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File this under "News to Me" (as I'm not sure if this stuff is common knowledge in the options community)

I just found out that there are ETFs that use an option index approach. The idea is that you buy the S&P 500 and then sell covered calls. Here are two sites that talk about it (granted, they're trying to sell the index).

http://www.cboe.com/micro/bxm/Callan_CBOE.pdf

http://www.cboe.com/micro/bxm/introduction.aspx

According to the data, you get the same (or better) performance with 2/3 the volatility. Interesing idea... Even if you disreguard the MPT idea that a big component of risk is volatility, portfolio volatility is a drag on performance.

I could only find two ETFs that track these indexes, BEP and BEO. Both trade at a premium to NAV, but that can change quickly. The big problem with them is the 1% expense ratio. When I did some math a while back about the effects of volatility on portfolio performance, it seemed that the overall risk was about 1.5% on a standard "agressive" MPT alloaction if you held the end point constant (ie, start with X and end with Y modulate volatility of returns and compare required annualized performance). That was based on Bernstein's Intelligent Asset Allocation, but I might be misinterpreting.

In any case, I'm posting here because I'm curious to know what you think of the approach? Is it worth the expense ratio? Has it been debunked by the community or is it yet to catch on?

My own take is that it is not worth the expense (as it would provide only a 0.4% advantage over a Vanguard ETF before taxes), but if there were lower cost vehicle out there it could be compelling. A do it yourself approach is not possible, as SPY trades for around $145 a share and would allow for appropriate diversification of writes.

Thanks,

Dave
Who is still reading McMillan
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