July 2009 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of nine positions with July 2009 expirations, with the following results:
- Four positions (ENDP, FDO, FXI, and IWM) closed in-the-money. The calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for the four exercised positions were:

Endo Pharmaceuticals Holdings Inc (ENDP): +31.7%
Family Dollar Stores Inc (FDO): +46.8%
iShares MSCI China Fund ETF (FXI): +85.3%
iShares MSCI Russell 2000 Small Cap Index ETF (IWM): +28.6%

- Five positions in the CCAP (BAC,CHL,EME,SOHU,and UNG) ended out-of-the-money. Decisions will be made to either sell the equities, or to keep them and sell calls to establish Aug09 covered call positions. The related transactions will be made during the next few days and the actual transactions will be posted on this blog site on the same day they occur.

Detailed results for the four positions that were assigned (called away) upon Jul09 expiration are as follows:

1. Endo Pharmaceutical Holdings Inc(ENDP) -- Closed
The transactions history for the ENDP covered calls was:
04/21/09 Bought 500 ENDP @ $17.61
04/21/09 Sold 5 ENDP May09 $17.50 Calls @ $.85
05/16/09 May09 Options Expired
Note: The closing price of ENDP was $15.83 on expiration Friday.
05/20/09 Sell-to-Open (STO) 5 ENDP Jul09 $17.50 @ $.55
Note: The price of ENDP was $16.72 today when the call options were sold.
07/18/09 Jul09 Options Exercised (500 shares of ENDP called away)
Note: Closing price of ENDP was $18.16 on expiration Friday.


The overall performance results(including commissions) for the ENDP transactions was as follows:
Stock Purchase Cost: $8,813.95
($17.61*500+$8.95 commission)

Net Profit:
(a) Options Income: +$674.60 [500*($.85+$.55) - 2*$12.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $17.50): -$63.95
= ($17.50-$17.61)*500 - $8.95 commissions

Total Net Profit(Stock exercised at $17.50): +$610.65
= (+$674.60 +$0.00 -$63.95)

Absolute Return: +7.7%
= +$674.60/$14,693.95
Annualized Return: +31.7%
= (+$674.60/$14,693.95)*(365/88 days)

2. Family Dollar Stores Inc(FDO) -- Closed
The transactions history for the FDO covered calls was:
06/29/09 Bought 500 FDO @ $28.68
06/29/09 Sold 5 FDO Jul09 $27.50 Calls @ $1.88
07/18/09 Jul09 Options Exercised (500 shares of FDO called away)
Note: Closing price of FDO was $30.73 on expiration Friday.

The overall performance results(including commissions) for the FDO transactions was as follows:
Stock Purchase Cost: $14,348.95
($28.68*500+$8.95 commission)

Net Profit:
(a) Options Income: +$927.30 (500*$1.88 - $12.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $27.50): -$598.95
= ($27.50-$28.68)*500 - $8.95 commissions

Total Net Profit(Stock exercised at $27.50): +$328.35
= (+$927.30 +$0.00 -$598.95)

Absolute Return (Stock Exercised at $27.50): +2.4%
= [($1.88-($28.68-$27.50)]/$28.68
Annualized Return: +46.8%
= [($1.88-($28.68-$27.50))/$28.68]*(365/19 days)

3. iShares MSCI China Fund ETF(FXI) -- Closed
The transactions history for the FXI covered calls was:
06/22/09 Bought 1200 FXI @ $36.14
06/22/09 Sold 12 FXI Jul09 $37.00 Calls @ $1.40
07/18/09 Jul09 Options Exercised (1200 shares of FXI called away)
Note: Closing price of FXI was $39.34 on expiration Friday.

The overall performance results(including commissions) for the FXI transactions was as follows:
Stock Purchase Cost: $43,376.95
($36.14*1200+$8.95 commission)

Net Profit:
(a) Options Income: +$1,662.05 (1200*$1.40 - $17.95 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $37.00): +$975.05
= ($37.00-$36.18)*1200 - $8.95 commissions

Total Net Profit(Stock exercised at $37.00): +$2,637.10
= (+$1,662.05 +$0.00 +$975.05)

Absolute Return (Stock Exercised at $37.00): +6.1%
= ($2,637.10/$43,376.95)
Annualized Return: +85.3%
= ($2,637.10/$43,376.95)*(365/26 days)

4. iShares MSCI Russell 2000 Small Cap Index Fund ETF(IWM) -- Closed
The transactions history for the FXI covered calls was:
05/21/09 Initial Stock Purchase Transaction -- Bought 500 IWM @ $48.22
05/21/09 Inital Calls Sold Transaction -- Sold 5 IWM Jun09 $47.00 Calls @ $2.87
A roll-up debit-spread transaction was executed as follows:
06/02/09 Buy-to-Close (BTC) 5 IWM Jun09 $47s @ $6.00
06/02/09 Sell-to-Open (STO) 5 IWM Jun09 $53s @ $1.51
Note: The price of IWM was $52.83 today when the debit-spread was transacted.
06/20/09 Jun09 Options Expired
06/24/09 Sell-to-Open (STO) 5 IWM Jul09 $51s @ $1.13
The price of IWM was $50.15 today when this transaction was executed.
07/18/09 Jul09 Options Exercised (500 shares of IWM called away)
Note: Closing price of IWM was $51.90 on expiration Friday.

The overall performance results(including commissions) for the IWM transactions was as follows:
Stock Purchase Cost: $24,118.95
= ($48.22*500+$8.95 commission)

Net Profit:
(a) Options Income: -$283.10
= (500*($2.87-$6.00+$1.51+$1.13) - 3*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $51.00): +$1,381.05
= ($51.00-$48.22)*500 - $8.95 commissions

Total Net Profit(Stock exercised at $51.00): +$1,097.95
= (-$283.10 +$0.00 +$1,381.05)

Absolute Return (Stock Exercised at $51.00): +4.6%
= +$1,097.95/$24,118.95
Annualized Return: +28.6%
= (+$1,097.95/$24,118.95)*(365/58 days)

Warren Buffett -- "The Best Advice I Ever Got"

Fortune magazine is presenting a series from several famous people called "The Best Advice I Ever Got." Fortunately, they were able to ask this question to Warren Buffett, who many believe is the top stock market investor ever. Since acquiring Berkshire Hathaway in 1965, Buffett's annual return-on-investment has approximated an amazing 20% versus the 9% average of the S&P 500.

So what would you think he would say was "the best advice I ever got"?
It occurred when he was 19 years old when he read "The Intelligent Investor" by Benjamin Graham. He refers us specifically to Chapter 8, "The Investor and Market Fluctuations"; and Chapter 20, "Margin of Safety as the Central Concept of Investment". It is fascinating to me how great minds process complex information -- they understand the myriad details, but their true genius lies in their ability to synthesize that complexity down to some essential, basic truths. In short, they can see the big picture when most people get bogged down with the details. Said another way, they see the forest when others only see some of the trees. When it comes to investing, Buffett certainly qualifies as a genius.

From these two chapters, Buffet's "best advice" is to "take the emotion out of investing and simply stick with good businesses." He explains that people "get all excited when stocks have gone up recently and they get depressed when they go down". You might recall from my "Investing Pyramid of Success" article (link) that 'emotional maturity' is one of the cornerstones of the pyramid, and to "take the emotion out of investing" is a key component of emotional maturity.

Taken within the context of Buffett's comments, re-reading chapters 8 and 20 of "The Intelligent Investor" has been a very rewarding experience. Some of the key topics include market timing and pricing, not following the crowd, how to view "Mr Market", margin of safety, and the four business principles of investing. Needless to say, I highly recommend that you obtain this book and carefully read these two chapters. Concentrate on all the details, but remain focused on Buffett's big-picture advice and seek to "take the emotion out of investing and simply stick with good businesses."

Regards and Godspeed to All,

Jeff

Returns -- Through June 2009

1. Month of June 2009 Result:

The Covered Calls Advisor Portfolio (CCAP) performance result for the month of June 2009 highlights the benefit of being a covered calls investor during a neutral market. The Russell 3000 benchmark was virtually unchanged for the month of June, as it increased by a mere 0.11%. In comparison, the CCAP increased by 2.87% during June. The CCAP outperformance is indicative of the advantage (when compared with a basic buy-and-hold strategy) that can accrue to covered calls investors from the options income received by selling near-month calls.

2. Year-to-Date Through June 2009 Results:

The 2009 Year-to-Date results are as follows:

CCAP Absolute Return (Jan 1st through June 30th, 2009) = +26.48%
= ($252,618.63 - $199,733.10)/$199,733.10

Benchmark Russell 3000(IWV) Absolute Return (Jan 1st through June 30th,2009) = +3.60%
= ($53.87 - $52.00)/$52.00

For the first six months of 2009, the table below shows that CCAP has outperformed the Russell 3000 benchmark by 22.88 percentage points (26.48% - 3.60%):





"Stick with Covered Calls"!







3. Prior Years Results:

The Covered Calls Advisor Portfolio (CCAP) was begun in September, 2007. The annualized returns achieved for 2007 and 2008 compared with the Russell 3000 benchmark results were as follows:








Note: This Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. A simple example demonstrates how it is calculated:
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]*100.

Regards and Godspeed,

Jeff

Establish United States Natural Gas Fund ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of the United States Natural Gas Fund ETF(UNG) covered calls as follows:

Established the United States Natural Gas Fund ETF(UNG) Covered Calls for Jul09:
06/30/09 Bought 1000 UNG @ $13.92
06/30/09 Sold 10 UNG Jul09 $14.00 Calls @ $.75

UNG invests in near-month futures contracts and tracks the price of natural gas. The Covered Calls advisor believes that natural gas is a cost effective, clean, and abundant alternative fuel and will be an increasingly important resource in fulfilling future U.S. energy needs. At its current price of $3.85, this advisor further believes that Nat Gas now trades at the lower end of its likely price range for the next several months. Therefore, now should be a good time to establish a position in this investment.

Some potential results from this transaction are:
Absolute Return if Stock Price Unchanged at $13.92: +5.4%
Annualized Return If Unchanged (ARIU): +108.4%

Absolute Return if Exercised at $14.00: +6.0%
Annualized Return If Exercised (ARIE): +120.9%

Downside Breakeven Price Point: $13.17
Downside Breakeven Protection: 5.4%

Establish Bank of America Corp Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Bank of America Corp (BAC) covered calls as follows:

Established Bank of America Corp (BAC) Covered Calls for Jul09:
06/30/09 Bought 1000 BAC @ $13.25
06/30/09 Sold 10 BAC Jul09 $13.00 Calls @ $.82

Some potential results from this transaction are:
Absolute Return if Exercised at $13.00: +4.3%
= [($.82-($13.25-$13.00)]/$13.25
Annualized Return If Exercised (ARIE): +87.2%
= [($.82-($13.25-$13.00))/$13.25]*(365/18 days)

Downside Breakeven Price Point: $12.43
Downside Breakeven Protection: 6.2%