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Saturday, October 31, 2009

Returns -- Through October 2009

This report presents the Covered Calls Advisor Portfolio (CCAP) performance results through October 2009.

1. Month of October 2009 Result:

The Covered Calls Advisor Portfolio decreased by 1.66% for the month of October 2009. In comparison, the benchmark Russell 3000 index (IWV) decreased by 2.60% for the month.


2. Year-to-Date Through October 2009 Results:

The 2009 Year-to-Date results are as follows:

CCAP Absolute Return (Jan 1st through October 31, 2009) = +31.15%
= ($261,949.96 - $199,733.10)/$199,733.10

Benchmark Russell 3000(IWV) Absolute Return (Jan 1st through October 31,2009) = +16.12%
= ($60.38 - $52.00)/$52.00

For the first ten months of 2009, the table below shows that CCAP has outperformed the Russell 3000 benchmark by 15.03 percentage points (31.15% - 16.12%):







"Stick with Covered Calls"!












3. 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 bottom-line 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.

If you have any comments or questions, please feel free to submit them by clicking the 'comments' link below. If you prefer more confidential correspondence, my email address is listed at the top-right sidebar of this blog site.

Regards and Godspeed,

Jeff

Thursday, October 29, 2009

Establish ProShares Short S&P 500 ETF Covered Calls

With the cash from the today's early exercise of Paychex and also from closing out the Cal Dive covered calls position, it was decided to increase the Covered Calls Advisor Portfolio(CCAP) position in ProShares Short S&P 500 ETF (SH) covered calls as follows:

Established ProShares Short S&P 500 ETF (SH) Covered Calls for Nov09:
10/29/09 Bought 300 SH @ $56.05
10/29/09 Sold 3 SH Nov09 $57.00 Calls @ $.90

The ProShares Short S&P 500 ETF position has now been increased so that it now represents approximately 19% of the assets in the Covered Calls Advisor Portfolio(CCAP). As a result, the CCAP for the Nov09 expiration is now 75% long, 19% short, and 6% cash in the underlying equities. The 6% cash buffer is for position management purposes in the event that this advisor decides to transact a net debit spread roll-up of an existing position prior to Nov09 expiration.

Some possible overall performance results(including commissions) for this SH investment would be as follows:
Equity Purchase Cost: $16,823.95
= ($56.05*300+$8.95 commission)

Net Profit:
(a) Options Income: +$258.80
= (300*$.90 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If price unchanged at $56.05): -$8.95
= ($56.05-$56.05)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $57.00): +$276.05
= ($57.00-$56.05)*300 - $8.95 commissions

Total Net Profit(If price unchanged at $56.05): +$249.85
= (+$258.80 +$0.00 -$8.95)
Total Net Profit(If exercised at $57.00): +$535.30
= (+258.80 +$0.00 +$276.05)

Absolute Return if Price Unchanged at $56.05: +1.5%
= +$249.85/$16,823.95
Annualized Return If Unchanged (ARIU): +23.6%
= (+$249.85/$16,823.95)*(365/23 days)

Absolute Return if Exercised at $57.00: +3.2%
= +$535.30/$16,823.95
Annualized Return If Exercised (ARIE): +50.5%
= (+$1,615.60/$33,560.95)*(365/23 days)

The downside breakeven price for this out-of-the-money position is $55.15 ($56.05-$.90), and as such provides a downside profit protection of up to 1.5% below the purchase price.

Cal Dive International (DVR) -- Closed

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Cal Dive International (DVR) was closed out today (10/29/09).

The transactions history was as follows:
10/26/09 Bought 500 DVR @ $10.21
10/26/09 Sold 5 DVR Nov09 $10.00 Calls @ $.55
10/29/09 Bought-to-Close 5 DVR Nov09 $10.00 Calls @ $.15
10/29/09 Sold 500 DVR @ $8.64

Cal Dive reported quarterly earnings today that were very disappointing. Earnings per share were $.03 lower than expected and revenue numbers missed analysts' forecast by an alarming 20.7%. Moreover, the company stated that "the fourth quarter is shaping up to be slower as our customers look to avoid the winter weather in the Gulf of Mexico and have already spent the majority of their capital budgets for the year". For this advisor, this represents a fundamental breakdown in the company's prospects, and as such is a sufficient reason to immediately exit the position despite the fact that this position was established only three days ago. Fortunately, this position was only 2.0% of the the overall Covered Calls Advisor Portfolio.

The overall performance results(including commissions) for the DVR transactions were as follows:
Stock Purchase Cost: $5,113.95
($10.21*500+$8.95 commission)

Net Profit:
(a) Options Income: +$174.60 [500*($.55 - $.15)- 2*($8.95 + 5*$.75)] commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$793.95
= ($8.64-$10.21)*500 - $8.95 commissions

Total Net Profit: -$619.35
= (+$174.60 +$0.00 -$793.95)

Absolute Return = -12.1%
= -$619.35/$5,113.95

Paychex Inc (PAYX) -- Closed by Early Exercise

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Paychex Inc (PAYX) was closed out today (10/29/09) when the short call options were assigned early which resulted in the stock position being sold at the $27.50 strike price.

The transactions history for this covered calls position was as follows:
10/13/09 Bought 500 PAYX @ $28.38
10/13/09 Sold 5 PAYX Nov09 $27.50 Calls @ $1.28
10/29/09 Positions Closed by Early Exercise (Options exercised and stock sold at $27.50)

This is the Covered Calls Advisor's first use of a covered calls "ex-dividend early exercise strategy". The Covered Calls Advisor originally entered this position with the full knowledge that early exercise was a likely occurrence since PAYX goes ex-dividend today and it was in the call options owner's economic interest to exercise early to obtain the stock and thus capture the dividend. This is true since the $.31 dividend payment exceeds the very minimal [approximately $.01=($27.50-($29.04-$1.55))] time value remaining in the call option. As described when this covered calls position was originally established (link), this outcome was the one preferred by this advisor since it results in a larger annualized return-on-investment than would occur if the original position was held until expiration.

The overall performance result(including commissions) for the PAYX transactions was as follows:
Stock Purchase Cost: $14,198.95
($28.38*500+$8.95 commission)

Net Profit:
(a) Options Income: +$627.30 [500*$1.28 - ($8.95 + 5*$.75)] commissions)
Note: the commissions shown is upon selling the options initially. There are no additional options commissions upon assignment.
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$448.95
= ($27.50-$28.38)*500 - $8.95 commissions

Total Net Profit: +$178.35
= (+$627.30 +$0.00 -$448.95)

Absolute Return = +1.3%
= +$178.35/$14,198.95

Annualized Return: +28.7%
= (+$178.35/$14,198.95)*(365/16 days)

With early exercise, this PAYX covered calls position is now completely closed and an absolute return-on-investment of +1.3% so far during this Nov09 expiration month has been obtained. Now, the $13,741.05 cash received from selling the 500 shares of PAYX is available for re-use and will be applied today to establish another covered calls position with another Nov09 expiration. The net effect is that we will be using the same investment capital twice in one expiration month, which will provide an opportunity for a possible profit double-dip. That is, a second Nov09 covered calls position will provide an opportunity to increase the +1.3% absolute return already achieved so far this month from the closed PAYX position. A separate post will be made on this blog later today after the new position has been established.

Wednesday, October 28, 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 Nov09:
10/28/09 Bought 600 SH @ $55.92
10/28/09 Sold 6 SH Nov09 $58.00 Calls @ $.65

The ProShares Short S&P 500 ETF tracks the inverse of the S&P 500 index. This moderately out-of-the-money covered calls position was established with approximately 13% of the assets in the Covered Calls Advisor Portfolio(CCAP), so that the CCAP for the Nov09 expiration will be 87% long and 13% short in the underlying equities. This approach was done to hedge the overall CCAP 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 will be the final covered calls position established for the Nov09 expiration. CCAP is now 95% invested with 5% in cash (money-market account). This 5% cash buffer is for position management purposes in the event that this advisor decides to transact a net debit spread roll-up of an existing position.

Some possible overall performance results(including commissions) for this SH investment would be as follows:
Stock Purchase Cost: $33,560.95
= ($55.92*600+$8.95 commission)

Net Profit:
(a) Options Income: +$376.55
= (600*$.65 - $13.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $55.92): -$8.95
= ($55.92-$55.92)*600 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $58.00): +$1,239.05
= ($58.00-$55.92)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $55.92): +$367.60
= (+$376.55 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $58.00): +$1,615.60
= (+376.55 +$0.00 +$1,239.05)

Absolute Return if Stock Price Unchanged at $55.92: +1.1%
= +$376.60/$33,560.95
Annualized Return If Unchanged (ARIU): +17.1%
= (+$376.60/$33,560.95)*(365/24 days)

Absolute Return if Stock Exercised at $58.00: +4.8%
= +$1,615.60/$33,560.95
Annualized Return If Exercised (ARIE): +73.2%
= (+$1,615.60/$33,560.95)*(365/24 days)

The downside breakeven price for this out-of-the-money position is $55.27 ($55.92-$.65), and as such provides a downside breakeven profit protection of up to 1.1% below the purchase price.


If you have any comments or questions, please feel free to submit them -- they are always welcomed. Click the 'comments' link below or post them on the justcoveredcalls Yahoo!Group site. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site.

Tuesday, October 27, 2009

Establish Intel Corporation Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Intel Corporation (INTC) covered calls as follows:

Established INTC Corporation (INTC) Covered Calls for Nov09:
10/27/09 Bought 700 INTC @ $19.70
10/27/09 Sold 7 INTC Nov09 $19.00 Calls @ $.88

This position represents a covered calls "ex-dividend early exercise strategy". INTC will go ex-dividend on Nov 4th with a quarterly dividend payment of $.14. So for this position, analysis of the potential returns for two scenarios is made: (1) an early exercise; or (2) a later exercise at the Nov09 expiration date. It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date (November 3rd in this case) only if the $.14 dividend amount is greater than the time value remaining in the call option at that time. It should be noted that for this covered calls position, a potential exercise under either scenario provides a satisfactory return-on-investment result, although an early exercise provides a higher annualized return (+38.9% versus +21.3% -- see below for details). Therefore, an early exercise is the Covered Calls Advisor's preferred outcome, but either of these exercise outcomes would provide satisfactory returns for the Covered Calls Advisor Portfolio.

Some potential results from this transaction are:

1. If Stock Exercised Early
It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date if the INTC $.14 dividend amount is greater than the time value remaining in the call option at that time. The time value today when this position was established was $.18 [$.88-($19.70-$19.00)], so early exercise may occur if there is a moderate decline in the time value during the next week. If this does occur and the option owner decides to exercise their call options early on 11/3, then the overall performance results(including commissions) for the INTC transactions would be as follows:

Stock Purchase Cost: $13,798.95
($19.70*700+$8.95 commission)

Net Profit:
(a) Options Income: +$601.80 (700*$.88 - $14.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$498.95
= ($19.70-$19.00)*700 - $8.95 commissions

Total Net Profit: +$102.85
= (+$601.80 +$0.00 -$498.95)

Absolute Return if Exercised Early on 11/03/09 = +0.75%
= +$102.85/$13,798.95

Annualized Return if Exercised Early on 11/09/09 : +38.9%
= (+$102.85/$13,798.95)*(365/7 days)


2. If Stock Exercised at Nov09 Expiration
It is likely that the owner of the long calls will not exercise early, on the day prior to the ex-dividend date, if the $.14 dividend amount is less than the time value remaining in the call option at that time. In this case, the overall performance results(including commissions) for the INTC transactions upon Nov09 expiration would be as follows:

Stock Purchase Cost: $13,798.95
($19.70*700+$8.95 commission)

Net Profit:
(a) Options Income: +$601.80 (700*$.88 - $14.20 commissions)
(b) Dividend Income: +$98.00 ($.14 * 700 shares)
(c) Capital Appreciation: -$498.95
= ($19.70-$19.00)*700 - $8.95 commissions

Total Net Profit: +$200.85
= (+$601.80 +$98.00 -$498.95)

Absolute Return if Exercised Early on 11/03/09 = +1.5%
= +$200.85/$13,798.95

Annualized Return if Exercised Early on 11/09/09 : +21.3%
= (+$200.85/$13,798.95)*(365/25 days)

Downside Breakeven Price Point: $18.68
= $19.70 - $.88 - $.14
Downside Breakeven Protection: 5.2%
This in-the-money position provides up to 3.6% [($19.70-$19.00)/$19.70] downside protection available while still achieving the maximum potential annualized return-on-investment of +21.3% from this covered calls position.

Monday, October 26, 2009

Establish Cal Dive International Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Cal Dive International (DVR) covered calls as follows:

Established Cal Dive International (DVR) Covered Calls for Nov09:
10/26/09 Bought 500 DVR @ $10.21
10/26/09 Sold 5 DVR Nov09 $10.00 Calls @ $.55

Cal Dive International, Inc., a marine contracting company, provides marine construction, diving, and offshore services to offshore oil and natural gas industry. The company offers manned diving, pipelay and pipe burial, platform installation, saturation, and platform salvage services, as well as construction, inspection, maintenance, and repair and decommissioning of offshore production and pipeline infrastructure. It primarily operates in the Gulf of Mexico Outer Continental Shelf, the northeastern U.S., Latin America, southeast Asia, Australia, the Middle East, India, and the Mediterranean. It recently signed its second contract agreement with China, a positive sign for future growth potential. It owns a fleet of 31 vessels, including 21 surface and saturation diving support vessels, 6 pipelay/pipebury barges, 1 pipebury barge, 1 combination derrick/pipelay barge, and 2 derrick barges. With oil currently above $75, the outlook for increasing development expenditures from major exploration and production companies for 2010 is promising. Cal Dive was founded in 1975 and is headquartered in Houston, Texas.

The 'Buy Alerts' spreadsheet below shows that DVR has a 'Total Points' rating of 23.59 which exceeds the Covered Calls Advisor's desired threshold of 20.0 points. As such, DVR became a candidate as a potential covered calls investment.






















Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for this DVR investment would be as follows:
Stock Purchase Cost: $5,113.95
= ($10.21*500+$8.95 commission)

Net Profit:
(a) Options Income: +$262.30
= (500*$.55 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock exercised at $10.00): -$113.95
= ($10.00-$10.21)*500 - $8.95 commissions

Total Net Profit(If stock exercised at $10.00): +$148.35
= (+$262.30 +$0.00 -$113.95)

Absolute Return if Stock Exercised at $10.00: +2.9%
= +$148.35/$5,113.95
Annualized Return If Exercised (ARIE): +40.7%
= (+$148.35/$5,113.95)*(365/26 days)

Downside Breakeven Price Point: $9.66
= $11.21 - $.55
Downside Breakeven Protection: 2.9%
This in-the-money position provides up to 2.1% [($10.21-$10.00)/$10.21] downside protection available while still achieving the maximum potential annualized return-on-investment of +40.7% from this covered calls position.

Establish Quidel Corporation Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Quidel Corporation (QDEL) covered calls as follows:

Established Quidel Corporation (QDEL) Covered Calls for Nov09:
10/26/09 Bought 300 QDEL @ $15.10
10/26/09 Sold 3 QDEL Nov09 $15.00 Calls @ $.90

Quidel Corporation, together with its subsidiaries, engages in the development, manufacture, and marketing of point-of-care (POC) diagnostic solutions for infectious diseases, and reproductive and women's health. It provides POC and other diagnostic tests under the QuickVue, QuickVue+, QuickVue Advance, Metra, Quidel, and MicroVue brand names. The company offers products for infectious diseases, such as Influenza, Group A Strep, and Respiratory Syncitial Virus; and for reproductive and women's health, including pregnancy, Chlamydia, Bacterial Vaginosis, and Bone Health. It also offers Immunoassay fecal occult blood test used to detect the presence of blood in stool specimens; and Helicobacter pylori test, a serological test to measure antibodies circulating in the blood caused by the immune response to the H. pylori bacterium. It sells its products to professionals for use in physician offices, hospitals, clinical laboratories, retail clinics, and wellness screening centers through a network of national and regional distributors, and a direct sales force in the United States, as well as through distributor arrangements primarily in Japan, Europe, and the Middle East. The company has recently announced an agreement with BioHelix Corporation for the development and commercialization of in vitro molecular diagnostic tests utilizing isothermal amplification technology. Quidel Corporation was founded in 1979 and is based in San Diego, California.

The 'Buy Alerts' spreadsheet below shows that QDEL has a 'Total Points' rating of 22.46 which exceeds the Covered Calls Advisor's desired threshold of 20.0 points. As such, QDEL became a viable candidate as a potential covered calls investment.






















Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for this QDEL investment would be as follows:
Stock Purchase Cost: $4,538.95
= ($15.10*300+$8.95 commission)

Net Profit:
(a) Options Income: +$258.80
= (300*$.90 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock exercised at $15.00): -$38.95
= ($15.00-$15.10)*300 - $8.95 commissions

Total Net Profit(If stock exercised at $15.00): +$219.85
= (+$258.80 +$0.00 -$38.95)

Absolute Return if Stock Exercised at $15.00: +4.8%
= +$219.85/$4,538.95
Annualized Return If Exercised (ARIE): +68.0%
= (+$219.85/$4,538.95)*(365/26 days)

Downside Breakeven Price Point: $14.20
= $15.10 - $.90
Downside Breakeven Protection: 4.8%
This in-the-money position provides up to 0.7% [($15.10-$15.00)/$15.10] downside protection available while still achieving the maximum potential annualized return-on-investment of +68.0% from this covered calls position.

Friday, October 23, 2009

Establish ITT Corporation Covered Calls

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

Established ITT Corporation (ITT) Covered Calls for Nov09:
10/23/09 Bought 300 ITT @ $55.28
10/23/09 Sold 3 ITT Nov09 $55.00 Calls @ $2.60
The option premium was especially attractive with an implied volatility (IV) of 40. This premium is larger than would normally be the case with a fairly large and predictable company such as ITT, but pending earnings on October 30th cause the IV to inflate above normal levels, which can be beneficial for covered calls investors who are sellers of call options.

This position represents a covered calls "ex-dividend early exercise strategy". ITT will go ex-dividend on Nov 10th with a quarterly dividend payment of $.213. So for this position, analysis of the potential returns for two scenarios is made: (1) an early exercise; or (2) a later exercise at the Nov09 expiration date. It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date (November 9th in this case) only if the $.213 dividend amount is greater than the time value remaining in the call option at that time. It should be noted that for this covered calls position, a potential exercise under either scenario provides a good return-on-investment result, although an early exercise provides a substantially higher annualized return (+87.5% versus +56.1% -- see below for details). Therefore, an early exercise is the Covered Calls Advisor's preferred outcome, but either of these exercise outcomes would provide excellent returns for the Covered Calls Advisor Portfolio.

ITT Corporation (ITT) is primarily a producer of defense electronics and fluid technology products. Fluid technology products (33% of sales) include pumps, valves, heat exchangers, mixers and fluid measuring instruments and controls for residential, agricultural, commercial, municipal and industrial applications. Defense electronics and services (54% of sales) are sold to the military and to government agencies. Products include traffic control systems, jamming devices that guard military planes against radar guided missiles, digital combat radios, night vision devices, radar, satellite instruments and other. Motion & flow control products (14% of sales) include switches and valves for industrial and aerospace applications, products for the marine and leisure markets, and fluid handling materials such as tubing systems and connectors for various automotive and industrial markets for the transportation industry.
In July 2009, the company raised its guidance for 2009 earnings per share to a $3.50 to $3.70 range from estimated revenues between $10.8 and $11.0 billion.

The 'Buy Alerts' spreadsheet below shows that ITT has a 'Total Points' rating of 20.83 which exceeds the Covered Calls Advisor's desired threshold of 20.0 points. As such, ITT became a viable candidate as a potential covered calls investment.


























Note: For expanded view, left click on the spreadsheet above.

Some potential results from this transaction are:

1. If Stock Exercised Early
It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date if the ITT $.213 dividend amount is greater than the time value remaining in the call option at that time. Since the time value today when this position was established was substantial at $2.32 [$2.60-($55.28-$55.00)], early exercise would be likely to occur only if there is a substantial compression (from $2.32 to below $.213) in the time value on the day prior to ex-dividend (i.e. November 9th). The likelihood of this occurence is relatively low and would only happen if there is a bullish move in the ITT stock price during the next 17 calendar days between today and November 9th. If this does occur and the option owner decides to exercise their call options early on 11/9, then the overall performance results(including commissions) for the ITT transactions would be as follows:

Stock Purchase Cost: $16,592.95
($55.28*300+$8.95 commission)

Net Profit:
(a) Options Income: +$768.80 (300*$2.60 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$92.95
= ($55.00-$55.28)*300 - $8.95 commissions

Total Net Profit: +$675.85
= (+$768.80 +$0.00 -$92.95)

Absolute Return if Exercised Early on 11/09/09 = +4.1%
= +$675.85/$16,592.95

Annualized Return if Exercised Early on 11/09/09 : +87.5%
= (+$675.85/$16,592.95)*(365/17 days)


2. If Stock Exercised at Nov09 Expiration
It is likely that the owner of the long calls will not exercise early, on the day prior to the ex-dividend date, if the $.213 dividend amount is less than the time value remaining in the call option at that time. In this case, the overall performance results(including commissions) for the ITT transactions upon Nov09 expiration would be as follows:

Stock Purchase Cost: $16,592.95
($55.28*300+$8.95 commission)

Net Profit:
(a) Options Income: +$768.80 (300*$2.60 - $11.20 commissions)
(b) Dividend Income: +$63.90 ($.213 * 300 shares)
(c) Capital Appreciation: -$92.95
= ($55.00-$55.28)*300 - $8.95 commissions

Total Net Profit: +$739.75
= (+$768.80 +$63.90 -$92.95)Net Profit:

Absolute Return if Exercised upon Nov09 Expiration on 11/21/09: +4.5%
= +$739.75/$16,592.95

Annualized Return if Exercised upon Nov09 Expiration on 11/21/09: +56.1%
= (+$739.75/$16,592.95)*(365/29 days)

Downside Breakeven Price Point: $52.467
= $55.28 - $2.60 - $.213
Downside Breakeven Protection: 4.5%
This in-the-money position provides up to 0.5% [($55.28-$50.00)/$55.28] downside protection available while still achieving the maximum potential annualized return-on-investment of +56.1% from this covered calls position.

If you have questions or comments about this "ex-dividend early exercise strategy" or anything related to this post, please feel free to submit them -- they are always welcomed. Click the 'comments' link below or post them on the justcoveredcalls Yahoo!Group site. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site.

Thursday, October 22, 2009

Establish iShares MSCI China ETF Covered Calls

Last week a covered calls position with a Nov09 expiration was established in the iShares MSCI China ETF (FXI). At that time it was mentioned that since China continues to rank #1 in this advisor's '2009 Country Value Rankings', it was likely that an additional position in FXI might be established this week. Today, the CCAP position in FXI was doubled to a total of 1,000 shares with the purchase of iShares MSCI China ETF (FXI) covered calls as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for Nov09:
10/22/09 Bought 500 FXI @ $43.73
10/22/09 Sold 5 FXI Nov09 $44.00 Calls @ $1.40

Some possible overall performance results(including commissions) for this FXI investment would be as follows:
Stock Purchase Cost: $21,873.95
= ($43.73*500+$8.95 commission)

Net Profit:
(a) Options Income: +$691.05
= (500*$1.40 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $43.73): -$8.95
= ($43.73-$43.73)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $44.00): +$126.05
= ($44.00-$43.73)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $43.73): +$682.10
= (+$691.05 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $44.00): +$817.10
= (+$691.05 +$0.00 +$126.05)

Absolute Return if Stock Price Unchanged at $43.73: +3.1%
= +$682.10/$21,873.95
Annualized Return If Unchanged (ARIU): +37.9%
= (+$682.10/$21,873.95)*(365/30 days)

Absolute Return if Stock Exercised at $44.00: +3.7%
= +$817.10/$21,873.95
Annualized Return If Exercised (ARIE): +45.4%
= (+$817.10/$21,873.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $42.33 ($43.73-$1.40), and as such provides a downside profit protection of up to 3.1% below the purchase price.

Establish Amgen Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Amgen Inc (AMGN) covered calls as follows:

Established Amgen Inc.(AMGN) Covered Calls for Nov09:
10/22/09 Bought 200 AMGN @ $56.40
10/22/09 Sold 2 AMGN Nov09 $57.50 Calls @ $1.20

Amgen Inc. is one of the world's largest biotechnology companies. It engages in the discovery, development, manufacture, and marketing of human therapeutics based on advances in cellular and molecular biology. The company markets human therapeutic products primarily in the areas of supportive cancer care, nephrology, and inflammation. Its principal products include Aranesp and EPOGEN that stimulate the production of red blood cells to treat anemia; Neulasta and NEUPOGEN, which selectively stimulate the production of neutrophils, a type of white blood cell that helps the body fight infections; and ENBREL that blocks the biologic activity of tumor necrosis factor by inhibiting TNF, a substance induced in response to inflammatory and immunological responses, such as rheumatoid arthritis and psoriasis. The company has a joint venture with Kirin Holdings Company, Limited to manufacture and market darbepoetin alfa; a co-promotion agreement with Wyeth for marketing and selling of ENBREL; and Johnson & Johnson to commercialize recombinant human erythropoietin as a human therapeutic. It markets its products to healthcare providers, including physicians or their clinics, dialysis centers, hospitals, and pharmacies primarily in the United States, Europe, and Canada. The company was founded in 1980 and is based in Thousand Oaks, California.

Yesterday, Amgen released 3rd quarter earnings that substantially exceeded analysts' expectations. But today the stock is selling off dramatically over concerns raised from a post-hoc subset analysis of the TREAT trial of Aranesp in kidney disease. This advisor believes that the stock sell-off today is overblown. In addition, there are potentially positive short-term catalysts from: (1) The full TREAT data at the American Society of Nephrology meeting on October 30th; and (2) PDUFA (Prescription Drug User Fee Act) for denosumab(dmab) for its FDA application for osteoporosis and also dmab Phase III data for prostate cancer. On a basic P/E analysis basis, the current year P/E of 11.3 ($56.40/$5.00 EPS est.) is relatively low both historically and relative to other companies with similar growth potential.

Below is the Covered Calls Advisor's 'Buy Alerts' spreadsheet for AMGN. It scored slightly below the desired threshold of 20.0 with a Total Points rating of 19.76. However, this advisor's conviction that today's sell-off is excessive provided sufficient impetus for establishing this position today.






















Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for the AMGN transactions would be as follows:
Stock Purchase Cost: $11,288.95
= ($56.40*200+$8.95 commission)

Net Profit:
(a) Options Income: +$229.55
= (200*$1.20 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $56.40): -$8.95
= ($56.40-$56.40)*200 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $57.50): +$211.05
= ($57.50-$56.40)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $56.40): +$220.60
= (+$229.55 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $57.50): +$440.60
= (+$229.55 +$0.00 +$211.05)

Absolute Return if Stock Price Unchanged at $56.40: +2.0%
= +$220.60/$11,288.95
Annualized Return If Unchanged (ARIU): +23.8%
= (+$220.60/$11,288.95)*(365/30 days)

Absolute Return if Stock Exercised at $57.50: +3.9%
= +$440.60/$11,288.95
Annualized Return If Exercised (ARIE): +47.5%
= (+$440.60/$11,288.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $55.20 ($56.40-$1.20), and as such provides a downside profit protection of up to 2.0% below the purchase price.

Establish China Unicom Ltd. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of China Unicom Ltd.(CHU) covered calls. The new position established today was as follows:

Established China Unicom Ltd.(CHU) Covered Calls for Nov09:
10/22/09 Bought 500 CHU @ $13.73
10/22/09 Sold 5 CHU Nov09 $15.00 Calls @ $.20

China Unicom (Hong Kong) Limited provides telecommunications services in the People's Republic of China. The company offers GSM telephone and related services, fixed-line voice and value-added services, broadband and other Internet-related services, information communications technology services, business and data communications services, and advertising and media services, as well as long distance services. As of December 31, 2008, it served approximately 133.365 million GSM subscribers in 31 provinces, municipalities, and autonomous regions in the Mainland China. In size, it is a distant second to China Mobile who now has over 500 million subscribers, but CHU's growth potential is excellent, especially in higher-end mobile handsets.

A potential short-term catalyst is that China Unicom negotiated an agreement to become the sole authorized seller of Apple iPhones in China, and they will initiate iPhone sales beginning on October 30th. Amazingly, in addition to the iPhone, China Unicom plans to release approximately 40 new mobile phone models between now and the end of 2010. Despite the very attractive growth prospects for China Unicom, at its current prices it provides an attractive opportunity for this value-oriented investor. Finally, growth prospects are enhanced even further if this advisor's impression is correct that the Chinese government is sympathetic to the idea of CHU becoming a more formidable competitor to China Mobile. As a result of these factors, a bullish out-of-the-money covered calls position was established in this instance.

Some possible overall performance results(including commissions) for the CHU transactions would be as follows:
Stock Purchase Cost: $6,873.95
= ($13.73*500+$8.95 commission)

Net Profit:
(a) Options Income: +$87.30
= (500*$.20 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $13.73): -$8.95
= ($13.73-$13.73)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $15.00): +$626.05
= ($15.00-$13.73)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $13.73): +$78.35
= (+$87.30 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $15.00): +$713.35
= (+$87.30 +$0.00 +$626.05)

Absolute Return if Stock Price Unchanged at $13.73: +1.2%
= +$78.35/$6,783.95
Annualized Return If Unchanged (ARIU): +14.1%
= (+$78.35/$6,783.95)*(365/30 days)

Absolute Return if Stock Exercised at $15.00: +10.4%
= +$713.35/$6,873.95
Annualized Return If Exercised (ARIE): +126.3%
= (+$713.35/$6,873.95)*(365/30 days)

The downside breakeven price for this moderately out-of-the-money position is $13.53 ($13.73-$.20), and as such provides a limited downside profit protection of up to 1.2% below the purchase price.

Establish TD Ameritrade Holding Corporation Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of TD Ameritrade Holding Corporation(AMTD) covered calls. The new position established today was as follows:

Established TD Ameritrade Holding Corporation(AMTD) Covered Calls for Nov09:
10/22/09 Bought 400 AMTD @ $19.70
10/22/09 Sold 4 AMTD Nov09 $20.00 Calls @ $.60

TD AmeriTrade Holding is a leading provider of discount brokerage services for both retail and institutional clients, with the vast majority of its business being conducted online. It has grown rapidly through some fortuitous acquisitions, including TD Waterhouse in 2006, a subsidiary of Fiserv in 2008, and in June this year AMTD acquired thinkorswim, who specializes in options trading and possesses a highly regarded options trading platform. This acquisition is enabling AMTD to continue its rapid growth in the important Daily Average Retail Trades(DARTs) metric. The extent of the benefit from this acquisition will become more apparent when AMTD's 4th quarter earnings are announced next week.

The 'Buy Alerts' spreadsheet below shows that AMTD has a 'Total Points' rating of 21.46 which exceeds the Covered Calls Advisor's desired threshold of 20.0 points.





















Note: For expanded view, left click on the spreadsheet above.


Some possible overall performance results(including commissions) for the AMTD transactions would be as follows:
Stock Purchase Cost: $7,888.95
= ($19.70*400+$8.95 commission)

Net Profit:
(a) Options Income: +$228.05
= (400*$.60 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $19.70): -$8.95
= ($19.70-$19.70)*400 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $20.00): +$111.05
= ($20.00-$19.70)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $19.70): +$219.10
= (+$228.05 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $20.00): +$339.10
= (+$228.05 +$0.00 +$111.05)

Absolute Return if Stock Price Unchanged at $19.70: +2.8%
= +$219.10/$7,888.95
Annualized Return If Unchanged (ARIU): +33.8%
= (+$219.10/$7,888.95)*(365/30 days)

Absolute Return if Stock Exercised at $20.00: +4.3%
= +$339.10/$7,888.95
Annualized Return If Exercised (ARIE): +52.3%
= (+$339.10/$7,888.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $19.10 ($19.70-$.60) which provides a downside profit protection of up to 2.8% below the purchase price.

Establish Multi-Fineline Electronix Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Multi-Fineline Electronix Inc.(MFLX) covered calls. The new position established today was as follows:

Established Multi-Fineline Electronix Inc.(MFLX) Covered Calls for Nov09:
10/22/09 Bought 400 MFLX @ $27.50
10/22/09 Sold 4 MFLX Nov09 $30.00 Calls @ $.80

Multi-Fineline Electronix, Inc.(MFLX) is a small company in the global electronic manufacturing services (EMS) industry, but a mid-tier player among producers of flexible printed circuit boards. The company's products are used in mobile phones, smart mobile devices, consumer products, portable bar code scanners, personal digital assistants, computer/storage devices, and medical devices. MFLX's technology niche relative to other producers is in applications requiring specified shapes, sizes, weights and functionality of wireless handsets. For example, flip-phones are a product of the flexibility of these circuit boards, and would otherwise be impractical with rigid circuit boards.

MFLX has manufacturing operations in the U.S. focused on design and application, and in China (2 plants) and Malaysia (soon opening a new plant) primarily for high-volume and cost-efficient manufacturing. Its customer base is somewhat concentrated in that Sony Ericsson, Motorola, Apple, and Rimm comprise over 90% of its sales. But relations with these customers seems strong and MFLX is now working closely with a potential fifth major Asian-based customer. Multi-Fineline Electronix is well positioned to benefit from what Jim Cramer refers to as the current "mobile internet tsunami". In their most recent quarterly earnings conference call, the CEO indicated that they were "pursuing both organic growth and new customers".
MFLX is based in Anaheim, CA, however currently approximately 91% of product sales are outside of the U.S. WBL Corporation Limited owns approximately 59% of MFLX.

In establishing this covered calls position, added uncertainty results from the quarterly earnings report scheduled for October 8th. However, this advisor was encouraged by the recent excellent quarterly report from Intel, a bellwether company in the semiconductor electronic components industry. As a result, the more bullish out-of-the-money position was established in this instance.

As shown below, MFLX ranks highly on the Covered Calls Advisor 'Buy Alerts' worksheet with a 'Total Points' rating of 22.63, well above the desired threshold of 20.0 points.





















Note: For expanded view, left click on the spreadsheet above.



Some possible overall performance results(including commissions) for the MFLX transactions would be as follows:
Stock Purchase Cost: $11,008.95
= ($27.50*400+$8.95 commission)

Net Profit:
(a) Options Income: +$308.05
= (400*$.80 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $27.50): -$8.95
= ($27.50-$27.50)*400 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $30.00): +$991.05
= ($30.00-$27.50)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $27.50): +$299.10
= (+$308.05 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $30.00): +$1,299.10
= (+$308.05 +$0.00 +$991.05)

Absolute Return if Stock Price Unchanged at $27.50: +2.7%
= +$299.10/$11,008.95
Annualized Return If Unchanged (ARIU): +33.1%
= (+$299.10/$11,008.95)*(365/30 days)

Absolute Return if Stock Exercised at $30.00: +11.8%
= +$1,299.10/$11,008.95
Annualized Return If Exercised (ARIE): +143.6%
= (+$1,299.10/$11,008.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $26.70 ($27.50-$.80) which provides a downside profit protection of up to 2.9% below the purchase price.

Tuesday, October 20, 2009

Establish EMCOR Group Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of EMCOR Group Inc.(EME) covered calls. You might recall that covered calls positions in EME were established in the CCAP each month for the past three expirations (Aug09,Sep09, and Oct09) and each month the stock ended in-the-money and the stock was called away; with annualized return results of 50.8%, 58.1%, and 64.4% respectively. The new position established today was as follows:

Established EMCOR Group Inc.(EME) Covered Calls for Nov09:
10/20/09 Bought 400 EME @ $24.35
10/20/09 Sold 4 EME Nov09 $25.00 Calls @ $.85

EMCOR Group, Inc. is an Engineering and Construction (E&C) company that provides electrical and mechanical construction and facilities services worldwide. It engages in the design, integration, installation, start-up, operation, and maintenance of various electrical and mechanical systems; heating, ventilation, air conditioning, and refrigeration; fire protection systems; plumbing systems; and various industrial maintenance services. Maintaining a corporate reputation for quality is essential for success in the highly-competitive bidding processes that are commonplace in the E&C industry. EMCOR is preeminent in this regard. In Fortune's Most Admired Companies rankings, EMCOR is #1 in the E&C category; and Forbes rates EMCOR as the "Best Managed" company in the Construction Industry.

The 'Buy Alerts' spreadsheet below shows that at its current price, EMCOR continues to have very compelling value characteristics across the board. It ranks very high on the Covered Calls Advisor 'Buy Alerts' worksheet shown below with a 'Total Points' rating of 24.70, well above the desired threshold of 20.0 points. Its earnings yield, balance sheet, and free cash flow levels are all at very attractive levels from a valuation perspective. EMCOR is also one of the beneficiaries now from the worldwide government stimulus money. These factors along with its excellent senior management team have been (over the past three options expiration months) and are continuing now to provide this advisor with an excellent covered calls investing opportunity.





















Note: For expanded view, left click on the spreadsheet above.


Some possible overall performance results(including commissions) for the EME transactions would be as follows:
Stock Purchase Cost: $9,748.95
= ($24.35*400+$8.95 commission)

Net Profit:
(a) Options Income: +$328.05
= (400*$.85 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $24.35): -$8.95
= ($24.35-$24.35)*400 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $25.00): +$251.05
= ($25.00-$24.35)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $24.35): +$319.10
= (+$328.05 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $25.00): +$579.10
= (+$328.05 +$0.00 +$251.05)

Absolute Return if Stock Price Unchanged at $24.35: +3.3%
= +$319.10/$9,748.95
Annualized Return If Unchanged (ARIU): +37.3%
= (+$319.10/$9,748.95)*(365/32 days)

Absolute Return if Stock Exercised at $25.00: +5.9%
= +$579.10/$9,748.95
Annualized Return If Exercised (ARIE): +67.8%
= (+$624.85/$8,468.95)*(365/32 days)

Establish Aspen Insurance Holdings Ltd. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Aspen Insurance Holdings Ltd.(AHL) covered calls. You might recall that covered calls positions in AHL were called away previously upon both Sep09 and Oct09 expirations in the CCAP with annualized return results of 32.1% and 28.75% respectively. The new position established today was as follows:

Established Aspen Insurance Holdings Ltd.(AHL) Covered Calls for Nov09:
10/20/09 Bought 300 AHL @ $28.20
10/20/09 Sold 3 AHL Nov09 $30.00 Calls @ $.35

Aspen Insurance Holdings Limited, through its subsidiaries, provides insurance and reinsurance products and services in the United Kingdom, the United States, and internationally. AHL's primary business is in catastrophe reinsurance including earthquakes, hurricanes, and floods. Pricing trends are currently positive relative to last year in several of these business areas. Moreover, AHL is continuing to grow and diversify into additional insurance and reinsurance areas while managing its own investment portfolio conservatively. It continues to represent an attractive, value-oriented investment that might earn $4.00 per share this fiscal year. The next quarterly earnings report will be issued in another week and the uncertainty that accompanies earnings reports for any company is certainly also evident in this case. However, this advisor believes there is a strong likelihood that AHL's results will meet or exceed analysts' current forecasts. In addition, at AHL's current price the stock offers a very good value in that it now trades at an historically low 80% of its book value. Also of importance, we have passed the traditional peak of the hurricane season without a major event and the presence of the El Nino effect bodes well for the remainder of the season. Another encouraging fact is that investing guru David Einhorn (Greenlight Capital) has taken a large position in several reinsurers and AHL is now one of his top holdings. It is also encouraging that the latest reporting quarter (2nd qtr 2009) shows that he added further to his already substantial AHL position. For these bullish reasons, it was decided to establish a moderately bullish out-of-the-money position in this Aspen Insurance Holdings investment.

Some possible overall performance results(including commissions) for the AHL transactions would be as follows:
Stock Purchase Cost: $8,468.95
= ($28.20*300+$8.95 commission)

Net Profit:
(a) Options Income: +$93.80
= (300*$.35 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $28.20): -$8.95
= ($28.20-$28.20)*300 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $30.00): +$531.05
= ($30.00-$28.20)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $28.20): +$84.85
= (+$93.80 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $30.00): +$624.85
= (+$93.80 +$0.00 +$531.05)

Absolute Return if Stock Price Unchanged at $28.20: +1.0%
= +$84.85/$8,468.95
Annualized Return If Unchanged (ARIU): +11.4%
= (+$84.85/$8,468.95)*(365/32 days)

Absolute Return if Stock Exercised at $30.00: +7.4%
= +$624.85/$8,468.95
Annualized Return If Exercised (ARIE): +84.2%
= (+$624.85/$8,468.95)*(365/32 days)

Monday, October 19, 2009

Continuation Transactions -- Fluor Corporation (FLR) and UnitedHealth Group Inc. (UNH)

Last Friday was expiration Friday for October 2009. In a Covered Calls Advisor's blog recent post, it was noted that of the thirteen covered calls positions for October 2009, two were closed out prior to expiration, two were in-the-money and were rolled-up-and-out early to a Nov09 expiration, seven were in-the-money at expiration and were therefore exercised and the stocks were called away, and two positions, Fluor Corporation(FLR) and UnitedHealth Group Inc.(UNH) ended out-of-the-money. Today it was decided to retain both the 300 shares of FLR and the 400 shares of UNH and to establish Nov09 covered calls position as follows:

1. Fluor Corporation(FLR) -- Continuation
The transactions history to date and the profit potential for the continuation covered calls position in FLR is as follows:
09/22/09 Bought 300 FLR @ $54.93
09/22/09 Sold 3 FLR Oct09 $55.00 Calls @ $1.95
10/17/09 Oct09 Options Expired
The closing price of FLR was $50.24 on expiration Friday.
10/19/09 Sell-to-Open (STO) 3 FLR Nov09 $55.00s @ $.95
The price of FLR was $51.57 today when this transaction was executed.

Some potential overall performance results(including commissions) for this FLR covered calls position would be as follows:
Stock Purchase Cost: $16,487.95
($54.93*300+$8.95 commission)

Net Profit:
(a) Options Income: +$847.60
= (300*($1.95+$.95) - 2*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $51.57):
-$1,016.95 = ($51.57-$54.93)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $55.00): +$12.05
= ($55.00-$54.93)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $51.57): -$169.35
= (+$847.60 +$0.00 -$1,016.95)
Total Net Profit(If stock price exercised at $55.00): +$859.65
= (+$847.60 +$0.00 +$12.05)

Absolute Return if Stock Price Unchanged at $51.57: -1.0%
= -$169.35/$16,487.95
Annualized Return If Stock Price Unchanged (ARIU): -6.2%
= (+$301.65/$51,974.95)*(365/60 days)

Absolute Return if Exercised at $55.00: +5.2%
= +$859.65/$16,487.95
Annualized Return If Exercised (ARIE) +31.7%
= (+$859.65/$16,487.95)*(365/60 days)


2. UnitedHealth Group Inc.(UNH) -- Continuation
The transactions history to date and the profit potential for the continuation covered calls position in UNH is as follows:
09/23/09 Bought 400 UNH @ $27.05
09/23/09 Sold 4 UNH Oct09 $26.00 Calls @ $1.95
10/17/09 Oct09 Options Expired
The closing price of UNH was $24.45 on expiration Friday.
10/19/09 Sell-to-Open (STO) 4 UNH Nov09 $26.00s @ $.80
The price of UNH was $24.77 today when this transaction was executed.

Some potential overall performance results(including commissions) for this UNH covered calls position would be as follows:
Stock Purchase Cost: $10,828.95
($27.05*400+$8.95 commission)

Net Profit:
(a) Options Income: +$1,076.10
= (400*($1.95+$.80) - 2*$11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $24.77):
-$920.95 = ($24.77-$27.05)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $26.00): -$428.95
= ($26.00-$27.05)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $24.77): +$155.15
= (+$1,076.10 +$0.00 -$920.95)
Total Net Profit(If stock price exercised at $26.00): +$647.15
= (+$1,076.10 +$0.00 -$428.95)

Absolute Return if Stock Price Unchanged at $24.77: +1.4%
= +$155.15/$10,828.95
Annualized Return If Stock Price Unchanged (ARIU): +8.9%
= (+$155.15/$10,828.95)*(365/59 days)

Absolute Return if Exercised at $26.00: +6.0%
= +$647.15/$10,828.95
Annualized Return If Exercised (ARIE) +37.0%
= (+$647.15/$10,828.95)*(365/59 days)

Sunday, October 18, 2009

October 2009 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of thirteen positions with October 2009 expirations. Four of these positions were modified prior to the Oct09 expiration date and the other nine positions were held until expiration.

- Two positions were closed out prior to expiration. These two positions were the Covered Calls Advisor's first experience with using inverse ETFs for covered calls positions. The results this month were mixed since the ProShares Short S&P 500 ETF(SH) was closed at a net loss and the ProShares UltraShort 20+ Year Treasury ETF (TBT) was closed with a small profit. Detailed results for each of these closed positions were posted previously on this blog. Importantly, it was determined that these two ETFs will be useful underlying equities for establishing covered calls positions whenever this advisor thinks there is a likelihood we are facing either a bearish overall market [establish an out-of-the-money position in SH] or potentially higher interest rates (establish an out-of-the-money position in TBT). An important point here is that a significant advantage for potential annualized returns is provided from establishing an out-of-the-money position on an inverse ETF (such as SH) when compared with an alternative of establishing an in-the-money position on its counterpart (such as SPY). This is because the out-of-the-money position retains the possibility of achieving a capital appreciation return on the investment whereas an in-the-money position precludes any capital appreciation return from being obtained.

- Two positions [Accenture Ltd(ACN) and Noble Corporation(NE)] that were in-the-money just prior to Oct09 expiration were retained in the Covered Calls Advisor Portfolio and were rolled-up-and-out from an Oct09 to a Nov09 expiration. This advisor continues to be bullish on these two companies' short-term prospects, so they were both rolled-up-and-out. The associated transactions were detailed in prior posts earlier this week on this blog.

Of the nine remaining positions that were held until Oct09 expiration:
- Two positions in the CCAP [Fluor Corporation(FLR) and UnitedHealth Group Inc.(UNH)] ended out-of-the-money. A decision will be made to either sell the stocks or to keep them and sell calls to establish Nov09 covered call position. It is likely that both stocks will be retained in the CCAP and that Nov09 covered calls positions will be established. The related transactions will be made early next week and the transactions will be posted on this blog site on the same day they occur.

- Seven positions [Amgen Inc.(AMGN), Aspen Insurance Holdings Ltd(AHL), China Mobile Ltd.(CHL), EMCOR Group Inc.(EME), Family Dollar Stores Inc(FDO), iShares MSCI China Fund ETF(FXI), and the iShares Emerging Markets Fund ETF(EEM)] closed in-the-money. The calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for these seven exercised positions were:
Amgen Inc.(AMGN): +26.5%
Aspen Insurance Holdings Ltd(AHL): +28.7%
China Mobile Ltd.(CHL): +42.7%
EMCOR Group Inc.(EME): +64.4%
Family Dollar Stores Inc.(FDO): +90.2%
iShares MSCI China Fund ETF(FXI): +35.0%
iShares Emerging Markets Fund ETF(EEM): +32.0%

Detailed results for these seven positions that were assigned (called away) upon Oct09 expiration are as follows:

1. Amgen Inc.(AMGN) -- Closed
The transactions history was as follows:
09/17/09 Bought 300 AMGN @ $59.88
09/17/09 Sold 3 AMGN Oct09 $57.50 Calls @ $3.75
10/17/09 Oct09 Options Exercised (300 shares of AMGN called away at $57.50)
Note: Closing price of AMGN was $61.32 on expiration Friday.

The overall performance results(including commissions) for the AMGN transactions are as follows:
Stock Purchase Cost: $17,972.95
($59.88*300+$8.95 commission)

Net Profit:
(a) Options Income: +$1,113.80
= [300*$3.75) - $11.20 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $57.50): -$722.95
= ($57.50-$59.88)*300 - $8.95 commissions

Total Net Profit: +$390.85
= (+$1,113.80 +$0.00 -$722.95)

Absolute Return: +2.2%
= +$390.85/$17,972.95
Annualized Return: +26.5%
= (+$390.85/$17,972.95)*(365/30 days)

2. Aspen Insurance Holdings Inc.(AHL) -- Closed
The transactions history was as follows:
09/18/09 Bought 500 AHL @ $26.16
09/18/09 Sold 5 AHL Oct09 $25.00 Calls @ $1.80
10/17/09 Oct09 Options Exercised (500 shares of AHL called away at $25.00)
Note: Closing price of AHL was $28.06 on expiration Friday.

The overall performance results(including commissions) for the AHL transactions are as follows:
Stock Purchase Cost: $13,088.95
($26.16*500+$8.95 commission)

Net Profit:
(a) Options Income: +$887.30
= (500*$1.80 - $12.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $25.00): -$588.95
= ($25.00-$26.16)*500 - $8.95 commissions

Total Net Profit: +$298.35
= (+$887.30 +$0.00 -$588.95)

Absolute Return: +2.3%
= +$298.35/$13,088.95
Annualized Return: +28.7%
= (+$298.35/$13,088.95)*(365/29 days)

3. China Mobile Ltd.(CHL) -- Closed
The transactions history was as follows:
09/24/09 Bought 200 CHL @ $50.25
09/24/09 Sold 2 CHL Oct09 $50.00 Calls @ $1.70
10/17/09 Oct09 Options Exercised (200 shares of CHL called away at $50.00)
Note: Closing price of CHL was $50.12 on expiration Friday.

The overall performance results(including commissions) for the CHL transactions are as follows:
Stock Purchase Cost: $10,058.95
($50.25*200+$8.95 commission)

Net Profit:
(a) Options Income: +$329.55
= (200*$1.70 - $10.45 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $50.00): -$58.95
= ($50.00-$50.25)*200 - $8.95 commissions

Total Net Profit: +$270.60
= (+$329.55 +$0.00 -$58.95)

Absolute Return: +2.7%
= +$270.60/$10,058.95
Annualized Return: +42.7%
= (+$390.85/$17,972.95)*(365/23 days)

4. EMCOR Group Inc.(EME) -- Closed
The transactions history was as follows:
09/25/09 Bought 300 EME @ $24.91
09/25/09 Sold 3 EME Oct09 $25.00 Calls @ $.95
10/17/09 Oct09 Options Exercised (300 shares of EME called away at $25.00)
Note: Closing price of EME was $25.13 on expiration Friday.

The overall performance results(including commissions) for the EME transactions are as follows:
Stock Purchase Cost: $7,481.95
($24.91*300+$8.95 commission)

Net Profit:
(a) Options Income: +$272.30
= (300*$.95 - $12.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $25.00): +$18.05
= ($25.00-$24.91)*300 - $8.95 commissions

Total Net Profit: +$290.35
= (+$272.30 +$0.00 +$18.05)

Absolute Return: +3.9%
= +$290.35/$7,481.95
Annualized Return: +64.4%
= (+$290.35/$7,481.95)*(365/22 days)

5. Family Dollar Stores Inc.(FDO) -- Closed
The transactions history was as follows:
09/23/09 Bought 300 FDO @ $26.65
09/23/09 Sold 3 FDO Oct09 $27.50 Calls @ $.80
10/17/09 Oct09 Options Exercised (300 shares of FDO called away at $27.50)
Note: Closing price of FDO was $28.36 on expiration Friday.

The overall performance results(including commissions) for the FDO transactions are as follows:
Stock Purchase Cost: $8,003.95
($26.65*300+$8.95 commission)

Net Profit:
(a) Options Income: +$228.80
= (300*$.80 - $11.20 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $27.50): +$246.05
= ($27.50-$26.65)*300 - $8.95 commissions

Total Net Profit: +$474.85
= (+$228.80 +$0.00 +$246.05)

Absolute Return: +5.9%
= +$474.85/$8,003.95
Annualized Return: +90.2%
= (+$474.85/$8,003.95)*(365/24 days)

6. iShares MSCI China Fund ETF(FXI) -- Closed
The transactions history was as follows:
08/28/09 Bought 1000 FXI @ $40.04
08/28/09 Sold 10 FXI Sep09 $39.00 Calls @ $1.95
Roll-Up-and-Out Transaction:
09/17/09 Buy-to-Close (BTC) 10 FXI Sep09 $39.00s @ $4.97
09/17/09 Sell-to-Open (STO) 10 FXI Oct09 $43.00s @ $2.02
Note: The price of FXI was $43.93 today when this debit-spread was transacted.
10/17/09 Oct09 Options Exercised (1000 shares of FXI called away at $43.00)
Note: Closing price of FXI was $43.17 on expiration Friday.

The overall performance results(including commissions) for the FXI transactions are as follows:
Stock Purchase Cost: $40,048.95
($40.04*1000+$8.95 commission)

Net Profit:
(a) Options Income: -$1,032.90
= [1000*($1.95-$4.97+$2.02) - 2*$16.45 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $43.00): +$2,951.05
= ($43.00-$40.04)*1000 - $8.95 commissions

Total Net Profit: +$1,918.15
= (-$1,032.90 +$0.00 +$2,951.05)

Absolute Return: +4.8%
= +$1,918.15/$40,048.95
Annualized Return: +35.0%
= (+$1,918.15/$40,048.95)*(365/50 days)

7. iShares Emerging Markets ETF(EEM) -- Closed
The transactions history was as follows:
08/25/09 Bought 500 EEM @ $36.64
08/25/09 Sold 5 EEM Sep09 $36.00 Calls @ $1.56
Roll-Up-and-Out Transaction:
09/17/09 Buy-to-Close (BTC) 5 EEM Sep09 $36.00s @ $3.29
09/17/09 Sell-to-Open (STO) 5 EEM Oct09 $38.00s @ $2.14
Note: The price of EEM was $39.24 today when this debit-spread was transacted and the remaining time value in the Sep09 option was only $.05 [$3.29-($39.24-$36.00)].
10/17/09 Oct09 Options Exercised (500 shares of EEM called away at $38.00)
Note: Closing price of EEM was $40.75 on expiration Friday.

The overall performance results(including commissions) for this EEM covered calls position was as follows:
Stock Purchase Cost: $18,328.95
($36.64*500+$8.95 commission)

Net Profit:
(a) Options Income: +$179.60
= (500*($1.56-$3.29+$2.14) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $38.00): +$671.05
= ($38.00-$36.64)*500 - $8.95 commissions

Total Net Profit(Stock exercised at $38.00): +$850.65
= (+$179.60 +$0.00 +$671.05)

Absolute Return: +4.6%
= +$850.65/$18,328.95
Annualized Return: +32.0%
= (+$850.65/$18,328.95)*(365/53 days)

Friday, October 16, 2009

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). Just prior to the stock market close today, it was evident that the current FXI position with an Oct09 expiration would end slightly in-the-money. Since China continues to rank #1 in this advisor's '2009 Country Value Rankings', this advisor decided to continue an FXI ETF position for the Nov09 expiration, so a new position was established today. A summary of the transactions today is as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for Nov09:
10/16/09 Bought 500 FXI @ $43.29
10/16/09 Sold 5 FXI Nov09 $44.00 Calls @ $1.40

The FXI ETF was selected as the primary investment vehicle for achieving broad exposure to China's stock market performance. 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. Since China remains as the Covered Calls Advisor's top investment idea, a commitment of approximately 8% of the total CCAP is now being allocated to FXI covered calls. It is also possible that an additional purchase of Nov09 FXI covered calls might be made early next week.

Some possible overall performance results(including commissions) for the FXI transactions would be as follows:
Stock Purchase Cost: $21,653.95
= ($43.29*500+$8.95 commission)

Net Profit:
(a) Options Income: +$687.30
= (500*$1.40 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $43.29):
-$8.95 = ($43.29-$43.29)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $44.00): +$346.05
= ($44.00-$43.29)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $43.29): +$678.35
= (+$687.30 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $44.00): +$1,033.35
= (+$687.30 +$0.00 +$346.05)

Absolute Return if Stock Price Unchanged at $43.29: +3.1%
= +$678.35/$21,653.95
Annualized Return If Unchanged (ARIU): +31.8%
= (+$678.35/$21,653.95)*(365/36 days)

Absolute Return if Stock Exercised at $44.00: +4.8%
= +$1,033.35/$21,653.95
Annualized Return If Exercised (ARIE): +48.4%
= (+$1,033.35/$21,653.95)*(365/36 days)

Establish Sohu.com Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Sohu.com Inc. (SOHU) covered calls as follows:

Established Sohu.com Inc. (SOHU) Covered Calls for Nov09:
10/16/09 Bought 200 SOHU @ $64.05
10/16/09 Sold 2 SOHU Nov09 $65.00 Calls @ $3.50

Sohu.com is an internet services provider to consumers and businesses in China. Their services include brand advertising, sponsored search, online games, and wireless services. It ranks very high on the Covered Calls Advisor 'Buy Alerts' worksheet shown below with a 'Total Points' rating of 23.66, well above the desired threshold of 20.0 points. It demonstrates Sohu's compelling value, profitability, and growth characteristics. In addition, the balance sheet is very strong with high cash levels and no debt.
























Note: For expanded view, left click on the spreadsheet above.


Some possible overall performance results(including commissions) for the SOHU transactions would be as follows:
Stock Purchase Cost: $12,818.95
= ($64.05*200+$8.95 commission)

Net Profit:
(a) Options Income: +$689.55
= (200*$3.50 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $64.05):
-$8.95 = ($65.05-$65.05)*200 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $65.00): +$181.05
= ($65.00-$64.05)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $64.05): +$680.60
= (+$689.55 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $65.00): +$870.60
= (+$689.55 +$0.00 +$181.05)

Absolute Return if Stock Price Unchanged at $64.05: +5.3%
= +$680.60/$12,818.95
Annualized Return If Unchanged (ARIU): +53.8%
= (+$680.60/$12,818.95)*(365/36 days)

Absolute Return if Stock Exercised at $65.00: +6.8%
= +$870.60/$12,818.95
Annualized Return If Exercised (ARIE): +68.9%
= (+$870.60/$12,818.95)*(365/36 days)

Establish Fuqi International Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Fuqi International Inc. (FUQI) covered calls as follows:

Established Fuqi International Inc. (FUQI) Covered Calls for Nov09:
10/16/09 Bought 200 FUQI @ $25.45
10/16/09 Sold 2 FUQI Nov09 $26.00 Calls @ $2.00

Fuqi International, Inc. is a leading designer of high quality precious metal jewelry in China; developing, promoting, and selling a broad range of products in the large and rapidly expanding Chinese luxury goods market. The company offers basic gold jewelry, as well as a range of products, including rings, bracelets, necklaces, earrings, and pendants made from precious metals, such as platinum, gold, palladium, and karat gold. It also manufactures jewelry with diamonds and other precious gemststone inlays, as well as gold coins and gold bars. FUQI serves its customers through approximately 30 provincial distributors and 700 direct sales agents in China and is still expanding into new markets and regions.

The 'Buy Alerts' spreadsheet below shows that Fuqi possesses both strong value and profitability characteristics. In addition, they possess a successful top management team that has been largely intact since the company's founding in 2001. This advisor believes that Fuqi is well positioned to continue to benefit directly from both its geographical growth opportunities within China, as well as China's ongoing wealth creation and accompanying consumer spending growth.























Note: For expanded view, left click on the spreadsheet above.


Some possible overall performance results(including commissions) for the FUQI transactions would be as follows:
Stock Purchase Cost: $5,098.95
= ($25.45*200+$8.95 commission)

Net Profit:
(a) Options Income: +$389.55
= (200*$2.00 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $25.45):
-$8.95 = ($25.45-$25.45)*200 - $8.95 commissions
(c) Capital Appreciation (If exercised at $26.00): +$101.05
= ($26.00-$25.45)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $25.45): +$380.60
= (+$389.55 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $26.00): +$490.60
= (+$389.55 +$0.00 +$101.05)

Absolute Return if Stock Price Unchanged at $25.45: +7.5%
= +$380.60/$5,098.95
Annualized Return If Unchanged (ARIU): +75.7%
= (+$380.60/$5,098.95)*(365/36 days)

Absolute Return if Stock Exercised at $26.00: +9.6%
= +$490.60/$5,098.95
Annualized Return If Exercised (ARIE): +97.6%
= (+$490.60/$5,098.95)*(365/36 days)

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 iShares MSCI South Korea ETF (EWY) covered calls as follows:

Established iShares MSCI South Korea ETF (EWY) Covered Calls for Nov09:
10/16/09 Bought 400 EWY @ $45.815
10/16/09 Sold 4 EWY Nov09 $46.00 Calls @ $1.90

EWY is the best investment vehicle available to capture widespread exposure to the diversified South Korean economy and stock market through a single equity. South Korea is a good value-oriented investment since some traditional value metrics such as P/E and P/Book are significantly less than those of the U.S., while the expectation for GDP growth with low inflation for 2010 also favors South Korea.

Some possible overall performance results(including commissions) for the EWY transactions would be as follows:
Stock Purchase Cost: $18,334.95
= ($45.815*400+$8.95 commission)

Net Profit:
(a) Options Income: +$748.05
= (400*$1.90 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $45.815):
-$8.95 = ($45.815-$45.815)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $46.00): +$65.05
= ($46.00-$45.815)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $45.815): +$739.10
= (+$748.05 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $46.00): +$813.10
= (+$748.05 +$0.00 +$65.05)

Absolute Return if Unchanged at $45.815: +4.0%
= +$739.10/$18,334.95
Annualized Return If Unchanged (ARIU) +40.9%
= (+$739.10/$18,334.95)*(365/36 days)

Absolute Return if Exercised at $46.00: +4.4%
= +$813.10/$18,334.95
Annualized Return If Exercised (ARIE) +45.0%
= (+$813.10/$18,334.95)*(365/36 days)

Gushan Environmental ADR (GU) -- Closed

Gushan is the leading biofuels producer in China. As stated when this position was originally purchased: "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!"

Probably the best thing that can be said about this investment is that it is fortunate that it was limited to only 2% of the portfolio. As shown below, this was a lousy choice. It is increasingly apparent now that China is making a substantial commitment to alternative fuels (especially in nuclear energy), but it is also now evident that the bio-diesel by-products that are Gushan's niche are no longer being considered as high priority for rapid development. So, this advisor decided today to exit this position at a loss.

The transactions history was as follows:
11/05/08 Bought 2000 GU @ $3.44
11/05/08 Sold 20 GU Dec08 $5.00 Calls @ $.36
12/20/08 Dec08 Options Expired
10/16/09 Sold 2000 GU @ $1.79

The overall performance results(including commissions) for the GU transactions were as follows:
Stock Purchase Cost: $6,888.95
($3.44*2000+$8.95 commission)

Net Profit:
(a) Options Income: +$696.05 [2000 * $.36 - ($8.95 + 20*$.75) commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$3,308.95
= ($1.79 - $3.44)*2000 - $8.95 commissions

Total Net Profit: -$2,612.90
= (+$696.05 +$0.00 -$3,308.95)

Absolute Return = -37.9%
= -$2,612.90/$6,888.95

Annualized Return: -40.1%
= (-$2,612.90/$6,888.95)*(365/345 days)

One lesson learned here is to avoid very low-priced stocks, as the ability to obtain significant options premiums (say $.30 or more) for writing covered calls can disappear because of the often relatively large percentage differences between adjacent strike prices whenever a stock is below $10.

So, will the Covered Calls Advisor ever venture into speculative stock territory again? Probably so, since speculating with less than five percent "mad money" can help to make the investing process even more enjoyable than it already is. But given the unsatisfactory result with Gushan, I am definitely planning to wait until next year before re-considering the possibility of establishing another speculative position. For now, I'll gladly follow this advisor's preferred investing process and "stick with covered calls".

Regards and Godspeed to All,
Jeff

Roll Up and Out -- Noble Corp. (NE)

Today is expiration Friday for October 2009. A decision was made to retain Noble Corp.(NE) in the Covered Calls Advisor Portfolio and to roll-out-and-up to the Nov09 expiration at the $42.00 strike price. The current Oct09 $36.00 covered calls were well in-the-money today (with NE at $41.56), and since the time value remaining in the options was only $.04 [$5.60-($41.56-$36.00)], a roll-up-and-out debit spread transaction was executed as follows:
10/16/09 Buy-to-Close (BTC) 3 NE Oct09 $36.00s @ $5.60
10/16/09 Sell-to-Open (STO) 3 NE Nov09 $42.00s @ $1.75
Note: Net Debit-Spread upon Roll-Up was $3.85 ($5.60 - $1.75)

The transactions history to date is as follows:
09/02/09 Bought 300 NE @ $33.98
09/02/09 Sold 3 NE Sep09 $34.00 Calls @ $1.30
Roll-Up-and-Out Transaction:
09/17/09 Buy-to-Close (BTC) 3 NE Sep09 $34.00s @ $5.22
09/17/09 Sell-to-Open (STO) 3 NE Oct09 $36.00s @ $3.87
Note: The price of NE was $39.19 today when this debit-spread was transacted and the remaining time value in the Sep09 option was only $.03 [$5.22-($39.19-$34.00)].
Roll-Up-and-Out Transaction:
10/16/09 Buy-to-Close (BTC) 3 NE Oct09 $36.00s @ $5.60
10/16/09 Sell-to-Open (STO) 3 NE Nov09 $42.00s @ $1.75
Note: The price of NE was $41.56 today when this transaction occurred.

The overall performance results(including commissions) for this NE covered calls position would be as follows:
Stock Purchase Cost: $10,202.95
($33.98*300+$8.95 commission)

Net Profit:
(a) Options Income: -$1,203.60
= (300*($1.30-$5.22+$3.87-$5.60+$1.75) - 3*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $41.56): +$2,265.05
= ($41.56-$33.98)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $42.00): +$2,397.05
= ($42.00-$33.98)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $41.56): +$1,061.45
= (-$1,203.60 +$0.00 +$2,265.05)
Total Net Profit(If stock price exercised at $42.00): +$1,193.45
= (-$1,203.60 +$0.00 +$2,397.05)

Absolute Return if Stock Price Unchanged at $41.56: +10.4%
= +$1,061.45/$10,202.95
Annualized Return If Unchanged (ARIU) +47.5%
= (+$1,061.45/$10,202.95)*(365/80 days)

Absolute Return if Exercised at $42.00: +11.7%
= +$1,193.45/$10,202.95
Annualized Return If Exercised (ARIE) +53.4%
= (+$1,193.45/$10,202.95)*(365/80 days)

Tuesday, October 13, 2009

Establish Paychex Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Paychex Inc (PAYX) covered calls as follows:

Established Paychex Inc (PAYX) Covered Calls for Nov09:
10/13/09 Bought 500 PAYX @ $28.38
10/13/09 Sold 5 PAYX Nov09 $27.50 Calls @ $1.28

A buy/write day order at a net debit of $27.10 was placed early this morning for this transaction and it executed at 2:10pm Eastern Time this afternoon at the prices shown above. Since PAYX just made a $.31 quarterly dividend declaration this morning, I analyzed the return potential for either an early exercise (note: ex-dividend date is 10/29/09) or a later exercise upon the Nov09 expiration date. A potential exercise under either scenario provides a satisfactory return-on-investment result, so the buy/write order was established.

Paychex, Inc. provides payroll, human resource, and benefits outsourcing solutions for small- to medium-sized businesses in the United States and Germany. It offers payroll processing services, which include calculation, preparation, and delivery of employee payroll checks; production of internal accounting records and management reports; preparation of federal, state, and local payroll tax returns; and collection and remittance of clients' payroll obligations. The company also provides payroll tax administration services; employee payment services; and regulatory compliance services, such as new-hire reporting and garnishment processing. Its human resource outsourcing services include payroll, employer compliance, human resource and employee benefits administration, risk management outsourcing, and the on-site availability of a professionally trained human resource representative. In addition, the company offers retirement services administration; workers' compensation insurance services; health and benefits services; time and attendance solutions; and other human resource services and products. It also operates a professional employer organization. Paychex serves approximately 554,000 clients in the United States; and 1,600 clients in Germany. Paychex, Inc. was founded in 1971 and is headquartered in Rochester, New York.

Some potential results from this transaction are:

1. If Stock Exercised Early
It is likely that the owner of the long calls will exercise early on the day prior to the ex-dividend date if the $.31 dividend amount is greater than the time value remaining in the call option at that time. If this occurs, the overall performance results(including commissions) for the PAYX transactions would be as follows:

Stock Purchase Cost: $14,198.95
($28.38*500+$8.95 commission)

Net Profit:
(a) Options Income: +$627.30 (500*$1.28 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$448.95
= ($27.50-$28.38)*500 - $8.95 commissions

Total Net Profit: +$178.35
= (+$627.30 +$0.00 -$448.95)

Absolute Return if Exercised Early on 10/28/09 = +1.3%
= +178.35/$14,198.95

Annualized Return if Exercised Early on 10/28/09 : +30.6%
= (+178.35/$14,198.95/$51,974.95)*(365/15 days)


2. If Stock Exercised at Nov09 Expiration
It is likely that the owner of the long calls will not exercise early, on the day prior to the ex-dividend date, if the $.31 dividend amount is less than the time value remaining in the call option at that time. If this occurs, the overall performance results(including commissions) for the PAYX transactions would be as follows:

Stock Purchase Cost: $14,198.95
($28.38*500+$8.95 commission)

Net Profit:
(a) Options Income: +$627.30 (500*$1.28 - $12.70 commissions)
(b) Dividend Income: +$155.00 ($.31 dividend * 500 shares)
(c) Capital Appreciation: -$448.95
= ($27.50-$28.38)*500 - $8.95 commissions

Total Net Profit: +$333.35
= (+$627.30 +$155.00 -$448.95)

Absolute Return if Exercised upon Nov09 Expiration on 11/21/09: +2.3%
= +$333.35/$14,198.95

Annualized Return if Exercised upon Nov09 Expiration on 11/21/09: +22.0%
= (+$333.35/$14,198.95)*(365/39 days)

________________________________________________________

What if cash-secured puts had been established instead of the covered calls?
At 2:10pm, when the covered calls were transacted, the bid/ask price for the Nov09 $27.50 puts was $.60/$.65. The potential overall results(including commissions) for a cash-secured puts position would have been as follows:

Cash-Securitization Cost: $13,750.00
= ($27.50*500)

Net Profit:
(a) Put Options Income: +$287.30 (500*$.60 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: $0.00

Total Net Profit: +$287.30
= (+$287.30 +$0.00 +$0.00)

Absolute Return if Exercised upon Nov09 Expiration on 11/21/09: +2.1%
= +$287.30/$13,750.00

Annualized Return if Exercised upon Nov09 Expiration on 11/21/09: +19.6%
= (+$287.30/$13,750.00)*(365/39 days)

The slightly higher potential returns available via covered calls made them the preferred investment vehicle in this instance.

Roll Up and Out -- Accenture Ltd. (ACN)

Accenture is going ex-dividend tomorrow (10/14/09) with an annual dividend payment of $.75 per share. Today, it was decided to retain the Covered Calls Advisor Portfolio position in Accenture Ltd. (ACN) and to roll-out-and-up to the Nov09 expiration at the $40.00 strike price. The current Oct09 $35.00 covered calls were well in-the-money today (with ACN at $39.18), and since the time value remaining in the options was only $.02 [$4.20-($39.18-$35.00)], a roll-out-and-up debit spread transaction was executed as follows:
10/13/09 Buy-to-Close (BTC) 3 ACN Oct09 $35.00s @ $4.20
10/13/09 Sell-to-Open (STO) 3 ACN Nov09 $40.00s @ $.80
Note: Net Debit-Spread upon Roll-Up was $3.40 ($4.20 - $.80)

With this transaction, this advisor decided it was preferable to keep ACN and capture the $.75 ex-dividend tomorrow rather than allow ACN to be called away today at the $35.00 strike price.

Hence, the transactions history to date is as follows:
08/24/09 Bought 300 ACN @ $35.51
08/24/09 Sold 3 ACN Sep09 $35.00 Calls @ $1.15
Roll-Out Transaction:
09/18/09 Buy-to-Close (BTC) 10 ACN Sep09 $35.00s @ $1.10
09/18/09 Sell-to-Open (STO) 10 ACN Oct09 $35.00s @ $1.90
Note: The price of ACN was $36.08 today when this debit-spread was transacted.
10/13/09 Buy-to-Close (BTC) 3 ACN Oct09 $35.00s @ $4.20
10/13/09 Sell-to-Open (STO) 3 ACN Nov09 $40.00s @ $.80
Note: The price of ACN was $39.18 today when this debit-spread was transacted.

Some possible overall performance results(including commissions) for the ACN transactions would be as follows:
Stock Purchase Cost: $10,661.95
= ($35.51*300+$8.95 commission)

Net Profit:
(a) Options Income: -$468.60
= (300*($1.15-$1.10+$1.90-$4.20+$.80) - 3*$11.20 commissions)
(b) Dividend Income: +$225.00 ($.75 * 300 shares)
(c) Capital Appreciation (If stock price unchanged at $39.18): +$1,092.05
= ($39.18-$35.51)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $40.00): +$1,338.05
= ($40.00-$35.51)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $39.18): +$848.45
= (-$468.60 +$225.00 +$1,092.05)
Total Net Profit(If stock price exercised at $40.00): +$1,094.45
= (-$468.60 +$225.00 +$1,338.05)

Absolute Return if Unchanged at $39.18: +8.0%
= +$848.45/$10,661.95
Annualized Return If Unchanged (ARIU) +32.6%
= (+$848.45/$10,661.95)*(365/89 days)

Absolute Return if Exercised at $40.00: +10.3%
= +$1,094.45/$10,661.95
Annualized Return If Exercised (ARIE) +42.1%
= (+$1,094.45/$10,661.95)*(365/89 days)