Sunday, May 1, 2016

Returns -- Year-to-Date Through April 2016

As shown in the "Year-to-Date 2016" line in the chart below, the Covered Calls Advisor Portfolio (CCAP) has underperformed the benchmark Russell 3000 index by 1.37 percentage points for the first four months of calendar year 2016. 















As a reminder, the Covered Calls Advisor Portfolio is not identical to the advisor's personal portfolio. However, it does provide a comparable overall portfolio return result since all equities in the CCAP are also held in this advisor's personal portfolio. To ensure comparability, all transaction dates and transaction prices herein are identical to those that were established in the Covered Calls Advisor's personal portfolio. The primary difference between the two accounts is the total number of shares held for each equity. This approach is used to preserve the confidentiality of the total value of the Covered Call Advisor's personal portfolio.

The Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. Here's an example to aid understanding of how the overall portfolio performance is determined: 
If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100Of course, the actual 'Total Account Value Return Percent' shown also adjusts for any deposits and withdrawals made each month.

If you have any comments or questions, please email me at the address shown in the right sidebar of this blog site.

Regards and Godspeed,
Jeff

Monday, April 18, 2016

April 2016 Option Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained four positions with April 2016 expirations.

I.  Three of the four positions were closed out at expiration. The overall average annualized return-on-investment for these three positions was +21.1%.  The return-on-investment results for each position was:
  • Bristol-Myers Squibb Co. = +2.1% absolute return (+24.1% annualized return)
  • Celgene Corp. = +1.8% absolute return (+22.2% annualized return)
  • Delta Air Lines Inc. = +1.4% absolute return (+17.1% annualized return)
As an example of how these returns were calculated, the details for the Bristol-Myers covered calls position is shown below.  The cash now available from the closing of these positions will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.  Any new positions will be posted on this site on the same day they occur.

Bristol-Myers Squibb Co. -- Covered Calls Position Closed at Expiration
The transactions were as follows:
Stock Purchase Cost: $19,096.95
= ($63.63*300+$7.95 commission)

Net Profit:
(a) Options Income: +$636.75
= ($2.13*300 shares) - $2.25 commissions
(b) Dividend Income (BMY assigned at Apr2016 expiration): +$114.00
= ($.38 dividend per share x 300 shares)

(c) Capital Appreciation (BMY assigned at $62.50 at Apr2016 expiration): -$346.95
+($62.50-$63.63)*300 - $7.95 commissions
Total Net Profit: +$403.80
= (+$636.75 +$114.00 -$346.95)
Absolute Return: +2.1%
= +$403.80/$19,096.95
Annualized Return: +24.1%
= (+$403.80/$19,096.95)*(365/32 days)


II.  One of the four positions (Western Digital Corporation) ended at expiration with the price of the stock below the strike price, so the options expired and the long shares remained in the Covered Calls Advisor Portfolio.  Today, the 300 shares of WDC were sold at $40.21. 

The overall performance result (including commissions) for this Western Digital (WDC) covered calls position was as follows:
The transactions were:
03/14/2016 Bought 300 WDC shares @ $48.23
03/02/2016 Sold 3 WDC Apr2016 $45.00 Call options @ $4.43
Note: a simultaneous buy/write transaction was executed.
03/30/2016 Ex-dividend of $.50 per share
04/15/2016 3 WDC Apr2016 Call options expired.  
Note: the price of WDC was $40.49 at options expiration.
04/18/2016 Sold 300 WDC shares at $40.21

The overall performance result (including commissions) for this Western Digital covered calls position was as follows:
Stock Purchase Cost: $14,476.95
= ($48.23*300+$7.95 commission)

Net Profit:
(a) Options Income: +$1,326.75
= ($4.43*300 shares) - $2.25 commissions
(b) Dividend Income: +$150.00
= ($.50 dividend per share x 300 shares)
(c) Capital Appreciation: -$2,413.95
+($40.21-$48.23)*300 - $7.95 commissions

Total Net Profit: -$937.20
= (+$1,326.75 +$150.00 -$2,413.95)

Absolute Return: -6.5%
= -$937.20/$14,476.95
Annualized Return: -67.5%
= (-$937.20/$14,476.95)*(365/35 days)

Saturday, April 9, 2016

Hooray! -- New Fiduciary Rule Allows Options in Retirement Accounts

In a Covered Calls Advisor post last September (Link), you were alerted to a proposed rule from the Dept of Labor (DOL) that included an elimination of trading options in IRA accounts.  Many, including covered calls investors, use options in our retirement accounts.  We do so not for the speculative, risky purposes feared by Federal government regulators, but for the exact opposite reason -- to reduce risk in our portfolio.  In fact, for covered calls, several reputable academic studies have confirmed that covered calls have only two-thirds the risk of comparable buy-and-hold stock portfolios.

Fortunately, the new fiduciary rule just released has removed the sections that eliminated the use of options in our retirement accounts.  Here is a quote from an article today in Barron's: " WHY THE GOVERNMENT backed down from banning options isn’t entirely clear. But that came after many investors had written to the Labor Department, explaining that they use options to enhance stock returns and reduce risks, rather than speculate on stock moves."  This letter from the Options Clearing Corporation (OCC) and TD Ameritrade (Link) is a very good example of a compelling argument that might well have influenced the DOL to retain options trading in their new rule.

Here is another article summarizing this issue: Link 

Thank you to those of you who wrote letters advocating (successfully) to retain options trading in our retirement accounts.


Best Wishes and Godspeed,
Jeff

Thursday, April 7, 2016

Worthwhile Reading Related to Earnings

First quarter earnings will begin to be reported early next week. 

1. Earnings Will Decide the Stock Market's Fate: Link

2. One perma-bear says:
  •  U.S. earnings recession will continue because of ongoing profit  margin reversion-to-the-mean: Link ; and
  •  The earnings recession is not just in the U.S. -- It's Global: Link 

3. .... But, It's Hard to Find a Pattern Between Profits and Stock Market Returns: Link

4. Market appears overvalued by these 4 valuation metrics: Link ;
    and also by Warren Buffett's favorite valuation measure: Link


Caveat emptor (i.e. Let the buyer beware)!

Best wishes,
Jeff