Live From the Desk 3

Enhanced Income Fund Update

We get a lot of questions surrounding the covered call strategy we use in the Enhanced Income Fund. Here are answers to some of the most common questions:

What do we look for?

We screen North American stocks looking for securities with the following criteria: high dividend payout, decent volatility and good liquidity.

What makes this unique?

What makes our fund unique is that most funds are restricted to trading options domestically and we are not geographically limited to writing covered calls only in Canada. There are not many cross-border funds that use this strategy available to Canadian investors.

How far out do we look?

We like to keep the options as short-dated as possible, the more often we can write, the more option premium we can take in. We do not like to write more than 6 weeks out and our average option duration is about 3 weeks.

How much is this strategy utilized in the portfolio?

The fund is limited to a 25% equity component. 80% of the equity weight (20% of the overall portfolio) is in covered calls. The other 5% is in trust or ex-trust stocks that yield over 8%.

Where is the best place to implement this strategy?

Our experience shows us that the US market is a much better place to implement this strategy than in Canada. That being said, for select stocks in Canada there are still some opportunities and we do have covered calls in Canada. The US option market has better liquidity, breather breath and better volatility so our tendency is to gravitate there for the most part.

Example of this strategy:

  1. Purchase Eli Lilly stock (LLY @ $35.20)
  2. Dividend yield on stock = 5.6%
  3. Write July $38 Calls = premium of $0.62
  4. Annualized option return = 21.1%
  5. Total expected return = 26.7%

until next time…

#The Vertex Team