Buying Buy Write Closed End Funds Right

Over the last few years (say 2) new closed end funds have popped up, featuring what appears to be an organized way to scalp call option premiums and earn some wopping, juicey, outsized, almost TGTBT yields. By scalping call option premiums, I mean that these "Buy-Write" funds invest in securities, and then sell call options that offer a way of collecting rent on their holdings. Apart from their great yields, they are exchange traded, offer diversification and unlike ETF, active management.

The premium offers downside protection offsetting a loss in the event of a stock's decline; it offers free rent if the stock stays put, not moving either way up to options experation day; and it offers an additional bump beyond the take out price if the stock is called away at a strike price that is higher than the purchase price. If the stocks are bought at a discount (which is not unheard of when a manager steps in to VWAP 300,000 shares), and call write premiums are sold on days when the stock enjoys higher days. While this could be more of an imagined method than how they skin the cat, it looks like there is a method to their high yield deal madness.

Sure, it's an old options trader's trick, but these are new products and the question remains whether they can keep kicking off out sized yields in all market conditions (if premiums reel in, then one imagines that the rent on their holdings won't stay high for long). So when looking at these fund's manager, the Butch and Sundance test are in order, wherein the investor continues to ask him or herself, "who are those guys?"

These closed end fund have been rolled out by some of the biggest investment management marketing machines on earth, including new jacks Blackstone and Blackrock (Merrill, Lunch), Fiduciary/Claymore, Madison, Madison/Claymore, and old salt Eaton Vance, all still "Made in the USA", as well as those managers that are now owned by giant, overseas (European) parent companies (Insurance), including Pimco, Nicholas Appelgate, and ING. The yields on these Buy-Write Strategy funds appear to range from the very high 7%s to over 10%.

And now, the symbols, with yields as of today, and Bollinger Band Rating (B+ for a what looks like a buy nearing the bottom of its trading range; B for a reversion to a mean, back "in the middle"; and B- for ripe, nearing a top of its trading range):

• BEP--10.60%, B
  
• PGP--7.80, B-
  
• RCC--10.40%,B
  
• NAI--31.80%, B+
  
• NFJ-- N/A
  
• MCN--8.80%, B-
  
• MSP--8.80%, B-
  
• IGD--8.80%, B
  
• FFA--8.70%, B
  
• HCE--8.80%, B
  
• BEO--N/A
• ETW-9.10%, B-
  
• ETV--9.50%, B-
  
• ETB--8.70%, B-
  
• EOS--8.50%, B-
  
• EOI--8.00%, B-
  
• DPD--8.60%, B-
  
• BWC--7.80%, B
  
• BDJ--8.10%, B-
  
• ECV--10.60%, B
  
• EEF--10.10%, B+
  

These option trading, arb funds hold the promise of large returns, while the sun shines. The question remains, what happens when the premiums on the calls they sell are less bloated? (Do your Due)

There are High Yield Municipal Funds, and Then There is Boston's Colonial Outfit-- CXE

Colonial High Income Municipal Trust, or CXE is a closed end municipal bond fund that is currently kicking off over 10%, which is looking fairly TGTBT*. That's 10 percent-- BEFORE TAXES, making the tax equivalent yield, well... pretty absurd, like one of Bill Gate's giant dividends for the faithful. Except, CXE pays monthly, for you fans of compounding interest.

It's trading at a -2% discount to it's Net Asset Value (NAV). It's leverage is 37.16 right now, which offers additional bang for the buck, but not more than seems right.

It's summary is as follows:

• Colonial High Income Municipal Trust is a diversified, closed-end, management investment company. Co.'s investment goal is to provide high current income, generally exempt from federal income taxes. Co.'s secondary investment goal is to seek total return. As of Nov 30 2003, Co. had total assets of $327,187,015 and an investment portfolio of $320,292,808.

You'll find a fact sheet, as of November 06, about the fund in slow acting .pdf file form on the website of its manager (Columbia Management, a unit of Bank of America), here

It shows an pretty even breakdown of AAA (22%), BBB (23%) and Non-rated paper (33%), which may be a little less funky than you'd think for a fund yielding so much. It's holdings are about 80 percent uninsured. And duration looks to be split down the middle. .However, it's holdings are not on the fact sheet.

It's been around since 1989, is managed by CFA, Maureen Newman; and has some major institutional holders of small bits and pieces.

We're still trying to fully understand why CXE is offering its free lunch, but the technicals appear attractive right now, as the Dow rallies, with Goldman pumping the Dow transports, perhaps in an effort to help "show" follow-through. CXE's MACD, which is a measure of moving averages for various time frames and how they meet and diverge, indicates the begining of a bullshit trend.

So, if you are taking some profits off the table from last year for the tax advantages of waiting until after the 1st, CXE could just be a good place to part the cash until something else comes along. But stay tuned (did we mention that we are still trying to find CXE's holdings listed somewhere online).


*TGTBT is short for "To Good To Be True", and is a service mark of Theyieldhoe.com.