Phil Anthropy

Assessing Closed-end Call Writing Funds (CEF: MCN)

Writing covered calls on stable stocks can generate nearly 1% per month if calls are sold at relative high points on a chart. While it is true that upside potential is curtailed, buy-and-hold investors in large cap stocks shouldn't care. If a stock is called away, there may be capital gains, but that same stock can be repurchased later with the proceeds on a dip. With low beta stocks, writing covered calls is essentially underwriting the speculation of others. I don't see how the passthrough of covered call premiums to CEF shareholders reduces the NAV, since NAV is based on stock holdings and proceeds of sales. Writing in-the-money (ITM) covered calls could indeed reduce NAV, but this would be a poor strategy, since in a rising market there is greater return on slightly out-of-the-money (OTM) calls. In a falling market, writing ITM calls will not stop erosion of NAV in terms of holdings, but will offset it through distribution of cash from premiums. So the strategy seems ok to me. However, since several others have commented on NAV erosion from CEF covered call writing, I must be missing something.