New Buy-Write Mutual Fund Aims to Outperform BXM Index

IRON funds buy write

The CBOE S&P 500 Buy-Write Index (“BXM”) is a benchmark designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. So-called “buy-write” strategies involve buying a stock or portfolio of stocks (in the case of the BXM, it is the S&P 500 Index itself), and “writing” (or selling) call options on those securities.

The objective of BXM and all buy-write strategies is to generate attractive risk-adjusted returns with lower volatility and less tail risk than long-only equity investments by generating income from the sale of call options. This isn’t a free trade however, as the seller of a call option caps the upside of the underling equity investment. Thus, when the underlying equity portfolio is experiencing strong returns, the buy-write portfolio can lag. This has certainly been the case over the past five years when the S&P 500 Index has had a strong run:

BXM vs SPY five years
Source: CBOE. Data as of November 6, 2015.

However, when equity market returns are flat to slightly positive, or even negative, buy-write strategies can perform well, as we have seen this year on a year-to-date basis:

BXM vs SPY year to date

With the outlook for equity market returns being relatively subdued, now may be a good time to consider a hedged equity strategy, such as a buy-write fund.

Actively Manged Buy-Write Strategies

While the BXM is a passively invested index, many buy-write funds take a more active approach (see Options Based Funds Outperform with Lower Volatility for more details on this category of funds). Thus, for investors interested in buy-write strategies with the potential to outperform BXM and possibly the S&P 500 Index, an actively managed fund is the right choice. And the good news is that one new fund is now available: the IRON Equity Premium Income Fund (CALIX).

The IRON Equity Premium Income Fund’s objective is to provide risk-adjusted returns that best those of BXM. While BXM provides passive investment exposure, the IRON Equity Premium Income Fund utilizes an actively managed options overlay strategy. It is IRON’s belief that buy-write returns can be enhanced by “opportunistically writing” and actively managing options on underlying securities, rather than “unnecessarily writing options” and thus capping performance during bull markets, as passive strategies might. One of the greatest risk to buy-write strategies is that underlying stocks are “called” away during periods of greater-than-expected capital appreciation, thus limiting upside participation.

Multiple Strategies to Add Value

In addition to using a systematic approach to select options with appropriate expiration dates and lower odds of being exercised, IRON also utilizes proprietary “roll strategies” as part of its ongoing, active management of the fund’s options portfolio. Much of the fund’s performance depends on the performance of its underlying securities – the securities it holds and on which it writes calls – since the fund doesn’t overwrite or use leverage to sell more options than it could cover in the event of the options being exercised.

Shares of the IRON Equity Premium Income Fund are available in A (CALIX) and I (CALLX) shares, with respective net-expense ratios of 1.45% and 1.10%. Both share classes require minimum initial investments of $10,000, and minimum subsequent investments of $1,000.

For more information, view the fund’s web page.

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