Write funds popular but risky

Options trading used to be considered an exotic form of investing that most individual investors left to the pros.

But the price of options drops in a strong market, and options have been getting cheaper since 2003. As a result, individuals have become active in the world of puts and calls.

As options have boomed, some investors have bought into option strategies and options funds that may not be as safe as they seem. Closed-end covered write funds, which hold on to their underlying equities but sell options for others to buy them, can make a tidy profit on the premiums they charge to write the option.

Tom Stotts, director of hedging options at RBC Dain Rauscher, says assets under management in such funds are “probably in the billion dollar range.” The write funds raise their money, then take no new investments from either existing or prospective investors.

Bernie Schaeffer, chairman and CEO of Schaeffer’s Investment Research and an expert in options, is skeptical.

“Because the market hasn’t been doing anything, lots of people are selling options, selling calls for the stock they own,” Schaeffer said.

That’s risky, he said, and the funds are risky, too. The funds make their income from the premiums, which are shrinking. They’re unprotected if their stocks fall. And they’ve sold away appreciation if their stocks gain.