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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.


  1. How do you adjust a CC in a downdraft? That is to say,- in this case the SPX should melt up? Thank you. Tom

  2. Tom,
    Thanks for your question. It motivated me to post an article on this topic (see Nov 6th, 2009 post).

  3. Thank you for your response regarding rolling the covered call.

    You indicate rolling if the stock price moves 10% above/below the strike price. It seems to me if the stock price has dropped that far below the option strike you will be chasing very little premium. Maybe not.

    Also, I wonder if the 10% concept would produce different results based upon the volatility of the underlying stock, i.e. more volatility, more premium.

    Thanks again.

  4. Tom,
    If the roll-to strike price is close to at-the-money, the option premium would be significant, not "very little".
    Regarding your second comment, it will always be true that the more volatile stocks will also have higher option premiums.

  5. I agree ATM will be the significant premium. I guess Im confused between the differences of what you wrote in #1 and #2

    #1 Roll up(down) when the current equity price is more than 10% above(below) the current strike price

    #2 Make the roll transactions when the current equity price is very close to the new strike price (within + or - $.25 of the new strike price) -- i.e. very close to at-the-money;

    Yes ATM is great premium. An equity 10% below the current strike price appears to me, a losing game. This is where I'm sure I'm misunderstanding you. My apologies to you and your readers.

    In the big scheme, it seems to me if one has to roll the short call, one is wrong in the trend and one will relinquish one's profit, or at best a significant share of it for that month.

    Thank you for your patience.