Mark Langner

Further Thoughts On Call-Writing Closed-end Funds (BEP, FFA, IGD, JPZ, JSN, MCN, NFJ)

Geoff - I am struggling with your exact issue in my fund (and an ongoing battle with my administrator) - we have a strict price target methodology and occassionally sell out of the money covered calls at strikes at or above our price targets. If we get called in - no worries because we had that target anyway and would have been gone from the stock so the income is a bonus, if it expires worthless that's good too... Essentially we are trading gains in the stocks that we would never see for that income. If we get the underlying call on the stock wrong (not often but it happens) then selling the calls can be a hedge against a loss in that position...

The problem I have is calculating the value of the position while its open. My admin wants to treat the two transactions as seperate - recording the value of the written call in the same fashion as you would account for a short position - marking the position to market at the end of the month... This has two problems for my NAV calcuation - first it gives investors that invest after I open a covered call position a "free ride" on risks that prior investors had taken when that position was taken (e.g,. the fund would still have the same absolute liability associated with that trade whether or not that later investor invested) and 2.) because we are betting that the stocks go up - we expect the value of the calls to increase (until they reach a point of time premium decay) in concert with the underlying stock position... so the covered call shows a phantom "loss" - artificially depressing the NAV of the fund..

My goal is to find a proper way to value the premium in the interim between opening a position and when the call either expires, is called in or has to be bought back... no one has been able to give me a good answer on this - suggestions?