Entering text into the input field will update the search result below

Check Out These 2 Covered Call Closed-End Funds


  • Covered call funds generate more income when the VIX is higher.
  • This article discusses two covered call CEFs that look attractive now - BDJ and NFJ.
  • BDJ invests about 80% in US equities which are strong dividend payers.
  • NFJ invests in a global portfolio of about 70% equities and 30% convertible bonds. About 65% is invested in the US companies.
  • This idea was discussed in more depth with members of my private investing community, Yield Hunting: Alt Inc Opps. Get started today »

Why Are Covered Call CEFs Attractive Now?

Covered call portfolio managers hold a portfolio of stocks and write call options against a portion of the portfolio to generate additional income.

The covered call segment of the closed-end fund market tends to outperform when:

- Implied volatility is relatively high. I use the VIX indicator to estimate whether option premiums are above or below average. The VIX is currently around 38, which is considerably above average for the last few years. As a general rule, when the VIX is 30 or higher, it is often a good time to consider writing covered calls.

- In a sideways or a down market. You generally give up some upside, but get some downside protection with these funds.

Most of the covered call funds write slightly out-of-the money call options, which allows them to enjoy some upside potential before the strike price is reached. But there is a trade-off since they get less downside protection compared to writing at-the-money or in-the-money call options.

In general, the relative downside to the covered call strategy occurs during very strong bull market cycles when a good portion of the upside gains can be lost when stocks are called away.

The NAV of the covered call CEFs were hurt in March in spite of their option hedges. One reason for this is that the VIX was under 20 in February and rose to 40 or higher in March. A rising VIX increases the implied volatility of short option positions. This causes short-term mark-to-market drops in NAV.

But this can also work in reverse. For example, if the VIX were to suddenly drop from the current 38 back down to 20, the option premium implied volatility would also fall which would benefit the NAVs of the funds.

For this

Marketplace Service For Those Hunting For Yield

George Spritzer's top investment ideas are being featured on Alpha Gen Capital's "Yield Hunting" marketplace service.

This service is dedicated to yield/income investors who wish to avoid market froth. We encourage investors to benefit from yield opportunities within closed-end funds, business development companies, and other niche areas. For safe and reliable income streams, check out Yield Hunting.

This article was written by

George Spritzer, CFA profile picture
Targeting 8+% Income Stream using CEFs, ETFs, Munis, Preferreds and REITs

George Spritzer, CFA is a registered investment advisor at Southland Investments and specializes in managing closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc. Some of my premium articles are published on Alpha Gen Capital's "Yield Hunting: Alt Inc Opps" https://seekingalpha.com/author/alpha-gen-capital/research

Analyst’s Disclosure: I am/we are long NFJ, BDJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.