Tuesday, January 31, 2012

Returns -- Through January 2012

1. January 2012 Year-to-Date Results:

The Covered Calls Advisor Portfolio (CCAP) is off to a great start in 2012. CCAP outperformed the benchmark Russell 3000 index by 3.95% (+9.05% minus +5.10%). This outperformance occurred primarily because of the large increases achieved for the month in the CCAP's two largest positions: Apple Inc. increased by +11.9% and iShares MSCI China ETF increased by +10.3%.

The financial results were as follows:

CCAP Absolute Return (Jan 1st through Jan 31st, 2012) = +9.05%
($320,198.62-$293,634.14)/$293,634.14

Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through Jan 31st, 2012) = +5.10%
($77.96-$74.18)/$74.18

As a reminder, the Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. Here's an example to aid understanding of how the overall portfolio performance is determined: 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.


2. Prior Years Results:

This Covered Calls Advisor blog began in September 2007. The performance results for 2007 through 2011 is summarized as follows:

This table shows that the Covered Calls Advisor Portfolio has outperformed the Russell 3000 benchmark by a total of 16.94% over the 4.3 years from the start of this blog in Sepember 2007 and the end of 2011. As shown, the corresponding average compound annual return-on-investment outperformance has averaged +3.85% per year. This average is within the Covered Calls Advisor's expected range of +3% to +5% average annual outperformance for long-term results achieved from a well-managed covered calls investing program.

Also as a reminder, the Covered Calls Advisor Portfolio is not identical to the advisor's personal portfolio. However, it does provide a comparable overall portfolio return result since all equities in the CCAP are also held in this advisor's personal portfolio. To ensure comparability, all transaction dates and transaction prices herein are identical to those that were established in the Covered Calls Advisor's personal portfolio. The primary difference between the two accounts is the total number of shares held for each equity. This approach is used to preserve the confidentiality of the total value of the Covered Call Advisor's personal portfolio.

As shown in the right sidebar near the top of this page, the Covered Calls Advisor's current Overall Market Meter rating is "SLIGHTLY BULLISH". The corresponding investing strategy is to, on-average, sell 2% out-of-the-money covered calls for the nearest expiration month.

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

Regards and Godspeed,
Jeff

Monday, January 30, 2012

Establish ProShares UltraShort 20+ Year Treasury Bonds ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of ProShares UltraShort 20+ Year Treasury ETF (Symbol TBT) covered calls as follows:

Established ProShares UltraShort 20+ Year Treasury ETF (TBT) Covered Calls for Feb2012:
01/30/2012 Bought 300 TBT @ $18.34
01/30/2012 Sold 3 TBT Feb2012 $19.00 Calls @ $.29
Note: the price of TBT was $18.34 when these call options were sold.

This investment corresponds to the Covered Calls Advisor's thesis that interest rates are bottoming. An out-of-the-money covered calls position in TBT will benefit if there is any increase in long-term Treasury Bond yields. Some readers might ask: "Why establish an out-of-the-money position in an inverse ETF instead of simply an in-the-money position in a direct investment (such as TLT)?"
My answer is: "An out-of-the-money position in the inverse TBT ETF enables the possibility of capital appreciation in the underlying ETF if interest rates are bottoming and begin to trend somewhat higher. This establishes the possibility of a substantially higher return-on-investment result compared with an in-the-money TLT position (since in-the-money covered calls positions eliminate the possibility of capital appreciation in the underlying equity).

Although there are unlimited outcomes, two possible overall performance results(including commissions) for this ProShares UltraShort 20+ Year Treasury ETF (TBT) position are as follows:
Stock Purchase Cost: $5,510.95
= ($18.34*300+$8.95 commission)

Net Profit:
(a) Options Income: +$75.80
= ($.29*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If price of TBT is unchanged at $18.34): -$8.95
= ($18.34-$18.34)*300 - $8.95 commissions
(c) Capital Appreciation (If TBT above $19.00 at Feb2012 expiration): +$189.05
+($19.00-$18.34)*300 - $8.95 commissions

Total Net Profit(If TBT unchanged at $18.34): +$66.85
= (+$75.80 +$0.00 -$8.95)
Total Net Profit(If TBT above $19.00 at Feb2012 options expiration): +$264.85
= (+$75.80 +$0.00 +$189.05)

1. Absolute Return if Unchanged at $18.34: +1.2%
= +$66.85/$5,510.95
Annualized Return If Unchanged (ARIU): +23.3%
= (+$66.85/$5,510.95)*(365/19 days)

2. Absolute Return (If TBT above $19.00 at Feb2012 options expiration): +4.8%
= +$264.85/$5,510.95
Annualized Return (If TBT above $19.00 at expiration): +92.3%
= (+$264.85/$5,510.95)*(365/19 days)

The downside 'breakeven price' at expiration is at $18.05 ($18.34 - $.29).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Hartford Financial Services Group Inc.(HIG) covered calls position is 60.8%. This compares with a probability of profit of 51.6% for a buy-and-hold of the Hartford over the same time period.

The 'crossover price' at expiration is $19.29 ($19.00 + $.29).
This is the price above which it would have been more profitable to simply buy-and-hold Hartford stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the covered calls position. The Options Pricing Model indicates that the probability that this will occur is 26.5%.

Sold 100% Cash-Secured Puts -- Hartford Financial Services Group Inc.

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Hartford Financial Services Group Inc.(Ticker Symbol HIG) with a Feb2012 expiration.

The transaction was as follows:
01/30/2012 Sold 3 Hartford Financial Services Group Inc.(HIG) Feb2012 $18.00 Put Options @ $1.14
Note: the price of The Hartford was $17.28 today when these Puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

Two possible overall performance results(including commissions) for this Hartford Financial Services Group Inc.(HIG) transaction would be as follows:
100% Cash-Secured Cost Basis: $5,400.00
= $18.00*300

Net Profit:
(a) Options Income: +$330.80
= ($1.14*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If HIG price unchanged at $17.28 at expiration): +$0.00
= ($17.28-$17.28)*300
(c) Capital Appreciation (If HIG above $18.00 at Feb2012 expiration): +$207.05
= ($18.00-$17.28)*300 -$8.95 commissions

Total Net Profit(If HIG price unchanged at $17.28): +$330.80
= (+$330.80 options income +$0.00 dividends +$0.00 capital appreciation)
Total Net Profit(If HIG above $18.00 at Feb2012 options expiration): +$537.85
= (+$330.80 +$0.00 +$207.05)

1. Absolute Return if Unchanged at $17.28: +6.1%
= +$330.80/$5,400.00
Annualized Return If Unchanged (ARIU): +117.7%
= (+$330.80/$5,400.00)*(365/19 days)

2. Absolute Return (If HIG above $18.00 at Feb2012 options expiration and Put options thus expire worthless): +10.0%
= +$537.85/$5,400.00
Annualized Return (If stock price above $22.00 at expiration): +191.3%
= (+$537.85/$5,400.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $16.86 ($18.00 - $1.14).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Hartford Financial Services Group Inc.(HIG) cash-secured Puts position is 60.8%. This compares with a probability of profit of 51.6% for a buy-and-hold of the Hartford over the same time period.

The 'crossover price' at expiration is $18.42 ($17.28 + $1.14).
This is the price above which it would have been more profitable to simply buy-and-hold Hartford stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the short Put options.

Closed -- Juniper Networks Inc. Covered Calls

The Feb2012 covered calls position in Juniper Networks Inc.(JNPR) was established last week prior to its earnings report. The earnings report was lousy. Not only were the quarterly results below expectations, but even more importantly, the forward guidance was grim. In short, Juniper's fundamentals have changed for the worse; so today, the covered calls position in Juniper Networks was exited at a loss to free up cash for another investment with a better near-term outlook. The detailed transactions history for this JNPR position and the corresponding results are as follows:
01/24/2012 Bought 300 JNPR @ $22.89
01/24/2012 Sold 3 JNPR Feb2012 $23.00 Calls @ $1.15
01/30/2012 Bought-to-Close 3 JNPR Feb2012 $23.00 Calls @ $.20
01/30/2012 Sold 300 JNPR @ $21.15

The performance results(including commissions) for these Juniper Networks Inc.(JNPR) transactions was as follows:
Stock Purchase Cost: $6,875.95
= ($22.89*300+$8.95 commission)

Net Profit:
(a) Options Income: +$262.60
= (300*($1.15 - $.20)-2*$11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$530.95
= ($21.15-$22.89)*300 - $8.95 commissions

Total Net Profit: -$268.35
= (+$262.60 +$0.00 -$530.95)

Absolute Return: -3.9%
= -$268.35/$6,875.95

Sold 100% Cash-Secured Puts -- Fusion-io Inc.

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Fusion-io Inc.(Ticker Symbol FIO) with a Feb2012 expiration.

The transaction was as follows:
01/30/2012 Sold 3 Fusion-io Inc.(FIO) Feb2012 $25.00 Put Options @ $1.90
Note: the price of FIO was $24.36 today when these Puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

Fusion-io has what the Covered Calls Advisor considers to be a 'disruptive technology' (that's a good thing!) advantage in the high-growth memory hardware/software industry.

Two possible overall performance results(including commissions) for this Fusion-io Inc.(FIO) transaction would be as follows:
100% Cash-Secured Cost Basis: $7,500.00
= $25.00*300

Net Profit:
(a) Options Income: +$558.80
= ($1.90*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FIO price unchanged at $24.36 at expiration): +$0.00
= ($24.36-$24.36)*300
(c) Capital Appreciation (If FIO above $25.00 at Feb2012 expiration): +$183.05
= ($25.00-$24.36)*300 -$8.95 commissions

Total Net Profit(If FIO price unchanged at $24.36): +$558.80
= (+$558.80 options income +$0.00 dividends +$0.00 capital appreciation)
Total Net Profit(If FIO above $25.00 at Feb2012 options expiration): +$741.85
= (+$558.80 +$0.00 +$183.05)

1. Absolute Return if Unchanged at $24.36: +7.5%
= +$558.80/$7,500.00
Annualized Return If Unchanged (ARIU): +143.1%
= (+$558.80/$7,500.00)*(365/19 days)

2. Absolute Return (If FIO above $25.00 at Feb2012 options expiration and Put options thus expire worthless): +9.9%
= +$741.85/$7,500.00
Annualized Return (If stock price above $22.00 at expiration): +190.0%
= (+$741.85/$7,500.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $23.10 ($25.00 - $1.90).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Fusion-io Inc.(FIO) cash-secured Puts position is 66.1%. This compares with a probability of profit of 53.0% for a buy-and-hold of Fusion-io over the same time period.

The 'crossover price' at expiration is $26.26 ($24.36 + $1.90).
This is the price above which it would have been more profitable to simply buy-and-hold Fusion-io stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the short Put options.

Friday, January 27, 2012

Sold 100% Cash-Secured Puts -- Mylan Inc.

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Mylan Inc. (MYL) with a Feb2012 expiration.

Mylan Inc. is a leading manufacturer of generic pharmaceutical products in finished tablet, capsule and powder dosage forms. MYL markets more than 1,000 products throughout the world with sales from: North America 53%, Europe 33%, and Asia/Pacific 14%. Generics account for about 90% of total revenues, with specialty products representing the balance.

With a virtual oligopoly of vertically integrated worldwide generic manufacturers, Mylan is well-positioned to capture a significant share of new generics -- and the prognosis for the future growth of prescription generic drugs remains very healthy. There are three primary reasons for this:
(1) Patents for many lucrative branded drugs will be expiring over the next few years;
(2) Aging populations in most countries result in increased prescription drugs usage; and
(3) Governments' efforts to control healthcare costs favor generics.
Importantly, these three factors are forecasted with great certainty, which provides a high level of confidence in the outlook for the generic drugs industry.
Also, although there is already widespread penetration of generics (versus branded drugs) in the U.S., a greater growth opportunity awaits Europe, and an even greater opportunity exists in Asia and elsewhere throughout the world.

Mylan is very attractive at its current price. With the expected 2011 earnings at $2.00 per share and an options exercise price of $20, the P/E ratio is 10. But the earnings growth rate for each of the next 3 years is likely to be in the teens. So, the PEG (Price-Earnings Growth) Ratio is significantly below 1.0, which makes Mylan a very attractive investing opportunity now.


Mylan Inc. (MYL) -- New Position
The transaction was as follows:
01/27/2012 Sold 7 Mylan Inc. (MYL) Feb2012 $20.00 Put Options @ $.41
Note: the price of MYL stock was $20.92 today when these puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the seven put options sold. A possible overall performance result(including commissions) for this Mylan Inc. (MYL) transaction would be as follows:
100% Cash-Secured Cost Basis: $14,000.00
= $20.00*700

Net Profit:
(a) Options Income: +$272.80
= ($.41*700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MYL stock above $20.00 at Feb2012 expiration): +$0.00
= ($20.00-$20.00)

Total Net Profit(If stock price above $20.00 at Feb2012 options expiration): +$272.80
= (+$272.80 +$0.00 +$0.00)

Absolute Return (If stock price above $20.00 at Feb2012 options expiration and put options thus expire worthless): +1.9%
= +$272.80/$14,000.00
Annualized Return (If stock price above $23.00 at expiration): +32.3%
= (+$272.80/$14,000.00)*(365/22 days)

The downside 'breakeven price' at expiration is at $19.59 ($20.00 - $.41).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Mylan Inc. cash-secured puts position is 69.7%. This compares with a probability of profit of 50.9% for a buy-and-hold of Mylan over the same time period.

The 'crossover price' at expiration is $21.33 ($20.92 + $.41).
This is the price above which it would have been more profitable to simply buy-and-hold Mylan stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the short put options.

Thursday, January 26, 2012

Establish ProShares UltraShort 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 UltraShort S&P 500 ETF (Symbol SDS) covered calls as follows:

Established ProShares UltraShort S&P 500 ETF (SDS) Covered Calls for Feb2012:
01/26/2012 Bought 1,000 SDS @ $17.07
01/26/2012 Sold 10 SDS Feb2012 $18.00 Calls @ $.29
Note: the price of SDS was $17.19 when the options were sold.

Based on Relative Strength indicators, the S&P 500 seems overbought at this time. So a long position (but only 5% of the total value of the Covered Calls Advisor Portfolio) was established in this inverse ETF (SDS) as a hedge against the likelihood of a short-term (Feb2012 expiration) market decline from current levels.

Some readers might ask: "Why establish an out-of-the-money position in an inverse ETF instead of simply an in-the-money position in a direct investment (such as SPY)?" My answer is: "An out-of-the-money position in the inverse SDS ETF enables the possibility of capital appreciation in the underlying ETF if the overall stock market now begins to trend lower. This establishes the possibility of a substantially higher return-on-investment result than could be achieved from an in-the-money SPY position (since in-the-money covered calls positions eliminate the possibility of capital appreciation in the underlying equity) .

Although there are unlimited outcomes, two possible overall performance results(including commissions) for the ProShares UltraShort S&P 500 ETF (SDS) transactions would be as follows:
Stock Purchase Cost: $17,078.95
= ($17.07*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$273.55
= ($.29*1,000 shares) - $16.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If price of SDS is unchanged at $17.07): -$8.95
= ($17.07-$17.07)*1,000 - $8.95 commissions
(c) Capital Appreciation (If SDS above $18.00 at Feb2012 expiration): +$921.05
+($18.00-$17.07)*1,000 - $8.95 commissions

Total Net Profit(If SDS unchanged at $17.07): +$264.60
= (+$273.55 +$0.00 -$8.95)
Total Net Profit(If SDS above $18.00 at Feb2012 options expiration): +$1,194.60
= (+$273.55 +$0.00 +$921.05)

1. Absolute Return if Unchanged at $17.07: +1.5%
= +$264.60/$17,078.95
Annualized Return If Unchanged (ARIU): +24.6%
= (+$264.60/$17,078.95)*(365/23 days)

2. Absolute Return (If SDS above $18.00 at Feb2012 options expiration): +7.0%
= +$1,194.60/$17,078.95
Annualized Return (If SDS above $18.00 at expiration): +111.0%
= (+$1,194.60/$17,078.95)*(365/23 days)

The downside breakeven price at expiration is at $16.78 ($17.07 - $.29). Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this ProShares UltraShort S&P 500 ETF covered calls position is 59.6%. This compares with a probability of profit of 51.7% for a buy-and-hold of SDS over the same time period.

The upside crossover price at expiration is $18.29 ($18.00 + $.29).
This is the price above which it would have been more profitable to simply buy-and-hold SDS until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the covered calls position. The Options Pricing Model indicates that the probability that this will occur is 22.2%.

Wednesday, January 25, 2012

Establish Xilinx Inc. Covered Calls

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

Established Xilinx Inc.(XLNX) Covered Calls for Feb2012:
01/25/2012 Bought 300 XLNX @ $35.30
01/25/2012 Sold 3 XLNX Feb2012 $34.00 Calls @ $1.60

Xilinx (along with Altera) is a primary company in the near-duopoly market for Programmable Logic Devices (PLDs), a sub-industry within the Semiconductor industry. Xilinx recently reported 4th quarter earnings results that exceeded estimates.

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $.19 with an ex-dividend date of Feb 6th. If the current $.30 [$1.60-($35.30-$34.00)] time value (i.e. extrinsic value) remaining in the short call option decays to less than $.19 by Feb 5th, then there is some possibility that the call options owner will exercise early and will call the stock away to capture the dividend. As shown below, two potential returns for this position are:
+18.2% annualized return if the stock is assigned at Feb2012 expiration
+20.0% annualized return if the stock is assigned early
This Covered Calls Advisor has a slight preference that the options owner is enticed to exercise early -- which would result in a somewhat higher annualized return-on-investment for this position. My thanks to Ed Boot, who described this strategy in a post on the JustCoveredCalls Yahoo! Group site.

Two possible overall performance results(including commissions) for the Xilinx Inc.(XLNX) transactions would be as follows:
Stock Purchase Cost: $10,598.95
= ($35.30*300+$8.95 commission)

Net Profit:
(a) Options Income: +$468.80
= ($1.60*300 shares) - $11.20 commissions
(b) Dividend Income (If stock assigned at Feb2012 expiration): +$57.00
= $.19 per share x 300 shares
(b) Dividend Income (If option exercised early on day prior to Feb 6th ex-div date): +$0.00
(c) Capital Appreciation (If stock assigned at $34.00): -$398.95
+($34.00-$35.30)*300 - $8.95 commissions

Total Net Profit(If stock assigned at Feb2012 expiration): +$126.85
= (+$468.80 +$57.00 -$398.95)
Total Net Profit(If option exercised on day prior to Feb 6th ex-div date): +$69.85
= (+$468.80 +$0.00 -$398.95)

1. Absolute Return (If stock assigned at Feb2012 expiration): +1.2%
= +$126.85/$10,598.95
Annualized Return (If stock assigned at Feb2012 expiration): +18.2%
= (+$126.85/$10,598.95)*(365/24 days)

2. Absolute Return (If option exercised on day prior to Feb 6th ex-div date): +0.7% = +$69.85/$10,598.95
Annualized Return (If option exercised early): +20.0%
= (+$675.85/$10,598.95)*(365/12 days)

The downside breakeven price at expiration is at $33.70 ($35.30 - $1.60).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Xilinx Inc.(XLNX) covered calls position is 72.7%. This compares with a probability of profit of 50.3% for a buy-and-hold of Xilinx over the same time period.

The upside crossover price at expiration is $35.79 ($34.00 + $1.60 +$.19 dividend).
This is the price above which it would have been more profitable to simply buy-and-hold XLNX stock until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the covered calls position.

The potential annualized returns in this position are attractive, but somewhat less than the desired +25% minimum annualized ROI that the Covered Calls Advisor prefers when establishing a covered calls position. The Implied Volatility (IV) in the XLNX options was 23.5 when these options were sold today. To reach the +25% minimum ROI threshold, equities with somewhat higher IVs will be targeted for applying this strategy in the future.

Tuesday, January 24, 2012

Establish Juniper Networks Inc. Covered Calls

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

Established Juniper Networks Inc.(JNPR) Covered Calls for Feb2012:
01/24/2012 Bought 300 JNPR @ $22.89
01/24/2012 Sold 3 JNPR Feb2012 $23.00 Calls @ $1.15

Two possible overall performance results(including commissions) for the Juniper Networks Inc.(JNPR) transactions would be as follows:

Stock Purchase Cost: $6,875.95
= ($22.89*300+$8.95 commission)

Net Profit:
(a) Options Income: +$333.80
= ($1.15*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $22.89): -$8.95
= ($22.89-$222.89)*300 - $8.95 commissions
(c) Capital Appreciation (If JNPR above $23.00 at Feb2012 expiration): +$24.05
+($23.00-$22.89)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $22.89): +$324.85
= (+$333.80 +$0.00 -$8.95)
Total Net Profit(If stock price above $23.00 at Feb2012 options expiration): +$357.85= (+$333.80 +$0.00 +$24.05)

1. Absolute Return if Unchanged at $22.89: +4.7%
= +$324.85/$6,875.95
Annualized Return If Unchanged (ARIU): +69.0%
= (+$324.85/$6,875.95)*(365/25 days)

2. Absolute Return (If stock price above $23.00 at Feb2012 options expiration): +5.2%= +$357.85/$6,875.95
Annualized Return (If stock price above $23.00 at expiration): +76.0%
= (+$357.85/$6,875.95)*(365/25 days)

The downside breakeven price at expiration is at $21.74 ($22.89 - $1.15). Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Juniper Networks covered calls position is 68.1%. This compares with a probability of profit of 51.0% for a buy-and-hold of Juniper over the same time period.

The upside crossover price at expiration is $24.04 ($22.89 + $1.15).
This is the price above which it would have been more profitable to simply buy-and-hold JNPR until Feb 17, 2012 (the Feb2012 options expiration date) rather than holding the covered calls position.

Sold 100% Cash-Secured Puts -- Market Vectors Gold Miners ETF

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in Market Vectors Gold Miners ETF (Symbol GDX) with a Feb2012 expiration.

The transaction was as follows:
01/24/2012 Sold 3 Market Vectors Gold Miners ETF (GDX) Feb2012 $52.00 Put Options @ $1.58
Note: the price of GDX was $51.99 today when these puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three put options sold.

Two possible overall performance results(including commissions) for this Market Vectors Gold Miners ETF (GDX) transaction would be as follows:
100% Cash-Secured Cost Basis: $15,600.00
= $52.00*300

Net Profit:
(a) Options Income: +$462.80
= ($1.58*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If GDX price unchanged at $51.99 and thus assigned at $52.00 at expiration): -$11.95
= ($51.99-$52.00)*300 - $8.95 commissions
(c) Capital Appreciation (If GDX above $52.00 at Feb2012 expiration): -$8.95
= ($22.00-$22.00) -$8.95 commissions

Total Net Profit(If GDX price unchanged at $51.99): +$450.85
= (+$462.80 +$0.00 -$11.95)
Total Net Profit(If GDX above $52.00 at Feb2012 options expiration): +$453.85
= (+$462.80 +$0.00 -$8.95)

1. Absolute Return if Unchanged at $51.99: +2.9%
= +$450.85/$15,600.00
Annualized Return If Unchanged (ARIU): +42.2%
= (+$450.85/$15,600.00)*(365/25 days)

2. Absolute Return (If GDX above $52.00 at Feb2012 options expiration and put options thus expire worthless): +2.9%
= +$453.85/$15,600.00
Annualized Return (If stock price above $22.00 at expiration): +42.5%
= (+$453.85/$15,600.00)*(365/25 days)

The downside breakeven price at expiration is $50.42 ($52.00 - $1.58).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2012 options expiration) for this Market Vectors Gold Miners ETF position is 67.3%. This compares with a probability of profit of 51.0% for a buy-and-hold of GDX over the same time period.

The upside crossover price at expiration is $53.58 ($52.00 + $1.58).
This is the price above which it would have been more profitable to simply buy-and-hold GDX until Feb 17, 2012 (the Feb2012 options expiration date) rather than selling the put options.

Saturday, January 21, 2012

January 2012 Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained nine covered calls positions with January 2012 expirations. On yesterday's options expiration Friday, all nine positions were in-the-money. As posted on this blog yesterday, three of these positions (iShares MSCI China ETF, iShares MSCI Emerging Markets ETF, and iShares MSCI South Korea ETF) were rolled up and out to Feb2012 covered calls.

Six covered calls positions (Citigroup, Halliburton, iShares MSCI Taiwan ETF, Morgan Stanley, Mylan Inc., and Peabody Energy) were in-the-money and the stocks were assigned (i.e. stock called away) upon options expiration yesterday. The detailed transactions history and financial results for these closed positions is as follows:

1. Citigroup Inc.(C) -- Closed
The transaction history is as follows:
10/26/2011 Sold 3 Citigroup, Inc.(C) Nov2011 $31.00 Put Options @ $1.96
Note: the price of Citi stock was $30.42 today when these puts were sold.
11/19/2011 Nov2011 Options Expired.
Note: the price of Citi stock was $26.28 upon options expiration.
11/30/2011 Sold 3 Dec2011 $27.00 call options @ $1.09
Note: the price of Citigroup stock was $26.61 when these options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of Citigroup was $26.03 upon options expiration.
12/21/2011 Sold 3 Jan2012 $28.00 calls @$.99
Note: the price of Citi was $27.02 when these options were sold.
01/21/2012 Jan2012 options assigned and stock sold at $28.00.
Note: the price of Citi was $29.64 at options expiration.

The overall performance result(including commissions) for these Citigroup Inc.(C) transactions was as follows:
100% Cash-Secured Cost Basis: $9,300.00
= $31.00*300

Net Profit:
(a) Options Income: +$1,178.40
= (300*($1.96+$1.09+$.99) - 3*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock assigned at $28.00): -$908.95
= ($28.00-$31.00)*300 - $8.95 commissions

Total Net Profit (Stock assigned at $28.00): +$269.45
= (+$1,178.40 +$0.00 -$908.95)

Absolute Return (Stock assigned at $28.00 at expiration): +2.9%
= +$269.45/$9,300.00
Annualized Return: +12.2%
= (+$269.45/$9,300.00)*(365/87 days)


2. Halliburton Co.(HAL) -- Closed
The transaction history is as follows:
10/26/2011 Sold 3 Halliburton Co.(HAL) Nov2011 $36.00 Put Options @ $2.06
Note: the price of HAL stock was $35.56 today when these puts were sold.
11/19/2011 Nov2011 Options Expired.
Note: the price of Halliburton stock was $35.96 upon options expiration.
11/30/2011 Ex-Dividend payment of $27.00 = $.09 * 300 shares
11/30/2011 Sold 3 Dec2011 $37.00 call options @ $1.05
Note: the price of Halliburton Co. stock was $35.99 when these options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of Halliburton was $31.76 upon options expiration.
01/03/2012 Sold 3 Jan2012 $35.00 call options @ $1.06
Note: the price of Halliburton was $34.48 when these options were sold.
01/21/2012 Jan2012 options assigned and stock sold at $35.00.
Note: the price of Halliburton was $36.20 at options expiration.

The overall performance results(including commissions) for this Halliburton Co.(HAL) position was as follows:
100% Cash-Secured Cost Basis: $10,800.00
= $36.00*300

Net Profit:
(a) Options Income: +$1,217.40
= ($2.06 + $1.05 + $1.06)*300 shares - 3*$11.20 commissions
(b) Dividend Income: +$27.00 ($.09*300 shares)
(c) Capital Appreciation (HAL stock assigned at $35.00 at Jan2012 expiration):
-$308.95 = ($35.00-$36.00)*300 -$8.95 commissions

Total Net Profit(Stock assigned at $35.00): +$935.45
= (+$1,217.40 +$27.00 -$308.95)

Absolute Return (Stock assigned at $35.00): +8.7%
= +$935.45/$10,800.00
Annualized Return (Stock assigned at $35.00 at expiration): +36.3%
= (+$935.45/$10,800.00)*(365/87 days)


3. iShares MSCI Taiwan ETF (EWT) -- Closed
The transactions history is as follows:
07/18/2011 Bought 1,000 EWT @ $14.65
07/19/2011 Sold 10 EWT Aug2011 $15.00 Calls @ $.31
Note: The price of EWT was $14.85 today when the options were sold.
08/20/2011 Aug2011 Options Expired.
08/31/2011 Sold 10 EWT Sep2011 $14.00 Calls @$.29
Note: The price of EWT was $13.89 when these call options were sold.
09/17/2011 Sep2011 EWT options expired.
09/20/2011 Sold 10 EWT Oct2011 $13.00 Calls @ $.32
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 10 EWT Nov2011 $13.00 Calls @ $.39
11/19/2011 Nov2011 EWT options expired.
11/30/2011 Sold 10 EWT Dec2011 $12.00 Calls @ $.29
12/17/2011 Dec2011 Options Expired.
Note: the price of EWT was $11.21 upon options expiration.
12/20/2011 Ex-Distribution $472.80 = $.4728 * 1,000 shares
01/03/2012 Sold 10 EWT Jan2012 $12.00 call options @ $.22
Note: the price of EWT was $11.87 when these options were sold.
01/21/2012 Jan2012 options assigned and stock sold at $12.00.
Note: the price of EWT was $12.46 at options expiration.

The overall performance results(including commissions) for these EWT transactions was as follows:
Stock Purchase Cost: $14,650.95
= ($14.65*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$1,721.30
= (1,000*($.31+$.29+$.32+$.39+$.29+$.22) - 6*$16.45 commissions)
(b) Dividend Income: +$472.80 = $.4728 * 1,000 shares
(c) Capital Appreciation (EWT assigned at $12.00): -$2,658.95
= ($12.00-$14.65)*1,000 - $8.95 commissions

Total Net Profit(EWT assigned at $12.00): -$464.85
= (+$1,721.30 +$472.80 -$2,658.95)

Absolute Return if Assigned at $12.00: -3.2%
= -$464.85/$14,650.95
Annualized Return If Assigned (ARIA) -6.2%
= (-$464.85/$14,650.95)*(365/187 days)


4. Morgan Stanley (MS) -- Closed
The transactions history is as follows:
10/26/2011 Sold 6 Morgan Stanley (MS) Nov2011 $17.00 Put Options @ $1.16
Note: the price of MS stock was $16.82 today when these puts were sold.
11/19/2011 Nov2011 MS put options exercised -- 600 shares MS purchased @ $17.00.
11/30/2011 Sold 6 MS Dec2011 $15.00 Calls @ $.44
Note: the price of MS was $14.18 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of Morgan Stanley was $14.98 upon options expiration.
12/21/2011 Sold 6 Jan2012 $16.00 calls @$.69
Note: the price of MS was $15.39 when these options were sold.
01/21/2012 Jan2012 MS options assigned and stock sold at $16.00.
Note: the price of MS was $18.39 at options expiration.

The overall performance results(including commissions) for this Morgan Stanley (MS) position was as follows:
100% Cash-Secured Cost Basis: $10,200.00
= $17.00*600

Net Profit:
(a) Options Income: +$1,333.65
= ($1.16+$.44+$.69)*600 shares - 3*$13.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $15.39): -$974.95
= ($15.39-$17.00)*600 - $8.95 commissions
(c) Capital Appreciation (If MS stock assigned at $16.00 at Jan2012 expiration):
-$608.95 = ($16.00-$17.00)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $15.39): +$358.70
= (+$1,333.65 +$0.00 -$974.95)
Total Net Profit(If stock price above $16.00 at Jan2012 options expiration): +$724.70
= (+$1,333.65 +$0.00 -$608.95)

1. Absolute Return if Unchanged at $15.39: +3.5%
= +$358.70/$10,200.00
Annualized Return If Unchanged (ARIU): +14.8%
= (+$358.70/$10,200.00)*(365/87 days)

2. Absolute Return (Stock price above $16.00 at Jan2012 options expiration): +7.1%
= +$724.70/$10,200.00
Annualized Return (Stock price above $16.00 at expiration): +29.8%
= (+$724.70/$10,200.00)*(365/87 days)


5. Mylan Inc.(MYL) -- Closed
The transaction history is as follows:
07/18/2011 Sold 5 Mylan Inc. (MYL) Aug2011 $23.00 Put Options @ $1.06
Note: the price of MYL stock was $22.98 today when these puts were sold.
08/20/2011 Aug2011 MYL options exercised and stock purchased at $23.00 per share.
08/22/2011 Sold 5 MYL Sep2011 $22.00 Calls @ $.46
09/17/2011 Sep2011 MYL options expired.
09/20/2011 Sold 5 MYL Oct2011 $22.00 Calls @ $.63
Note: The price of MYL was $20.48 when these call options were sold.
10/22/2011 Oct2011 options expired.
Note: the MYL price was $18.04 at option expiration.
10/24/2011 Sold 5 MYL Nov2011 $19.00 Call Options @ $.56
Note: the price of MYL was $18.08 when the options were sold.
11/19/2011 Nov2011 MYL options expired.
11/30/2011 Sold 5 MYL Jan2011 $20.00 Calls @ $1.11
Note: the price of MYL was $19.38 today when these call options were sold.
01/21/2012 Jan2012 MYL options assigned and stock sold at $20.00.
Note: the price of MYL was $21.56 at options expiration.

The overall performance results(including commissions) for these Mylan Inc. transactions was as follows:
Stock Purchase Cost: $11,508.95
= ($23.00*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,846.50
= 500*($1.06+$.46+$.63+$.56+$1.11) - 5*$12.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If MYL exercised at $20.00): -$1,508.95
= ($20.00-$23.00)*500 - $8.95 commissions

Total Net Profit(MYL assigned at $20.00): +$337.55
= (+$1,846.50 +$0.00 -$1,508.95)

Absolute Return (Stock Assigned at $20.00): +2.9%
= +$337.55/$11,508.95
Annualized Return: +5.7%
= (+$337.55/$11,508.95)*(365/187 days)


6. Peabody Energy Corp.(BTU) -- Closed
The transaction history is as follows:
09/19/2011 Bought 300 shares BTU at $44.208
09/19/2011 Sold 3 BTU Oct2011 $47 Calls @ $1.67
10/22/2011 Oct2011 options expired.
Note: the BTU price was $38.89 at option expiration.
10/24/2011 Sold 3 BTU Nov2011 $41.00 Call Options @ $1.85
Note: the price of BTU was $40.40 when the options were sold.
11/19/2011 Nov2011 BTU options expired.
11/30/2011 Sold 3 BTU Dec2011 $39.00 Calls @ $1.10
Note: the price of BTU was $37.90 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of BTU was $32.98 upon options expiration.
01/03/2012 Sold 3 BTU Jan2012 $35.00 call options @ $1.59
Note: the price of BTU was $35.34 when these options were sold.
01/21/2012 Jan2012 BTU options assigned and stock sold at $35.00.
Note: the price of BTU was $37.85 at options expiration.

The overall performance results(including commissions) for this Peabody Energy Corp.(BTU) position was as follows:
Stock Purchase Cost: $13,271.35
= ($44.208*300+$8.95 commission)

Net Profit:
(a) Options Income: +$1,818.20
= (300*($1.67+$1.85+$1.10+$1.59) - 4*$11.20 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (Stock assigned at $35.00): -$2,771.35
= ($35.00-$44.208)*300 - $8.95 commissions

Total Net Profit (Stock assigned at $35.00): -$953.15
= (+$1,818.20 +$0.00 -$2,771.35)

Absolute Return (BTU stock assigned at $35.00 at expiration): -7.2%
= -$953.15/$13,271.35
Annualized Return: -21.1%
= (-$953.15/$13,271.35)*(365/124 days)

Where Are We Now on the Emotional Roller Coaster of Investing?

Periodically, I like to re-visit the Emotional Roller Coaster of Investing to think about where we are in the cycle. The chart below shows how different emotional states of investors change with the stock market. The green sections are normally bullish times to be invested whereas the red portions are bearish times.










Many studies have documented how individual investors, and even professionals, chase performance. When markets are doing well, investors get less concerned about risk and put their money to work in investments that have been doing well recently. Too often that means investing while looking through a rearview mirror. Unfortunately, that is often opposite of what we should be doing. This reality is confirmed by three of the most renowned investors of the past century:
- "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell" -- John Templeton
- "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful" -- Warren Buffett
- "I have every confidence in the threefold merit of this general method based on (a) sound logic, (b) simplicity of application, and (c) an excellent supporting record. At bottom it is a technique by which true investors can exploit the recurrent excessive optimism and excessive apprehension of the speculative public." -- Benjamin Graham

So, Where Are We Now on the Emotional Roller Coaster of Investing?
My own assessment is that we are now transitioning from 'hope' to 'relief'. To better understand the various stages, let's consider how investors' emotions have corresponded to our recent stock market history. The bull market 'euphoria' ended in October 2007 when the Dow peaked at slightly about 14,000. During the winter of 2007/2008, 'unease' began to set in as the Dow declined below its 200-day moving average. In the Spring of 2008 a decline in real estate values began to become apparent and investors transitioned to the 'denial' stage since it was so hard to believe that our long-held assumption of neverending increases in the value of real estate then appeared to be in jeopardy. 'Pessimism' ensued as the stock market continued its steady decline into the summer as the credit crunch became more apparent and the price of oil reached $150 per barrel. 'Panic' occurred in the autumn of 2008 with financial bailouts of some large banks; and culminated in the September bankruptcy of Lehman Brothers. The stock markets' steep decline continued through the winter of 2008/2009 with 'capitulation' occurring from late January to early March of 2009 when the market quickly declined by another 20%. Investors were clearly in 'despair' as the Dow reached its closing low of 6,547 on March 9th, 2009. It is said that "Hindsight is 20/20", but that low point turned out to be what John Templeton called "the time of maximum pessimism" and thus "the best time to buy".

During the 2 years and 10 months since that March 2009 low, the market has rebounded 94% to its current level of 12,720. During this period, the market has been climbing the proverbial "wall of worry". Investors have had 'hope' that the worst was over, but nevertheless continued to fear a return of the bear market. My current belief is that the strongly bullish stock market move during the last month is signaling the transition from 'hope' to 'relief'. As 4th quarter earnings continue to be released, it is becoming increasingly apparent that earnings are continuing to grow (albeit at a somewhat slower increase) and that the likelihood of a return to recession in 2012 is low.

If we are now entering the 'relief' stage, then the next question would be: What would enable us to move to the next stage of 'optimism'? My first caveat is that it is unrealistic to expect to accurately forecast future events. But my gut feeling is that we will continue in 'relief' throughout 2012. Europe will likely be in a mild recession. The U.S. GDP will likely grow at a relatively modest 2-3% while Emerging Markets growth will slow slightly, but their GDP will grow very nicely at about the 5% level. With the expected continuation of relatively low inflation, a worldwide GDP growth average of about 3% is supportive of an expectation of continued modest growth in stock prices in 2012 -- perhaps in the 8% to 12% range for the year. This viewpoint is also consistent with the Covered Calls Advisor's current Overall Market Meter rating of Slightly Bullish (see right sidebar).

The Presidential campaigns leading up to the election in November this year is likely to be more hostile than ever; and also a very closely contested one. The uncertainty surrounding the widely different viewpoints of the two candidates will tend to cause investors to be uncertain about the future and therefore cautious with their investments. Despite the 94% rebound, investors remain cautious and now continue to invest moreso in bonds than in stocks, despite the exceedingly low rates available from bonds. I don't expect investors' sentiment to change until after the election. In early 2013, as policy priorities and legislative changes become more apparent, it is possible that a transition from 'relief' to 'optimism' could occur. Of course, it is also possible that rather than advancing to 'optimism', 'relief' could jump directly to 'unease' (or some other place on the roller coaster). In the mean time, we remain in the green section of the emotional roller coaster -- where a slightly bullish investing posture seems most appropriate.

I hope this article is helpful in stimulating your own thinking about the current state of the market and also the importance of not allowing our emotions to have an adverse effect on our investment decision-making.

Do you agree or disagree that we have now entered the 'relief' stage? Why?

As always, I welcome your comments. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar if you would prefer to keep your comments confidential.

Godspeed,
Jeff

Friday, January 20, 2012

Roll Up and Out -- iShares MSCI China ETF, iShares MSCI Emerging Markets ETF, and iShares MSCI South Korea ETF

Today was Jan2012 options expiration. With less than 30 minutes before the market close, three existing covered calls were rolled up and out to Feb2012 covered calls.
The advantage of waiting until this afternoon to roll these positions was to extract almost all of the extrinsic value from the short options before establishing the position for the next expiration month.

The detailed transactions history for these three covered calls positions as well as possible performance results are as follows:

1. iShares MSCI China ETF (FXI) -- Continuation Transactions
The transaction history is as follows:
04/18/2011 Bought 1,000 FXI @ $44.80
04/20/2011 Sold 10 FXI May2011 $47.00 Calls @ $.49
Note: the price of FXI was $45.88 when the calls were sold.
05/31/2011 Sold 10 FXI Jul2011 $47.00 Calls @ $.37
Note: The price of FXI was $45.18 when these call options were sold.
06/21/2011 FXI ETF distribution of $.68555 per share
07/16/2011 Jul2011 FXI options expired.
07/18/2011 Sold 10 FXI Aug2011 $42.00 Calls @$.71
08/20/2011 Aug2011 FXI options expired.
08/22/2011 Sold 10 FXI Sep2011 $42.00 Calls @ $.65
09/17/2011 Sep2011 FXI options expired.
09/20/2011 Sold 10 FXI Oct2011 $38.00 Calls @ $.47
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 10 FXI Nov2011 $37.00 Calls @ $.86
11/19/2011 Nov2011 FXI options expired.
11/30/2011 Sold 10 FXI Jan2012 $38.00 Calls @ $1.10
Note: the price of FXI was $36.42 today when these call options were sold.
12/20/2011 Ex-Distribution $79.40 = $.0794 * 1,000 shares
01/20/2012 Bought-to-Close 10 FXI Jan2012 $38.00 Calls @ $.68
Note: the price of FXI was $38.67 when these call options were bought.
01/20/2012 Sold 10 FXI Feb2012 $40.00 Calls @ $.49
Note: the price of FXI was $38.72 today when these call options were sold.

Two possible overall performance results(including commissions) for these iShares MSCI China ETF (FXI) transactions would be as follows:
Stock Purchase Cost: $44,808.95
= ($44.80*1,000+$16.45 commission)

Net Profit:
(a) Options Income: +$4,358.40
= (1,000*($.49+$.37+$.71+$.65+$.47+$.86+$1.10-$.68+$.49) - 8*$12.70 commissions)
(b) Distribution Income: $767.95 = ($.68555+$.0794) * 1,000 shares
(c) Capital Appreciation (If FXI price unchanged at $38.72 at expiration): -$6,088.95
= ($38.72-$44.80)*1,000 - $8.95 commissions
(c) Capital Appreciation (If FXI assigned at $40.00 at expiration): -$4,808.95
= ($40.00-$44.80)*1,000 - $8.95 commissions

Total Net Profit (If FXI price unchanged at $38.72 at expiration): -$962.90
= (+$4,358.40 +$767.95 -$6,088.95)
Total Net Profit (If FXI assigned at $40.00): +$317.40
= (+$4,358.40 +$767.95 -$4,808.95)

1. Absolute Return (If FXI unchanged at $38.72 at expiration): -2.1%
= -$962.90/$44,808.95
Annualized Return (If FXI unchanged at expiration): -2.6%
= (-$962.90/$44,808.95)*(365/306 days)

2. Absolute Return (If FXI assigned at $40.00 at expiration): +0.7%
= +$317.40/$44,808.95
Annualized Return If Assigned (ARIA): +0.8%
= (+$317.40/$44,808.95)*(365/306 days)


2. iShares MSCI Emerging Markets ETF (EEM) -- Continuation
The transactions history is as follows:
04/18/2011 Bought 500 EEM @ $47.81
04/19/2011 Sold 5 EEM May2011 $49.00 Calls @ $.83
Note: the price of EEM was $48.32 when the calls were sold.
05/27/2011 Sold 5 EEM Jun2011 $49.00 Calls @ $.44
Note: the price of EEM was $47.83 when the calls were sold.
06/18/2011 Jun2011 Options Expired
Note: the price of EEM was $45.34 upon options expiration.
6/22/2011 Distribution Income $.46092 per share.
06/28/2011 Sold 5 EEM Jul2011 $47.00 Calls @ $.62
Note: price of EEM was $46.42 when these options were sold.
07/16/2011 Jul2011 EEM options expired.
07/18/2011 Sold 5 EEM Aug2011 $47.00 Calls @$.99
Note: The price of EEM was $46.55 when these call options were sold.
08/20/2011 Aug2011 EEM options expired.
08/22/2011 Sold 5 EEM Sep2011 $42.00 Calls @ $.71
09/17/2011 Sep2011 EEM options expired.
09/20/2011 Sold 5 EEM Oct2011 $42.00 Calls @ $.63
Note: The price of EEM was $39.68 when these call options were sold.
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 5 EEM Nov2011 $41.00 Calls @ $.78
11/19/2011 Nov2011 EEM options expired.
11/30/2011 Sold 5 EEM Dec2011 $41.00 Calls @ $.59
Note: the price of EEM was $39.71 today when these call options were sold.
12/20/2011 Ex-Distribution $173.48 = $.34696 * 500 shares
01/20/2012 Bought-to-Close 5 EEM Jan2012 $39.00 Calls @ $2.43
Note: the price of EEM was $41.41 when these call options were bought.
01/20/2012 Sold 5 EEM Feb2012 $42.00 Calls @ $.80
Note: the price of EEM was $41.50 today when these call options were sold.

Two possible overall performance results(including commissions) for these iShares MSCI Emerging Markets ETF (EEM) transactions would be as follows:
Stock Purchase Cost: $23,913.95
= ($47.81*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,820.70
= [500*($.83 +$.35+$.62+$.99+$.71+$.63+$.78+$.59-$2.43+$.80) - 9*$12.70 commissions]
(b) Distribution Income: $403.94 = ($.46092+$.34696) * 500 shares
(c) Capital Appreciation (If EEM unchanged at $41.50 at expiration): -$3,163.95
= ($41.50-$47.81)*500 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $42.00): -$2,913.95
= ($42.00-$47.81)*500 - $8.95 commissions

Total Net Profit (If EEM price unchanged at $41.50 at expiration): -$939.31
= (+$1,820.70 +$403.94 -$3,163.95)
Total Net Profit (If EEM assigned at $42.00): -$689.31
= (+$1,820.70 +$403.94 -$2,913.95)

1. Absolute Return (If EEM price unchanged at $41.50 at expiration): -3.9%
= -$939.31/$23,913.95
Annualized Return if Unchanged at expiration (ARIU): -4.7%
= (-$939.31/$23,913.95)*(365/306 days)

2. Absolute Return (If EEM assigned at $42.00 at expiration): -2.9%
= -$689.31/$23,913.95
Annualized Return If Assigned (ARIA): -3.4%
= (-$689.31/$23,913.95)*(365/306 days)


3. iShares MSCI South Korea ETF (EWY) -- Continuation
The transactions history is as follows:
10/25/2011 Bought 800 EWY @ $54.62
10/25/2011 Sold 8 EWY Nov2011 $54.00 Calls @ $2.59
Note: these call options were sold with the price of EWY at $54.62
11/19/2011 Nov2011 EWY options expired.
11/30/2011 Sold 8 EWY Dec2011 $56.00 Calls @ $1.48
Note: the price of EWY was $55.38 today when these call options were sold.
12/20/2011 Ex-Distribution $298.41 = $.37301 * 800 shares
01/20/2012 Bought-to-Close 8 EWY Jan2012 $55.00 Calls @ $1.75
Note: the price of EWY was $56.73 when these call options were bought.
01/20/2012 Sold 8 EWY Feb2012 $57.00 Calls @ $1.50
Note: the price of EWY was $56.73 when these call options were sold.

Two possible overall performance results(including commissions) for the EWY position would be as follows:
Stock Purchase Cost: $43,704.95
= ($54.62*800+$8.95 commission)

Net Profit:
(a) Options Income: +$2,871.20
= (800*($2.59+$1.48-$.1.75+$1.50) - 3*$14.95 commissions)
(b) Dividend Income: +$298.41 = $.37301* 800 shares
(c) Capital Appreciation (If EWY price unchanged at $56.73): +$1,679.05
= ($56.73-$54.62)*800 - $8.95 commissions
(c) Capital Appreciation (If EWY assigned at $57.00): +$1,895.05
= ($57.00-$54.62)*800 - $8.95 commissions

Total Net Profit (If EWY price unchanged at $56.73): +$4,848.66
= (+$2,871.20 +$298.41 +$1,679.05)
Total Net Profit(If EWY assigned at $57.00): +$5,064.66
= (+$2,871.20 +$298.41 +$1,895.05)

1. Absolute Return if Unchanged at $56.73: +11.1%
= +$4,848.66/$43,704.95
Annualized Return If Unchanged (ARIU): +34.9%
= (+$4,848.66/$43,704.95)*(365/116 days)

2. Absolute Return if Assigned at $57.00: +11.6%
= +$5,064.66/$43,704.95
Annualized Return If Assigned (ARIA): +36.5%
= (+$5,064.66/$43,704.95)*(365/116 days)

Wednesday, January 18, 2012

Overall Market Meter Rating Changes from "Neutral" to "Slightly Bullish"

Each month during options expiration week, the Covered Calls Advisor recalculates the current values for each of the eight factors used to determine the "Overall Market Meter" rating. This month, the Overall Market Meter rating changed from Neutral to Slightly Bullish.

The eight factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next three indicators), and
- growth (the last indicator).















The current Market Meter Average of 3.75 (see blue line in chart above) is greater than the 3.38 of last month. The 3.75 is a Slightly Bullish rating (range from 3.5 to 4.5). Six of the eight factors used to determine the Overall Market Meter rating remained unchanged from the prior analysis last month. The factor that most influenced this month's change to Slightly Bullish (from Neutral) was Price Trend. The Price Trend indicator changed from Bearish to Bullish because the current price of the S&P 500 Index has now increased more than +5% above its 150-day SMA(Simple Moving Average) threshold. This factor will remain Bullish until the price of SPY moves to more than 5% below its 150-day SMA. The other factor that changed since last month's Overall Market Meter rating was Future Earnings Growth which declined from Slightly Bullish to Neutral.

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bullish sentiment is to "on-average sell 2% out-of-the-money covered calls for the nearest expiration month." So with the January 2012 options expiration this week, newly established positions for February 2012 expiration will be established in accordance with this guideline.

Your comments or questions regarding this post (or the details related to any of the eight factors used in this model) are welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Godspeed,
Jeff

Tuesday, January 3, 2012

Continuation Transactions -- Six Positions

There are currently eleven holdings in the Covered Calls Advisor Portfolio. Covered calls with Jan2012 expirations were established previously for four of these holdings. Today, covered calls have been re-established on six holdings (Halliburton Co., iShares MSCI Emerging Markets ETF, iShares MSCI South Korea ETF, iShares MSCI Taiwan ETF, Peabody Energy Corp., and Valero Energy Corp.).

The sole remaining holding that remains unhedged is Apple Inc. The Covered Calls Advisor is expecting Apple to report quarterly earnings numbers on January 24th that are well above analysts' consensus estimates. Therefore call options will not be sold against Apple stock until after this announcement.

The detailed transactions history for the six covered calls positions established today as well as possible performance results are as follows:

1. Halliburton Co.(HAL) -- Continuation
The transaction history is as follows:
10/26/2011 Sold 3 Halliburton Co.(HAL) Nov2011 $36.00 Put Options @ $2.06
Note: the price of HAL stock was $35.56 today when these puts were sold.
11/19/2011 Nov2011 Options Expired.
Note: the price of Halliburton stock was $35.96 upon options expiration.
11/30/2011 Ex-Dividend payment of $27.00 = $.09 * 300 shares
11/30/2011 Sold 3 Dec2011 $37.00 call options @ $1.05
Note: the price of Halliburton Co. stock was $35.99 when these options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of Halliburton was $31.76 upon options expiration.
01/03/2012 Sold 3 Jan2012 $35.00 call options @ $1.06
Note: the price of Halliburton was $34.48 when these options were sold.

Two possible overall performance results(including commissions) for this Halliburton Co.(HAL) position would be as follows:
100% Cash-Secured Cost Basis: $10,800.00
= $36.00*300

Net Profit:
(a) Options Income: +$1,217.40
= ($2.06 + $1.05 + $1.06)*300 shares - 3*$11.20 commissions
(b) Dividend Income: +$27.00 ($.09*300 shares)
(c) Capital Appreciation (If stock price unchanged at $34.48): -$464.95
= ($34.48 - $36.00)*300 - $8.95 commissions
(c) Capital Appreciation (If HAL stock above $35.00 at Jan2012 expiration): -$308.95= ($35.00-$36.00)*300 -$8.95 commissions

Total Net Profit(If stock price unchanged at $34.48): +$779.45
= (+$1,217.40 +$27.00 -$464.95)
Total Net Profit(If stock above $35.00 at Jan2012 options expiration):+$935.45
= (+$1,217.40 +$27.00 -$308.95)

1. Absolute Return if Unchanged at $34.48: +7.2%
= +$779.45/$10,800.00
Annualized Return If Unchanged (ARIU): +30.3%
= (+$779.45/$10,800.00)*(365/87 days)

2. Absolute Return (If stock above $35.00 at Jan2012 options expiration): +8.7%
= +$935.45/$10,800.00
Annualized Return (If stock price above $36.00 at expiration): +36.3%
= (+$935.45/$10,800.00)*(365/87 days)


2. iShares MSCI Emerging Markets ETF (EEM) -- Continuation
The transaction history is as follows:
04/18/2011 Bought 500 EEM @ $47.81
04/19/2011 Sold 5 EEM May2011 $49.00 Calls @ $.83
Note: the price of EEM was $48.32 when the calls were sold.
05/27/2011 Sold 5 EEM Jun2011 $49.00 Calls @ $.44
Note: the price of EEM was $47.83 when the calls were sold.
06/18/2011 Jun2011 Options Expired
Note: the price of EEM was $45.34 upon options expiration.
6/22/2011 Distribution Income $.46092 per share.
06/28/2011 Sold 5 EEM Jul2011 $47.00 Calls @ $.62
Note: price of EEM was $46.42 when these options were sold.
07/16/2011 Jul2011 EEM options expired.
07/18/2011 Sold 5 EEM Aug2011 $47.00 Calls @$.99
Note: The price of EEM was $46.55 when these call options were sold.
08/20/2011 Aug2011 EEM options expired.
08/22/2011 Sold 5 EEM Sep2011 $42.00 Calls @ $.71
09/17/2011 Sep2011 EEM options expired.
09/20/2011 Sold 5 EEM Oct2011 $42.00 Calls @ $.63
Note: The price of EEM was $39.68 when these call options were sold.
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 5 EEM Nov2011 $41.00 Calls @ $.78
11/19/2011 Nov2011 EEM options expired.
11/30/2011 Sold 5 EEM Dec2011 $41.00 Calls @ $.59
Note: the price of EEM was $39.71 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of EEM was $37.16 upon options expiration.
12/20/2011 Ex-Distribution $173.45 = $.3469 * 500 shares
01/03/2012 Sold 5 Jan2012 $39.00 call options @ $.98
Note: the price of EEM was $39.05 when these options were sold.

A possible overall performance result(including commissions) for these iShares MSCI Emerging Markets ETF (EEM) transactions would be as follows:
Stock Purchase Cost: $23,913.95
= ($47.81*500+$8.95 commission)

Net Profit:
(a) Options Income: +$3,125.70
= [500*($.83 +$.35+$.62+$.99+$.71+$.63+$.78+$.59+$.98) - 9*$12.70 commissions]
(b) Distribution Income: $403.91 = ($.46092+$.3469) * 500 shares
(c) Capital Appreciation (If EEM assigned at $39.00 at expiration): -$4,413.95
= ($39.00-$47.81)*500 - $8.95 commissions

Total Net Profit (If EEM assigned at $39.00): -$884.34
= (+$3,125.70 +$403.91 -$4,413.95)

Absolute Return (If EEM assigned at $39.00 at expiration): -3.7%
= -$884.34/$23,913.95
Annualized Return If Assigned (ARIA): -4.9%
= (-$884.34/$23,913.95)*(365/278 days)


3. iShares MSCI South Korea ETF (EWY) -- Continuation
The transactions history is as follows:
10/25/2011 Bought 800 EWY @ $54.62
10/25/2011 Sold 8 EWY Nov2011 $54.00 Calls @ $2.59
Note: these call options were sold with the price of EWY at $54.62
11/19/2011 Nov2011 EWY options expired.
11/30/2011 Sold 8 EWY Dec2011 $56.00 Calls @ $1.48
Note: the price of EWY was $55.38 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of EWY was $51.38 upon options expiration.
12/20/2011 Ex-Distribution $298.40 = $.373 * 800 shares
01/03/2012 Sold 8 EWY Jan2012 $55.00 call options @ $1.07
Note: the price of EWY was $54.20 when these options were sold.

Two possible overall performance results(including commissions) for the EWY position would be as follows:
Stock Purchase Cost: $43,704.95
= ($54.62*800+$8.95 commission)

Net Profit:
(a) Options Income: +$4,067.15
= (800*($2.59+$1.48+$1.07) - 3*$14.95 commissions)
(b) Distribution Income: +$298.40
(c) Capital Appreciation (If EWY price unchanged at $54.20): -$344.95
= ($54.20-$54.62)*800 - $8.95 commissions
(c) Capital Appreciation (If EWY assigned at $55.00): +$295.05
= ($55.00-$54.62)*800 - $8.95 commissions

Total Net Profit (If EWY price unchanged at $54.20): +$4,020.60
= (+$4,067.15 +$298.40 -$344.95)
Total Net Profit(If EWY assigned at $55.00): +$5,200.60
= (+$4,067.15 +$298.40 +$295.05)

1. Absolute Return if Unchanged at $54.20: +9.2%
= +$4,020.60/$43,704.95
Annualized Return If Unchanged (ARIU): +38.2%
= (+$4,020.60/$43,704.95)*(365/88 days)

2. Absolute Return if Assigned at $55.00: +11.9%
= +$5,200.60/$43,704.95
Annualized Return If Assigned (ARIA): +49.4%
= (+$5,200.60/$43,704.95)*(365/88 days)


4. iShares MSCI Taiwan ETF (EWT) -- Continuation
The transactions history is as follows:
07/18/2011 Bought 1,000 EWT @ $14.65
07/19/2011 Sold 10 EWT Aug2011 $15.00 Calls @ $.31
Note: The price of EWT was $14.85 today when the options were sold.
08/20/2011 Aug2011 Options Expired.
08/31/2011 Sold 10 EWT Sep2011 $14.00 Calls @$.29
Note: The price of EWT was $13.89 when these call options were sold.
09/17/2011 Sep2011 EWT options expired.
09/20/2011 Sold 10 EWT Oct2011 $13.00 Calls @ $.32
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 10 EWT Nov2011 $13.00 Calls @ $.39
11/19/2011 Nov2011 EWT options expired.
11/30/2011 Sold 10 EWT Dec2011 $12.00 Calls @ $.29
12/17/2011 Dec2011 Options Expired.
Note: the price of EWT was $11.21 upon options expiration.
12/20/2011 Ex-Distribution $472.80 = $.4728 * 1,000 shares
01/03/2012 Sold 10 EWT Jan2012 $12.00 call options @ $.22
Note: the price of EWT was $11.87 when these options were sold.

Two possible overall performance results(including commissions) for the EWT transactions would be as follows:
Stock Purchase Cost: $14,650.95
= ($14.65*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$1,721.30
= (1,000*($.31+$.29+$.32+$.39+$.29+$.22) - 6*$16.45 commissions)
(b) Dividend Income: +$472.80 = $.4728 * 1,000 shares
(c) Capital Appreciation (If unchanged at $11.87): -$2,788.95
= ($11.87-$14.65)*1,000 - $8.95 commissions
(c) Capital Appreciation (If assigned at $12.00): -$2,658.95
= ($12.00-$14.65)*1,000 - $8.95 commissions

Total Net Profit(If EWT price unchanged at $11.87): -$594.85
= (+$1,721.30 +$472.80 -$2,788.95)
Total Net Profit(If EWT price assigned at $12.00): -$464.85
= (+$1,721.30 +$472.80 -$2,658.95)

Absolute Return if Unchanged at $11.87: -4.1%
= -$594.85/$14,650.95
Annualized Return If Unchanged (ARIU) -7.9%
= (-$594.85/$14,650.95)*(365/187 days)

Absolute Return if Assigned at $12.00: -3.2%
= -$464.85/$14,650.95
Annualized Return If Assigned (ARIA) -6.2%
= (-$464.85/$14,650.95)*(365/187 days)


5. Peabody Energy Corp.(BTU) -- Continuation
The transaction history is as follows:
09/19/2011 Bought 300 shares BTU at $44.208
09/19/2011 Sold 3 BTU Oct2011 $47 Calls @ $1.67
10/22/2011 Oct2011 options expired.
Note: the BTU price was $38.89 at option expiration.
10/24/2011 Sold 3 BTU Nov2011 $41.00 Call Options @ $1.85
Note: the price of BTU was $40.40 when the options were sold.
11/19/2011 Nov2011 BTU options expired.
11/30/2011 Sold 3 BTU Dec2011 $39.00 Calls @ $1.10
Note: the price of BTU was $37.90 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of BTU was $32.98 upon options expiration.
01/03/2012 Sold 3 BTU Jan2012 $35.00 call options @ $1.59
Note: the price of BTU was $35.34 when these options were sold.

Two possible overall performance results(including commissions) for this Peabody Energy Corp.(BTU) position would be as follows:
Stock Purchase Cost: $13,271.35
= ($44.208*300+$8.95 commission)

Net Profit:
(a) Options Income: +$1,818.20
= (300*($1.67+$1.85+$1.10+$1.59) - 4*$11.20 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock assigned at $35.00): -$2,771.35
= ($35.00-$44.208)*300 - $8.95 commissions

Total Net Profit (If stock assigned at $35.00): -$953.15
= (+$1,818.20 +$0.00 -$2,771.35)

Absolute Return (If stock assigned at $35.00 at expiration): -7.2%
= -$953.15/$13,271.35
Annualized Return (If stock assigned at $39.00): -21.1%
= (-$953.15/$13,271.35)*(365/124 days)


6. Valero Energy Corp.(VLO) -- Continuation
The transaction history is as follows:
10/25/2011 Sold 4 Valero Energy Corp.(VLO) Nov2011 $22.00 Put Options @ $1.75
Note: the price of VLO stock was $21.26 today when these puts were sold.
11/19/2011 Nov2011 VLO put options exercised -- 400 shares VLO purchased @ $22.00.
11/30/2011 Sold 4 VLO Dec2011 $23.00 Calls @ $.61
Note: the price of VLO was $22.27 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of VLO was $20.52 upon options expiration.
01/03/2012 Sold 4 VLO Feb2012 $22.00 call options @ $.84
Note: the price of VLO was $21.04 when these options were sold.

Two possible overall performance results(including commissions) for this Valero Energy Corp.(VLO) transaction would be as follows:
100% Cash-Secured Cost Basis: $8,800.00
= $22.00*400

Net Profit:
(a) Options Income: +$1,244.15
= ($1.75+$.61+$.84)*400 shares - 3*$11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $21.04 at expiration): -$392.95
= ($21.04-$22.00)*400 - $8.95 commissions
(c) Capital Appreciation (If VLO stock above $23.00 at Dec2011 expiration): -$8.95
= ($22.00-$22.00)*400 -$8.95 commissions

Total Net Profit(If stock price unchanged at $21.04): +$851.20
= (+$1,244.15 +$0.00 -$392.95)
Total Net Profit(If stock price above $22.00 at Feb2012 options expiration):
+$1,235.20 = (+$1,244.15 +$0.00 -$8.95)

1. Absolute Return if Unchanged at $21.04: +9.7%
= +$851.20/$8,800.00
Annualized Return If Unchanged (ARIU): +30.4%
= (+$851.20/$8,800.00)*(365/116 days)

2. Absolute Return (If stock price above $22.00 at Feb2012 options expiration):
+14.0% = +$1,235.20/$8,800.00
Annualized Return (If stock price above $22.00 at expiration): +44.2%
= (+$1,235.20/$8,800.00)*(365/116 days)

Sunday, January 1, 2012

Returns -- Through December 2011

This Covered Calls Advisor blog began in September 2007. The performance results have been as follows:















The Covered Calls Advisor uses the Russell 3000 Index as a benchmark against which the Covered Calls Advisor Portfolio is compared. The table above shows that the Covered Calls Advisor Portfolio has outperformed the Russell 3000 benchmark by a total of 16.94% over the 4.3 years that this blog has existed. As shown above, the corresponding average compound annual return-on-investment outperformance of 3.85% per year. This average is within the Covered Calls Advisor's expected range of +3% to +5% outperformance for long-term results obtained from a well-managed covered calls investing program.

As also shown in the table above, the Covered Calls Advisor Portfolio (CCAP) underperformed the benchmark Russell 3000 index by 1.60 percentage points (-0.57% minus +1.03%) in calendar year 2011. The primary reason for this relative underperformance is the substantial underperformance of emerging market equities compared with U.S. equities during this period. The benchmark Russell 3000 index consists solely of U.S. stocks whereas the Covered Calls Advisor's Portfolio has contained about 30% exposure to international (primarily emerging market) equities. While this emerging markets exposure has penalized comparative performance during the past two years, the Covered Calls Advisor maintains a commitment to the long-run benefits of global investing, namely:
(1)Improved portfolio diversification; and most importantly
(2)Achieving overall portfolio return-on-investment outperformance.

As 2011 concludes, my wish for each of you is for a Happy and Prosperous New Year in 2012!

And remember the Covered Calls Advisor's motto: "Stick With Covered Calls".

Godspeed,
Jeff