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Wednesday, December 31, 2008

Returns -- For Calendar Year 2008

Wow! What a Year!
We have to go back to the Great Depression to find a stock market performance that was worse than this year. For 2008, the S&P 500 declined by 38.3% which makes 2008 the single worst percentage decline since 1931, when the S&P 500 declined 43.4%.

The Covered Calls Advisor Portfolio(CCAP) declined by 20.48% in 2008. While this is certainly not a satisfactory result, when viewed in direct comparison with the 38.39% decline in the Russell 3000 Index ETF (ticker symbol IWV) overall stock market benchmark, the CCAP substantially outperformed by a total of 17.9 (38.39%-20.48%) percentage points. Consequently, this advisor remains encouraged by the results that can be achieved through a disciplined and persistent strategy of selling near-month covered calls in a diversified portfolio.

The single measure used by the Covered Calls Advisor to determine overall portfolio investment performance results is called 'Total Account Value Return Percent' -- a simple example demonstrates how this measure is calculated:
If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100.

Detailed CCAP results are shown below and are compared, as stated previously above, against an overall stock market benchmark for the comparable time period, namely the Russell 3000 Index ETF (ticker symbol IWV).

Full Year 2008 Results (Jan 1st through Dec 31st, 2008):

CCAP Full Year 2008 Absolute Return = -20.48%
($205,071.35-$257,886.51)/$257,886.51

Benchmark Russell 3000 Full Year 2008 Absolute Return =
-38.39%
($52.00-$84.40)/$84.40


Finally, as shown in the sidebar near the top of this site, the Covered Calls Advisor's Overall Market Meter continues to show that a SLIGHTLY BULLISH investment posture is appropriate at this time. The corresponding covered calls investing approach is to write near-month primarily slightly out-of-the-money covered calls. By 'slightly out-of-the-money', this advisor means that covered calls positions should be established, on average, in the range between 1.0% and 2.5% below the strike price for next-month covered calls.

Wishing You a Happy and Prosperous New Year in 2009!

Regards and Godspeed,
Jeff

Tuesday, December 30, 2008

Roll Up -- Humana Inc (HUM)

The Covered Calls Advisor Portfolio (CCAP) covered call position in Humana Inc(HUM) was rolled-up today (12/30/08) from the Jan09 $30s to the Jan09 $35s.

The spread transaction was executed as follows:
12/30/08 Buy-to-Close (BTC) 10 HUM Jan09 $30s @ $5.30
12/30/08 Sell-to-Open (STO) 10 HUM Jan09 $35s @ $1.90
Net Debit on Roll Up $3.40 ($5.30-$1.90)

The ‘net debit to strike price difference ratio’ was 68% [($5.30-$1.90)/($35-$30)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. An additional reason for rolling up is that I like the potential for ongoing appreciation in HUM in 2009 and currently plan to retain the stock for continuing to write future covered calls against the Humana stock upon the Jan09 expiration. Rolling-up to the $35 strike price increases the likelihood that the HUM stock will be retained at Jan09 expiration thus making it slightly easier to then simply sell a Feb09 call to move the HUM covered calls forward from January to February.

A summary of the HUM transactions so far is as follows:
11/24/08 Initial Stock Purchase Transaction -- Bought 1000 HUM @ $25.55
11/24/08 Inital Calls Sold Transaction -- Sold 10 HUM Dec08 $25.00 Calls @ $2.90
Roll-Up-And-Out Spread Transaction:
12/08/08 Buy-to-Close (BTC) 10 HUM Dec08 $25s @ $5.50
12/08/08 Sell-to-Open (STO) 10 HUM Jan09 $30s @ $3.10
Roll-Up Spread Transaction:
12/30/08 Buy-to-Close (BTC) 10 HUM Jan09 $30s @ $5.30
12/30/08 Sell-to-Open (STO) 10 HUM Jan09 $35s @ $1.90

The overall performance results(including commissions) for the HUM transactions through the Jan09 expiration would be as follows:

Stock Purchase Cost: $25,558.95 ($25.55*1,000+$8.95 commission)
Net Profit:
(a) Options Income: -$1,052.25 (1000*($2.90-$5.50+$3.10-$5.30+$1.90) - 3*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$9,432.10= ($35.00-$25.55)*1000 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $35.00): +$8,379.85
= (-$1,052.25 +$0.00 +$9,432.10)

Absolute Return If Exercised = +32.8%
+$8,379.85/$25,558.95
Annualized Return If Exercised (ARIE) +221.6%
(+$8,379.85/$25,558.95)*(365/54 days)

Tuesday, December 23, 2008

Microsoft Corp (MSFT) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 500 shares owned in Microsoft Corp(MSFT):
12/23/08 Covered Calls Continuation Transaction -- STO 5 Jan09 $21.00 Calls @ $.36

The Transactions History to date is as follows:
08/18/08 Bought 500 MSFT @ $27.95
08/18/08 Sold 5 MSFT Sep08 $28.00 Calls @ $.81
09/11/08 $55.00 Dividend Received ($.11*500 shares)
09/20/08 Sep08 Options Expired
09/26/08 Covered Calls Continuation Transaction -- STO 5 Oct08 $28.00 Calls @ $.55
10/18/08 Oct08 Options Expired
10/20/08 Sold 5 MSFT Nov08 $22.50 Calls @ $1.75
11/22/08 Nov08 Options Expired
11/24/08 Sold 5 MSFT Dec08 $20 Calls @$.80
12/11/08 $65.00 Dividend Received ($.13*500 shares)
12/20/08 Dec08 Options Expired
12/23/08 Covered Calls Continuation Transaction -- STO 5 Jan09 $21.00 Calls @ $.36

The overall performance results(including commissions) for the MSFT transactions are as follows:
Stock Purchase Cost: $13,983.95
($27.95*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,751.50 (500*($.81+$.55+$1.75+$.80+$.36) - 5*$12.70 commissions)
(b) Dividend Income: +$130.00 ($55.00+$65.00)
(c) Capital Appreciation (If exercised): -$3,492.90
= ($21.00-$27.95)*500 - 2*$8.95 commissions

Annualized Return If Exercised (ARIE) -30.9%

Monday, December 22, 2008

Establish iShares MSCI South Korea ETF Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of the iShares MSCI South Korea ETF (EWY).

South Korea ranks #1 in this advisor's '2009 Country Value Rankings'.
To achieve this ranking, S. Korea demonstrates positive financial attributes in virtually all of the categories measured by these rankings. Some examples specifically for S. Korea are:
- Real GDP growth (estimated at 4.3%) should exceed inflation (est. at 3.0%) in 2009
- Relatively low current P/E Ratio of 8.6
- Relatively low P/Book Ratio of 1.23
- Government expected to operate with a Budget Surplus in 2009
- Current Accounts Balance (Exports minus Imports) expected to be positive in 2009

There are relatively few South Korean companies trading on American exchanges. The best way to invest in the strong potential for the South Korean stock market is through ETFs; and the one that is best proxy for the overall country's economy and stock market is the iShares MSCI South Korea ETF (ticker symbol EWY). Fortunately for us covered calls investors, this ETF has reasonably good liquidity in both the ETF itself but also in the call options. It is also well diversified across all sectors of the South Korean economy, with substantial percentages of the total portfolio in the consumer, industrial, information technology, and financial sectors.


Established iShares MSCI South Korea ETF (EWY) Covered Calls for Jan09:
12/22/08 Bought 600 EWY @ $28.50
12/22/08 Sold 6 EWY Jan09 $30.00 Calls @ $1.10

Annualized Return If Unchanged (ARIU): +54.1%
Annualized Return If Exercised (ARIE): +128.1%
Downside Breakeven Protection: 3.9%

Establish Express Scripts Inc Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Express Scripts Inc (ESRX).

Express Scripts provides a range of Pharmacy Benefits Management(PBM) services in North America. The primary emphasis is mail order prescription fulfillment. The purchase of this company demonstrates a belief in the growth in the demographic and social trends that are important drivers in Express Scripts business; that is an aging population with increasing prescription needs; increasing percent of generic drug penetration (which is also the most profitable category for ESRX); and the commitment of the Obama administration and Congress to pursue health-care cost efficiency opportunities. In this regard, an increased emphasis on e-prescribing, mail order generics, and extending medical prescription benefits to more citizens are all trends that will directly benefit Pharmacy Benefits Managements(PBMs) in general and including Express Scripts in particular. The current P/E ratio is somewhat high at 20.5 but earnings are expected to grow by 20% next year. Other key financial metrics (such as the 0.8 Price/Sales Ratio and Total Debt of only 12.4% of their $14.8 Billion Market Cap) are at attractive levels. The excellence of their operational execution is demonstrated by the fact that cash flow is growing at a faster rate than net income. Overall, the success of their business model is evident in their having achieved an exceptional 85.4% return-on-equity.

Established Express Scripts Inc (ESRX) Covered Calls for Jan09:
12/22/08 Bought 200 ESRX @ $59.86
12/22/08 Sold 2 ESRX Jan09 $60.00 Calls @ $2.90

Annualized Return If Unchanged (ARIU): +68.0%
Annualized Return If Exercised (ARIE): +71.3%
Downside Breakeven Protection: 4.8%

Establish Potash of Saskatchewan Corp Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Potash of Saskatchewan Corp (POT). This is a repeat of a successful covered calls position taken in POT last month which concluded with the call option being exercised and the POT stock was called away at options expiration last Friday.

The rationale in support of re-establishing an investment in Potash remains the same as stated previously when the POT covered calls position was established last month, which was as follows:
Potash Corp (POT) is the world's largest producer of crop fertilizers and they produce each of the three primary fertilizers (potash, phosphates, and nitrogen-based products). Of these three, potash is the most beneficial to farmers in terms of enhancing the productivity of arable acreage; consequently potash is in greatest demand and has the best profit margins of the three fertilizers. Potash Corp. ranks #1 in the world in potash production with about 22% of the world's supply. They are, therefore, in a very enviable position because of the relatively high cost to establish new potash production mines. The stock price of POT has plummeted this year at an even faster rate than the overall market, but this advisor believes that worldwide recession fears have created a temporarily depressed demand for fertilizers along with a steep, but also temporary, decline in feed grain and oilseed futures prices. But as the significant worldwide growth in the numbers of people moving up into the middle class continues (especially in China and India), and they continue to improve their diets (including more protein), the ongoing strong demand for more and more fertilizer will continue. Consequently, prices for corn, soybeans, and wheat are likely now to be reaching the lower end of their future price range, and POT is well positioned for a very nice price rebound when crop prices firm up. In the meantime, Potash Corp maintains their commitment to steadily increasing production capacity to meet the growing demand while maintaining good profit margins and a strong balance sheet. Finally, there is great value in the company's current stock price when it is evaluated in relation to key financial ratio metrics (including P/E ratio, free cash flow, and return-on-equity among others).

Today a covered calls investment was established with the purchase of Potash (POT) and the selling of the Jan09 $65 call options:
12/22/08 Bought 200 POT @ $65.84
12/22/08 Sold 2 POT Jan09 $65.00 Calls @ $5.90

Annualized Return If Unchanged (ARIU): +107.8%
Annualized Return If Exercised (ARIE): +107.8%
Downside Breakeven Protection: 9.0%

Establish iShares MSCI China ETF Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares MSCI China ETF (FXI).

China ranks #2 in this advisor's '2009 Country Value Rankings'. Only South Korea (in which the CCAP has also established a current covered calls position) ranks higher than China in the Covered Calls Advisor's country valuation ratings.
Some of the key value-oriented metrics for China are as follows:
- Real GDP growth of approximately 7.0% in 2009 should substantially exceed the estimated inflation rate of 4.1%
- Relatively low current P/E Ratio of 11.0
- Relatively low P/Book Ratio of 1.65
- Government expected to operate with a Budget Surplus in 2009
- Current Accounts Balance (Exports minus Imports) expected to be positive in 2009

Rather than try to select individual companies in China, the FXI ETF was selected for investment. It consists of market-cap-weighted positions in the 25 largest companies in China, and although it is most heavily weighted in the financial, energy, and telecommunications sectors, it still provides a relatively good way to diversify across the Chinese economy and its overall stock market performance.


Established iShares MSCI China ETF (FXI) Covered Calls for Jan09:
12/22/08 Bought 700 FXI @ $29.23
12/22/08 Sold 7 FXI Jan09 $32.00 Calls @ $.95

Annualized Return If Unchanged (ARIU): +45.6%
Annualized Return If Exercised (ARIE): +178.7%
Downside Breakeven Protection: 3.3%

Establish Sybase Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Sybase Inc (SY).

Sybase is a systems software company with strong products in both the enterprise storage and the mobile phone systems/messaging areas, both of which will offer strong future growth possibilities, and their offerings in mobile messaging are especially highly regarded. Yet, the valuation of Sybase continues to be surprisingly reasonable. For example, the current P/E ratio is only 13, while earnings are expected to grow in excess of 20% over the next 12 months. Other financial metrics are strong as well:
- Cash & Equivalents is very high at 28% of a $2 billion total market capitalization.
- Free Cash Flow as a percent of market cap is an attractive 9.3%
- Given the high cash and free cash flow levels, total debt is very reasonable at 23% of market cap.
- Price/Sales Ratio of 1.9 is relatively low compared with most other systems software companies
- Return-on-Equity is good at 21.7%

Sybase also demonstrates a commitment to shareholders with their very high corporate goverance ratings. Finally, 10-year CEO John Chen seems to be a very candid, enthusiastic, and visionary leader, and these attributes are especially valuable in the always rapidly-evolving information technology sector.


Established Sybase Inc (SY) Covered Calls for Jan09:
12/22/08 Bought 300 SY @ $23.36
12/22/08 Sold 3 SY Jan09 $25.00 Calls @ $.65

Annualized Return If Unchanged (ARIU): +39.0%
Annualized Return If Exercised (ARIE): +137.6%
Downside Breakeven Protection: 2.8%

Establish Raytheon Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of the Raytheon Company (RTN).



Established Raytheon (RTN) Covered Calls for Jan09:
12/22/08 Bought 300 RTN @ $49.20
12/22/08 Sold 3 RTN Jan09 $47.50 Calls @ $2.60

Annualized Return If Unchanged (ARIU): +33.6%
Annualized Return If Exercised (ARIE): +33.6%
Downside Breakeven Protection: 5.9%

Saturday, December 20, 2008

December 2008 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 12 positions with December 2008 expirations, with the following results:
- 9 positions (ACN,AOB,APC,HPQ,FXI,EWY,MCK,PBR & POT) closed in-the-money.
The calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for these positions was:

Accenture Ltd -38.7%
American Oriental Bioengineering Inc +133.0%
Anadarko Petroleum Corp +115.0%
Hewlett-Packard Co. +92.1%
iShares MSCI China ETF -66.0%
iShares MSCI South Korea ETF -120.8%
McKesson Corp +133.7%
Petroleo Brasileiro -80.1%
Potash Corp of Saskatchewan Inc +201.4%

- 3 positions in the CCAP (MO,GU, and MSFT) ended out-of-the-money. Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Jan09 covered call positions. The related transactions will be made during the next few days and the actual transactions will be posted on this blog site on the same day they occur.


Details for each of the exercised positions are as follows:

1. Accenture Ltd. -- Closed
The Transactions History was as follows:
08/18/08 Initial Stock Purchase Transaction -- Bought 300 ACN @ $41.01
08/18/08 Initial Calls Sold Transaction -- Sold 3 ACN Sep08 $40.00 Calls @ $1.90
09/20/08 Sep08 Options Expired
09/26/08 Covered Calls Continuation Transaction -- STO 3 Oct08 $40.00 Calls @ $.70
10/08/08 $126.00 Ex-Dividend Income ($.42*300 shares)
10/18/08 Oct08 Options Expired
10/28/08 Covered Calls Continuation Transaction -- STO 3 ACN Nov08 $35.00 Calls at $.75
11/22/08 Nov08 Options Expired
11/24/08 Covered Calls Continuation Transaction -- STO 3 ACN Dec08 $30 Calls at $2.05
12/20/08 Dec08 Options Exercised -- 300 shares ACN called away
Note: Closing price of ACN was $32.21 on expiration Friday

The overall performance results(including commissions) for the ACN transactions through the Dec08 expiration were as follows:
Stock Purchase Cost: $12,311.95
($41.01*300+$8.95 commission)

Net Profit:
(a) Options Income: +$1,575.20 (300*($1.90+$.70+$.75+$2.05) - 4*$11.20 commissions)
(b) Dividend Income: +$126.00
(c) Capital Appreciation: -$3,320.90
= ($30.00-$41.01)*300 - 2*$8.95 commissions

Total Net Profit: -$1,619.70
= (+$1,575.20 +$126.00 -$3,320.90)

ACN Annualized Return on Investment -38.7%
(-$1,619.70/$12,311.95)*(365/124 days)


2. American Oriental Bioengineering Inc -- Closed

Transactions History:
Established American Oriental Bioengineering Inc (AOB) Covered Calls for Dec08:
11/24/08 Initial Stock Purchase Transaction -- Bought 1500 AOB @ $4.91
11/24/08 Initial Calls Sold Transaction -- Sold 15 AOB Dec08 $5.00 Calls @ $.40
12/20/08 Dec08 Options Exercised -- 1500 shares AOB called away
Note: Closing price of AOB was $6.30 on expiration Friday

The overall performance results(including commissions) for the AOB transactions through the Dec08 expiration was as follows:
Stock Purchase Cost: $7,356.05
($4.91*1500+$8.95 commission)

Net Profit:
(a) Options Income: +$579.80 (1500*$.40 - $20.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$117.10
= ($5.00-$4.91)*1500 - 2*$8.95 commissions

Total Net Profit: +$696.90
= (+$579.80 +$0.00 +$117.10)

AOB Annualized Return on Investment +133.0%
(+$696.90/$7,356.05)*(365/26 days)


3. Anadarko Petroleum Corp -- Closed
11/24/08 Initial Stock Purchase Transaction -- Bought 500 APC @ $35.62
11/24/08 Initial Calls Sold Transaction -- Sold 5 APC Dec08 $35.00 Calls @ $3.60
12/20/08 Dec08 Options Exercised -- 500 shares APC called away
Note: Closing price of APC was $37.16 on expiration Friday

The overall performance results(including commissions)for the APC transaction through the Sep08 expiration was as follows:
Stock Purchase Cost: $17,818.95
($35.62*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,787.30 (500*$3.60 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$327.90
= ($35.00-$35.62)*500 - 2*$8.95 commissions

Total Net Profit: +$1,459.40
= (+$1,787.30+$0.00-$327.90)

APC Annualized Return on Investment: +115.0%
(+$1,459.40/$17,818.95)*(365/26 days)


4. Hewlett-Packard Co -- Closed
11/24/08 Initial Stock Purchase Transaction -- Bought 500 HPQ @ $35.18
11/24/08 Initial Calls Sold Transaction -- Sold 5 HPQ Dec08 $35.00 Calls @ $2.55
12/20/08 Dec08 Options Exercised -- 500 shares HPQ called away
Note: Closing price of HPQ was $35.40 on expiration Friday

The overall performance results(including commissions)for the HPQ transaction through the Dec08 expiration was as follows:
Stock Purchase Cost: $17,598.95
($35.18*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,262.30 (500*$2.55 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$107.90
= ($35.00-$35.18)*500 - 2*$8.95 commissions

Total Net Profit: +$1,154.40
= (+$1,262.30+$0.00-$107.90)

HPQ Annualized Return on Investment: +92.1%
(+$1,154.40/$17,598.95)*(365/26 days)

5. iShares MSCI China ETF -- Closed
Transactions History:
08/18/08 Initial Calls Sold Transaction -- Bought 800 FXI @ $40.60
08/18/08 Initial Calls Sold Transaction -- Sold 8 FXI Sep08 $44.00 Calls @ $.60
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 8 Oct08 $40.00 Calls @ $1.10
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 8 Nov08 $34.00 Calls @ $1.30
11/22/08 Nov08 Options Expired
11/24/08 Covered Calls Continuation Transaction -- Sold 8 FXI Dec08 $27 Calls at $1.55
12/20/08 Dec08 Options Exercised -- 800 shares FXI called away
Note: Closing price of FXI was $30.55 on expiration Friday

The overall performance results(including commissions) for the FXI transactions through the Dec08 expiration were as follows:
Stock Purchase Cost: $32,488.95
($40.60*800+$8.95 commission)

Net Profit:
(a) Options Income: +$3,610.10 (800*($.60 + $1.10 + $1.30 + $1.55) - 2*$14.95 commissions)
(b) Dividend Income: +$0
(c) Capital Appreciation: -$10,897.90
= ($27.00-$40.60)*800 - 2*$8.95 commissions

Total Net Profit: -$7,287.80
= (+$3,610.10 +$0.00 -$10,897.90)

FXI Annualized Return on Investment -66.0%
(-$7,287.80/$32,488.95)*(365/124 days)

6. iShares MSCI South Korea ETF(EWY) -- Closed

The Transactions History was as follows:
08/18/08 Initial Stock Purchase Transaction -- Bought 700 EWY @ $48.35
08/18/08 Initial Calls Sold Transaction -- Sold 7 EWY Sep08 $50 Calls @ $1.05
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- Sold 7 EWY Oct08 $47.00 Calls @
$.65
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 7 Nov08 $30.00 Calls @ $2.30
11/22/08 Nov08 Options Expired
11/24/08 Covered Calls Continuation Transaction -- Sold 7 EWY Dec08 $24 Calls at $1.25
12/20/08 Dec08 Options Exercised -- 700 shares EWY called away
Note: Closing price of EWY was $29.05 on expiration Friday

The overall performance results(including commissions) for the EWY transactions through the Dec08 expiration were as follows:
Stock Purchase Cost: $33,853.95
($48.35*700+$8.95 commission)

Net Profit:
(a) Options Income: +$3,618.20 (700*($1.05+$.65+$2.30+$1.25) - 4*$14.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$17,062.90
= ($24.00-$48.35)*700 - 2*$8.95 commissions

Total Net Profit: -$13,894.70
= (+$3,618.20 +$0.00 -$17,062.90)

EWY Annualized Return on Investment -120.8%
(-$13,894.70/$33,853.95)*(365/124 days)


7. McKesson Corporation -- Closed

The Transactions History was as follows:
11/24/08 Initial Stock Purchase -- Bought 300 MCK @ $30.72
11/24/08 Initial Call Option Transaction -- Sold 3 MCK Dec08 $30.00 Calls @ $2.35
11/26/08 $36.00 Ex-Dividend Income ($.12 per share X 300 shares)
11/28/08 Roll Up Transaction -- BTC 3 MCK Dec 30s @ $5.28
11/28/08 Roll Up Transaction -- STO 3 MCK Dec 35s @ $1.63
Note: MCK was trading at $34.88 today when the roll up transaction was executed.
12/20/08 Dec08 Options Exercised -- 300 shares MCK called away
Note: Closing price of MCK was $37.89 on expiration Friday

The overall performance results(including commissions) for the MCK transactions through the Dec08 expiration was as follows:
Stock Purchase Cost: $9,224.95
($30.72*300+$8.95 commission)

Net Profit:
(a) Options Income: -$423.60 (300*($2.35-$5.28+$1.63) - 3*$11.20 commissions)
(b) Dividend Income: +$36.00 (300*$.12/share)
(c) Capital Appreciation: +$1,266.10
= ($35.00-$30.72)*300 - 2*$8.95 commissions

Total Net Profit: +$878.50
= (-$423.60 +$36.00 +$1,266.10)

MCK Annualized Return on Investment +133.7%
(+$878.50/$9,224.95)*(365/26 days)


8. Petroleo Brasileiro(Petrobras) -- Closed

The Transactions History was as follows:
07/07/08 Initial Stock Purchase Transaction -- Bought 400 PBR @ $65.95
07/07/08 Initial Calls Sold Transaction -- Sold 4 PBR Jul08 $65.00 Calls @ $2.95
07/19/08 July08 Options Expired
07/24/08 Covered Calls Continuation Transaction -- Sold 4 PBR Aug08 $60.00 Calls @ $1.00
Note: Price of PBR was $56.86 at the time when the calls were sold today.
08/16/08 Aug08 Options Expired
08/18/08 Covered Calls Continuation Transaction -- STO 4 Sep08 $55.00 Calls @ $.90
Note: Price of PBR was $49.45 when the calls were sold today.
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 4 Oct08 $47.50 Calls @ $2.70
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 4 Nov08 $30.00 Calls @ $2.30
11/22/08 Nov08 Options Expired
11/24/08 Covered Calls Continuation Transaction -- Sold 4 Dec08 Dec08 $20 Calls at $2.15
12/20/08 Dec08 Options Exercised -- 400 shares PBR called away
Note: Closing price of PBR was $23.40 on expiration Friday

The overall performance results(including commissions) for the PBR transactions through the Dec08 expiration were as follows:
Stock Purchase Cost: $26,388.95
($65.95*400+$8.95 commission)

Net Profit:
(a) Options Income: +$4,728.30 (400*($2.95+$1.00+$.90+$2.70+$2.30+$2.15) - 6*$11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$17,062.90
= ($24.00-$48.35)*700 - 2*$8.95 commissions

Total Net Profit: -$12,334.60
= (+$4,728.30 +$0.00 -$17,062.90)

PBR Annualized Return on Investment -80.1%
(-$12,334.60/$33,853.95)*(365/166 days)


9. Potash of Saskatchewan Inc -- Closed

Transactions History:
11/28/08 Initial Stock Purchase Transaction -- Bought 200 POT @ $61.40
11/28/08 Initial Calls Sold Transaction -- Sold 2 POT Dec08 $65.00 Calls @ $4.00
12/20/08 Dec08 Options Exercised -- 400 shares POT called away
Note: Closing price of POT was $72.26 on expiration Friday

The overall performance results(including commissions) for the POT transactions through the Dec08 expiration was as follows:
Stock Purchase Cost: $12,288.95
($61.40*200+$8.95 commission)

Net Profit:
(a) Options Income: +$789.55 (200*$4.00 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$702.10
= ($65.00-$61.40)*200 - 2*$8.95 commissions

Total Net Profit: +$1,491.65
= (+$789.55 +$0.00 +$702.10)

POT Annualized Return on Investment +201.4%
(+$1,491.65/$12,288.95)*(365/22 days)

Friday, December 19, 2008

Establish United States Oil Fund ETF Covered Calls




A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of the United States Oil Fund ETF (USO).

USO is an ETF proxy for the spot price of West Texas light, sweet crude oil. The oil price has plummeted from $140+ earlier this year to below $35 now. By establishing a position in USO now, this advisor is not trying to "pick the bottom" of the oil price. Rather, it is a commitment to the proposition that oil is reasonably close to the lower end of its likely future price range and that its price is likely to move higher over the next several months. Because of the intense bearishness in its recent price, the implied volatility in the USO options have spiked up to a very high level -- this makes selling the calls (and the associated very high potential returns from this covered calls position) an especially attractive investment now.


Established United States Oil Fund ETF (USO) Covered Calls for Jan09:
12/19/08 Bought 200 USO @ $32.33
12/19/08 Sold 2 USO Jan09 $34.00 Calls @ $2.40

Annualized Return If Unchanged (ARIU): +93.3%
Annualized Return If Exercised (ARIE): +158.4%
Downside Breakeven Protection: 7.4%

Tuesday, December 16, 2008

"Explain Why You Are Buying" -- Revisited

Earlier this year, an article on this blog titled "Explain Why You Are Buying" (link) described why it is important for us to be able to make a "clear, concise, and confident" explanation as to why a particular stock should be purchased. In support of this recommendation, this Covered Calls Advisor blog has begun providing a short explanation as to why a particular stock was selected for purchase. For example, the most recent newly established covered calls position was in Potash of Saskatchewan -- the second paragraph (link) provides a summary of this advisor's rationale for why Potash was determined to be a worthwhile buy.

What caused this advisor to 'revisit' this topic once again in this article? Today I was reading an article in Fortune titled "The best stocks for 2009" (link). While reading the article, I was struck by the exceptionally clear analysis and reasoning provided in support of why each stock had been selected as a 'buy' -- which reminded me once again of how important it is for each of us to take the time to make a "clear, concise, and confident" explanation of a particular stock before making a final commitment to the actual purchase decision.

Regards and Godspeed,
Jeff

Monday, December 8, 2008

Roll-Up-And-Out -- Humana Inc (HUM)

The Covered Calls Advisor Portfolio (CCAP) covered call position in Humana Inc(HUM) was rolled-up-and-out today (12/08/08) from the Dec08 $25s to the Jan09 $30s. The spread transaction was executed as follows:

12/08/08 Buy-to-Close (BTC) 10 HUM Dec08 $25s @ $5.50
12/08/08 Sell-to-Open (STO) 10 HUM Jan09 $30s @ $3.10
Net Debit on Roll Up $2.40 ($5.50-$3.10)
Note: The price of HUM was $30.24 today when the call options spread transaction was executed.

This transaction meets the Covered Calls Advisor criterion that the average daily rate-of-decay for the new position is more than 200% higher than that for retaining the existing position. In fact, as described in detail below, today's options spread transaction achieved a very attractive increase in the average daily rate of decay of 229.5%, which was calculated as follows:
As of today there are exactly 12 calendar days remaining until Dec08 options expiration. For the existing HUM Dec08 $25 call, the 'average daily rate-of-decay' of the short call option position was $.0217 [total time value of $.26 ($5.50-($30.24-$25.00)) divided by 12 days remaining until Dec08 expiration]. This $.0217 per day [which alternatively can be thought of as $2.17 per day per option contract written(since each contract represents 100 shares of stock)] represents the average daily income that will be squeezed out of the remaining time value of the option between today and the option expiration date. This $.0217 per day from retaining the existing position is then compared against the 'average daily rate-of-decay' for a new Jan09 $30 strike alternative position. For this alternative, the 'avg daily rate-of-decay' is $.0715 which is obtained from the time value of $2.86 [$3.10-($30.24-$30.00)] divided by the 40 days remaining until Jan09 expiration. This roll-up-and-out alternative has a 229.5% ($.0715-$.0217)/$.0217 greater average daily rate-of-decay than the existing position if the existing position were to be retained until expiration.

A summary of the HUM transactions so far is as follows:
11/24/08 Initial Stock Purchase Transaction -- Bought 1000 HUM @ $25.55
11/24/08 Inital Calls Sold Transaction -- Sold 10 HUM Dec08 $25.00 Calls @ $2.90
Roll-Up-And-Out Spread Transaction:
12/08/08 Buy-to-Close (BTC) 10 HUM Dec08 $25s @ $5.50
12/08/08 Sell-to-Open (STO) 10 HUM Jan09 $30s @ $3.10
Net Debit on Roll Up was $2.40 ($5.50-$3.10)
Note: Price of HUM was $30.24 today when the call options spread transaction was executed.

The overall performance results(including commissions) for the HUM transactions through the Jan09 expiration would be as follows:

Stock Purchase Cost: $25,558.95
($25.55*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$450.35 (1000*($2.90-$5.50+$3.10) - 3*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$4,432.10
= ($30.00-$25.55)*1000 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $30.00): +$4,882.45
= (+$450.35 +$0.00 +$4,432.10)

Annualized Return If Exercised (ARIE) +129.1%
(+$4,882.45/$25,558.95)*(365/54 days)

Friday, December 5, 2008

A Heuristic Approach for Rolling-Up-and-Out Covered Calls

A prior post (link) described the decision-making process used by the Covered Calls Advisor to determine if an existing covered calls position should be rolled-up (in the same expiration month) to a higher strike price. Alternatively, this post explains a heuristic method used to analyze whether an existing position should be rolled-up-and-out (i.e. rolled 'up' to a higher strike price and simultaneously 'out' to the next expiration month).

First, the term 'heuristic' is defined in Webster's dictionary as "involving or serving as an aid to learning, discovery, or problem-solving by experimental and especially trial-and-error methods." So by definition, the criteria developed to determine whether or not to 'roll-up-and-out' a particular covered call will not be a scientifically derived optimal solution, but rather this advisor's best estimate, based on experience with covered calls (especially options premium pricing and options time decay rates) as to what the decision-making rule should be at this time. Over time, it is expected that the decision criteria will be modified as additional information (i.e. feedback) is received that provides additional insights into this question. This continual feedback loop process is consistent with and is a normal feature of the heuristic method.

To determine what the roll-up-and-out policy should be, let's consider an existing covered calls position in the Covered Calls Advisor Portfolio. The existing position was:
Owned 600 shares Fluor(FLR) at a price this afternoon of $44.56.
Had 6 Dec08 $35 calls written (i.e. a short positon) at a price this afternoon of $10.10
Question: Should the existing covered calls be rolled-up-and-out to the Jan09 $45 strike?
(Note: the Jan09 $45 option was priced at the same time this afternoon at $5.30)

In answering this question, it is important to understand two key concepts:
(1) Notice that there is no mention above of when the existing FLR covered calls were established or the prices of the stock and calls when this covered calls position was originally established. It is only natural for us to want to know what our initial cost basis is in the existing position. However, including this historical information in our decision-making thought process actually distorts that process. What was paid initially and how much profit (or loss) has been achieved so far is irrelevant for us today when analyzing whether to roll-up-and-out or to simply maintain our existing position. The concept of disregarding past transactions and price changes that occur prior to today is a concept referred to by economists as a ‘sunk cost’. A sunk cost is simply a cost that has already been incurred. It’s past. It’s history. In short, it's irrelevant when trying to answer the question today as to whether to simply retain the existing position or whether to roll-up-and-out to another position.
(2) The second key concept used to aid in answering this question is what is referred to as 'average daily rate-of-decay', which is a short phrase that describes the average daily decline in the remaining time value of the call options assuming the existing covered calls position are retained until the options expiration date. For example, as of today there are exactly 15 calendar days until Dec08 options expiration. For the existing FLR Dec08 $35 call, the 'average daily rate-of-decay' of the short call option position is $.036 [total time value of $.54 ($10.10-($44.56-$35.00)) divided by 15 days remaining until Dec08 expiration]. This $.036 per day [which alternatively can be thought of as $3.60 per day per option contract written(since each contract represents 100 shares of stock)] represents the average daily income that will be squeezed out of the remaining time value of the option between today and the option expiration date. This $.036 per day from retaining the existing position is then compared against the 'average daily rate-of-decay' for a new Jan08 $45 strike alternative position. In this case, the 'avg daily rate-of-decay' is $.123 ($5.30 divided by 43 days remaining until Jan09 expiration). This roll-up-and-out alternative has a 241.7% greater average daily rate-of-decay than the existing position if it were to be retained until expiration. This +241.7% increase in the average daily rate-of-decay is a very substantial increase -- so the decision was made today to close out the initial covered calls and simultaneously roll-up-and-out to the Jan09 $45s.

As implied above, the heuristic approach is an ongoing work in progress. As time progresses and additional information and roll-up-and-out alternatives are considered, it is expected that the Covered Calls Advisor will develop a specific threshold that will dictate precisely when to keep the existing position and when it is preferable to roll-up-and-out. For now, a threshold of +200% will be used. That is, a roll-up-and-out transaction will be done if the average daily rate-of-decay is more than 200% higher than that for retaining the existing position.

The transactions history to date for the Fluor covered calls position is as follows:
11/24/08 Initial Stock Purchase Transaction -- Bought 600 FLR @ $35.35
11/24/08 Initial Calls Sold Transaction -- Sold 6 FLR Dec08 $35 Calls @ $3.50
12/03/08 Ex-Dividend of $75.00 ($.125*600 shares)
12/05/08 Roll-Up-And-Out Transaction:
Bought to Close 6 FLR Dec08 $35 Calls @ $10.10
Sold to Open 6 FLR Jan09 $45 Calls @ $5.30

Including the roll-up-and-out transactions today for the Fluor covered calls, the overall performance results(including commissions) through the Jan09 expiration would be as follows:

Stock Purchase Cost: $21,218.95
($35.35*600+$8.95 commission)

Net Profit:
(a) Options Income: -$820.35 (600*($3.50-$10.10+$5.30) - 3*$13.45 commissions)
(b) Dividend Income: +$75.00 ($.125*600 shares)
(c) Capital Appreciation (If stock price unchanged): +$5,508.10
= ($44.56-$35.35)*600 - 2*$8.95 commissions
(d) Capital Appreciation (If exercised): +$5,772.10
= ($45.00-$35.35)*600 - 2*$8.95 commissions

Total Net Profit(If stock price unchanged at $44.56): +$4,762.75
= (-$820.35 +$75.00 +$5,508.10)
Total Net Profit(If stock price exercised at $45.00): +$5,026.75
= (-$820.35 +$75.00 +$5,772.10)

Annualized Return If Unchanged (ARIU): +141.3%
(+$4,762.75/$21,218.95)*(365/54 days)

Annualized Return If Exercised (ARIE) +160.1%
(+$5,026.75/$21,218.95)*(365/54 days)

For comparison, an ARIE of +129.9% would be achieved if the roll-up-and-out transactions had not been made today, and instead the original position had simply been held until Dec08 expiration.

Finally, further analysis will be done in the near future to develop criteria to help determine the trade-offs involved at any given time as to whether an existing covered calls positions should be: (1) retained as is; (2) rolled-up (to a higher strike price in the same expiration month); or (3) rolled-up-and-out (simultaneously to both a higher strike price and a future expiration month). In addition, future posts on this blog will address the decision-making processes needed when the stock price declines and the possibilities of rolling-down or rolling-down-and-out become a consideration.

Recommended Reading and Videos

A new section termed 'Recommended Reading and Videos' is now provided in the sidebar of this blog. Each link provides access to investment-related articles and videos the Covered Calls Advisor has found to be especially informative, interesting, and well-written. Some entries will relate specifically to covered calls.

For the thoughtful covered calls investor, these links will provide worthwhile and thought-provoking insights. To that end, please commit to including it as part of your regular (at least once per week) investment-related reading regimen.

Regards,
Jeff

Sunday, November 30, 2008

Establish Potash Corp of Saskatchewan Inc Covered Calls

A new covered calls position was established on Friday in the Covered Calls Advisor Portfolio (CCAP) with the purchase of Potash Corp of Saskatchewan Inc (POT).

Potash Corp (POT) is the world's largest producer of crop fertilizers and they produce each of the three primary fertilizers (potash, phosphates, and nitrogen-based products). Of these three, potash is the most beneficial to farmers in terms of enhancing the productivity of arable acreage; consequently potash is in greatest demand and has the best profit margins of the three fertilizers. Potash Corp. ranks #1 in the world in potash production with about 22% of the world's supply. They are, therefore, in a very enviable position because of the relatively high cost to establish new potash production mines. The stock price of POT has plummeted this year at an even faster rate than the overall market, but this advisor believes that worldwide recession fears have created a temporarily depressed demand for fertilizers along with a steep, but also temporary, decline in feed grain and oilseed futures prices. But as the significant worldwide growth in the numbers of people moving up into the middle class continues (especially in China and India), and they continue to improve their diets (including more protein), the ongoing strong demand for more and more fertilizer will continue. Consequently, prices for corn, soybeans, and wheat are likely now to be reaching the lower end of their future price range, and POT is well positioned for a very nice price rebound when crop prices firm up. In the meantime, Potash Corp maintains their commitment to steadily increasing production capacity to meet the growing demand while maintaining good profit margins and a strong balance sheet. Finally, there is great value in the company's current stock price when it is evaluated in relation to key financial ratio metrics (including P/E ratio, free cash flow, and return-on-equity among others).

Established Potash Corp of Saskatchewan Inc (POT) Covered Calls for Dec08 as follows:
11/28/08 Bought 200 POT @ $61.40
11/28/08 Sold 2 POT Dec08 $65.00 Calls @ $4.00

Annualized Return If Unchanged (ARIU): +108.0%
Annualized Return If Exercised (ARIE): +205.4%
Downside Breakeven Protection: 6.5%

Returns -- Through November 2008

Both 2008 year-to-date and 2007 performance results for the Covered Calls Advisor Portfolio (CCAP) are presented below. The single measure used to determine overall portfolio investment performance results is called 'Total Account Value Return Percent' -- a simple example demonstrates how it is calculated:
If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100.

In addition, CCAP results each year are shown below and are always compared against an overall stock market benchmark for the comparable time period, namely the Russell 3000 Index ETF (ticker symbol IWV).

1. 2008 Year-to-Date Results (Jan 1st through Nov 30th, 2008):

CCAP 2008 Year-to-Date Absolute Return = -25.6 %
($199,733.10-$257,886.51)/$257,886.51

Benchmark Russell 3000(IWV) 2008 Yr-to-Date Absolute Return = -39.2%
($51.35-$84.40)/$84.40

A 25.6% decline so far this year is certainly disappointing. But when viewed in comparison with the 39.2% decline in the overall stock market benchmark, the CCAP is currently outperforming by 13.6 percentage points (39.2%-25.6%).

2. 2007 Results:

The Covered Calls Advisor Portfolio (CCAP) was initiated on September 14th, 2007 with a beginning balance of $250,000. The CCAP balance at year-end (12/31/07) was $257,886.51. Below are the returns of the CCAP for this 2007 timeframe compared with the results of the Russell 3000 (IWV) benchmark during the same time period.

CCAP 2007 Absolute Return = +3.2%
($257,886.51-$250,000.00)/$250,000.00
Benchmark (IWV) 2007 Absolute Return = -1.2%
($84.40-$85.43)/$85.43

The corresponding annualized return for the 108 days the CCAP existed in 2007 (between Sept 14, 2007 and Dec 31, 2007) was:

CCAP 2007 Annualized Return = +10.7%
[($257,886.51-$250,000.00)/$250,000.00]*(365/108 days)

Benchmark Russell 3000(IWV) 2007 Annualized Return = -4.1%
[($84.40-$85.43)/$85.43]*(365/108 days)

As shown in the sidebar near the top of this site, the Covered Calls Advisor's Overall Market Meter shows that a SLIGHTLY BULLISH investment posture is appropriate at this time. The corresponding covered calls investing approach is to write near-month primarily slightly out-of-the-money covered calls. By 'slightly out-of-the-money', this advisor means that for a covered calls portfolio, on average covered calls positions should be established somewhere between 1.0% and 2.5% below the strike price.

Saturday, November 29, 2008

'Buy Alerts' Spreadsheet

With my academic background as an Industrial Engineer, it is probably not surprising that I have a strong preference for using a heavy dose of quantitative analysis in my stock selection process. In a previous post, the detailed 'Analysis Sheet' used for evaluating a potential covered calls position was presented (link).
In response to readers who have indicated that using the 'Analysis Sheet' is just too cumbersome for them, the Covered Calls Advisor has now developed a more user-friendly stock selection analysis sheet which I am hopeful is more practical for your use -- let's call it 'Buy Alerts'. This spreadsheet includes those financial ratios and metrics that this advisor has found to be most relevant as an aid in identifying good stocks to purchase. These criteria are categorized as follows:
  • Stock Advisory Services Ratings -- the two services preferred by this advisor are Schwab Equity Ratings and MarketGrader.com; but you can, of course, use whatever advisory ratings you personally prefer.

  • Solvency Ratios -- the three key financial ratios here are: (1) Total cash & cash equivalents as a percent of market capitalization, which should be > 10%; (2) Total debt as a percent of market cap should be less than 40%; and (3) Free Cash Flow as a percent of market cap should be > 10%.

  • Value Ratios -- the two metrics here are: (1) the current year Price/Earnings Ratio should be less than 15; and (2) the Price/Sales Ratio should be less than 1.5.
  • Growth Ratio -- the 'P/E Ratio Comparison' calculates next year's P/E ratio (based on analysts' estimated earnings) divided by the current P/E ratio (based on actual earnings for the most recent 12-months). This 'P/E Ratio Comparison' result should be less than 1.0.
  • Profitability Ratio -- for this financial ratio, the company's return-on-equity (ROE) should be > 25%.

A simple spreadsheet was developed to aid in recording the results for any company under consideration for investment. The spreadsheet format also enables an easy side-by-side comparison with other companies. Prior to establishing the covered calls position in Fluor earlier this week, the Covered Calls Advisor completed a 'Buy Alerts' spreadsheet for several companies in the Engineering & Construction industry, namely Fluor, Jacobs Engineering, Foster Wheeler, and McDermott. It is presented below for your review:





In reviewing this spreadsheet, you can see that Flour, Jacobs, and Foster Wheeler each ranked equally highly with 'Total Points' of 8 (out of a maximum possible total points of 9). So why was Fluor selected to add to the Covered Calls Advisor Portfolio? The answer lies in the fact that the 'Buy Alerts' should be viewed essentially as a starting point in the more comprehensive stock selection decision process. This spreadsheet should be used only as a 'first pass' tool, which determines only if a particular company is worthy of further analysis as a potential future investment. If the total points for a particular company is 7, 8, or 9, then they are a viable candidate for further analysis. Beyond the 'Buy Alerts' spreadsheet, essential further analysis would include calculating return-on-investment potential, analyzing risk factors, and assessing the quality of the company's management. Additionally, valuable insights can be gained from studying a company's website. For example, it is very worthwhile to take about one hour to listen to top management's presentation and to listen to their answers to analysts' questions during their most recent quarterly earnings conference call (archives of the most recent conference call are usually available in the Investor Relations section of their website). It is also helpful to read recent commentary about the company from various stock advisory services (Standard & Poor's, Morningstar, and Argus for example) as well as from websites such as Yahoo! Finance, Seeking Alpha, or even Wikinvest.

I hope both this 'Buy Alerts' form and the additional suggestions for doing your homework on a particular company are helpful. It may sound like a lot of work (and time commitment), but 'doing your homework' prior to making a decision to invest your money is both a wise approach and a worthwhile time investment that will greatly increase the likelihood of achieving exceptional investment returns.

Regards and Godspeed to All,

Jeff

Friday, November 28, 2008

Roll Up -- McKesson Corporation (MCK)

The Covered Calls Advisor Portfolio (CCAP) covered call position in McKesson Corporation(MCK) was rolled up today (11/28/08) from the Dec08 $30s to the Dec08 $35s. The spread transaction was executed as follows:

11/28/08 Buy-to-Close (BTC) 3 MCK Nov08 $30s @ $5.28
11/28/08 Sell-to-Open (STO) 3 MCK Nov08 $35s @ $1.63
Net Debit on Roll Up $3.65 ($5.28-$1.63)

The ‘net debit to strike price difference ratio’ was 73% [($5.28-$1.63)/($35-$30)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. In addition, I like the MCK holding and would like to retain the stock for continuing to write future covered calls against the McKesson stock upon the Dec08 expiration.

A summary of the MCK transactions so far is as follows:
11/24/08 Initial Stock Purchase -- Bought 300 MCK @ $30.72
11/24/08 Initial Call Option Transaction -- Sold 3 MCK Dec08 $30.00 Calls @ $2.35
11/26/08 $36.00 Ex-Dividend Income ($.12 per share X 300 shares)
11/28/08 Roll Up Transaction -- BTC 3 MCK Dec 30s @ $5.28
11/28/08 Roll Up Transaction -- STO 3 MCK Dec 35s @ $1.63
Note: MCK was trading at $34.88 today when the roll up transaction was executed.

The overall performance results(including commissions) for the MCK transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $9,224.95
($30.72*300+$8.95 commission)

Net Profit:
(a) Options Income: -$423.60 (300*($2.35-$5.28+$1.63) - 3*$11.20 commissions)
(b) Dividend Income: +$36.00 (300*$.12/share)
(c) Capital Appreciation (If exercised): +$1,266.10
= ($35.00-$30.72)*300 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $35.00): +$878.50
= (-$423.60 +$36.00 +$1,266.10)

Annualized Return If Exercised (ARIE) +133.7%
(+$878.50/$9,224.95)*(365/26 days)

The tradeoff in this roll-up transaction is that:
- it increases the potential annualized return of the position from 79.9% originally to 133.7% now.
- it decrease the downside breakeven protection from 8.0% initially to 3.8% now

As stated above, since it is this advisor's current inclination to want to retain the stock upon Dec08expiration in order to then establish a Jan09 covered calls position on MCK, today's roll-up spread was transacted.

Thursday, November 27, 2008

I'm a 'Covered Calls Investor'

Although covered calls is neither a complicated nor risky strategy, most of the general investing public is clueless when it comes to understanding covered calls. In fact, whenever I have the opportunity to speak with someone about my use of covered calls, I often receive one of two reactions; either a quizzical expression or simply a blank stare -- perhaps you've received similar reactions?

Regardless of the sad state of investment intelligence evident in most people, I continue to identify myself to them as a 'covered calls investor'. Yes, 'covered calls investor' is the term that most clearly reflects how I perceive my investing persona since: (1) About 90% of my money is invested in covered calls; (2) I remain fully invested in covered calls at all times -- that is, I don't believe in market timing and putting money into and pulling it out of the market at various times; and (3) I try to maintain the mentality of a longer-term 'investor' rather than a short-term 'trader'-- this is true even though some might consider me a 'trader' since I prefer to almost exclusively write near-month covered calls.

So what term would you choose to use for yourself in relation to your covered calls persona? Some possibilities are:
- Covered Calls Investor -- if you want to sound more solid and conservative
- Covered Calls Trader -- if you want to sound like a financial aficionado
- Covered Calls Speculator -- if you want to sound like a wheeler-dealer
- Covered Calls Hedging Specialist -- if you want to sound like a Wall Street insider
- Covered Calls Derivatives Specialist -- if you want to sound wise but mysterious

Isn't it nice that there are so many possibilities here? It's great that our strategy can encompass such a variety of descriptive terms.
And I'm definitely not implying that 'covered calls investor' is the best term; it is just the one that best describes my investing style and personality.

In addition to a 'covered calls investor', I also think of myself as a 'covered calls advisor' as indicated by the name of this blog. In that regard, I'm interested in freely and openly sharing my thoughts and ideas on covered calls with you at any time. I recognize that the term 'advisor' might seem a tad presumptuous since it implies a certain degree of wisdom (and it takes time to truly earn that level of trust). It is my earnest hope that as time progresses you will conclude that the term 'advisor' is a valid moniker.

Regards and Godspeed to All,

Jeff

Monday, November 24, 2008

Continuation Transactions -- Accenture, Altria, iShares MSCI China ETF, iShares MSCI South Korea ETF, Microsoft, and Petrobras

Today, covered calls positions were established against six equities already owned in the Covered Calls Advisor Portfolio(CCAP). As shown by the transactions history below, the Nov08 options expired worthless and new options were sold today to roll-out to Dec08 covered call positions.

1. Accenture(ACN) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 300 shares owned in Accenture(ACN):
11/24/08 Covered Calls Continuation Transaction -- STO 3 Dec08 $30.00 Calls @ $2.05

The Transactions History to date is as follows:
08/18/08 Initial Stock Purchase Transaction -- Bought 300 ACN @ $41.01
08/18/08 Initial Calls Sold Transaction -- Sold 3 ACN Sep08 $40.00 Calls @ $1.90
09/20/08 Sep08 Options Expired
09/26/08 Covered Calls Continuation Transaction -- STO 3 Oct08 $40.00 Calls @ $.70
10/18/08 Oct08 Options Expired
10/28/08 Sold 3 ACN Nov08 $35.00 Calls at $.75
11/22/08 Nov08 Options Expired
11/24/08 Sold 3 ACN Dec08 $30 Calls at $2.05

The overall performance results(including commissions) for the ACN transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $12,311.95
($41.01*300+$8.95 commission)

Net Profit:
(a) Options Income: +$1,575.20 (300*($1.90+$.70+$.75+$2.05) - 4*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): -$3,320.90
= ($30.00-$41.01)*300 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $30.00): -$1,745.70
= (+$1,575.20 +$0.00 -$3,320.90)

Annualized Return If Exercised (ARIE) -52.8%
(-$1,745.70/$12,311.95)*(365/98 days)

2. Altria(MO) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 500 shares owned in Altria(MO):
11/24/08 Covered Calls Continuation Transaction -- STO 5 Dec08 $16.00 Calls @ $.63

The Transactions History to date is as follows:
08/19/08 Initial Stock Purchase Transaction -- Bought 500 MO @ $20.91
08/19/08 Initial Calls Sold Transaction -- Sold 5 MO Sep08 $21.00 Calls @ $.51
9/11/08 Ex-Dividend of $145.00 ($.29 * 500 shares)
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 5 Oct08 $21.00 Calls @ $.43
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 5 Nov08 $21.00 Calls @ $.67
11/22/08 Nov08 Options Expired
11/24/08 Sold 3 MO Dec08 $16 Calls at $.63

The overall performance results(including commissions) for the MO transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $10,463.95
($20.91*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,059.20 (500*($.51+$.43+$.67+$.63) - 4*$12.70 commissions)
(b) Dividend Income: +$290.00 ($.29 per share*500 shares ex-divs on 9/11/08 & 12/11/08)
(c) Capital Appreciation (If exercised): -$2,472.90
= ($16.00-$20.91)*500 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $16.00): -$1,123.70
= (+$1,059.20 +$290.00 -$2,472.90)

Annualized Return If Exercised (ARIE) -40.4%
(-$1,123.70/$10,463.95)*(365/97 days)


3. iShares MSCI China ETF(FXI) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 800 shares owned in iShares MSCI China ETF(FXI):
11/24/08 Covered Calls Continuation Transaction -- STO 8 Dec08 $27.00 Calls @ $1.55

The Transactions History to date is as follows:
08/18/08 Initial Calls Sold Transaction -- Bought 800 FXI @ $40.60
08/18/08 Initial Calls Sold Transaction -- Sold 8 FXI Sep08 $44.00 Calls @ $.60
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 8 Oct08 $40.00 Calls @ $1.10
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 8 Nov08 $34.00 Calls @ $1.30
11/22/08 Nov08 Options Expired
11/24/08 Sold 8 FXI Dec08 $27 Calls at $1.55

The overall performance results(including commissions) for the FXI transactions through the Nov08 expiration would be as follows:
Stock Purchase Cost: $32,488.95
($40.60*800+$8.95 commission)

Net Profit:
(a) Options Income: +$3,610.10 (800*($.60 + $1.10 + $1.30 + $1.55) - 2*$14.95 commissions)
(b) Dividend Income: +$0
(c) Capital Appreciation (If exercised): -$10,897.90
= ($27.00-$40.60)*800 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $27.00): -$7,287.80
= (+$3,610.10 +$0.00 -$10,897.90)

Annualized Return If Exercised (ARIE) -83.5%
(-$7,287.80/$32,488.95)*(365/98 days)

4. iShares MSCI South Korea ETF(EWY) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 700 shares owned in iShares MSCI South Korea ETF(EWY):
11/24/08 Covered Calls Continuation Transaction -- STO 7 Dec08 $24.00 Calls @ $1.25

The Transactions History to date is as follows:
The Transactions History to date is as follows:
08/18/08 Initial Stock Purchase Transaction -- Bought 700 EWY @ $48.35
08/18/08 Initial Calls Sold Transaction -- Sold 7 EWY Sep08 $50 Calls @ $1.05
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- Sold 7 EWY Oct08 $47.00 Calls @
$.65
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 7 Nov08 $30.00 Calls @ $2.30
11/22/08 Nov08 Options Expired
11/24/08 Sold 7 EWY Dec08 $24 Calls at $1.25

The overall performance results(including commissions) for the EWY transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $33,853.95
($48.35*700+$8.95 commission)

Net Profit:
(a) Options Income: +$3,618.20 (700*($1.05+$.65+$2.30+$1.25) - 4*$14.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): -$17,062.90
= ($24.00-$48.35)*700 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $24.00): -$13,894.70
= (+$3,618.20 +$0.00 -$17,062.90)

Annualized Return If Exercised (ARIE) -152.9%
(-$13,894.70/$33,853.95)*(365/98 days)


5. Microsoft(MSFT) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 500 shares owned in Microsoft Corp(MSFT):
11/24/08 Covered Calls Continuation Transaction -- STO 2 Dec08 $21.00 Calls @ $1.26

The Transactions History to date is as follows:
08/18/08 Bought 500 MSFT @ $27.95
08/18/08 Sold 5 MSFT Sep08 $28.00 Calls @ $.81
09/20/08 Sep08 Options Expired
09/26/08 Covered Calls Continuation Transaction -- STO 5 Oct08 $28.00 Calls @ $.55
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 5 Nov08 $24.00 Calls @ $1.89
11/18/08 $65.00 (Ex-Div of $.13 per share * 500 shares)
11/22/08 Nov08 Options Expired
11/24/08 Sold 5 MSFT Dec08 $21 Calls at $1.26


The overall performance results(including commissions) for the MSFT transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $13,983.95
($27.95*500+$8.95 commission)

Net Profit:
(a) Options Income: +$2,409.20 (500*($.81+$.55+$2.30+$1.26) - 4*$12.70 commissions)
(b) Dividend Income: +$65.00
(c) Capital Appreciation (If exercised): -$3,492.90
= ($21.00-$27.95)*500 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $21.00): -$1,018.70
= (+$2,409.20 +$65.00 -$3,492.90)

Annualized Return If Exercised (ARIE) -27.1%
(-$1,018.70/$13,983.95)*(365/98 days)


6. Petrobras (PBR) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 400 shares owned in Petrobras(PBR):
11/24/08 Covered Calls Continuation Transaction -- STO 4 Dec08 $20.00 Calls @ $2.15

The Transactions History to date is as follows:
07/07/08 Initial Stock Purchase Transaction -- Bought 400 PBR @ $65.95
07/07/08 Initial Calls Sold Transaction -- Sold 4 PBR Jul08 $65.00 Calls @ $2.95
07/19/08 July08 Options Expired
07/24/08 Covered Calls Continuation Transaction -- Sold 4 PBR Aug08 $60.00 Calls @ $1.00
Note: Price of PBR was $56.86 at the time when the calls were sold today.
08/16/08 Aug08 Options Expired
08/18/08 Covered Calls Continuation Transaction -- STO 4 Sep08 $55.00 Calls @ $.90
Note: Price of PBR was $49.45 when the calls were sold today.
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 4 Oct08 $47.50 Calls @ $2.70
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 4 Nov08 $30.00 Calls @ $1.89
11/22/08 Nov08 Options Expired
11/24/08 Sold 4 PBR Dec08 $20 Calls at $2.15

The overall performance results(including commissions) for the PBR transactions through the Dec08 expiration would be as follows:
Stock Purchase Cost: $26,388.95
($65.95*400+$8.95 commission)

Net Profit:
(a) Options Income: +$4,564.30 (400*($2.95 + $1.00 + $.90 + $2.70 + $1.89 + $2.15) - 6*$11.95 commissions)
(b) Dividend Income: +$0
(c) Capital Appreciation (If exercised): -$18,397.90
= ($65.95-$20.00)*400 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $34.00): -$13,833.60
= (+$4,564.30 +$0.00 -$18,397.90)

Annualized Return If Exercised (ARIE) -136.7%
(-$13,833.60/$26,388.95)*(365/140 days)

Establish American Oriental Bioengineering Inc Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of American Oriental Bioengineering Inc (AOB).

AOB is a Chinese manufacturer and distributor of more than 40 State FDA-approved prescription and over-the-counter pharmaceutical and personal health products. They have traded on the NYSE since 2006 and have a terrific growth history as well as future potential combined with a very attractive valuation. Through a combination of aggressive acquisitions and very good organic growth, AOB has a compounded annual growth rate in both revenue and earnings that exceeds 60% over the past 4 years. As a value proposition, its market cap is currently $380 million with an excellent balance sheet containing $220 million cash and only $126 million in debt (most at 4.5% that doesn't mature until 2015). The P/E ratio for 2008 is estimated at 6.2 and revenue and earnings growth should continue to expand in 2009 without the company needing to take on additional debt. The Covered Calls Advisor obtains international exposure primarily through the use of country-wide ETFs, which provides sector diversification in the most attractive countries for investments. This advisor only invests in individual companies outside of the U.S. where the investment case is very compelling both from a growth and value perspective -- and this is clearly the case with AOB.

Established American Oriental Bioengineering Inc (AOB) Covered Calls for Dec08:
11/24/08 Bought 1500 AOB @ $4.91
11/24/08 Sold 15 AOB Dec08 $5.00 Calls @ $.40

Annualized Return If Unchanged (ARIU): +113.6%
Annualized Return If Exercised (ARIE): +140.1%
Downside Breakeven Protection: 8.1%

Establish Anadarko Petroleum Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Anadarko Petroleum Corp (APC).

Anadarko is one of the largest worldwide exploration and production companies primarily involved with natural gas. This advisor believes that natural gas has a strong claim as being an essential long-term energy resource for America since it has two key characteristics: (1) it's abundant in the U.S.; and (2) it's a clean-burning energy alternative to oil. These two advantages make it an attractive option as our country seeks ways towards energy independence in conjunction with environmental responsibility; and thus nat gas could be a good long-term investment opportunity. Anadarko has proven reserves and annual production rates very similar to that of Devon Energy and Apache Corporation. However, Anadarko's market cap is only $17 billion whereas Devon and Apache are $31 billion and $25 billion respectively. Anadarko has substantial long-term debt but management is committed to reducing it to 25-35% of market capitalization and is making good progress in that direction; and their free cash flow (at 15% of market cap) is tops among its peers. It's current year P/E ratio is less than 7 and its return-on-equity is adequate at approximately 20%. Importantly, CEO Jim Hackett and his top management team seem excellent, and their goals for APC include 5-9% growth per year with 120% production reserve replacement annually. Finally, their low production costs enables them to achieve greater than 10% return-on-investment even if the Nat Gas spot price were to decline to as low as $5.09.

Established Anadarko Petroleum Corp (APC) Covered Calls for Dec08:
11/24/08 Bought 500 APC @ $35.62
11/24/08 Sold 5 APC Dec08 $35.00 Calls @ $3.60

Annualized Return If Exercised (ARIE): +117.3%
Downside Breakeven Protection: 10.1%

Establish McKesson Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of McKesson Corporation (MCK).

Perhaps you are not yet very familiar with McKesson. It might surprise you to know that it is the largest health company in America in terms of revenue with $100+ billion annually -- Yes; it generates even more sales than Johnson & Johnson. Its primary business is drug distribution and it delivers approximately one-third of all drugs in America. Incredibly, its total market capitalization is only $9 billion -- so its P/Sales ratio is an amazingly low 0.1. The current year P/E is only 9 and return-on-equity is an impressive 70%. With management's focus on continued revenue growth; and even more importantly their profit margin improvement plans, this seems like a great time to purchase this high quality company at a very reasonable price. One future growth driver could be in the international arena since currently only 8% of revenues are from outside the U.S. Another possible area of growth is the fact that there is a lot of room for future increases in the use of information technology in the health care industry, and McKesson already has a Technology Solutions division (although currently relatively small) which should benefit and grow as investments in healthcare information technology are pursued by the Obama administration's stated healthcare technology and cost containment policy initiatives.

Established McKesson Corporation (MCK) Covered Calls for Dec08:
11/24/08 Bought 300 MCK @ $30.72
11/24/08 Sold 3 MCK Dec08 $30.00 Calls @ $2.35

Annualized Return If Exercised (ARIE): +79.9%
Downside Breakeven Protection: 8.0%

The annualized return shown above includes an ex-dividend on Nov. 26th of $.12 per share.

Establish Hewlett Packard Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Hewlett Packard (HPQ).

Hewlett Packard is performing exceedingly well in all divisions, but especially in personal computers, printers, and enterprise storage/servers. And with the recent acquisition of EDS completed, the services division is now set to give IBM a run for its money in that arena. Software is now the only division that could use a revenue boost, but a significant acquisition in that area will likely have to wait a year or more until the complete and successful EDS integration is assured. HPs CEO, Mark Hurd, is a terrific leader, yet the company surprisingly trades at a historically low P/E of 10.8; and likewise a historically low P/Sales of 0.8. Moreover, HP was one of the few technology companies to beat its recently reported 3rd quarter revenue and earnings per share estimates and to maintain its previously stated full year guidance estimates for 2008. Although future revenue growth will likely be limited to 'high single digits', this quality company seems to be a worthwhile purchase in its current $35 price range.

Established Hewlett Packard (HPQ) Covered Calls for Dec08:
11/24/08 Bought 500 HPQ @ $35.18
11/24/08 Sold 5 HPG Dec08 $35.00 Calls @ $2.55

Annualized Return If Exercised (ARIE): +94.5%
Downside Breakeven Protection: 7.2%

Establish Fluor Corp Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Fluor Corp (FLR).

Fluor is an excellent example of a company whose price has been hit too hard as a result of the overall market decline and the rapid fall in the price of oil from $140+ per barrel to the $50 range. At $50, this advisor believes that oil has the potential for much less downside than upside in its future price; and when the oil price begins to increase again, Flour's stock price will likely move much, much higher. It is a preeminent, quality construction and engineering company with a primary emphasis on oil & gas construction and with the additional advantage of a strong worldwide presence (57% international revenue).
It is also a value-oriented investment; with its current P/E of 7 being only about 1/2 of its potential growth rate for the next few years. And the return-on-equity is good at 35%. Finally, in the most recent quarter, its contract backlog was 28% higher than for the same period last year.

Established Fluor Corp (FLR) Covered Calls for Dec08:
11/24/08 Bought 600 FLR @ $35.35
11/24/08 Sold 6 FLR Dec08 $35.00 Calls @ $3.50

Annualized Return If Exercised (ARIE): +129.9%
Downside Breakeven Protection: 10.3%

The annualized return shown above includes an ex-dividend on Dec. 3rd of $.125 per share.

Establish Humana Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Humana Inc (HUM):

Humana is a managed healthcare company with nationwide coverage. Its large exposure to government-sponsored programs (primarily medicare) has been a major headwind for its share price because of fears that the Obama administration will accelerate efforts to shrink healthcare costs (and therefore profits for companies like HUM). I believe the punishment the stock has taken over this concern is overdone and that initially, healthcare policy changes will be focused moreso on expanding coverage for the uninsured. A second reason the company's stock has taken a beating this year is because of the earnings misses that resulted directly from the advent of the Medicare Prescription program this year and the Humana's underestimates of prescription reimbursment costs they would incur this year -- this problem will be corrected with the experience gained from reimbursment levels so far this year and the opportunity to revise pricing to profitable levels which will become effective in January 2009. Next year, earnings should increase about 30% above this year's result; and with a currently depressed P/E of only 6, a P/Sales of only 0.2, and a strong cash flow, there is a lot of room for a nice price recovery if my thesis as described above is anywhere close to being accurate.


Established Humana Inc (HUM) Covered Calls for Dec08:
11/24/08 Bought 1000 HUM @ $25.55
11/24/08 Sold 10 HUM Dec08 $25.00 Calls @ $2.90

Annualized Return If Exercised (ARIE): +129.0%
Downside Breakeven Protection: 11.4%

Dell, General Electric, Honeywell, and St Jude Medical -- Closed

Four Nov08 covered calls positions that expired with the stock prices out-of-the-money were closed out today by selling the stock. It was decided to sell these four stocks rather than rolling-out to Dec08 covered calls to raise cash in order to invest in covered call opportunites that this advisor believes are more attractive at this time. The detailed results for the completed positions in Dell, GE, Honeywell, and St Jude Medical are as follows:

1. Dell Inc (DELL) -- Closed

The position in Dell (DELL) was closed today by selling the 1200 shares owned.

The Transactions History to date is as follows:
09/25/08 Initial Stock Purchase Transaction -- Bought 1200 DELL @ $16.73
09/25/08 Initial Calls Sold Transaction -- Sold 12 DELL Oct08 $17.00 Calls @ $.75
10/18/08 Oct08 Options Expired
10/28/08 Sold 1200 DELL Nov08 $13.00 Calls at $.78
11/22/08 Nov08 Options Expired
11/24/08 Sold 1200 DELL @$9.55

The overall performance results(including commissions) for the DELL transactions are as follows:
Stock Purchase Cost: $20,084.95
($16.73*1200-$8.95 commission)

Net Profit:
(a) Options Income: +$1,800.10 (1200*($.75+$.78) - $35.90 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation: -$8,633.90
= -($16.73-$9.55)*1200 - 2*$8.95 commissions

Total Net Profit: -$6,833.80
= (+$1,800.10 + $0 - $8,633.90)

Annualized Return: -207.0%
(-$6,833.80/$20,084.95)*(365/60 days)


2. General Electric (GE) -- Closed

The position in General Electric (GE) was closed today by selling the 200 shares owned.

The Transactions History to date is as follows:
10/02/08 Initial Stock Purchase Transaction -- Bought 200 GE @ $22.25
10/02/08 Initial Calls Sold Transaction -- Sold 2 GE Oct08 $22.00 Calls @ $1.53
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 2 Nov08 $21.00 Calls @ $.88
11/22/08 Nov08 Options Expired
11/24/08 Sold 200 GE @$15.01

The overall performance results(including commissions) for the GE transactions are as follows:
Stock Purchase Cost: $4,458.95
($22.25*200+$8.95 commission)

Net Profit:
(a) Options Income: +$461.10 (200*($1.53+$.88) - 2*$10.45 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation: -$1,465.90
= ($15.01-$22.25)*200 - 2*$8.95 commissions

Total Net Profit: -$1,004.80
= (+$461.10 + $0 - $1,465.90)

Annualized Return: -155.2%
(-$1,004.80/$4,458.95)*(365/53 days)


3. Honeywell Inc (HON) -- Closed

The position in Honeywell (HON) was closed today by selling the 500 shares owned.

The Transactions History to date is as follows:
05/23/08 Initial Stock Purchase Transaction -- Bought 500 HON @ $58.89
05/23/08 Initial Calls Sold Transaction -- Sold 5 HON Jun08 $60 Calls @ $1.20
06/20/08 Jun08 Options Expired
07/02/08 Covered Calls Continuation Transaction -- Sold 5 Jul08 $52.50 Calls @ $.85
Note: Price of HON was $50.12 when the calls were sold today.
07/19/08 July08 Options Expired
07/24/08 Covered Calls Continuation Transaction -- Sold 5 HON Aug08 $52.50 Calls @ $1.38
Note: Price of HON was $52.02 when the calls were sold today.
08/14/08 $137.50 (Ex-Div of $.275*500 shares)
08/16/08 Aug08 Options Expired
08/18/08 Covered Calls Continuation Transaction -- STO 5 Sep08 $52.50 Calls @ $1.00
Note: Price of HON was $50.86 when the calls were sold today.
09/20/08 Sep08 Options Expired
09/23/08 Covered Calls Continuation Transaction -- STO 2 Oct08 $40.00 Calls @ $5.45
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 2 Nov08 $32.50 Calls @ $.95
11/18/08 $137.50 (Ex-Div of $.275*500 shares)
11/22/08 Nov08 Options Expired
11/24/08 Sold 500 HON @$25.90

The overall performance results(including commissions) for the HON transactions are as follows:
Stock Purchase Cost: $29,453.95
($58.89*500-$8.95 commission)

Net Profit:
(a) Options Income: +$5,351.50 (500*($1.20+$.85+$1.38+$1.00+$5.45+$.95) - 5*$12.70)$35.90 commissions)
(b) Dividend Income: $275.00 ($137.50 * 2 Ex-Divs)
(c) Capital Appreciation: -$16,512.90
= ($25.90-$58.89)*500 - 2*$8.95 commissions

Total Net Profit: -$10,886.40
= (+$5,351.50 + $275.00 - $16,512.90)

Annualized Return: -72.9%
(-$10,886.40/$29,453.95)*(365/185 days)


4. St Jude Medical Inc (STJ) -- Closed

The position in St Jude Medical (STJ) was closed today by selling the 400 shares owned.

The Transactions History to date is as follows:
08/18/08 Initial Stock Purchase Transaction -- Bought 400 STJ @ $46.36
08/18/08 Initial Calls Sold Transaction -- Sold 4 STJ Sep08 $45.00 Calls @ $2.40
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- Sold 4 STJ Oct08 $45.00 Calls @ $1.60
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 4 Nov08 $40.00 Calls @ $1.15
11/22/08 Nov08 Options Expired
11/24/08 Sold 500 STJ @$27.93

The overall performance results(including commissions) for the STJ transactions are as follows:
Stock Purchase Cost: $18,552.95
($46.36*400+$8.95 commission)

Net Profit:
(a) Options Income: +$2,024.15 (400*($2.40+$1.60+$1.15) - 3*$11.95 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation: -$7,389.90
= ($27.93-$46.36)*400 - 2*$8.95 commissions

Total Net Profit: -$5,365.75
= (+$2,024.15 + $0 - $7,389.90)

Annualized Return: -107.7%
(-$5,365.75/$18,552.95)*(365/98 days)

November 2008 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 10 positions with November 2008 expirations, with the following results:
- All 10 positions (ACN,MO,DELL,GE,HON,EWY,FXI,MSFT,PBR, and STJ)ended out-of-the-money.

Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Dec08 covered call positions. The related transactions will be made today and tomorrow and the actual transactions will be posted on this blog site on the same day they occur.

Friday, November 7, 2008

Market Meter Changes From Neutral to Slightly Bullish

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

The current readings for each of the six metrics are:

1. U.S. Earnings Yield and Bond Yield Spread:
7.71%-3.69%=+4.02% is Very Bullish.

2. Rest-of-World Earnings Yield and Bond Yield Spread:
8.81%-3.40%=+5.41% is Very Bullish.

3. Real U.S. Earnings & GDP Growth:
a. U.S. Actual Earnings Growth (Year-Over-Year) for Latest 2 Quarters:
-27.6% is Very Bearish
b. U.S. Estimated GDP Growth: Year-Over-Year GDP Growth for Next 2 Qtrs Minus Projected Inflation Rate
(-1.5% GDP Growth - 2.0% Inflation)= -3.5% which is Bearish.

4. Current Vs. Expected P/E Ratios:
Current trailing 12-months P/E for S&P 500 is 13.0 and the expected P/E with trailing 12-mos. inflation at 2.7% is 17.6:
(17.6-13.0)/13.0 = +35.6% is Very Bullish.

5. Market Sentiment:
a. Longer-Term (Price Change vs. 9 months ago for Russell 3000):
(52.21-76.50)/76.50=-31.8% is Very Bearish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
Very Bullish.
c. Shorter-Term (Equity-Only Put/Call Ratio):
Average of Most Recent 21-Day Ratio and Yesterday's Ratio is Bullish.

The average of the longer-term and the two shorter term sentiment indicators provides the result for this metric. Thus, since the first metric is 'very bearish', the second is 'very bullish' and the third is 'bullish', the overall Market Sentiment rating averages as 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 sidebar column of this blog. The meter also states the recommended covered calls investing strategy that corresponds with 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."

By '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 1.0% and 2.0% below the options strike price.

Wednesday, November 5, 2008

Establish Gushan Environmental ADR Covered Calls

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

Established Gushan Environmental ADR (GU) Covered Calls for Dec08. Gushan is the leading biofuel products producer in China. This is an admittedly speculative, but potentially very profitable, investment. Gushan has a relatively small (currently slightly below $300 million) market cap, but both its valuation and growth prospects are very attractive. From a value perspective, the company trades at a P/E on current year expected earnings of less than 5, has cash of more than 50% of market cap, low debt, and expected production growth of approximately 50% over the next year. In addition, while listening to the latest quarterly earnings conference call, I was impressed by the apparent capabilities, clarity, and vision of Gushan's senior management team.

The overwhelming majority of positions in the Covered Calls Advisor Portfolio (CCAP) are invested in well-established, high quality companies. But the CCAP investing guidelines allow for one speculative position (not exceeding 5% of total assets) at any given time -- Gushan is it!

11/05/08 Bought 2000 GU @ $3.44
11/05/08 Sold 20 GU Dec08 $5.00 Calls @ $.36

Annualized Return If Stock Price Unchanged (ARIU): +84.1%
Annualized Return If Exercised (ARIE): +452.7%
Downside Breakeven Protection: 10.5%

Friday, October 31, 2008

Returns -- Through October 2008

Both 2008 year-to-date and 2007 performance results for the Covered Calls Advisor Portfolio (CCAP) are presented below. In each instance, CCAP results are compared against the Russell 3000 Index ETF(IWV) benchmark.

1. 2008 Year-to-Date Results (Jan 1st through Oct 31st, 2008):
CCAP 2008 Year-to-Date Absolute Return = -21.8%

($201,744.61-$257,886.51)/$257,886.51

Benchmark Russell 3000(IWV) 2008 Yr-to-Date Absolute Return = -33.8%
($55.85-$84.40)/$84.40

The CCAP is currently tracking at 12.0 percentage points (33.8%-21.8%) better than the market benchmark so far in 2008.

2. 2007 Results:
The Covered Calls Advisor Portfolio (CCAP) was initiated on September 14th, 2007 with a beginning balance of $250,000. The CCAP balance at year-end (12/31/07) was $257,886.51. Below are the returns of the CCAP for this 2007 timeframe compared with the results of the Russell 3000 (IWV) benchmark during the same time period.

CCAP 2007 Absolute Return = +3.2%
($257,886.51-$250,000.00)/$250,000.00

Benchmark (IWV) 2007 Absolute Return = -1.2%
($84.40-$85.43)/$85.43

The corresponding annualized return for the 108 days the CCAP existed in 2007 (between Sept 14, 2007 and Dec 31, 2007) was:
CCAP 2007 Annualized Return = +10.7%
[($257,886.51-$250,000.00)/$250,000.00]*(365/108 days)

Benchmark Russell 3000(IWV) 2007 Annualized Return =
-4.1%

[($84.40-$85.43)/$85.43]*(365/108 days)


This Advisor's Overall Market Meter continues to indicate that a NEUTRAL investment posture is appropriate at this time. The corresponding covered calls investing approach is to write near-month primarily at-the-money covered calls. By 'at-the-money', this advisor means that for a covered calls portfolio, on average covered calls positions should be established somewhere between 1.0% below and 1.0% above the strike price.

Monday, October 20, 2008

Continuation Transactions -- Altria, General Electric, and iShares MSCI China ETF

Today, covered calls positions were established against four equities already owned in the Covered Calls Advisor Portfolio(CCAP). As shown by the transactions history below, the Oct08 options expired worthless and new options were sold today to roll-out to Nov08 covered call positions.

1. Altria(MO) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 500 shares owned in Altria(MO):
10/20/08 Covered Calls Continuation Transaction -- STO 5 Nov08 $21.00 Calls @ $.67

The Transactions History to date is as follows:
08/19/08 Initial Stock Purchase Transaction -- Bought 500 MO @ $20.91
08/19/08 Initial Calls Sold Transaction -- Sold 5 MO Sep08 $21.00 Calls @ $.51
9/11/08 Ex-Dividend of $145.00 ($.29 * 500 shares)
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 5 Oct08 $21.00 Calls @ $.43
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 5 Nov08 $21.00 Calls @ $.67

The overall performance results(including commissions) for the MO transactions through the Nov08 expiration would be as follows:
Stock Purchase Cost: $10,463.95
($20.91*500+$8.95 commission)

Net Profit:
(a) Options Income: +$779.60 (500*($.51+$.43+$.67) - 2*$12.70 commissions)
(b) Dividend Income: +$145.00 ($.29 per share*500 shares ex-div on 9/11/08)
(c) Capital Appreciation (If exercised): +$27.10
= ($21.00-$20.91)*500 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $21.00): +$951.70
= (+$779.60 +$145.00 +$27.10)

Annualized Return If Exercised (ARIE) +37.7%
(+$951.70/$10,463.95)*(365/88 days)


2. General Electric(GE) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 200 shares owned in General Electric(GE):
10/20/08 Covered Calls Continuation Transaction -- STO 2 Nov08 $21.00 Calls @ $.88

The Transactions History to date is as follows:
10/02/08 Initial Stock Purchase Transaction -- Bought 200 GE @ $22.25
10/02/08 Initial Calls Sold Transaction -- Sold 2 GE Oct08 $22.00 Calls @ $1.53
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 2 Nov08 $21.00 Calls @ $.88

The overall performance results(including commissions) for the GE transactions through the Nov08 expiration would be as follows:
Stock Purchase Cost: $4,458.95
($22.25*200+$8.95 commission)

Net Profit:
(a) Options Income: +$456.60 (200*($1.53+$.88) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): -$267.90
= ($21.00-$22.25)*200 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $21.00): +$188.70
= (+$456.60 +$0.00 -$267.90)

Annualized Return If Exercised (ARIE) +35.1%
(+$188.70/$4,458.95)*(365/44 days)



3. iShares MSCI China ETF(FXI) Continuation Transaction

The following transaction was made today to establish a covered calls position against the 800 shares owned in iShares MSCI China ETF(FXI):
10/20/08 Covered Calls Continuation Transaction -- STO 8 Nov08 $34.00 Calls @ $1.30

The Transactions History to date is as follows:
08/18/08 Initial Calls Sold Transaction -- Bought 800 FXI @ $40.60
08/18/08 Initial Calls Sold Transaction -- Sold 8 FXI Sep08 $44.00 Calls @ $.60
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 8 Oct08 $40.00 Calls @ $1.10
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 8 Nov08 $34.00 Calls @ $1.30

The overall performance results(including commissions) for the FXI transactions through the Nov08 expiration would be as follows:
Stock Purchase Cost: $32,488.95
($40.60*800+$8.95 commission)

Net Profit:
(a) Options Income: +$2,370.10 (800*($.60 + $1.10 + $1.30) - 2*$14.95 commissions)
(b) Dividend Income: +$0
(c) Capital Appreciation (If exercised): -$5,297.90
= ($34.00-$40.60)*800 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $34.00): -$2,927.80
= (+$2,370.10 +$0.00 -$5,297.90)

Annualized Return If Exercised (ARIE) -37.0%
(-$2,927.80/$32,488.95)*(365/89 days)

October 2008 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 12 positions with October 2008 expirations, with the following results:
- All 12 positions (ACN,DELL,EWT,EWY,FXI,GE,HON,HUM,MO,MSFT,PBR, and STJ)ended out-of-the-money.

Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Nov08 covered call positions. The related transactions will be made during the next few days and the actual transactions will be posted on this blog site on the same day they occur.

Thursday, October 2, 2008

Establish General Electric Covered Calls

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

Established General Electric (GE) Covered Calls for Oct08:
10/02/08 Bought 200 GE @ $22.25
10/02/08 Sold 2 GE Oct08 $22.00 Calls @ $1.53

Given GE's $12B stock offering announced today at $22.25 and the strong likelihood that GE's offering is successful (given the fact that the underwriting consortium consists of the strongest banks Bank of America, Citigroup, Deutsche Bank, Goldman Sachs, JP Morgan, and Morgan Stanley), I now have increased confidence that the stock will be able to stay above the $22 strike price for the next 16 days until expiration. In addition, the implied volatility of the GE option was an extraordinarily high 76% when sold this morning thus making the GE option very attractive to sell and also the associated potential annualized return of 131.0% for the covered calls if exercised is especially attractive.

Annualized Return If Exercised (ARIE): +131.0%
Downside Breakeven Protection: 6.9%