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CHOOSING THE "WRITE" CALL
Choosing which call to write is the most important part of any coveredcall strategy. Because there are so many choices, covered callstrategies usually differ wildly from one trader to the next. Sometraders opt to write long-term calls in order to eliminate the hassleof rolling their positions every month.  

Others choose to write significantly out-of-the-money calls in order tomaximize the upside potential of their portfolio. Still others chooseto write at-the-money calls, drastically limiting their upsidepotential but maximizing their time decay.

The BXM utilizes the latterapproach, and it raised more than a few eyebrows in the optionsindustry. By choosing time decay and downside protection over capitalappreciation, many thought that the CBOE had hamstrung their newproduct.

These doubts were eased when Ibbotson & Associates released a studythat found the BXM actually outperformed the S&P 500 in the periodfrom 1988-2004. This same study found that the BXM achieved its returnswith only two-thirds of the volatility of the S&P 500.

ìThisstrategy is meant to reduce risk,î says Moran. ìThe Ibbotson study,along with the long-term track record of the BXM, back that up. TheBuyWrite strategy, over the long term, should actually lower youroverall portfolio volatility.î

KEEP IT SIMPLE, STUPID
Perhaps the BXMís most intriguing benefit for buyside traders is itsinherent simplicity. Traders who write covered calls against their ownportfolios have to deal with a number of headaches. First, they have toendure the hassle of managing their underlying positions. Then, theyhave to go through the lengthy process of selecting the month, strikeand price of the calls that they wish to write.

Finally, when theircalls are set to expire, they have to relinquish their underlying or gothrough the aggravation of rolling their calls to another month. Itís adifficult and time-consuming process that many financial professionals simply choose toavoid.

However, since the BXM replicates the returns from owning the S&P500 index and writing at-the-money calls against it, it takes all ofthe hassle out of executing a covered call strategy. In fact, itís so simplethat you donít even have to own the underlying.

ìThe simplicity of thisproduct is its key selling point,î says Moran. ìIf you like the idea ofwriting covered calls, but you donít want to mess around with theunderlying or anything else, this packaged product can be veryappealing. You donít have to worry about rolling your calls or evendealing with the hassle of expiration.î

BXM IN THE WILD
The BXM is not available on any options exchange. Instead, it has beenlicensed to a number of different brokerage firms. In turn, these firmshave created their own products that replicate the strategy of the BXM.

So far, the most popular BuyWrite products are closed-end funds andstructured notes. There are currently over thirty closed-end funds andstructured notes indexed to the BuyWrite products. Most of theseproducts are identical, although a few incorporate interesting tweakssuch as tax minimization strategies.

SPINOFFS
The high time decay and relatively low volatility of covered callindexes has made them particularly appealing in todayísever-fluctuating market. Attempting to capitalize on this popularity,the CBOE also launched two companion products to the BXM last year. TheBXD replicates writing covered calls on the Dow Jones IndustrialAverage and BXN replicates writing covered calls on the NASDAQ 100Index.

Although these products are relatively new, they have already begun toattract the attention of a new class of customer - yield hungrytraders.

ìMany funds and retail brokers are now offering our buy-writeproducts as an alternative for yield-conscious investors,î says Moran.ìThe yield of the BXM, in terms of options premium, has averaged about1.6% per month. That is nearly 20% per year, which is a very attractiveyield for investors. On the BXN, you have even higher yields due to thehigher volatility in the NASDAQ market. The yields in that product haveaveraged about three percent per month.î"

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