Tuesday, August 25, 2009

Establish ProShares Short S&P 500 ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of ProShares Short S&P 500 ETF (SH) covered calls as follows:

Established ProShares Short S&P 500 ETF (SH) Covered Calls for Sep09:
08/25/09 Bought 900 SH @ $57.74
08/25/09 Sold 9 SH Sep09 $59.00 Calls @ $.80

The ProShares Short S&P 500 ETF tracks the inverse of the S&P 500 index. This is the first time the Covered Calls Advisor has established a covered calls position in an inverse ETF. This position was established with approximately 20% of the Covered Calls Advisor Portfolio(CCAP) so that the CCAP for the Sep09 expiration will be 80% long and 20% short in the underlying equities. This approach was done to provide a better match with the current Overall Market Meter rating (see upper right sidebar) of "Neutral", whereas the CCAP's normal 100% long equities approach tends to result in a slightly bullish posture. This 80/20 long/short approach is similar to the long/short approach of numerous hedge funds and will result in improved overall returns relative to the Russell 3000 benchmark if a price correction occurs in the overall market during the current expiration month. I will be closely monitoring the interplay between the long and short components of the CCAP this month to seek new insights into the inherent advantages and disadvantages of this approach.

Some potential results from this transaction are:
Absolute Return if Stock Price Unchanged at $57.74: +1.4%
Annualized Return If Unchanged (ARIU): +20.2%

Absolute Return if Exercised at $59.00: +3.6%
Annualized Return If Exercised (ARIE): +52.1%

Downside Breakeven Price Point: $56.94
Downside Breakeven Protection: 1.4%

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