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