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.

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