The CBOE S&P 500 BuyWrite Index Since 1988: +1,100%

In a quest to squeeze more income out of portfolios, investors are jumping into the options market, according to Bloomberg News. There, they can sell "call" options on a stock they just bought for say, $10, giving buyers the right to buy shares from them at say, $12 if the price rises beyond that level within a specified time period. For that right, the buyer of the option pays an upfront fee or premium, say $1, which gives the seller a dividend-like income. Data compiled by Bloomberg shows the PowerShares S&P 500 BuyWrite Portfolio (PBP), an exchange-traded fund, averaged 127,459 shares a day in January -- its highest level of activity since April 2009.

This "buy-write" approach has worked well recently, returning 6 percent in 2011. That bested the performance of the S&P 500 Index, which returned barely 2 percent over the same period. Buy-write has performed well over the long-term, too. The return on the Chicago Board Options Exchange Nasdaq-100 BuyWrite Index (BXN) has increased 11-fold since June 1988, compared with the ninefold return in the S&P 500. Money managers like how a buy-write strategy can increase returns while lowering volatility.

The downside is that a big stock-price run up will enrich the option holder, not the option writer. Also, if the stock should fall sharply, the option premium income will offer only a small cushion. The result: Buy-write strategies perform best in "sideways" markets in which volatility is high, as was the case in 2011. If you buy The PowerShares S&P 500 BuyWrite Portfolio ETF, don't expect it to exactly match the return of the CBOE's BuyWrite Index, though: Annual expenses of 0.75 percent eat into returns, and a further 0.30 percent is lost on average in the rolling over of options contracts.