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Saturday, May 30, 2009

Returns -- Through May 2009

As shown in the table below, the Covered Calls Advisor Portfolio (CCAP) has outperformed the Russell 3000 benchmark by 19.53 percentage points (23.01% - 3.48%) so far in 2009:

"Stick with Covered Calls"!

The five primary reasons for the exceptional performance of the CCAP so far in 2009 are as follows:

1. Good Stock Selection: Good stock selection is Job #1 for covered calls investors. Of all the factors that contribute to the CCAP outperformance versus the benchmark, it is difficult to determine a precise incremental benefit attributable to each factor. However, it is certainly safe to say that 'good stock selection' has provided the single greatest contribution to the outperformance that has been achieved. The Covered Calls Advisor Portfolio has done particularly well so far this year by:
- Overweighting international stocks (especially China). The 'normal' weighting of international stocks in the CCAP is 30.0%. Currently, international positions (all in Asian emerging markets) represents 50.1% of total CCAP holdings. The relative outperformance of international emerging markets stocks compared with domestic stocks in 2009 has been substantial. For example, for the first 5 months this year, the iShares MSCI Emerging Markets Index ETF (EEM) has increased by 33.1% whereas the U.S. domestic-based Russell 3000 Index ETF (IWV) has increased by 3.5%.
- Overweighting technology stocks. Technology has been the top performing sector for U.S. companies with a 19.2% year-to-date return so far in 2009. The normal weighting of tech stocks in a domestic portfolio would be about 18%. The CCAP has averaged 26% exposure to the technology sector so far this year.

2. Stick with the Covered Calls Investing Process: Two key elements of this process include:
- Remain fully invested. After a brutal January and February, it was difficult to maintain a fully-invested investment posture. It was definitely tempting to hunker down and 'go into cash' with a signficant portion of the portfolio. But a strong commitment to following the Covered Calls Advisor's investing process, one aspect of which is to maintain a fully-invested portfolio, has paid off during the unexpectedly bullish bounce we have experienced in March, April, and May.
- Stay aligned with the Covered Calls Advisor's Overall Market Meter. This meter is always shown in the upper right sidebar of this blog. After experiencing the huge bear market of 2008 and its continuation into January and February of 2009, 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. But once again, a strong commitment to following the Covered Calls Advisor's investing process has helped to achieve the substantial outperformance results to-date in 2009. The slightly out-of-the-money positions enabled many stock positions to capture some capital appreciation as prices increased toward and sometimes above their strike prices at expiration.

3. Follow Portfolio Diversification Recommendations: Maintaining adequate portolio diversification is another key concept in the Covered Calls Advisor's investing process. On the right sidebar of this blog is a link to the 'Current Portfolio Diversification Recommendations'. These recommendations are provided for asset classes and, in the case of domestic equities, down to the sector level. These recommendations are revised periodically whenever this advisor's avid reading and research in investing and economic topics leads to the conclusion that adjustments to the recommended portfolio diversification allocations are warranted. It is not intended that the recommended percentages be followed rigidly, but rather used as a general guideline to inform the investor's decision-making process.

4. Active Portfolio Management: The Covered Calls Advisor favors active rather than passive portfolio management. This advisor maintains that modest incremental portfolio returns can be obtained by adjusting existing covered calls positions on a timely basis during the expiration month. As a result of substantial price appreciation since early March, mid-month roll-up transactions have provided opportunities to extract incremental profits from several investments. In this regard, you might also recall that the Covered Calls Advisor has recently fine-tuned the criteria used for triggering roll-up and roll-down decisions.

5. Benefit from High Options Volatility: So far, 2009 has been an especially profitable year to sell options -- the CBOE Volatility Index (VIX) has averaged 41. This average has been substantially higher than the long-term market volatility average, which is closer to 22. Consequently, the options income received this year from selling near-month call options has provided an exceptionally large stream of options income into the Covered Calls Advisor's Portfolio.

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

1. May 2009 Year-to-Date Results:

CCAP Absolute Return (Jan 1st through May 31st, 2009) = +23.01%
= ($245,691.65 - $199,733.10)/$199,733.10

Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through May 31st,2009) = +3.48%
= ($53.81 - $52.00)/$52.00

2. Prior Years 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:

Note: 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.

Regards and Godspeed,



  1. Jeff,

    Glad to see another great month for the covered call portfolio. Im thinking of putting together a post on my blog that summarizes all of the covered call/cash-secured put strategies that are discussed on various blogs, and wanted to know if it would be alright if I included your method.


  2. Excellent results Jeff! I am just getting started with CC's. Have you tried or do you use Ron Groenke's VISIONS software? Thanks for the help with DNDN.


  3. Thanks for your comments Rich.
    I don't use Groenke's software. His approach is more 'technical analysis' oriented, whereas I am primarily a 'value oriented' investor.


  4. Mr. P,

    Absolutely amazing that your YTD is almost exactly equal to my YTD (23.96)!
    It should be interesting to see how value investing compares to technical trading this year.

    Jeff W