases in retail inventory levels
  • The inventory-to-sales ratio (measure of how many times a company’s inventory is sold and replaced in a given time frame) is maintaining a healthy level @ 1.26
  • The Producer Price Index (PPI) fell by 1.0% in May, more than the drop of 0.6% expected
  • Excluding food and energy, the PPI rose 0.2% in May matching April’s increase
  • Retail sales fell 0.2% in May, the 2nd consecutive monthly decline
  • The Consumer Price Index, a measure of inflation, fell 0.3% in May mainly due to the steep decline in the energy index as gas prices fell. Inflation concerns seem to be calmed in the near term
  • Industrial production declined by 0.1% in May as a rise of 0.1% was anticipated
  • Initial jobless claims for the week ending 6-9-12 came in at 386,000 higher than the 375,000 expected

For the week, the S&P 500 rose by 1.3% for a year-to-date return of 7.9%, including dividends.

A 6-month chart of the S&P 500 shows the index moving above its 200-d simple moving average in early June and approaching its 50-d SMA:

Recent bullish chart of S&P 500

The VIX (CBOE Volatility Index) or investor fear gauge, shows a 6-month range (between 12-26) currently resides at 21.11. Although this is an acceptable level, the wild ride the VIX has been in of late is no friend of covered call writers:

VIX as of 6-15-12
IBD: Confirmed uptrend
BCI: Cautiously bullish on our economy and stock market. Concerns remain about news out of Europe this weekend, high unemployment and news out of the FOMC policy meeting on Wednesday. As a result, this site remains fully invested but favoring a higher percentage of  in-the-money strikes as we focus in on the July contracts.
My best to all,


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

22 Responses to “Covered Call Writing Exchange-Traded Funds”

  1. Peter June 16, 2012 7:26 am #


    What do you think about selling options on the six “outperformers” you listed in the article?


    • Alan Ellman June 16, 2012 9:19 am #


      Good thought but these funds do not have options associated with them.


  2. Steve Z June 16, 2012 11:11 am #

    Alan, interesting blog. I was unaware of the CEFs. Most people write about the ETF/ETN combo of PBP & BWV. I’m curious why you narrowed the article to CEFs and excluded their more well known cousins?

    Also, I noticed the top 5 over the past year were the only ones that were 100% options. Probably implies that in different market conditions different ones of these funds would outperform the market.

    I also saw that their returns are kind of like REITs, i.e., it’s all about the dividends and not about price appreciation. Given almost all of them pay over a 9% dividend and one is as high as 15%, dividend/income investors might find these interesting.


    • Alan Ellman June 17, 2012 9:30 am #


      Many of my articles are the result of member inquiry or suggestion. In the past two months I’ve had three members ask about CC CEFs as an alternative to self-writing. Although I am not a proponent of this strategy it may be appropriate for some members and so I wrote this week’s articles. As far as their “ETF cousins” and extended family members like leveraged ETF funds, perhaps a future follow-up article will be apprpriate. In the interim, let’s view a comparison chart of the S&P 500 along with PBP and BWV over the past 6 months. With the overall market up 11%, these cc ETFs have under-performed. In a down market we would probably see the reverse. My firm belief is that a cc writer who has mastered this strategy can achieve far greater results through stock and strike selection and exit strategy execution. This is our advantage over the CEFs and ETFs. Click on the chart to enlarge and use the back arrow to return to this blog.

      Thanks for the comment.


  3. Barry Bergman June 16, 2012 6:39 pm #

    Premium Members,

    The Weekly Report for 06-15-12 has been uploaded to the Premium Member website and is available for download.


    Barry and The BCI Team

  4. Phil June 17, 2012 6:22 am #


    Is there a way of computing the amount of a dividend distribution from the % dividend yield column in our weekly stock report?


    • Alan Ellman June 17, 2012 11:23 am #


      Yes. The column on our Premium Stock Report and Watch List titled “% Dividend Yield” represents an ANNUAL yield based on current market price. For example, DLR shows a yield of 3.90. That becomes an annual cash yield of $2.88 per share ($74.04 x 3.9%). Since most dividends are distributed quarterly, the amount is $0.72 per quarter. If the time value of the option premium is MORE than $0.72, there is little or no chance of early exercise the day before the ex-dividend date. Here’s how to get ex-dividend date info:

      Free site for ex-dividend dates:

      • type in stock ticker

      • get quote

      • key statistics on left

      • ex-dividend dates on lower right if applicable

      • additional tickers can be entered on right side for more ex-dividend dates.


  5. Alan Ellman June 17, 2012 9:05 pm #

    Strike price selection:

    This week’s stock list has several securities with multiple strike price choices that offer a minimum of a 1-month, 2-4% return or higher. The spreadsheet below shows three such equities where I highlighted as follows:

    Yellow: excellent downside protection of the option profit.

    Green: excellent upside potential share appreciation

    Purple: excellent initial return on the option (time value only)

    Click on the chart to enlarge and use the back arrow to return to this blog.


  6. Alan Ellman June 18, 2012 6:16 am #

    Running list stocks in the news: MLNX:

    On April 18th, MLNX reported a steller 1st quarter earnings report with earnings beating estimates by 88.9%. Revenues rose 61.1% year-over-year and operating margin expanded to 17.6% from 8.8% a year ago. Analyst estimates for 2012 and 2013 increased by 71.6% and 47% respectively. Share value of MLNX has outpaced such peer giants as Intel, Broadcom and Qlogic. Below is a chart showing recent POSITIVE earnings surprises. Click on chart to enlarge and use the back arrow to return to this blog.


  7. Paige June 18, 2012 3:19 pm #


    Would you consider a one month return of 1.5% acceptable if it also came with a large downside protection of greater than 8%? I’m a new premium member and find this very exciting.Thanks for all you do.


    • Alan Ellman June 19, 2012 12:34 pm #


      Welcome to our BCI community!

      This would be absolutely acceptable to a conservative investor with low risk-tolerance and most appropriate in bearish or volatile market conditions. For me, my goal is to generate a minimum of a 2%, initial 1-month return. For others that figure may be more or less. It won’t take you long to find your comfort level.


  8. Alan Ellman June 19, 2012 12:49 pm #

    Interesting trade:

    Here is a trade made by a BCI member that is the opposite type of trade discussed by Paige in # 7 above. Thus far the trade I am about to show you is working our great:

    6-15-12: Buy ARNA @ $8.39

    6-15-12: Sell July $9 call @ $1.42

    ROO = 16.9%

    Upside potential = 7.3%

    Possible 1-month return = 24.2%

    These stats tell us that there is HUGE implied volatility in the premium which means the market is anticipating a large price movement by expiration Friday (in either direction). The first event we think of is the earnings report. So I checked and found it to be 8-8-12, after expiration of the July contracts. I told the member my thoughts and added “somethings up”. He repsonded that the company is expecting final FDA approval of an anti-obesity drug. That makes sense. This is a high-risk trade that so far is working out. As I type these words, ARNA is trading at $10.26. The current 24.2%, 1-month return is protected by 12.3% ($1.26/$10.26). If negative news comes out prior to expiration Friday, that can change. In these scenarios, look for the time value of the premium to approach zero. If that happens, unwind the total position and use the cash to enter a new position (see pages 264-271 of “Encyclopedia…”). See the Ellman Calculator spreadsheet at the bottom for this trade. Click on image to enlarge and use the back arrow to return to this blog.


  9. Alan Ellman June 19, 2012 4:58 pm #

    Forex and Options Trading Expo: September 13th-15th:

    Here is the list of speakers who will be joining me at the Paris Hotel in Las Vegas. My presentationj is scheduled for Friday September 14th @ 4:30:

    Hope to see you there.


  10. Debbie June 20, 2012 7:47 am #

    When I check the postions in my brokerage account the options I sold appear as a debit. Shouldn’t it be a credit as I received a cash premium? Thanks for clarifying this.


    • Alan Ellman June 20, 2012 3:13 pm #


      The “activity” page of your brokerage will show a debit for the short open option position because there is a chance you will buy it back. The cash balance section, however, will show a credit and the cash is available for trading.


    • owencpa June 21, 2012 3:36 pm #


      Do what I do. Think of the quantity numbers as assets and liabilities (easy for me as a CPA). Think like your bank accounts. Cash account ( a positive number) is an asset you own. Credit card (a liability you owe) is a liability.

      The stock you bought will show a positive number for the quantity. You OWN it. it is an asset. The option quantitiy is a negative number. You OWE them 1 contract, a liability.

      As Alan noted you still have the cash you received as an asset. What you hope for is that the stock gets called, you get that cash back, too, and you no longer “owe” the broker a call option.

  11. Alan Ellman June 21, 2012 5:52 am #

    Running list stocks in the news: PETM:

    On May 22nd, PETM released its 1st quarter earnings report with earnings up 39% from the prior year, a 16.4% beat. Sales rose 9.4% also beating estimates. Operating income was up 26.8% in that time frame. PETM also recently announced an 18% increase in its quarterly dividend and a new $525 million share buyback program. The company has also collaborated with Martha Stewart to launch new lines of pet products. Management has raised guidance as have analysts. PETM has a trailing 12-month ROE of 27.6% well above its peer group average of 17.4%. Our premium running list shows an industry segment rank of “A”, a beta of 0.87 and a dividend yield of 0.80%.


  12. Alan Ellman June 21, 2012 3:24 pm #

    Premium members:

    This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site.

    For your convenience, here is the link to login to the premium site:

    Not a premium member? Check out this link:

    Alan and the BCI team

  13. Ron June 22, 2012 2:07 am #


    I see for the past few months you have been favoring in the money strike prices but curious in a bull market if you prefer at the moiney or out of the money options. Thank you.


    • Alan Ellman June 22, 2012 10:07 am #


      I consider out-of-the-money strikes the most bullish and aggressive of the strike choices. They will generate the highest returns if called but have the highest breakeven points. Check out this week’s blog article for more information on this topic.


  14. Amy June 22, 2012 6:33 am #


    What do you think of these CEFs as investments in general compared to mutual funds?


    • Alan Ellman June 22, 2012 10:14 am #


      CEFs is not my area of expertise but I can guide you as to what to look for. Most CEFs specialize in bonds so you must understand the bond market in these cases. The share price can also fluctuate above and below net asset value (NAV) so most who use these securities look to get a fund currently “on sale” or below NAV. Ask why are they trading below NAV! Many use leverage as the ones discussed in this week’s article so you should know something about the management team. Finally, many of these funds trade on very low volume so liquidity and trading executions should be evaluated before entering into these investment vehicles. You should be fully educated before you invest even one penny of your hard-earned money in any security including these.


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