Covered Call ETF’sAs we have seen, the covered call is an options strategy in which an investor holds a long position in an asset, then sells call options against the same asset in order to generate income. Most people interested in using a covered-call program pick their own stocks and sell calls against them. Once you get over the initial learning curve, paper-trade for awhile, and become familiar with them, this type of trading becomes a relatively easy technique to master. For some people, however, this can be too much work. Fortunately, there is an alternative available in certain exchange-traded funds (ETF’s). Many mutual funds and ETF’s augment their total return by selling calls against their holdings. A few ETF’s are available that exist solely to engage in a covered-call program. Two of the more popular and purer examples of these are: PowerShares S&P 500 BuyWrite Portfolio (PBP), and PowerShares Nasdaq 100 BuyWrite Portfolio (PQBW). The PBP ETF tracks the CBOE S&P 500 BuyWrite Index, which implements a call-writing strategy on the S&P 500 index. The PQBW ETF is similar except it writes calls against the Nasdaq 100 index. Keep in mind that if you do choose to use these ETF's, you will pay an expense ratio (0.75% at last check), which can significantly reduce the income received from call premium. Also, remember that some types of markets, particularly slowly rising or stagnant markets, are well-suited to covered calls and these ETF’s should do relatively well. On the other hand, in a bear market, these ETF’s may perform rather poorly.
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