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.

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