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Spoofing, Surveillance and Supervision

Jay Biondo, Product Manager - Surveillance at Trading Technologies, co-authored an article along with James Lundy and Nicholas Wendland, both of Drinker Biddle & Reath LLP, reviewing the CFTC's regulations and expanding efforts, 21st century surveillance and supervision, as well as strategic recommendations.

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February 24, 2006

Buying a Young Index: A New Wrinkle on Familiar Strategy

By Mark Longo

Although the CBOE created the BuyWrite Index, it isn't executing the strategy itself. Instead, the CBOE licensed the BuyWrite strategy to a number of brokerage firms. In turn, these firms have created their own products that replicate the strategy of the BXM. So far, the most popular BuyWrite products are closed-end funds and structured notes. As of press time, thirty closed-end funds and structured notes are indexed to the BuyWrite products with a combined asset value of over $20 billion. Most of these products are identical, although a few incorporate interesting tweaks such as tax minimization strategies.

Appealing Indexes

The high time decay and relatively low volatility of covered call indexes have made them particularly appealing in today's ever-fluctuating market. Attempting to capitalize on this popularity, the CBOE recently launched two companion products to the BXM. The BXD replicates writing covered calls on the Dow Jones Industrial Average and BXN replicates writing covered calls on the Nasdaq 100 Index. Although these products are relatively new, they have already begun to attract the attention of a new class of customer-yield hungry traders. "Many funds and retail brokers are now offering our buy-write products as an alternative for yield-conscious investors," says Moran. "The yield of the BXM, in terms of options premium, has averaged about 1.6 percent per month. That is nearly 20 percent per year, which is a very attractive yield for investors. On the BXN, you have even higher yields due to the higher volatility in the Nasdaq market. The yields in that product have averaged about three percent per month."

Comments or questions about the column can be sent to Mark.Longo@sourcemedia.com