Institutional funds such as endowments and foundations as well as tax exempt entities and retirement plans have increasingly embraced “Buy Write” strategies from managers that incorporate the usage of options in recent years in their
investment portfolios.
A typical “buy write” strategy involves the purchase of an equity position and then selling, or “writing” a covered call against this long position to earn premium income. The desired effect is to add incremental returns to the portfolio above simply owning the long equity position “naked,” through the call sales and also the portfolio should theoretically be able to weather more downside with less “damage” as the call premium earned contributes to lower break even “entry prices” on the initial equity purchases, and thus lower the overall volatility characteristics of one’s portfolio. [ETF Spotlight: Buy Write]
We would expect then as institutions are becoming more comfortable with such managed strategies such as buy writes that incorporate options, that ETFs that deliver similar strategies will also catch on. PowerShares S&P 500 Buy Write Portfolio (NYSEArca: PBP) debuted at the end of 2007 and tracks the CBOE S&P 500 Buy Write Index. [Buy Write ETFs Mimic Covered Call Strategy]
The methodology incorporates the purchase of a long position that is indexed to the S&P 500 along with the sale of one month, at the money or slightly out of the money calls in the S&P 500 Index. Thus, the call sales are “covered” and not naked, and this strategy is commonly known as a “buy write.”
The iPath CBOE S&P 500 Buy Write Index ETN (NYSEArca: BWV) is a similar product, but unlike PBP it is in ETN form. [These ETFs May Protect You in Down Markets]
Year to date, with the S&P 500 Index up 9.63%, PBP has returned 4.58% and BWV has rallied 3.58%. Neither product trades a ton of volume on a daily basis, with PBP averaging about 91,000 shares daily while BWV trades less than 2,000 shares per day, but liquidity is present in both funds due to the nature of the underlying securities (S&P 500 Index and related call options) in order to allow for sizable transactions on either side of the market.
PowerShares S&P 500 Buy Write Portfolio
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