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Saturday, December 29, 2007

New Year's Resolutions

Do you make New Year’s Resolutions?
Sometimes I do and sometimes I don’t – but I’ve decided on two for 2008:

1. Lose Weight – As of two months ago, I had reached my highest weight ever at 220 pounds; which is way above my desired weight of 175. I joined a health club on November 1, 2007 and have been exercising every day (except Christmas eve and Christmas day) since. This exercising, along with better nutrition, has enabled me to lose 15 pounds so far and I resolve to continue daily exercise and to return to 175 pounds in 2008. By the way, here’s the best book available on good nutrition: Link to "Eat, Drink, and Be Healthy"

2. Bible Reading – I will be reading the entire Bible beginning on Jan 1, 2008 and completing it on Dec 31, 2008. This might sound like a difficult task, but it is actually surprisingly easy, as it requires a commitment of only 15-20 minutes of reading every day. “The One Year Bible” (Link here) provides conveniently organized readings for each day of the year from the Old Testament, New Testament, Psalms, and Proverbs. There is also an excellent blog (Link to One Year Bible Blog) that is updated daily and provides valuable educational insights related to each day’s readings.

I hope you will consider making your own resolutions for 2008. In any case, my best wishes to you for a happy, healthy, and prosperous 2008!

God Bless You,

Jeff

Thursday, December 27, 2007

Buy RenaissanceRe Holdings Ltd.

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

RenaissanceRe Holdings Ltd. Covered Calls Established for Jan08

12/27/07 Bought 400 RNR @ $60.64
12/27/07 Sold 4 RNR Jan08 60 Calls @ $2.60

Annualized Return If Unchanged: 54.0%
Annualized Return If Exercised: 54.0%
Downside Breakeven Protection: 4.3%

This will be the only financial sector position in the CCAP for January '08 expiration as I continue to be underweighted in financials. I am very pleased to be able to add this in-the-money covered calls position because of its high potential annualized return (54.0%) -- this return will be achieved even if the stock price declines by up to 0.9% by Jan08 expiration. This return potential for an in-the-money covered call position is exceptional given the relatively low 90-day historic volatility of RNR stock, which is currently at 28.1%.

Wednesday, December 26, 2007

Buy AT&T, Herbalife, and Seagate Technology

Three new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

1. AT&T Covered Calls Established for Jan08

12/26/07 Bought 300 T @ 41.49
12/26/07 Sold 3 T Jan08 42.5 Calls @ $.65

Annualized Return If Unchanged: 38.5%
Annualized Return If Exercised: 75.5%
Downside Breakeven Protection: 2.5%

The annualized returns above also include the $.40 quarterly dividend which will go ex-div on 1/8/08.


2. Herbalife Covered Calls Established for Jan08

12/26/07 Bought 500 HLF @ 39.32
12/26/07 Sold 5 HLF Jan08 40 Calls @ $1.40

Annualized Return If Unchanged: 54.1%
Annualized Return If Exercised: 80.5%
Downside Breakeven Protection: 3.6%


3. Seagate Technology Covered Calls Established for Jan08

12/26/07 Bought 800 STX @ 25.84
12/26/07 Sold 8 STX Jan08 27.5 Calls @ $.55

Annualized Return If Unchanged: 32.3%
Annualized Return If Exercised: 130.1%
Downside Breakeven Protection: 2.1%

Halliburton, Hewlett Packard, and Kinetic Concepts -- Continuation Transactions

1. Halliburton (HAL) Continuation Transaction

The following transaction was made today to continue the covered calls written against the 700 shares of HAL:
12/26/07 Covered Calls Continuation Transaction -- STO 7 Jan08 37.5 Calls @ $1.05

The Transactions History to date is as follows:
10/24/07 Initial Stock Position -- Bought 700 HAL @ 40.01
10/24/07 Initial Call Options -- Sold 7 HAL Nov07 40 Calls @ $1.25
11/17/07 Nov07 Option Expiration Date – HAL closed below the strike price at $37.02
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 37.5 Calls @ $.85
11/29/07 Ex-Dividend Date -- $.09*700
12/22/07 Dec07 Option Expiration Date – HAL closed below the strike price at $37.29
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 37.5 Calls @ $1.05

The overall performance results(including commissions)for the HAL transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $28,016.95
($40.01*700+$9.95 commission)

Net Profit:
(a) Options Income: $2,159.40 (700*$1.25 + 700*.85 + 700*1.05 - 3*15.20 commissions)
(b) Dividend Income: $63.00 ($.09*700)
(c) Capital Appreciation (If stock price unchanged from $37.29): -$1,923.90
= (40.01-37.29)*700 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): -$1,776.90
= (40.01-37.50)*700 - 2*9.95 commissions

Total Net Profit(If stock price unchanged at $37.29): +$298.50
= ($2,159.40+$63.00-$1,923.90)
Total Net Profit(If stock price exercised at $37.50): +$445.50
= ($2,159.40+$63.00-$1,776.90)

Annualized Return If Unchanged (ARIU) +4.5% (+$298.50/$28,016.95)*(365/87)
Annualized Return If Exercised (ARIE) +6.7% (+$445.50/$28,016.95)*(365/87)


2. Hewlett Packard (HPQ) Continuation Transaction

The following transaction was made today to continue the covered calls written against the 500 shares of HPQ:
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 42.5 Calls @ $1.20

The Transactions History to date is as follows:

11/28/07 Initial Stock Position -- Bought 500 HPQ @ 49.96
11/28/07 Initial Call Options -- Sold 5 HPQ Dec07 52.5 Calls @ $.55
12/10/07 Ex-Dividend Date -- $.08*500 shares
12/22/07 Dec07 Option Expiration Date – HPQ closed below the strike price at $52.03
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 52.5 Calls @ $1.20

The overall performance results(including commissions)for the HPQ transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $24,989.95
($49.96*500+$9.95 commission)

Net Profit:
(a) Options Income: $847.60 (500*$.55 + 500*1.20 - 2*13.70 commissions)
(b) Dividend Income: $40.00 ($.08*500)
(c) Capital Appreciation (If stock price unchanged from $52.03): +$1,015.10
= (52.03-49.96)*500 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): +$1,250.10
= (52.50-49.96)*500 - 2*9.95 commissions

Total Net Profit(If stock price unchanged at $52.03): +$1,902.70
= ($847.60+$40.00+$1,015.10)
Total Net Profit(If stock price exercised at $52.50): +$2,137.70
= ($847.60+$40.00+$1,250.10)

Annualized Return If Unchanged (ARIU) +53.4% (+$1,902.70/$24,989.95)*(365/52)
Annualized Return If Exercised (ARIE) +60.0% (+$2,137.70/$24,989.95)*(365/52)


3. Kinetic Concepts Inc (KCI) Continuation Transaction

The following transaction was made today to continue the covered calls written against the 400 shares of KCI:
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95

The Transactions History to date is as follows:

11/20/07 Initial Stock Position -- Bought 400 KCI @ 59.53
11/20/07 Initial Call Options -- Sold 4 KCI Dec07 60 Calls @ $2.35
12/22/07 Dec07 Option Expiration Date – KCI closed below the strike price at $54.25
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95

The overall performance results(including commissions)for the KCI transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $23,821.95
($59.53*400+$9.95 commission)

Net Profit:
(a) Options Income: $1,694.10 (400*$2.35 + 400*1.95 - 2*12.95 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation (If stock price unchanged from $54.25): -$2,131.90
= (54.25-59.53)*400 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): -$1,831.90
= (55.00-59.25)*400 - 2*9.95 commissions

Total Net Profit(If stock price unchanged at $54.25): -$437.80
= ($1,694.10+$0-$2,131.90)
Total Net Profit(If stock price exercised at $55): -$137.80
= ($1,694.10+$0-$1,831.90)

Annualized Return If Unchanged (ARIU) -11.2% (-437.80/$23,821.95)*(365/60)
Annualized Return If Exercised (ARIE) -3.5% (-137.80/$23,821.95)*(365/60)

Monday, December 24, 2007

Travelers -- Closed

The covered call position in Travelers (TRV) expired out-of-the-money last Friday. The investment in TRV was closed today by selling the stock. This decision was made because the annualized return if the stock price is unchanged (ARIU) between today and the Jan08 expiration for all potential TRV covered calls did not reach the required threshold for an investment by the Covered Calls Advisor of >25%. The transactions and results achieved for the TRV covered calls position closed today was as follows:

Transactions History:
11/19/07 Initial Stock Position -- Bought 500 TRV @ 51.23
11/19/07 Initial Call Options -- Sold 5 TRV Dec07 55 Calls @ $.55
12/06/07 Dividend Received -- 500 @ $.29
12/21/07 Call Options Expire
12/24/07 Closing Transaction -- Sold 500 TRV @ 54.67

Performance Results(including commissions):
Stock Purchase Cost: $25,624.95
($51.23*500+$9.95 commission)

Net Profit:
(a) Options Income: +$261.30 ($.55*500-13.70)
(b) Dividend Income: +$145.00 ($.29*500)
(c) Capital Appreciation: +$1,710.05 ($54.67-$51.23)*500-$9.95
Total Net Profit: $2,116.35 (+$261.30+$145.00+$1,710.05)

TRV ANNUALIZED RETURN ON INVESTMENT: +86.1%
($2,116.35/$25,624.95)*(365/35)

A recent article described the opportunity provided by covered calls to obtain profits from three sources -- options income; dividend income; and capital appreciation in the underlying stock. Although it is uncommon to achieve profits from all three sources in a single near-month covered call position, this Travelers investment shows that it can be done. Also, the corresponding annualized return on investment (86.1% in this instance) can be very high when this triple-income result does occur.

Saturday, December 22, 2007

Triple-Income Potential with Covered Calls Investing

The buy-and-hold investor has two potential sources of profit:
(1) capital appreciation in the price of the stock, and
(2) dividends received.
The covered calls investor has both of these profit sources, but adds a third source of profit -- the income received from selling call options on the underlying stock.

This three-legged stool is symbolic of the solid foundation that can be achieved with a covered calls investing program. Although it is correctly stated that the covered calls investor places an upper limit on the maximum profit that can be achieved, selling call options against ones underlying stock provides the benefit of an immediate source of income that also provides some downside profit protection in the event of a decline in the price of the stock. This advisor's objective remains the same as it was in the first post ever made on this blog site: "Covered calls offer an excellent avenue for obtaining market-beating results while at the same time offering the added benefit of doing so with less overall portfolio risk."

The Covered Calls Advisor Portfolio (CCAP) results-to-date have demonstrated this triple-income principle. The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000. The portfolio has grown to its current value of $259,070.34.
The corresponding annualized return is +13.2%.
[(259,070.34-250,000.00)/250,000.00]*(365/100 days)*100

The three sources of the total profit and the corresponding percentage contribution from each source are as follows:
Options Income is 66.6% of total profit ($6,034.32)
Capital Appreciation is 19.4% of total profit ($1,763.52)
Dividend Income is 14.0% of total profit ($1,272.50)

Of course, future results may vary significantly from these percentages achieved to-date. Nevertheless, the results above show the opportunity that exists for the covered calls investor to obtain profit contributions from each of the three possible income sources.

December 2007 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 9 positions with Dec07 expirations, with the following results:

- 4 positions closed in-the-money and the calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for these positions were:
Celanese -- +122.4%
Honeywell -- +12.9%
Humana -- +77.7%
Intel -- +29.1%

- 5 positions (HAL,HPQ,EWY,KCI, and TRV) ended out-of-the-money. Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Jan08 covered call positions. The related transactions will be made during the upcoming week and the actual transactions will be posted herein on the same day they occur.


Details for each of the four exercised positions were as follows:

1. Celanese -- Closed
A covered calls position in CE was established in the CCAP on 11/20/07 and the stock closed in-the-money yesterday (expiration Friday):

Transactions History:
11/20/07 Initial Stock Position -- Bought 200 CE @ 36.56
11/20/07 Initial Call Options -- Sold 2 CE Dec07 40 Calls @ $.60
12/22/07 Options Exercised -- STC 200 CE @ $40.00

Performance Results(including commissions):
Stock Purchase Cost: $7,321.95
($36.56*200+$9.95 commission)

Net Profit:
(a) Options Income: $108.55 ($.60*200-$11.45 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: $678.05 [($40.00*200-$9.95)-$7,321.95]
Total Net Profit: $786.60 ($108.55+$0+$678.05)

CE ANNUALIZED RETURN ON INVESTMENT: +122.4%
($786.60/$7,321.95)*(365/32)

2. Honeywell -- Closed
A covered calls position in HON was first established in the CCAP on 9/10/07. The stock was retained for writing October, November, and December covered calls. The stock closed in-the-money yesterday (expiration Friday) and the position was closed. The transactions for HON covered calls were as follows:

Transactions History:
9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Options -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct07 Option Expiration Date – HON closed below the strike price at $58.32
10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25
10/30/07 Roll Up Transaction -- (BTC) 5 HON Nov 57.5s @ $3.00
10/30/07 Roll Up Transaction -- (STO) 5 HON Nov 60s @ $1.25 The stock was trading at $59.83 when this roll-up transaction was made.
11/16/07 Dividend Received -- 500 @ $.25
11/17/07 Nov07 Option Expiration Date – HON closed below the strike price at $55.88
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 57.5 Calls @ $.90
12/22/07 Options Exercised -- STC 500 HON @ $57.50

Performance Results(including commissions):
Stock Purchase Cost: $27,124.95
($54.23*500+$9.95 commission)

Net Profit:
(a) Options Income: -$704.80
(b) Dividend Income: $125.00 ($.25*500)
(c) Capital Appreciation: $1,565.10
Total Net Profit: $985.30 (-$704.80+$125.00+$1,565.10)

HON ANNUALIZED RETURN ON INVESTMENT: +12.9%
($985.30/$27,124.95)*(365/103)

3. Humana -- Closed
A covered calls position in HUM was established in the CCAP on 11/20/07 and the stock closed in-the-money yesterday (expiration Friday):

Transactions History:
11/20/07 Initial Stock Position -- Bought 500 HUM @ 71.60
11/20/07 Initial Call Options -- Sold 5 HUM Dec07 75 Calls @ $1.70
12/22/07 Options Exercised -- STC 500 HUM @ $75.00

Performance Results(including commissions):
Stock Purchase Cost: $35,809.95
($71.60*500+$9.95 commission)

Net Profit:
(a) Options Income: $836.30 ($1.70*500-$13.70 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: $1,680.10 [($75.00*500-$9.95)-$35,809.95]
Total Net Profit: $2,516.40 ($836.30+$0+$1,680.10)

HUM ANNUALIZED RETURN ON INVESTMENT: +77.7%
($2,516.40/$35,809.95)*(365/33)

4. Intel -- Closed
A covered calls position in INTC was established in the CCAP on 10/22/07 and the stock closed in-the-money on expiration Friday:

Transactions History:
11/20/07 Initial Stock Position -- Bought 1000 INTC @ 25.59
11/20/07 Initial Call Options -- Sold 10 INTC Dec07 25 Calls @ $1.28
12/22/07 Options Exercised -- STC 1000 INTC @ $25.00

Performance Results(including commissions):
Stock Purchase Cost: $25,599.95
($25.59*1000+$9.95 commission)

Net Profit:
(a) Options Income: $1,262.55 ($1.28*1000-$17.45 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: -$609.90 [($25.00*1000-$9.95)-$25,599.95]
Total Net Profit: $652.65 ($1,262.55+$0-$609.90)

INTC ANNUALIZED RETURN ON INVESTMENT: +29.1%
($652.65/$25,599.95)*(365/32)

The Celanese and Humana results show the large annualized returns that can be achieved by writing deep out-of-the-money calls on rapidly appreciating stocks.

The Honeywell covered calls was a highly-managed holding, including transactions through three sequential expiration months as well as roll-ups. The overall result was satisfactory; however, in this case, a greater return would have been achieved had the roll-up transactions not been transacted.

The Intel position shows that a good annualized return (29.1%) is achievable with in-the-money covered calls when the options expire in-the-money. A good net profit is achieved since the net loss in the stock position is more than offset by the options income received.

Thursday, December 13, 2007

Market Meter Changes to Slightly Bullish

The Covered Calls Advisor conducts weekly reviews of the six key metrics used to determine its U.S. Market Meter Indicator. Today the indicator has changed from its prior Bullish rating to a current rating of Slightly Bullish.

The current readings for the six metrics are:
1. U.S. Earnings and Bond Yield Spread:
5.299%-4.09%=+1.21% is Slightly Bullish.
2. Rest-of-World Earnings and Bond Yield Spread:
6.115%-3.84%=+2.28% is Bullish.
3. Real Earnings Growth:
(1.0%-2.0%)=-1.0% is Slightly Bearish.
4. Current Vs. Expected P/E Ratios:
(18.6-18.87)/18.87=-1.4% is Neutral.
5. Investor Sentiment (Price Momentum):
a. Longer-Term (for Russell 3000):
(86.02-81.66)/81.66=+5.3% is Slightly Bullish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
(Bullish + Neutral)/2 = Slightly Bullish
Since both the shorter-term and longer-term indicators are Slightly Bullish, then this overall Investor Sentiment rating is also Slightly Bullish.
6. Covered Calls Advisor's Gut Feeling: Neutral

The composite overall average outlook for the six indicators above is SLIGHTLY BULLISH, which is now reflected on the 'U.S. Market Meter' Indicator at the top of the right-side column of this blog. The meter also states the recommended investing strategy for this assessment: "The Covered Calls Advisor says: The Current Overall Stock Market Outlook is: SLIGHTLY BULLISH. The Corresponding Investing Strategy is: SELL SLIGHTLY OUT-OF-THE-MONEY COVERED CALLS."

For further insights into the definitions of each of the six components of the overall market meter, refer to the following two prior articles:
Link to 'Developing an Overall Market Outlook'
Link to 'Changes in Overall Market Outlook'

By 'slightly out-of-the-money', this advisor means that the covered call positions in a portfolio of near-month covered calls should now be established on-average with the stock price between 0.5% below and 1.5% below the options strike price.

A primary macroeconomic factor that will determine the short-term performance of the overall market is whether a recession will be avoided and the desired soft-landing achieved. Historic studies have repeatedly demonstrated that the stock market is bullish during the first six months after an initial Fed rate cut if a recession is, in fact, avoided. This advisor believes that an earnings recession will occur (defined as 2 consecutive quarters of negative corporate quarterly earnings growth), but that a recession based on GDP (two consecutive quarters of negative GDP growth) will be narrowly avoided. This descriptive analysis would tend to confirm the 'Slightly Bullish' overall rating result above.

In addition, it is noted that we are currently in a bull market that began on 10/9/02 and in which we have to date had a 91.4% increase as measured by the S&P 500. (Note: A bull market is defined as a rally exceeding +20% after a period of a 20+% decline).

Prior to this one, there have been five bull markets since 1970. This advisor analyzed the U.S. Earnings Yield to Bond Yield Spread at the end of each of these bull markets and discovered that these bull markets did not end until the U.S. Earnings Yield was more than 1% lower than the 10-Yr Treasury Bond Yield. In fact, the actual yield differences at the end of these five bull markets were -1.29%, -2.06%, -4.27%, -3.24%, and -1.39%. In comparison, as shown in #1 above, the current U.S. yield spread is +1.21%. In this advisor's opinion, this provides further support for the notion that the end of the current bull market is not imminent.

Regards and Godspeed

Monday, December 10, 2007

Changes to Overall Market Outlook Indicators

At the top of the right-hand column of this blog, the Covered Calls Advisor provides an Overall Market Meter that shows this advisor's current overall stock market forecast -- which at any given time can range from very bearish to very bullish or anywhere in between. To date, the Market Meter has been a composite rating of five indicators. These indicators were described in detail in a prior post on this blog link to 'Developing an Overall Stock Market Outlook'.
Today, two changes are being made to the list of five indicators. One is a change of an existing indicator and the other is a completely new indicator:

1. Change 'Inflation' Indicator to 'Real Earnings Growth' Indicator
This advisor has compared annual inflation rates with annual stock market returns going back for the past century and has determined that inflation rates by themselves are not a good predictor of stock returns. Previously, it was surmised that a low inflation (<+2%) environment would normally be bullish for stocks and high rates (>+6%) would be bearish. Regardless of its apparent logic, history does not support this conclusion. However, the first statement on inflation from the prior blog post referenced above is true; namely, "inflation has always been and will remain a critically important factor in evaluating the economy's ability to sustain and support adequate growth."
Corporate earnings growth is key -- annualized % increases in total corporate earnings is superior to interest rates alone as a metric for predicting stock market returns. The 'nominal' corporate earnings percentage increase needs to be adjusted to the extent that inflation reduces the 'real' impact of those earnings. Thus, 'Real Earnings Growth' is calculated as total annual corporate earnings growth percent minus the annual inflation rate percent.
The 'real earnings growth' indicator ratings will be:
>20% Very Bullish
12 to 20% Bullish
7 to 12% Slightly Bullish
2 to 7% Neutral
-2 to 2% Slightly Bearish
-7 to -2% Bearish
< -7% Very Bearish
The difficulty herein lies in being able to reasonably accurately forecast the average corporate earnings growth % for the next six months. This advisor begins with the forecast provided by Standard and Poor's and then adjusts their S&P 500 projection by an amount consistent with the Covered Calls Advisor's own overall assessment. Presently, S&P is forecasting a 2.4% increase in S&P 500 6-month forward operating earnings. This advisor believes the earnings slowdown will be more pronounced, and is forecasting a 1.0% increase. This combined with an 2.0% inflation estimate results in a 'real earnings growth' of -1.0% (+1.0% nominal earnings growth minus 2.0% inflation) which, as shown above, is a 'slightly bearish' rating for this indicator.

2. Add a 'Rest-of-World Earnings and Bond Yield Spread' Indicator
Presently, a 'U.S. Earnings and Bond Yield Spread' indicator is used as one metric of the overall market analysis. This indicator provides an investor's perspective on the desirability of investing in U.S.-based stocks rather than bonds or vice versa. However, since the U.S. market represents less than one-half of the world's market capitalization, a 'Rest-of-World Earnings and Bond Yield Spread' indicator is added to provide the same perspective for non-U.S. companies that is provided by this indicator for U.S.-based companies. The iShares EAFE ETF Index (EFA), a composite of the 21 most highly developed countries in the world (excluding the U.S. and Canada) will be utilized for this purpose. Presently, the relevant spread is 2.03%, which is a 'bullish' rating for this indicator.


Both of these indicators will be used after the market closes tomorrow, when the next weekly analysis is completed, for each of the six indicators now used to determine the Overall Market Meter rating. The results of this analysis will be posted on this blog tomorrow evening and will be reflected on the 'Overall Market Meter' shown at the top of the right-side column at that time.

Wednesday, December 5, 2007

International Investing

Question: Do you have any international investments in your covered calls portfolio?

If you're like many investors, the answer is "No". This article presents a case for not only including exposure to international equities, but also for making them a significant portion of your covered call assets.

The primary basis for including non-U.S. (i.e. International) equities relates to the concept of portfolio diversification. To put diversification in context, here are some related comments from a prior blog post:
"There are three primary components related to diversification: Asset Allocation, Sector Diversification, and Position Sizing -- Each of these will be discussed in greater depth in future postings. For now, this advisor will simply present my own guidelines for diversification:
(a) Asset Allocation
Domestic Equities – 70% (roughly 40% large cap and 30% mid/small cap)
International Equities – 25%
Fixed Income – 0%
Cash – 5%
Note: This advisor maintains an aggressive investing approach. You might be more conservative in your own portfolio with a lower percentage of equities and a higher percentage of fixed income and cash.
(b) Sector Diversification - Invest in at least five of the six sectors listed below:
Consumer (includes both Consumer Staples and Consumer Discretionary)
Energy (including Materials)
Financial
Health Care
Industrial (including Telecom and Utilities)
Information Technology
(c) Position Sizing – No single position more than 20% of total. This is the same guideline used by this advisor’s broker, Charles Schwab & Co."

As you notice above, this advisor previously recommended that approximately 25% of ones portfolio be committed to international equities. This may seem somewhat high to some of you; however, the international component in my current asset allocation recommendation is actually higher, namely:
U.S.-based equities -- 69%
International equities -- 31%

Further breakdown by region:
U.S. Large Cap (>$5 billion market cap) -- 44%
U.S. Small & Mid Cap (<$5 billion) -- 25%
Europe -- 16%
Japan -- 5%
Emerging Markets(primarily Asia/Pacific ex-Japan & Latin America) -- 7%
Canada -- 2%
Australia -- 1%

It is very important to understand that the percentages above are by no means rigid percentages. Rather they are simply a baseline from which adjustments are made based on regional and country-specific valuation judgments. For example, my current asset allocation preferences are:
U.S. Large Cap -- Overweight
U.S. Mid/Small Cap -- Marketweight
Europe -- Underweight
Japan -- Overweight
Emerging Markets -- Overweight
Canada -- Underweight
Australia -- Underweight

Hence, my current target allocations might approximate:
U.S. Large Cap -- 50%
U.S. Mid/Small Cap -- 25%
Europe -- 8%
Japan -- 7%
Emerging Markets -- 10%

The asset allocations in the Covered Calls Advisor Portfolio (CCAP) at the current time are as follows:
U.S. Large Cap -- 70%
U.S. Mid/Small Cap -- 9%
Europe -- 0%
Japan -- 0%
Emerging Markets -- 21%
As you can readily see, there is a large discrepancy between plan and actual allocations in current CCAP holdings. Going forward, I intend to do a much better job of practicing what I preach as far as asset allocation is concerned.

Unfortunately, the options market in international equities is much less liquid than for U.S.-based equities. In addition, the availability of financial information as well as financial analysts' assessments are also much more scarce for most international equities -- but valuable information and analysis is now growing rapidly. Also, regional and single-country ETFs can often be a viable alternative to individual companies in making international investments in our covered calls portfolios.

I would like to re-iterate and expand on this comment from a prior post: "This advisor maintains an aggressive investing approach."
You might be more conservative in your approach to covered calls investing and that is fine. But being more conservative does not imply that international equities should be excluded from ones portfolio. To the contrary, including a generous international investing exposure is a desirable reflection of our increasingly global economy and may actually help to reduce overall portfolio risk.

Finally, if you would like a country-by-country percentage breakdown for Europe and Emerging Markets, email me at partlow@cox.net and I will be happy to forward it to you.

Regards and Godspeed

Saturday, December 1, 2007

Returns -- Through November 2007

The overall performance results of the Covered Calls Advisor Portfolio (CCAP) is presented monthly at the end of each calendar month. Results are based solely on the annualized percent change of the total dollar value of the CCAP.
For comparison purposes, the primary benchmark against which the portfolio’s performance is measured is the Schwab MarketTrack Balanced Portfolio (SWBGX), a worldwide, diversified asset allocation fund. SWBGX typically contains approximately 46% domestic stocks (26% large cap; 20% small cap), 16% international stocks, 34% bonds, and 4% cash.

The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000.
At market close on 11/30/2007, the total portfolio value was $254,495.14, a $4,495.14 increase in overall portfolio value since inception.

CCAP Annualized Return = 8.5%
[(254,495.14-250,000)/250,000]*(365/77 days)*100

Annualized Return for SWBGX Benchmark = 6.8%
[(17.67-17.42)/17.42]*(365/77 days)*100

Wednesday, November 28, 2007

Buy iShares MSCI South Korea Index ETF and Hewlett-Packard Co.

Two new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

1. iShares MSCI South Korea Index ETF
11/28/07 Bought 800 EWY @ 65.22
11/28/07 Sold 8 EWY Dec07 68 Calls @ $1.75

Annualized Return If Unchanged: 40.8%
Annualized Return If Exercised: 105.6%
Downside Breakeven Protection: 2.7%

2. Hewlett-Packard Co.
11/28/07 Bought 500 HPQ @ 49.96
11/28/07 Sold 5 Dec07 52.5 Calls @ $.55

Annualized Return If Unchanged: 16.7%
Annualized Return If Exercised: 94.1%
Downside Breakeven Protection: 1.1%

Tuesday, November 20, 2007

Buy Celanese, Intel, and Kinetic Concepts

Three new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

1. Celanese Corp Covered Calls Established for Dec07

11/20/07 Bought 200 CE @ 36.56
11/20/07 Sold 2 CE Dec07 40 Calls @ $.60

Annualized Return If Unchanged: 18.7%
Annualized Return If Exercised: 126.0%
Downside Breakeven Protection: 1.6%


2. Intel Corp Covered Calls Established for Dec07

11/20/07 Bought 1000 INTC @ 25.59
11/20/07 Sold 10 INTC Dec07 25 Calls @ $1.28

Annualized Return If Unchanged: 30.7%
Annualized Return If Exercised: 30.7%
Downside Breakeven Protection: 5.0%


3. Kinetic Concepts Inc Covered Calls Established for Dec07

11/20/07 Bought 400 KCI @ 59.53
11/20/07 Sold 5 KCI Dec07 60 Calls @ $2.35

Annualized Return If Unchanged: 45.0%
Annualized Return If Exercised: 54.0%
Downside Breakeven Protection: 3.9%

Monday, November 19, 2007

Buy Humana and Travelers

Two new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

1. Humana Inc Covered Calls Established for Dec07

11/19/07 Bought 500 HUM @ 71.60
11/19/07 Sold 5 HUM Dec07 75 Calls @ $1.70

Annualized Return If Unchanged: 26.2%
Annualized Return If Exercised: 78.8%
Downside Breakeven Protection: 2.4%


2. Travelers Companies Covered Calls Established for Dec07

11/19/07 Bought 500 TRV @ 51.23
11/19/07 Sold 5 TRV Dec07 55 Calls @ $.55

Annualized Return If Unchanged: 18.1%
Annualized Return If Exercised: 99.5%
Downside Breakeven Protection: 1.6%

November 2007 Expiration Closing Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 8 positions with Nov07 expirations with the following results so far:

- 2 positions closed in-the-money and the calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results were:
McDonald's -- +92.6%
Merck -- +39.5%

- 6 positions (ACN,LLY,HAL,HON,EWY,JPM) ended out-of-the-money. Three positions were closed out today by selling the stock. The 3 closed positions were Accenture(ACN), JP Morgan(JPM), and Eli Lilly(LLY), and each of their annualized return-on-investment (ROI) %s are summarized as follows:
Accenture -- -116.0%
JP Morgan -- -61.0%
Eli Lilly -- -61.3%

These 3 covered call positions were poor investments. However, this advisor believes that sometimes it is better to accept your losses and re-apply the assets where there are better future opportunities. This is the case with these three and the reason for deciding to sell out of the stock is presented below in each case. The transactions history and performance results for each of these 3 covered call positions is provided below:

1. Accenture – Closed

It was decided to close out the ACN position since there is an earnings release prior to the Dec07 expiration date and this advisor prefers not to hold stocks during earnings releases.

Transactions History:
10/23/07 Initial Stock Position -- Bought 1000 ACN @ 39.48
10/23/07 Option Exercised –- Sold 10 ACN Nov07 40 Calls @ $1.05
11/17/07 Nov07 Option Expiration Date – ACN closed below the strike price
11/19/07 Sold 1000 ACN @ $35.08

Performance Results(including commissions):
Stock Purchase Cost: $39,489.95 ($39.48*1000+$9.95 commissions)

Options Income: $1,032.55 ($1.05*1000-$17.45 commissions)
Dividend Income: $0
Capital Appreciation: -$4,419.90 [($35.08*1000-$9.95)-$39,489.95]
Net Profit: -$3,387.35 ($1,032.55-$4,419.90)

ANNUALIZED RETURN ON INVESTMENT:
(-$3,387.35/$39,489.95)*(365/27 days) = -116.0%


2. JPM – Closed
It was a difficult decision whether to continue with or close out this JPM holding.
What caused this advisor to decide to sell out was the fact that JPM has some credit write-off issues, and although modest compared with some other large money-center banks, it still provides a cloud that could continue to adversely effect the stock's perception and price for a while.


Transactions History:
10/23/07 Initial Stock Position -- Bought 500 JPM @ 45.58
10/23/07 Ititial Calls Position -- Sold 5 JPM Nov07 45 Calls @ $1.75
11/17/07 Nov07 Option Expiration Date – JPM closed below the strike price
11/19/07 Sold 500 JPM @ $41.82

Performance Results(including commissions):
Stock Purchase Cost: $22,799.95 ($45.58*500+$9.95 commissions)

Options Income: $861.30 ($1.75*500-$13.70 commissions)
Dividend Income: $0
Capital Appreciation: -$1,899.90 [($41.82*500-$9.95)-($45.58*500-$9.95)]
Net Profit: -$1,028.60 ($861.30-$1,899.90)

ANNUALIZED RETURN ON INVESTMENT:
(-$1,028.60/$22,799.95)*(365/27 days) = -61.0%


3. LLY – Closed
This position was closed out because analysts' consensus future earnings estimates for LLY have decreased since this purchase which is reason enough alone to sell the stock according to this advisor's methodology.


Transactions History:
10/23/07 Initial Stock Position -- Bought 500 LLY @ 56.48
10/23/07 Initial Calls Position -- Sold 5 LLY Nov07 55 Calls @ $2.95
11/13/07 Dividend Received -- 500 @ $.425
11/17/07 Nov07 Option Expiration Date – LLY closed below the strike price
11/19/07 Sold 500 LLY @ $50.62

Performance Results(including commissions):
Stock Purchase Cost: $28,249.95 ($56.48*500+$9.95 commissions)

Options Income: $1,461.30 ($2.95*500-$13.70 commissions)
Dividend Income: $212.50 (500*$.425)
Capital Appreciation: -$2,949.90 [($50.62*500-$9.95)-($56.48*500-$9.95)]
Net Profit: -$1,276.10 ($1,461.30+$212.50-$2,949.90)

ANNUALIZED RETURN ON INVESTMENT:
(-$1,276.10/$28,149.95)*(365/27 days) = -61.3%

Halliburton and Honeywell -- Continuation Transactions

1. Halliburton (HAL) Continuation Transaction

I confess that I'm not a big fan of the Energy sector right now as it is likely that the price of oil is now peaking in the $95 range and could well hit $70 before it reaches $100. However, I am committed to diversification, so I've decided to retain the HAL holding.

The following transaction was made today to continue the covered calls written against the 700 shares of HAL:
11/19/07 Covered Calls Continuation Transaction -- STO 7 Dec07 37.5 Calls @ $.85

The Transactions History to date is as follows:
10/24/07 Initial Stock Position -- Bought 700 HAL @ 40.01
10/24/07 Initial Call Options -- Sold 7 HAL Nov07 40 Calls @ $1.25
11/17/07 Nov07 Option Expiration Date – HAL closed below the strike price at $37.02
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 37.5 Calls @ $.85

The overall performance results(including commissions)for the HAL transactions through Dec07 expiration would be as follows:
Stock Purchase Cost: $28,016.95
($40.01*700+$9.95 commission)

Net Profit:
(a) Options Income: $1,439.60 (700*$1.25 + 700*.85)
(b) Dividend Income: $63.00 ($.09*700)
(c) Capital Appreciation (If stock price unchanged from $37.02): -$2,112.90
(c) Capital Appreciation (If exercised): -$1,776.90
Total Net Profit(If stock price unchanged at $37.02): -$610.30 ($1,439.60+$63.00-$2,112.90)
Total Net Profit(If stock price exercised at $37.50): -$274.30 ($1,439.60+$63.00-$1,776.90)

Annualized Return If Unchanged (ARIU) -13.5% (-$610.30/$28,016.95)*(365/59)
Annualized Return If Exercised (ARIE) -6.1% (-$274.30/$28,016.95)*(365/59)



2. Honeywell (HON) Continuation Transaction

Each of the last two months the Covered Calls Advisor Portfolio (CCAP) has attempted to roll up to the 60 strike price to get the stock to be called away at 60. The stock has been a yo-yo recently between the 55 and 60 range and is now at the lower end. I remain bullish on the company and am confident the Dave & Dave management team will be successful in achieving their revenue and earnings growth plans; therefore the HON holding is retained.

The following transaction was made today to continue the covered calls written against the 500 shares of HON:
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 57.5 Calls @ $.90

A summary of the HON transactions so far, including today's roll up is as follows:
9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Options -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct07 Option Expiration Date – HON closed below the strike price at $58.32
10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25
10/30/07 Roll Up Transaction -- (BTC) 5 HON Nov 57.5s @ $3.00
10/30/07 Roll Up Transaction -- (STO) 5 HON Nov 60s @ $1.25 The stock was trading at $59.83 when this roll-up transaction was made.
11/16/07 Dividend Received -- 500 @ $.25
11/17/07 Nov07 Option Expiration Date – HON closed below the strike price at $55.88
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 57.5 Calls @ $.90

The overall performance results(including commissions)for the HON transactions through Dec07 expiration would be as follows:
Stock Purchase Cost: $27,124.95
($54.23*500+$9.95 commission)

Net Profit:
(a) Options Income: -$704.80
(b) Dividend Income: $125.00 ($.25*500)
(c) Capital Appreciation (If stock price unchanged from $55.88): $760.10
(c) Capital Appreciation (If exercised): $1,565.10
Total Net Profit(If stock price unchanged at $55.88): $180.30 (-$704.80+$125.00+$760.10)
Total Net Profit(If stock price exercised at $57.50): $985.30 (-$704.80+$125.00+$1,565.10)

Annualized Return If Unchanged (ARIU) 2.4% ($180.30/$27,124.95)*(365/103)
Annualized Return If Exercised (ARIE) 12.9% ($985.30/$27,124.95)*(365/103)

Saturday, November 17, 2007

November Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 8 positions with Nov07 expirations with the following results:

- 2 positions closed in-the-money and the calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results were:
McDonald's -- 92.6%
Merck -- 39.5%

- 6 positions (ACN,LLY,HAL,HON,EWY,JPM) ended out-of-the-money. Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Dec07covered call positions. The related transactions will be made Monday morning and the actual transactions will be posted at that time.


Details for the two exercised positions were as follows:

1. McDonald's -- Closed
As you might recall, McDonald's was first identified as a 'Special Situation' by this advisor on 10/13/07 (Link to McDonald's original post) because of their $1.50 annual dividend payment that would occur prior to the November expiration as well as the strong fundamentals of the company. A covered calls position in MCD was established in the CCAP on 10/22/07 and the stock closed in-the-money on expiration Friday:

Transactions History:
10/22/07 Initial Stock Position -- Bought 500 MCD @ $55.94
10/22/07 Initial Call Options -- Sold 5 MCD Nov07 57.5 Calls @ $.70
11/13/07 Dividend Received -- 500 @ $1.50
11/17/07 Options Exercised -- STC 500 MCD @ $57.50

Performance Results(including commissions):
Stock Purchase Cost: $27,979.95
($55.94*500+$9.95 commission)

Net Profit:
(a) Options Income: $336.30 ($.70*500-$13.70 commission)
(b) Dividend Income: $750.00 ($1.50*500)
(c) Capital Appreciation: $760.1 [($57.50*500-$9.95)-$27,979.95]
Total Net Profit: $1,846.40 ($336.30+$750.00+$760.10)

ANNUALIZED RETURN ON INVESTMENT:

($1,846.40/$27,979.95)*(365/26) = 92.6%


2. Merck -- Closed
The 'Transactions History' below shows that MRK stock was in-the-money on Oct07 expiration Friday, but a decision was made to keep the stock and to simultaneously roll up to the 52.5s and out to the Nov07 calls. Shortly thereafter, a roll up from the Nov 52.5 to the Nov 57.5 was transacted. The stock closed in-the-money at the November expiration Friday, so the option was exercised and the stock was sold at the $57.50 option price.

Transactions History
9/7/07 Initial Stock Position -- Bought 500 MRK @ $49.97
9/7/07 Initial Call Options -- Sold 5 MRK Oct07 50 Calls @ $1.85
10/19/07 Roll Up to 52.5s and Out to Nov. -- BTC 5 MRK Oct 50s @ $3.90
10/19/07 Roll Up to 52.5s and Out to Nov. -- STO 5 MRK Nov 52.5s @ $2.40
10/26/07 Roll Up -- BTC 5 MRK Nov 52.5s @ $5.20
10/26/07 Roll Up -- STO 5 MRK Nov 57.5s @ $1.30
Note: MRK stock was trading at $57.40 when this 10/26 roll up transaction was executed.
11/17/07 Options Exercised -- STC 500 MRK @ $57.50

Performance Results(including commissions):
Stock Purchase Cost: $24,994.95
($49.97*500+$9.95 commission)

Net Profit:
(a) Options Income: -$1,843.50
Change in Options Value = 1st Options Write Income $911.30($1.85*500-$13.70 commission) minus 1st Options Buyback Cost $1,963.70($3.90*500+$13.70 commission) plus 2nd Options Write Income $1,186.30($2.40*500-$13.70) minus 2nd Options Buyback Cost $2,613.70($5.20*500+$13.70) plus 3rd Options Write Income $636.30 ($1.30*500-$13.70) = -$1,843.50 ($911.30-$1,963.70+$1,186.30-$2,613.70+$636.30)
(b) Capital Appreciation: $3,765.00 ($57.50-$49.97)*500
Total Net Profit: $1,921.50 (+$3,765.00-$1,843.50)

ANNUALIZED RETURN ON INVESTMENT:
(1,921.50/24,994.95)*(365/71 days) = 39.5%

Wednesday, November 7, 2007

Analysis Sheet

Below is a sample 'Analysis Sheet' used by the Covered Calls Advisor to evaluate each potential covered call position. The sheet shown below is for the Covered Calls Advisor Portfolio current position in McDonald's. It is presented using ZOHO Sheet to enable you, the reader, to view not only the numbers on the sheet, but also the formulas used in each cell if you choose to do so. Unfortunately, the ZOHO Sheet takes several seconds to load so some patience is required before you are able to navigate it.

The seven columns on the 'Analysis Sheet' are as follows:
1. Input Description
2. Input Value -- The financial data manually keyed into the sheet.
3. Category -- There are ten analysis categories used.
4. Financial Metrics -- A brief description of the financial measure being calculated.
5. Actuals -- The calculated value for the associated financial metric.
6. Ratings Methodology -- The point value assigned to each range of values for each financial metric.
7. Points -- The points achieved for that particular financial metric based on the 'Actuals'(#5 above) and where they fall within the 'Ratings Methodology'(#6 above) range.

In addition, a 'Summary of Results' is shown at the bottom center section of the sheet. The 'Actuals' column shows the points achieved for each category as well as the total for all ten categories. The final summary column labeled 'Achieve' shows a YES or NO which indicates whether the desired threshold was or was not achieved for each category. A grand total of 80 points or more is required to achieve the overall threshold for the covered call position being analyzed -- reaching this level is equivalent to a 'Buy' for establishing the position.





Preparing each 'Analysis Sheet' typically requires about 20 minutes of data collection and data entry. This advisor primarily uses Schwab.com data resources to capture the requisite information. A prior article (Covered Calls Selection Process link) described how the number of potential covered call investment candidates are narrowed down to a manageable number. Typically, about 30-40 covered call 'Analysis Sheet' positions are completed each month to identify 10-20 investments.

This level of detailed analysis for each potential position is more effort than many covered call investors feel is warranted for analyzing a particular position. These feelings are expected and they're fine, because each person should seek his/her own approach, criteria, and comfort level when making covered call investing choices.

This 'Analysis Sheet' is a work-in-progress. Rarely does a month go by without some tweak to the methodology, and continued future modifications will undoubtedly occur. I hope this article has provided you some useful ideas and that it might stimulate your thinking regarding your own covered calls selection methodology.

Regards and Godspeed

Monday, November 5, 2007

On Being ASCCT Readers

This article describes five techniques we should apply whenever we are reading investing-related information. We should seek to be ASCCT readers – that is Avid, Selective, Careful, Critical, and Thoughtful readers. Applying these five techniques will enable us to improve our ability to absorb and utilize the financial information we read so that we can ultimately be more successful as covered calls investors. I ask your forbearance in allowing me to express the following small bit of my personal philosophy on investing success and the associated importance of reading:

Success comes from the application of knowledge.
Knowledge comes from seeking and absorbing truthful information.
Truthful information comes from listening, reading, thinking, and analyzing.”

So to become a more successful covered calls investor, reading is an essential and fundamental tool.
Below is a more detailed presentation of the five keys to success in reading investing-related information:

1. Be an ‘Avid’ Reader – An ‘avid’ reader describes someone who simply loves to read. And if you really enjoy investing, which covered call investors invariably do, then you should probably be spending an average of a minimum of two hours a day reading investing-related information.
2. Be a ‘Selective’ Reader – As you know, there’s an incredible volume of investing information available for reading. So how do we focus on quality investing information and avoid the extraneous ‘noise’? Some specific suggestions in this regard were included in the most recent post nk) on this blog.
3. Be a ‘Careful’ Reader – This is very important! Because of the huge volume of items available to read, there is a natural tendency to speed-read or skim what we are reading so we can cover even more total quantity of material. Don’t do it!! If we have carefully chosen to read only ‘quality’ investing information (see step #2 above), then we must commit ourselves to fully read and concentrate on every sentence we are reading, and to read deliberately enough so that we seriously try to fully understand everything the author is trying to convey to us. You’ll be amazed at how much more in-depth understanding you can achieve by committing yourself to ‘careful’ reading.
4. Be a ‘Critical’ Reader –You already know this, but it’s worth repeating over and over again – “Don’t believe everything you read!” Utilize the analytical ability God gave you to critique the information you’re provided. Some of it will be totally true, some will be partially true, and some will be downright wrong. Analyze, analyze, analyze until your gut feeling provides you increasing confidence that you are getting closer to the truth in whatever the particular subject you are reading about.
5. ‘Think’ About What You Have Read – The final critically important part of analyzing what we’ve read is simply thinking about it. This skill requires us to devote some quiet time to think about what we’ve read to assess its validity and what further analysis you might need to undertake. Find time (go for a walk; or sit in your favorite lounge chair; or whatever else works for you) and cut off the extraneous noise and other competing activities and think about what you’ve read. By the way, Warren Buffett is a great proponent of this quiet time thinking technique.

I hope you agree that to be a successful covered calls investor, we need to read avidly, selectively, carefully, critically, and thoughtfully. “ASCCT” if it helps you to remember it. I invite you to please try this approach during the next month. I’m confident you’ll be pleasantly surprised at how your investing knowledge, savvy, and confidence will begin to grow.

Friday, November 2, 2007

Recommended Reading

In the right-hand column of this blog site, I’ve just added a section called ‘Recommended Reading'. This list provides links to those sites that I consider as essential regular reading for my own investing education.

A short description of why I like each site is as follows:

1. General Financial Media Sites:
• Barrons – This is my favorite site for high-quality investing-related information. It is a true bargain at $79/year for the online-only service.
• Bloomberg – Good news source for worldwide financial news.
• MarketWatch – Good overall stock market information site. Others you might consider instead of this one are Yahoo Finance or CNN/Money.

2. The Big Picture:
• Bespoke Investment Group – If you like quantitative finance as I do, especially charts and graphs, then definitely check out this site.
• Briefing.com – Good common sense investment analysis and advice.
• The Capital Spectator – Intelligent economic information and commentary.

3. Stock Investing
• Seeking Alpha – Well-organized aggregator of a variety of quality investing blog posts.
• Vinvesting – Aggregator of value investing information.
• GuruFocus – Tracks stock selections and holdings of many of the top stock market investors.

4. Stock Selection -- In a prior post (Stock Selection 101 link), I made a case for using two stock advisory services for identifying potential stock purchase candidates. The two used by this advisor are:
• Schwab Equity Ratings – Link
Note: you must have a Schwab account to obtain access to these ratings.
• MarketGrader.com – Link
Annual subscription price is $100.

This list of sites will certainly be modified over time -- I hope you've found some interesting new sites for your review on the current list. As a lifetime learner and avid reader, I’m always seeking additional excellent investing sites. I would certainly welcome hearing about your own personal favorite investing sites.

Regards and Godspeed

Thursday, November 1, 2007

Returns -- Through October 2007

The overall performance results of the Covered Calls Advisor Portfolio (CCAP) will be presented monthly at the end of each calendar month. Results are based solely on the annualized percent change of the total dollar value of the CCAP.
For comparison purposes, the primary benchmark against which the portfolio’s performance will be measured is the Schwab MarketTrack Balanced Portfolio (SWBGX), a worldwide, diversified asset allocation fund. SWBGX typically contains approximately 46% domestic stocks (26% large cap; 20% small cap), 16% international stocks, 34% bonds, and 4% cash.

The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000.
At market close on 10/31/2007, the total portfolio value was $263,114.03, a $13,114.03 increase in overall portfolio value since inception.

CCAP Annualized Return = 40.7%
[(263,114.03-250,000)/250,000]*(365/47 days)*100

Annualized Return for SWBGX Benchmark = 31.6%
[(18.13-17.42)/17.42]*(365/47 days)*100

Wednesday, October 31, 2007

Roll Up -- iShares MSCI South Korea Index ETF

The Covered Calls Advisor Portfolio (CCAP) covered call positions in iShares MSCI South Korea Index ETF(EWY) were rolled up today (10/31/07) from the Nov 70S to the Nov 75s. The transactions were as follows:

10/31/07 Buy-to-Close (BTC) 8 EWY Nov 70s @ $5.20
10/31/07 Sell-to-Open (STO) 8 EWY Nov 75s @ $1.75
Net Debit on Roll Up $3.45

The ‘net debit to strike price difference ratio’ was 69% [($5.20-$1.75)/($75-$70)]*100, which achieved the desired threshold of rolling up when the ratio is <75%.

A summary of the EWY transactions so far is as follows:
Initial EWY Post: EWY Link
10/23/07 Initial ETF Position -- Bought 800 EWY @ 68.40
10/23/07 Initial Calls Postion -- Sold 8 EWY Nov07 70 Calls @ 1.90
Today:
10/31/07 Roll Up Transaction -- BTC 8 EWY Nov 70s @ $5.20
10/31/07 Roll Up Transaction -- STO 8 EWY Nov 75s @ $1.75
Note: EWY ETF was trading at $74.45 today when the roll up transaction was executed.

The results-to-date through the completed Nov 70 covered calls and the status on the newly established Nov 75 covered calls position (including commissions) are each summarized below:

(a) Completed Covered Calls Transactions:
Original Stock Investment 10/23/07 – Purchased 800 shares EWY @ $68.40
= $68.40*800 + $9.95 commission = ($54,729.95)
Change in ETF Value ($74.45-$68.40)*800 = $4,840.00
Change in Options Value = Options Write Income $1,504.05($1.90*800-$15.95 commission) minus Options Buyback Cost $4,175.95($5.20*800+$15.95 commission)=
-$2,671.90($1,504.05-$4,175.95)

Net Change (+$4,840.00-$2,671.90) = $2,168.10

ANNUALIZED RETURN ON INVESTMENT:
(2,168.10/54,729.95)*(365/8 days) = 180.7%

(b) New Covered Call Position Established Today:
10/31/07 Retained 800 EWY at $74.45 = ($59,560)
10/31/07 Sold 8 Nov07 75 Calls @ $1.75 = $1,384.05 ($1.75*800-$15.95 commission)

Annualized Return If Unchanged (ARIU) 50.5%
Annualized Return If Exercised (ARIE) 66.3%
Downside Breakeven Protection 2.4% =Avg. of .14%/day for 17 days until expiration which exceeds the minimum threshold average of .06%/day required by the covered calls advisor.

Tuesday, October 30, 2007

Roll Up -- Honeywell

The Covered Calls Advisor Portfolio (CCAP) covered call position in Honeywell (HON) was rolled up today (10/30/07) from the Nov 57.5 to the Nov 60. The transactions were as follows:

10/30/07 Buy-to-Close (BTC) 5 HON Nov 57.5s @ $3.00
10/30/07 Sell-to-Open (STO) 5 HON Nov 60s @ $1.25
Net Debit on Roll Up $1.75

The ‘net debit to strike price difference ratio’ was 70% [($3.00-$1.25)/($60-$57.5)]*100, which was better than this advisor’s desired minimum threshold of <75% for roll ups.

A summary of the HON transactions so far, including today's roll up is as follows:
9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Option -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct07 Option Expiration Date – HON closed below the strike price at $58.32
10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25
10/30/07 Roll Up Transaction -- (BTC) 5 HON Nov 57.5s @ $3.00
10/30/07 Roll Up Transaction -- (STO) 5 HON Nov 60s @ $1.25
The stock was trading at $59.83 when today's roll-up transaction was made.

The results-to-date through the completed Nov 57.5 covered calls and the status on the newly established Nov 60 covered calls position (including commissions) are each summarized below:

(a) Completed Covered Calls Transactions:
Original Stock Investment 9/10/07 – Purchased 500 shares HON @ $54.23
= $54.23*500 + $9.95 commission = ($27,124.95)
Change in Stock Value to Present ($59.83-$54.23)*500 = $2,800.00
Change in Options Value = 1st Options Write Income $886.30($1.80*500-$13.70 commission) minus 1st Options Buyback Cost $2,336.30($4.70*500+$13.70 commission) plus 2nd Options Write Income $536.30($1.10*500-$13.70) plus 3rd Options Write Income $1,111.30($2.25*500-$13.70) minus 2nd Options Buyback Cost $1,513.70($3.00*500+$13.70) = -$1,316.10($886.30-$2,336.30+$536.30+1,111.30-$1,513.70)

Net Change (+$2,800.00-$1,316.10) = $1,483.90

ANNUALIZED RETURN ON INVESTMENT:
(1,483.90/27,124.95)*(365/50 days) = 39.3%

(b) New Covered Call Position Established Today:
10/30/07 Retained 500 HON at $59.83 = ($29,915)
10/30/07 Sold 5 Nov07 60 Calls @ $1.25 = $611.30 ($1.25*500-$13.70 commission)

Annualized Return If Unchanged (ARIU) 42.3%
Annualized Return If Exercised (ARIE) 48.1%
Downside Breakeven Protection 2.1% =Avg. of .12%/day for 18 days until expiration which exceeds the minimum threshold of .06%/day for the covered calls advisor.

Friday, October 26, 2007

Roll Up Adjustment -- Merck

The Covered Calls Advisor Portfolio (CCAP) covered call position in Merck (MRK) was rolled up today (10/26/07) from the Nov 52.5 to the Nov 57.5. The transactions were as follows:

10/26/07 Buy-to-Close (BTC) 5 MRK Nov 52.5s @ $5.20
10/26/07 Sell-to-Open (STO) 5 MRK Nov 57.5s @ $1.30
Net Debit on Roll Up $3.90

The ‘net debit to strike price difference ratio’ was 78% [$3.90/($57.7-$52.5)]*100, which was slightly above this advisor’s desired threshold of rolling up when the ratio is <75%.

A summary of the MRK transactions so far is as follows:
Initial MRK Post:
9/7/07 Bought 500 MRK @ 49.97
9/7/07 Sold 5 MRK Oct07 50 Calls @ 1.85
Prior Roll Out Transaction:link
10/19/07 BTC 5 MRK Oct 50s @ $3.90
10/19/07 STO 5 MRK Oct 52.5s @ $2.40
Today:
10/26/07 BTC 5 MRK Nov 52.5s @ $5.20
10/26/07 STO 5 MRK Nov 57.5s @ $1.30
Note: MRK stock was trading at $57.40 today when the roll up transaction was executed.

The results-to-date through the completed Nov 52.5 covered calls and the status on the newly established Nov 57.5 covered calls position (including commissions) are each summarized below:

(a) Completed Covered Calls Transactions:
Original Stock Investment 9/7/07 – Purchased 500 shares MRK @ $49.97
= $49.97*500 + $9.95 commission = ($24,994.95)
Change in Stock Value ($57.40-$49.97)*500 = $3,715.00
Change in Options Value = 1st Options Write Income $911.30($1.85*500-$13.70 commission) minus 1st Options Buyback Cost $1,963.70($3.90*500+$13.70 commission) plus 2nd Options Write Income $1,186.30($2.40*500-$13.70) minus 2nd Options Buyback Cost $2,613.70($5.20*500+$13.70) = -$2,479.80($911.30-$1,963.70+$1,186.30-$2,613.70)

Net Change (+$3,715.00-$2,613.70) = $1,101.30

ANNUALIZED RETURN ON INVESTMENT:
(1,101.30/24,994.95)*(365/49 days) = 32.8%

(b) New Covered Call Position Established Today:
10/26/07 Retained 500 MRK at $57.40 = ($28,700)
10/26/07 Sold 5 Nov07 57.5 Calls @ $1.30 = $636.30 ($1.30*500-$13.70 commission)

Annualized Return If Unchanged (ARIU) 37.6%
Annualized Return If Exercised (ARIE) 40.5%
Downside Breakeven Protection 2.3% =Avg. of .10%/day for 22 days until expiration.

Wednesday, October 24, 2007

Buy Halliburton

The Covered Calls Advisor Portfolio (CCAP) established the following new covered call position:

10/24/07 Bought 700 HAL @ 40.01
10/24/07 Sold 7 HAL Nov07 40 Calls @ $1.25

Annualized Return If Unchanged: 47.1%
Annualized Return If Exercised: 47.1%
Downside Breakeven Protection: 3.1%

This position completes the establishing of positions for Nov07 covered calls. Approximately $9,600 cash (3.7% of total CCAP value) remains in CCAP to cover potential management of existing positions, such as roll ups.

Please click on the comments link below if you have any questions or feedback on the CCAP. Your comments are always appreciated.

Regards and Godspeed

Tuesday, October 23, 2007

Buy Accenture, iShares MSCI South Korea Index ETF, JP Morgan Chase, and Eli Lilly

Four new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

1. Accenture Ltd CL A Covered Calls Established

10/23/07 Bought 1000 ACN @ 39.48
10/23/07 Sold 10 ACN Nov07 40 Calls @ $1.05

Annualized Return If Unchanged: 38.8%
Annualized Return If Exercised: 58.1%
Downside Breakeven Protection: 2.7%


2. iShares MSCI South Korea Index ETF Covered Calls Established

10/23/07 Bought 800 EWY @ 68.40
10/23/07 Sold 8 EWY Nov07 70 Calls @ $1.90

Annualized Return If Unchanged: 39.0%
Annualized Return If Exercised: 71.8%
Downside Breakeven Protection: 2.8%


3. JP Morgan Chase Covered Calls Established

10/23/07 Bought 500 JPM @ 45.58
10/23/07 Sold 5 JPM Nov07 45 Calls @ $1.75

Annualized Return If Unchanged: 37.4%
Annualized Return If Exercised: 37.4%
Downside Breakeven Protection: 3.8%
Downside Maximum Return Protection 1.3% =[(45.58-45.00)/45.58]*100

4. Eli Lilly & Co. Covered Calls Established

10/23/07 Bought 500 LLY @ 56.48
10/23/07 Sold 5 LLY Nov07 55 Calls @ $2.95

Annualized Return If Unchanged: 49.0%
Annualized Return If Exercised: 49.0%
Downside Breakeven Protection: 5.2%
Downside Maximum Return Protection 2.6% =[(56.48-55.00)/56.48]*100

You'll notice that the first two positions are out-of-the-money (OTM) covered calls and the last two are in-the-money (ITM). An additional indicator termed 'downside maximum return protection' is included for any covered calls that are ITM when established. This represents the maximum percent that the stock price can fall by the expiration date and the maximum annualized ROI % will still be achieved.

Monday, October 22, 2007

Buy McDonald's

The Covered Calls Advisor Portfolio (CCAP) established the following new covered call position:

10/22/07 Bought 500 MCD @ 55.94
10/22/07 Sold 5 MCD Nov07 57.5 Calls @ $.70

Annualized Return If Unchanged: 55.94%
Annualized Return If Exercised: 94.4%
Downside Breakeven Protection: 1.3%

As you may recall, MCD goes ex-dividend on 11/13/07 with an annual dividend of $1.50 per share. Reference Link to McDonald's post. For clarification, this dividend is included in the annualized return %s above, but is excluded from the downside breakeven protection calculation.

Honeywell -- Continuation Transaction

The following transaction was made today to continue the covered calls written against the 500 shares on HON:

10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25


The Transactions History to date is as follows:

9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Option -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct’07 Option Expiration Date – HON closed below the strike price at $58.32
10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25


The Performance Results potential (including commissions) if the current position is called is as follows:
Stock Purchase Cost: $27,124.95 ($54.23*500+$9.95 commissions)
Option Income: +$181.45 ($180*5-$470*5+$110*5+225*5-$43.55 commissions)
Capital Appreciation: $1,615.10 ($57.50*500-$9.95 -$27,124.95)
Net Profit: $1,796.55 ($181.45 + $1,615.10)


ANNUALIZED RETURN ON INVESTMENT IF CALLED:
(1,796.55/27,124.95)*(365/61 days) = 39.6%

United Health Group -- Closed

The initial UNH covered call position expired with the stock out-of-the-money. Today the 300 shares of stock were sold. It was decided not to continue with selling additional call options against the 300 shares owned because the potential annualized return-on-investment available for such a transaction did not exceed this advisor's threshold of >25% annualized return if stock price unchanged (ARIU).

1. United Health Group – Closed

Transactions History:
9/17/07 Bought 300 UNH @ 49.77
9/17/07 Sold 3 Oct07 50 Calls @ 1.50
10/22/07 Sold 300 UNH @ 47.26

Performance Results(including commissions):
Stock Purchase Cost: $14,940.95 ($49.77*300+$9.95 commissions)
Option Income: $437.80 ($1.50*300-$12.20 commissions)
Capital Appreciation: -$772.90 [($47.26*300-$9.95)-$14,940.95]
Net Profit or Loss: -$335.10 ($437.80-$772.90)

ANNUALIZED RETURN ON INVESTMENT:
(-335.10/14,940.95)*(365/35 days) = -23.4%

Sunday, October 21, 2007

October 2007 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained 11 positions with Oct07 expirations with the following results:
- 8 positions closed in-the-money so the calls were exercised and the stock was called away. Details of each of these transactions are presented below.
- 1 position (MRK) was also in-the-money, but the October option was covered and a new Nov07 covered call position was established.
See MRK Roll Out link
- 2 positions (HON and UNH) ended out-of-the-money. Decisions will be made to either sell the stock, or to establish Nov07 covered call positions against these stock holdings. The related transactions will be made Monday morning and the actual transactions will be posted at that time.

The 8 closed positions and each of their annualized return-on-investment (ROI) %s are summarized as follows:
BMC Software -- 39.2%
Fluor -- 75.1%
Hewlett Packard -- 34.9%
iShares MSCI EAFE ETF -- 31.3%
Materials Select Sector SPDR ETF -- 35.8%
Nike -- 37.2%
Oil Service HOLDRS Trust ETF -- 42.7%
Travelers Cos. -- 44.6%

The transactions history and performance results for each of these 8 covered call positions is provided below:

1. BMC Software – Closed

Transactions History:
9/17/07 Initial Stock Position -- Bought(BTO)500 BMC @ 30.50
9/17/07 Initial Call Options -- Sold (STO) 5 Oct07 30 Calls @ 1.65
10/20/07 Option Exercised – STC 500 BMC @ $30.00

Performance Results(including commissions):
Stock Purchase Cost: $15,259.95 ($30.50*500+$9.95 commissions)
Option Income: $811.30 ($1.65*500-$13.70 commissions)
Capital Appreciation: -$269.90 [($30.00*500-$9.95)-$15,259.95]
Net Profit: $514.40 ($811.30-$269.90)

ANNUALIZED RETURN ON INVESTMENT:
(514.40/15,259.95)*(365/33 days) = 39.2%


2. FLR – Closed

Transactions History:
9/18/07 Initial Stock Position -- BTO 100 FLR @ $138.17
9/18/07 Initial Call Option -- STO 1 FLR Oct 140 @$4.90
10/2/07 Roll Up Transaction -- BTC 1 FLR Oct 140 @ $11.60
10/2/07 Roll Up Transaction -- STO 1 FLR Oct 150 @ $4.50
10/20/07 Option Exercised – STC 100 FLR @ $150.00

Performance Results(including commissions):
Stock Purchase Cost: $13,826.95 ($138.17*100+$9.95 commissions)
Option Income: -$249.85 ($490-$1160+$450-$29.85 commissions)
Capital Appreciation: $1,163.10 [($150.00*100-$9.95)-$13,826.95]
Net Profit: $913.25 ($1,163.10-$249.85)

ANNUALIZED RETURN ON INVESTMENT:
(913.25/13,862.95)*(365/32 days) = 75.1%


3. Hewlett Packard – Closed

Transactions History:
9/11/07 Initial Stock Position -- Bought 500 HPQ @ 49.78
9/11/07 Initial Call Options -- Sold 5 Oct07 50 Calls @ 1.75
10/20/07 Option Exercised – STC 500 HPQ @ $50.00

Performance Results(including commissions):
Stock Purchase Cost: $24,899.95 ($49.78*500+$9.95 commissions)
Option Income: $861.30 ($1.75*500-$13.70 commissions)
Capital Appreciation: $90.10 [($50.00*500-$9.95)-$24,899.95]
Net Profit: $951.40 ($861.30+$90.10)

ANNUALIZED RETURN ON INVESTMENT:
(951.40/24,899.95)*(365/40 days) = 34.9%


4. iShares MSCI EAFE ETF – Closed

Transactions History:
9/11/07 Initial Stock Position -- BTO 400 EFA @ 77.75
9/11/07 Initial Call Options -- STO 4 Oct07 78 Calls @ 2.50
10/20/07 Option Exercised – STC 400 EFA @ $78.00

Performance Results(including commissions):
Stock Purchase Cost: $31,109.95 ($77.75*400+$9.95 commissions)
Option Income: $987.05 ($2.50*400-$12.95 commissions)
Capital Appreciation: $80.10 [($78.00*400-$9.95)-$31,109.95]
Net Profit: $1,067.15 ($987.05+$80.10)

ANNUALIZED RETURN ON INVESTMENT:
(1,067.15/31,109.95)*(365/40 days) = 31.3%


5. Materials Select Sector SPDR ETF – Closed

Transactions History:
9/12/07 Initial Stock Position -- BTO 200 XLB @ 38.84
9/12/07 Initial Call Options -- STO 2 Oct07 39 Calls @ 1.45
10/20/07 Option Exercised – STC 200 XLB @ $39.00

Performance Results(including commissions):
Stock Purchase Cost: $7,777.95 ($38.84*200+$9.95 commissions)
Option Income: $278.15 ($1.45*200-$11.85 commissions)
Capital Appreciation: $12.10 [($39.00*200-$9.95)-$7,777.95]
Net Profit: $290.25 ($278.15+$12.10)

ANNUALIZED RETURN ON INVESTMENT:
(290.25/7,777.95)*(365/38 days) = 39.2%


6. Nike Inc. – Closed

Transactions History:
9/7/07 Initial Stock Position -- BTO 500 NKE @ 54.83
9/7/07 Initial Call Options -- STO 5 NKE Oct07 55 Calls @ 2.30
10/20/07 Option Exercised – STC 500 NKE @ $55.00

Performance Results(including commissions):
Stock Purchase Cost: $27,424.95 ($54.83*500+$9.95 commissions)
Option Income: $1,136.30 ($2.30*500-$13.70 commissions)
Capital Appreciation: $65.10 [($55.00*500-$9.95)-$27,424.95]
Net Profit: $1,201.40 ($1,136.30+$65.10)

ANNUALIZED RETURN ON INVESTMENT:
(1,201.40/27,424.95)*(365/43 days) = 37.2%


7. Oil Service HOLDRS Trust ETF – Closed

Transactions History:
9/12/07 Initial Stock Position -- BTO 200 OIH @ 184.35
9/12/07 Initial Call Options -- STO 2 Oct07 185 Calls @ 7.70
10/20/07 Option Exercised – STC 200 OIH @ $185.00

Performance Results(including commissions):
Stock Purchase Cost: $36,879.95 ($184.35*200+$9.95 commissions)
Option Income: $1,528.15 ($7.70*200-$11.85 commissions)
Capital Appreciation: $110.10 [($185.00*200-$9.95)-$36,879.95]
Net Profit: $1,638.25 ($1,528.15+$110.10)

ANNUALIZED RETURN ON INVESTMENT:
(1,638.25/36,879.95)*(365/38 days) = 42.7%


8. Travelers Cos. – Closed

Transactions History:
9/10/07 Initial Stock Position --BTO 500 TRV @ 49.37
9/10/07 Initial Call Options -- STO 5 TRV Oct07 50 Calls @ 1.85
10/20/07 Option Exercised – STC 500 TRV @ $50.00

Performance Results(including commissions):
Stock Purchase Cost: $24,694.95 ($49.37*500+$9.95 commissions)
Option Income: $911.30 ($1.85*500-$13.70 commissions)
Capital Appreciation: $295.10 [($50.00*500-$9.95)-$24,694.95]
Net Profit: $1,206.40 ($911.30+$295.10)

ANNUALIZED RETURN ON INVESTMENT:
(1,206.40/24,694.95)*(365/40 days) = 44.6%


The performance of the overall Covered Calls Advisor Portfolio (CCAP) as measured by the total portfolio value will be posted on this site monthly on the last day of each calendar month. The initial posting for the monthly overall CCAP performance results will therefore be on October 31, 2007.

Regards and Godspeed

Saturday, October 20, 2007

Covered Calls Selection Process

A previous article Stock Selection 101 described the Covered Calls Advisor's stock selection process. This article picks up where that article left off by describing the process used for systematically narrowing the initial list of 200-300 stock purchase candidates to a final list of 10-20 covered call positions to be added to the Covered Calls Advisor Portfolio (CCAP).

This advisor normally writes near-month covered calls on stocks whose next earnings release is sometime after the next expiration date. Since we have just completed the Oct07 expiration, we first look to eliminate from the preliminary list of 200-300 stocks, those stocks that do have an earnings release between now and Nov07 options expiration on Nov.17th. As noted in a previous post, it is desirable for the covered call writer to avoid the uncertainty along with the accompanying erratic price moves that are often associated with earnings surprises -- so we consciously avoid owning stocks when they are releasing earnings results. November is one of four expiration months (February, May, and August are the other three) when most companies will be releasing their quarterly earnings. This is true since for most companies, their fiscal year coincides with the calendar year so their quarters conclude at the end of March, June, September, and December. And since quarterly earnings are normally reported between 3 and 6 weeks after the end of a quarter, the majority of earnings releases will occur in the expiration monthly periods of Feb,May,Aug,and Nov. So, our initial screen eliminating all earnings reporting stocks from the 287 initial stock candidates identified for November expiration leaves us with only 113 remaining stock purchase candidates.

The second screen further eliminates any of the 113 stocks for which no options are traded or where the options open interest is very low(less than 150). This month that is 15 stocks, so after the options liquidity screen for November, there are now 98 (113-15) stocks remaining on the list. The third screen eliminates stocks that are, from this advisor's experience, either too volatile to be warranted as covered call investment candidates; or on the other hand too stable to generate adequate annualized return on investments -- thus equities are eliminated from further consideration that have historic volatilities below 20 or above 43. For Nov07 expirations, this volatility screen eliminates 29 additional stocks, so there remains only 69 (98-29) stock candidates for establishing covered call positions.

So now only 69 stocks remain for consideration as potential candidates for our Nov07 covered call selections. This is fewer than is normally the case; but again, that's what happens with so many earnings releases during Feb,May,Aug,and Nov expiration months. The fourth and final screen provides a list of those covered call positions (using all 69 potential stocks remaining) that meet the following criteria:
1. Common Price >$9.90
2. Open Interest >150
3. Annualized Return If Unchanged (ARIU) >25%
4. Expiration Date = 11/17/07
5. Call Option Overpriced by more than 0%
6. Stock Price between 3.5% below and 2% above strike price.
7. Historic Volatility of stock between 20% and 43%.
8. Option Bid Price >= .40
9. Downside Breakeven Protection >2.0%
The Value Line Daily Options Screener is used to conduct this screen. The 69 stock symbols were keyed and run through this screener. A total of 32 positions were identified that met all of the nine criteria listed above.

Each of these 32 positions will be entered into an 'Analysis Sheet' to identify the highest ranking covered call positions to be selected. Along with the overall rankings generated from the 'Analysis Sheets', additional consideration is given to ensure that adequate portfolio diversification as well as consistency with the overall investing 'themes' is achieved in the CCAP. The 'Analysis Sheet' includes all of the detailed factors this advisor includes in evaluating each covered call investment under consideration. A preview of these factors was provided in an earlier post 10 Factors link. Presentation of a sample 'Analysis Sheet' will be provided in a post at a later date.

Regards and Godspeed

Friday, October 19, 2007

Roll Ups Revisited – Fluor and Honeywell

For October expirations, two of eleven positions established in the Covered Calls Advisor Portfolio (CCAP) were rolled up from their initial strike price to a higher strike price. This article shows the trade history and the results to date for those two holdings, which were FLR and HON.

1. FLR – Closed

Since FLR was trading above the $150 strike price at the close on Friday 10/19, one call was exercised and the 100 shares of FLR were called away at the strike price of $150. The trading history, including the roll up transaction, was as follows:
9/18/07 Initial Stock Position -- BTO 100 FLR @ $138.17
9/18/07 Initial Call Option -- STO 1 FLR Oct 140 @$4.90
10/2/07 Roll Up Transaction -- BTC 1 FLR Oct 140 @ $11.60
10/2/07 Roll Up Transaction -- STO 1 FLR Oct 150 @ $4.50
10/20/07 Option Exercised – STC 100 FLR @ $150.00

The performance results (including commissions) are as follows:
Stock Purchase Cost: $13,826.95 ($138.17*100+$9.95 commissions)
Option Income: -$249.85 ($490-$1160+$450-$29.85 commissions)
Capital Appreciation: $1,163.10 [($150.00*100-$9.95)-$13,826.95]
Net Profit: $913.25 ($1,163.10-$249.85)

ANNUALIZED RETURN ON INVESTMENT:
(913.25/13,862.95)*(365/32 days) = 75.1%

Two important observations here:
(a) This result demonstrates the advantage of rolling up to a higher strike price when the underlying stock has increased substantially in price. When the initial covered call position was taken in FLR Initial FLR position,the maximum annualized return on investment was 55.6%. By transacting the mid-month roll up, the overall annualized ROI achieved increased by 19.5 percentage points from 55.6% to 75.1%. Remember: It is this advisor's strategy to consider roll ups only when there is a potential increase of at least 15 percentage points in the annualized ROI. Of course, the ability to achieve this higher return is dependent on the underlying stock’s ability to retain its price increase and to close at or above the higher strike price on the expiration date. In the 2nd example presented below with HON, an increased return was not achieved since the stock closed well below the higher strike price.
(b) This FLR example also demonstrates that covered call writing does not have to be, as it is frequently and erroneously portrayed, solely an income producing strategy. To take full advantage of the profit making potential of covered calls, both income and capital appreciation factors should be analyzed as to their respective potential contributions to the overall ROI performance in the covered call decision-making process.

2. HON – Interim Position

Like Fluor, the initial Oct’07 covered call position in Honeywell was rolled up to a higher strike price during the past month. Unlike FLR, HON did not close in-the-money but rather out-of-the-money. The trading history, including the roll up transaction, to date is as follows:
9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Option -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct’07 Option Expiration Date – HON closed at $58.32

The performance results to date (including commissions) are as follows:
Stock Purchase Cost: $27,124.95 ($54.23*500+$9.95 commissions)
Option Income: -$929.85 ($180*5-$470*5+$110*5-$29.85 commissions)
Capital Appreciation: $2,035.05 ($58.32*500-$27,124.95)
Net Profit: $1,105.20 ($2,035.05 - $929.85)

ANNUALIZED RETURN ON INVESTMENT:
(1,105.20/27,124.95)*(365/40 days) = 37.2%

Although an excellent annualized ROI of 37.2% has been achieved to date, the analysis performed when the initial position was established Initial HON position demonstrates that a greater result would have been achieved if the roll up had not been transacted. In that case, the Oct 55 option would have been exercised, the stock called away, and the annualized ROI achieved would have been 43.2%. But again, 37.2% is still great and a decision will be made during the next 2 days concerning whether on Monday morning to sell the HON stock; or retain the HON stock and sell Nov’07 options against it. Regardless of the decision, an article will be posted on Monday after the transaction is completed.

Regards and Godspeed

Roll Out -- Merck

With MRK at 53.79 this afternoon, the Covered Calls Advisor Portfolio Oct 50 position was in-the-money. It was decided to keep the MRK stock and roll out to a Nov 52.5 covered call position as follows:

Previously: Initial MRK Post
9/7/07 Bought 500 MRK @ 49.97
9/7/07 Sold 5 MRK Oct07 50 Calls @ 1.85
Today:
10/19/07 BTC 5 MRK Oct 50 @ $3.90
10/19/07 STO 5 MRK Oct 52.5 @ $2.40
Note: MRK stock was trading at $53.79 today when the roll out transaction was executed.

The result for the completed Oct 50 covered call position and the status on the newly established Nov 52.5 covered call position (including commissions) are each summarized below:

(a) Completed Covered Call Position:
Original Stock Investment 9/07/07 – Purchased 500 shares @ $49.97
= $49.97*500 + $9.95 commission = ($24,994.95)
Change in Stock Value ($53.79-$49.97)*500 = $1,910.00
Change in Options Value = Original Income of $911.30 ($1.85*500-$13.70 commission)minus Option Buyback Cost $1,963.70 ($3.90*500+$13.70 commission) = -$1,052.40 ($911.30-$1,963.70)
Overall Net Change ($1,910.00-$1,052.40) = $857.60
ANNUALIZED RETURN ON INVESTMENT:
(857.60/24,994.95)*(365/42 days) = 29.8%

(b) New Covered Call Position Established:
10/19/07 Retained 500 MRK at $53.79 = ($26,895)
10/19/07 Sold 5 NOV07 52.5 Calls @ $2.40 = $1,186.30 ($2.40*500-$13.70 commission)

Annualized Return If Unchanged (ARIU) 26.0%
Annualized Return If Exercised (ARIE) 26.0%
Downside Breakeven Protection 4.5%
Downside Maximum Return Protection 2.4% =[(53.79-52.50)/53.79]*100

Saturday, October 13, 2007

Special Situation: Capturing McDonald's Dividend

McDonald's is one of only a few domestic companies that pays an annual (not quarterly) dividend. A dividend of $1.50 per share goes ex-dividend on November 13, 2007.

The Covered Calls Advisor recommends considering taking a position in the nearest out-of-the-money (OTM) covered call for Nov'07. The stock closed Friday at $57.02 with the Nov 57.5 at $1.30 bid. At these prices, some key stats on a covered call position would be:
Annualized Return if Stock Price Unchanged (ARIU) = 54.3%
Annualized Return if Exercised (ARIE) =63.6%
Downside Breakeven Protection = 2.3% Note: Not great, but at .07% per day (2.3%/33 days) it exceeds this advisor's minimum threshold of .06% per day.
Overall, excellent return potential for a relatively low volatility stock.

Are you concerned about having the stock called away if the stock price is above $57.50 on or before Nov 12th if the holder of the option decides to exercise early to obtain the stock and capture the dividend?
Don't be! In that instance, we have still benefited from the capital appreciation and will have achieved a 40.7% annualized return.

You might want to wait until after McDonald's officially releases their 3rd quarter earnings this Friday, 10/19/07, although they just released preliminary earnings per share of $.83 which was $.05 above consensus estimates and revenue also exceeded expectations -- the stock reacted favorably to this news on Friday. If you decide to wait until after earnings release to take a position, the stock may have risen above the $57.50 strike price. That's OK -- in that case simply evaluate the possibility of selling the $60 strike price instead.

The Covered Calls Advisor Portfolio has not yet taken a position in McDonald's and may or may not ultimately do so. But I do intend to wait until after next Friday's official earnings release and re-evaluate at that time and then make a decision.

Regards and Godspeed,

A Tribute to Coach Wooden

Sunday, October 14, 2007 is the 97th birthday of Coach John Wooden. Coach has had a great influence on me despite the fact that I have never played basketball on his team or even met him face-to-face. Sure, I’m a basketball fan and his coaching accomplishments are legendary – in fact many consider him as the best coach of all time. But his greater influence to me is as a premier role model in his beliefs and personal character.

During the summer after my sophomore year in high school, I attended the week-long Pocono Mountain Basketball Camp in Pennsylvania. The highlight of that experience was the appearance of Coach Wooden after dinner Friday night and the talk he gave to us on his ‘Pyramid of Success’. He has long defined success by saying: “Success is peace of mind which is a direct result of self-satisfaction in knowing you made the effort to do the best of which you are capable." He explained the pyramid to us in some detail that evening; and yes, he described how it related to playing basketball. But the primary focus of the pyramid really had little to do with basketball, but everything to do with how to live our lives. Even to this day, I have a framed ‘Pyramid of Success’ as signed by ‘John Wooden’ as the sole item hanging in front of me above my computer desk.

McDonald’s has developed a website dedicated to Coach Wooden as a tribute to him. I sincerely hope you will spend 15 or 20 minutes there. I especially recommend you spend time in the links for The Pyramid of Success and also Favorite Maxims (especially his Seven Point Creed). Enjoy:
Coach Wooden link

Since this site is devoted to covered calls investing, I’ve developed the following as a personal tribute to Coach:

Stock Selection is the foundation.The diversification triumverate of asset allocation, sector diversification, and position sizing is at the central core. Covered call position selection is at the pinnacle. These components act together to enable success for the covered calls investor.



Making the effort to do the best of which I am capable,

Regards and Godspeed

Friday, October 12, 2007

Reminder: Begin Writing Your Monthly Themes

A prior post (Investing Themes link) presented a case to encourage every covered call investor to develop a written list of his/her investing ‘themes’ that would help to provide overall guidance in making stock selection decisions, and to do so during the week prior to options expiration each month. Therefore, the time to begin with a first draft of your current investing themes is NOW. Don’t expect your first draft to be a finely crafted list. Remember, it’s only a first draft (a rough draft) of those investing themes that you want to emphasize for your portfolio holdings in the near-term future. If you write your first draft sometime during this weekend (Note: you might want to plan to write your first draft during the weekend prior to options expiration Friday every month), then you can spend a few minutes from time to time during the remainder of this upcoming week thinking about, modifying, and fine tuning your themes.

To assist you in initiating the process of writing down your investing themes monthly, the current themes of the Covered Calls Advisor are presented below. You are welcome to use them as a guideline for developing your own themes. But please, whatever your themes are, write them down! Trust me – don’t take a shortcut here and simply think about your themes. Again, write them down! As the months go by, you’ll be pleasantly surprised at how much the process of committing your ideas to paper will help you to clarify your thinking when it comes to making your stock selection decisions.

The Covered Calls Advisors current investing themes are:
1. Sector Weightings:
· Overweight – Health Care; Industrials; Technology
· Marketweight – Materials; Energy; Consumer Staples; Telecom
· Underweight – Consumer Discretionary; Finance; Utilities
2. Emphasize large-cap companies.
3. Emphasize domestic companies that have a large international exposure.
4. Overweight international equities – especially big Europe (i.e. United Kingdom, Germany and France); South Korea; and Taiwan.
5. Emphasize companies whose exposure to high energy and other commodity costs is minimal.
6. Mitigate risk caused by the slowdown in the U.S. economy. Identify companies with more defensively-oriented characteristics (such as health care) and that are less dependent on increases in consumer spending.

The time is now! Get that pen and paper (or turn on your Microsoft Word program) and begin to write your first draft of your own current investing themes.

Regards and Godspeed


Thursday, October 11, 2007

Keep or Sell?

Expiration Friday for October is now exactly one week away. Let’s consider the following question: How should we decide which stocks currently owned in our covered calls portfolio should be kept and which ones should be sold? This article describes the decision-making process used by the Covered Calls Advisor to answer this question.

While the decision to sell an existing underlying stock can of course be made at any time, the overwhelming majority of the keep or sell decisions made by us covered call investors are normally made near the monthly options expiration dates. The easiest approach to the keep or sell decision faced by us covered call investors as an expiration Friday approaches is to simply do nothing. And unfortunately, since it is the easiest approach, it is too often the approach used by many covered call investors. With this approach, the following will automatically occur:
1. Almost all in-the-money (ITM) positions will be called away (a.k.a. ‘assigned’ or ‘exercised’) and the underlying stock will be sold for the strike price value; and
2. For all out-of-the-money (OTM) positions, the options will expire worthless and the underlying stock is retained in the portfolio.

This do-nothing approach is absolutely NOT the technique recommended by this advisor. It definitely flies in the face of good common sense when you think about it, since the end result of this do-nothing approach is that those stocks are sold which have actually been the strongest performers in the portfolio (the winners if you will); and those stocks that have been the weakest performers (i.e. the losers) are the ones that are retained. This is exactly the opposite of what we would normally be inclined to do if we simply owned the stocks and were not facing an imminent options expiration date.

Since the result of this do-nothing approach is inherently counterintuitive and clearly undesirable, then what does constitute a desirable approach? First, plan to evaluate each and every stock in the portfolio to make an assessment of whether to keep or sell that stock, based on an objective set of pre-defined criteria. For the Covered Calls Advisor, the keep or sell decision-making process is as follows:
1. During the week prior to expiration each month, make a list of all covered call stocks that have options written against them for that particular month.
2. Plan to sell (either on expiration Friday or early the following Monday) those stocks for which any one of the following criteria is met:
· The stock rating as provided by either of the two stock advisory services you follow has been reduced below a ‘buy’ rating; or
· The consensus analysts’ future earnings estimates (see Reuters Research) for the company have been reduced since the stock was initially purchased; or
· There is an earnings release scheduled between this month’s expiration date and prior to next month’s options expiration date; or
· The annualized return if unchanged % (ARIU) for establishing next month’s covered call position does not meet or exceed a 25%+ threshold.
3. Process any transactions necessary in order to: (a) keep those stocks for writing additional covered calls for the next month that meet all criteria listed in #2 above; and (b) sell those stocks that fail to meet any one of the criteria listed in #2 above.

The requirements listed in #2 above are very restrictive – so much so that it has been this advisor’s experience that it is not uncommon for only 20% to 25% of stocks to be retained from one expiration month to the next. But don’t be concerned about the relatively high turnover – over a period of time you’ll see that it is actually quite preferable to other alternatives.

So how does this approach apply to the eleven positions currently in the Covered Calls Advisor Portfolio? As of right now, only two of these stocks (BMC and TRV) have earnings releases scheduled for the period between October expiration (10/22/07) and November expiration (11/17/07) and so they will definitely be eliminated from the ongoing CCAP. However, all eleven positions will be re-evaluated next Friday (on the expiration date itself) to make the final keep or sell decision based on using all four of the analysis criteria for each stock owned.

Regards and Godspeed