Covered Calls and Red Sox

Not much to talk about today in the market. The major indices are all up slightly with about 30 minutes to go. Marsh McClennan and Minnie Mining are getting hit. I read an interesting article on The Street Dot Com by Steve Smith about closed end funds that index to the S+P 500 buy-write index.

For space sake, I will assume you know about selling covered calls, if not click here. I have read studies that say selling covered call options increases returns and I have read studies that say the opposite. There is no shortage of places to get good insight about this type of trade.

I sell calls occasionally in my money management practice, but not too often. I have known some advisors that sells calls on every stock they own. I don't think this is the best way to go. If you have a properly diversified portfolio with 30-40 stocks you should expect that some of them will skyrocket and some will not. If you sell calls on one that does go way up you will hurt your overall return.

My goal in selling options, I believe, is unique and may be a good way to think about the strategy, or maybe not that is up to you. This year we have had a flat stock market. No doubt you have heard someone smart predict that the market will be range bound for the next 10 years or so. While I don't think anyone can predict what a stock market will do for that length of time, they could be right. If that is the case, dividends will play a large role in your total return. If the S+P 500 is up only 2% this year, a portfolio structured to yield 3% will go a long way to helping you outperform. I use covered calls in an effort to gain an extra 1% for the portfolio over the course of the year, kind of like sneaking in a few extra dividends. I only need a few option trades per year to achieve this goal. If the market lifts dramatically, a portfolio with only a few calls written will capture almost all of the effect.

As for the funds, which are First Trust Fiduciary Asset Management Covered Call Fund (FFA) and the Madison/Claymore Covered Call Fund (MCN), they seem very interesting. According to Yahoo Finance MCN has 7.9% yield and FFA has no yield although I suspect that is due to the newness of the fund. If the market stays range bound these funds should outperform. My first thought is that I would not want to have my entire portfolio in something I know will lag that next time we have a 2003-like rally but as one of several tools for an account that has less than $100,000 it may makes sense. I plan to watch these for a while to make a final judgment. At this point I think the funds do merit some study.

Now the Red Sox. Holy cow! I have to admit I have been shocked at some of the decisions manager Terry Francona has made, like if Schilling was hurt why did he pitch in game one, but I have come to expect strange things from the Sox in October. Some writer had a great line about the Red Sox several years ago. He said, as a man close to 60 years old, "the Red Sox killed my father and now they are coming after me." Such is the plight of being a fan. I have come to expect the worst and hope for the best. That way I don't get too upset when they leave Pedro in too long. Speaking of Pedro, does anyone think he has anything left? The bullpen is so over used that he has to be able to go a long way today for them to have a realistic chance. Pass the pepto!