A "BuyWrite" strategy, also known as a "covered call," is an investment strategy where the investor buys a stock or a basket of stocks and writes (or sells) call options that cover the stock position.

The advantage of this strategy is that the option premium cushions downside moves in an equity portfolio.

The trade-off, however, is that the upside potential of the investment is truncated when the index moves above the option's strike price.

Therefore, the BuyWrite strategy has outperformed stocks in neutral and bear markets and underperformed stocks in bull markets.

The profit/loss profile of a BuyWrite strategy executed at a 122 strike price can be seen in Exhibit 1.

The CBOE DJIA BuyWrite Index (the "BXD SM" or the "BXD Index SM") measures the total rate of return of a hypothetical "covered call" strategy applied to the Dow Jones Industrial Average (the "DJIA").

This strategy consists of a hypothetical portfolio containing a "long" position indexed to the DJIA on which are sold a succession of one-month, at-the-money call options on the DJIA listed on the Chicago Board Options Exchange (CBOE) under the ticker symbol "DJX."

The BXD covered call strategy requires that each DJX call option in the hypothetical portfolio be held to maturity, generally the third Friday of each month. The DJX index option contract is based on 1/100th (one-one-hundredth) of the current value of the DJIA. When DJIA is at 12,200, the DJX level should be near 122.

Exhibit 2: Beginning in October 1997, an investment of one dollar ($1) in each of the equity indexes would have grown to similar amounts, but the BXD growth was more stable.

Exhibit 3: Relative to fixed income and cash, the BXD's asset growth was superior, yet more volatile.

Fund Evaluation Group (FEG) conducted an evaluation of the CBOE DJIA BuyWrite Index from a total portfolio perspective. We reviewed the complete performance history (Oct. 16, 1997 through Nov. 30, 2006) analyzing returns and risk in terms of standard deviation comparing the BXD to various equity and fixed-income benchmarks.

The BXD was initiated at a starting price of 100 on Oct. 16, 1997. We analyzed the risk-adjusted returns by calculating the Sharpe ratio. FEG evaluated the impact BXD might have had on several different portfolios.

For purposes of this study (unless otherwise noted), we used monthly returns calculated at month-end. Finally, FEG studied the impact of including an allocation to the CBOE DJIA Volatility Index (VXD) in portfolios.

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