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Why You'll Overpay with the BEP Fund


Replicating the BXM is easy -- and will save you time and money.

Now here's something I never understand. Why does S&P 500 Covered Call Fund (BEP) trade at any important premium or discount to NAV (Net Asset Value)?

BEP is a closed-end fund that tracks BXM, the CBOE's Buy-Write index. It's about the easiest-to-replicate index imaginable. They simply write the closest ATM call each month versus going theoretical long in the SPX. You can do it yourself pretty simply, or own it via a regular mutual fund. The only difference in BEP is it pays out all the dividends in 2 shots per year.

Why does that merit a premium? I have no idea, but it happens periodically. It's off a bit now, but still about 7% above NAV.

I've looked at the relationship here as a window into volatility expectations. In theory, if they want this pup so bad, there must be big demand for call writing, no? And if so, as a contrarian, doesn't that imply higher volatility in the future? You could also make the case that it's overbullishness in general.

But in practice, not sure you get the greatest signals. Sure -- it worked well in March. BEP traded at a pretty big discount at a time when the market bottomed. But on the flip side, it peaked almost 2 months ago and the market has kept rallying.

So let's call it a modest sign of complacency, albeit one that hasn't worked.
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