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  • gatesofstone gatesofstone Aug 8, 2009 3:29 PM Flag

    Question re: covered call funds

    I own DPO and several other covered call funds. I just bought these earlier this year, but plan to hold all of them long-term for the income.

    For those with a longer history in covered call funds than I; in a bull market, do you think the call-writing feature of the fund might hold it back, so that the NAV appreciation would underperform an equity fund with no covered call-writing? Or does a fund like DPO tend to go up just as much, and follow the DJIA despite this? Thanks.

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    • LINE has been paying quarterly and has not missed a payment; next one is due in November.

      I don't know much about BBEP, but it appears, although the yield is high, that they have not paid the distribution since early this year. That's probably why it is priced so low.

    • I actually bot LINE after I had owned TYN for about 3 months. I saw that component acting so well I couldn't resist it. It's been up about 50pc since. Course so has TYN, with no K1 hassles. Have you ever looked at BBEP. Seth Klarman cleared out of LINE a few months back and bot it at about 7. He is pretty smart. I assume they will reinstate the dividend soon.

    • I agree that they've had a good run, and wish I had bought those 3 funds you mentioned earlier instead of the individual MLP's.

      Instead I bought FMO a few months ago, and back in the fall some individual MLP's (LINE, EPD, ETP, NRGY, KMP.) Was not that much fun at tax time, although I can't complain about my gain in LINE. And NRGY is as stable as a rock.

    • I employ a covered call strategy, using both deep in the money and out of the money calls. This conservative strategy is yielding results of about 10% better than SPY performance since March 6th. As of 6/30/09 DPO seems to be using out of the money calls on all of its positions, which can yield a 20-30% annual return. That return is less than the S&P 500 return since March 9th. In a super strong market, like the one we are experiencing, out of the money calls will likely result in assignments that tend to limit performance. In a normal up trending market, the covered call strategy will usually result in a nice income cash flow as described above. However, in a down market the strategy fails, causing unrealized losses and dependence on dividends. Deep in the money calls during a down market will produce some income from the calls, but a continued unrealized loss on the underlying stocks.

      • 3 Replies to beta_7727
      • Others I know who write covered calls on the indexes say the same thing; the income is very good. A retired guy I know is doing this on the leveraged ETF's and says he is making a lot of money.

        For a non-pro like myself, what do you think is the best way to learn how to write covered calls? I'd be interested in trying it (slowly and carefully.)

      • I'm assuming that the DOW will experience a Fib. retraction of 33% to 50% from it's present value and it's lows of 6000+. So assuming I'm right, a correct in mid 8,000 or so might be the next bottom.

        How will DPO fare if this scenario works out?

        My guess and I invite response, since I'm new here, is that a 1500 point retraction might lead to a $10. or so PPS.

        Since a big part of their business is writing covered calls and profiting on the premiums left on the table, can they reverse course and take advantage the other way, if they see the market has formed an intermediat term top?

        The chart of DPO seems, as it should, to mirror the DOW 30. If I think that we're in for an October surprise to the downside at what PPS would anyone here suggest?

        I've put in a long term bid at $10.10.

        I'm figuring a lot of the "good" news of a bottoming has already come out and that there's a lot of people wanting to either take profits or reduce losses in the next month or so.

        Any responses would be greatly appreciated.

      • It is best to load these funds into Clear Station
        or MSN tracking portfolio and see how they do.

        I did quite a while ago and they did not do so well.

        ROC ia not good as it shows strategy is failing and
        fund is selling capital to keep dividend to keep you.

    • I am curious as to what other funds you hold, as I am interested as well. Yes I also would like to HOLD for the long term.

      • 1 Reply to renegade426
      • Most of my covered call funds are with Eaton Vance. ETW is a "buy-write" fund which writes covered calls on all or almost all of the portfolio. My other options CEF's are similar to DPO in that they write call options on about half the portfolio; EOS, ETY, and EXG. ETV is another good buy-write fund, similar to ETW. Most of mine distribute quarterly, but you may prefer the monthly payers like EOS and EOI. They are all described in detail on Eaton Vance's site in the fact sheets.

        For international exposure I own BGY and for preferred stocks, I own BTZ. Both of these have an option strategy on part of the portfolio as well.

        Due to the complex accounting for options strategies, much of options income is characterized as "return of capital." A buy-write fund like ETW or ETV will have a lot of the income characterized as ROC.

    • That is a hard question to answer but I will try. These funds do best when the market goes up slowley with little volatility. If it goes up a lot then their stocks are called and their respective appreciation is eliminated on those called issues. Hence NAV will lag the market significantley.