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Tuesday, March 31, 2009

Returns -- Through March 2009

The Covered Calls Advisor Portfolio (CCAP) has substantially outperformed the Russell 3000 benchmark so far in 2009. The chart below presents the monthly performance of the CCAP for each month this year and also provides a comparison with the results of the Russell 3000 benchmark.




Let's consider the dramatic difference between the very bearish January and February and the very bullish March:



January and February 2009 -- During the bearish market of January and February, selling call options against our stock holdings provided us covered calls investors with a clear relative advantage over the typical buy-and-hold investors. The relative outperformance of covered calls compared with a buy-and-hold strategy during bearish markets (and also in range-bound markets) is readily understandable because of the additional income received from regularly selling near-month call options.


March Madness 2009 -- This advisor's favorite sport is college basketball; so this is an exciting time of the year for me. This year, March Madness excitement also applies to the bullishness we experienced in the stock market -- the March 2009 overall stock market increase of +7.57% was so explosive that it ranks in the top 3% of historical monthly returns. Those financial advisors who advise clients not to invest in covered calls will often use the rationale that covered calls underperform (compared with a buy-and-hold strategy) during bull market moves. So if their objections are valid, then we would have expected that the very bullish March'09 would very likely have been a month of underperformance for the CCAP relative to its Russell 3000 benchmark. However, the chart above shows that March was actually another month of outperformance for the Covered Calls Advisor Portfolio. The primary reasons for the exceptional performance of the CCAP in March were:

  1. Stock Selection -- Just as with buy-and-hold, stock selection is Job #1 with covered calls. Good stock selection overall as well as a significant overweighting of the best-performing sector of the market (information technology) benefitted the portfolio's March performance.
  2. Selling Primarily Out-of-the-Money Calls -- After a brutal January and February, it was psychologically difficult to stick with the Covered Call Advisor's current Overall Market Meter rating of 'Slightly Bullish' and the associated covered calls strategy of selling primarily slightly out-of-the-money calls. The natural tendency is to change to a much more conservative deep-in-the-money investing posture after a bearish period, such as that we just experienced in January and February. But a commitment to maintaining the discipline to continue following the Covered Calls Advisor's pre-defined investing process paid off during March. The out-of-the-money positions enabled most stock positions to achieve significant capital appreciation as prices increased toward and sometimes slightly above their Mar09 strike prices.
  3. Taking Advantage of High Options Volatility -- The CBOE Volatility Index (VIX) continues to trade at high levels. Consequently, the options income being received currently from selling near-month call options provides an exceptionally large stream of options income for the portfolio.

4. Timely Roll-Ups -- As a result of substantial price appreciation in UnitedHealth Group and BHP Billiton, mid-month roll-up transactions have provided the opportunity to extract incremental profits from these investments.

Granted, merely one month of covered calls outperformance during a very bullish stock market period does not prove anything. Is it possible that the fortuitous results achieved in the four categories above won't be achieved every month?
Of Course!! -- In fact it is unusual that a favorable confluence of all of the four factors described above would occur during the same month. Nevertheless, the March outperformance by CCAP in the face of the strong bullish move does provide encouragement with respect to this advisor's intention of showing that a well-structured, disciplined covered calls strategy can outperform a basic buy-and-hold strategy over a long-term investing horizon.

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

The 2009 Year-to-Date results as well as the Prior Years (2007 & 2008) results are as follows:

1. March 2009 Year-to-Date Results:

CCAP Absolute Return (Jan 1st through Mar 31st, 2009) = +3.07%
($205,864.90-$199,733.10)/$199,733.10

Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through Mar 31st,2009) = -11.77%
($45.88-$52.00)/$52.00

The CCAP has outperformed the Russell 3000 benchmark by a total of 14.84 percentage points (comparing +3.07% with -11.77%) thus far in 2009.

2. Prior Years (2007 & 2008) Results:

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









For establishing new covered calls positions at this time, the Covered Calls Advisor's Overall Market Meter (shown in the right sidebar near the top of this page) shows that a SLIGHTLY BULLISH investment posture is recommended.
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.

Regards and Godspeed,

Jeff

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