Friday, October 16, 2009

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,