Each month on the day after the monthly options expiration date, this summary report provides the results of all positions that have been closed out during the past month (i.e. since the prior month's options expiration date). So this post covers the period from the day after last month's December 16th, 2022 options expiration through yesterday's January 20th, 2023 monthly options expiration date.
During this past month, the Covered Calls Advisor Portfolio held a total of fifteen Covered Calls positions. Eleven positions were closed out at a profit and four positions were closed out at a loss.
The specific results for each position are summarized as follows:
- Two Covered Calls positions expired in-the-money (stock price above the strike price) on the January 20th, 2023 monthly options expiration date with the following results:
- Energy Select Sector SPDR ETF (XLE) -- +3.3% absolute return in 37 days (equivalent to a +32.8% annualized return-on-investment).
- Tyson Foods Inc. (TSN) -- -0.1% absolute return in 53 days (equivalent to a -1.0% annualized return-on-investment).
- Two Covered Calls positions expired in-the-money during the past month on their weekly options expiration date and were therefore assigned at their strike prices with the following results:
- Alcoa Corporation (AA) -- +1.7% absolute return in 15 days (equivalent to a +42.4% annualized return-on-investment).
- Bank of America Corporation (BAC) -- -5.4% absolute return in 31 days (equivalent to a -63.8% annualized return-on-investment).
- Four Covered Calls positions were closed out by early assignment on the last business day prior to their ex-dividend date with the following results:
- Cisco Systems Inc. (CSCO) -- +0.7% absolute return in 5 days (equivalent to a +48.5% annualized return-on-investment).
- EOG Resources Inc. (EOG) -- +1.4% absolute return in 10 days (equivalent to a +50.9% annualized return-on-investment).
- JPMorgan Chase & Co. (JPM) -- +0.8% absolute return in 7 days (equivalent to a +41.1% annualized return-on-investment).
- U.S. Bancorp (USB) -- +0.6% absolute return in 7 days (equivalent to a +40.8% annualized return-on-investment).
- Seven Covered Calls positions were closed early based on my decision at that time to close out (i.e. unwind) the positions with the following results:
- Freeport McMoRan Inc. (FCX) -- +1.9% absolute return in 7 days (equivalent to a +100.0% annualized return-on-investment).
- iShares China Large-Cap ETF (FXI) -- +1.6% absolute return in 7 days (equivalent to a +82.2% annualized return-on-investment).
- Global Payments Inc. (GPN) -- +2.1% absolute return in 15 days (equivalent to a +51.0% annualized return-on-investment).
- Kohl's Corporation (KSS) -- -10.0%
absolute return in 24 days (equivalent to a -152.2% annualized
return-on-investment).
- Medtronic PLC (MDT) -- +1.7% absolute return in 21 days (equivalent to a +29.9% annualized return-on-investment).
- Mosaic Company (MOS) -- +1.6% absolute return in 5 days (equivalent to a +115.6% annualized return-on-investment).
- Suncor Energy Inc. (SU) -- -8.2% absolute return in 33 days (equivalent to a -91.2% annualized return-on-investment).
During the past year (last 12 months) 110 of 124 positions (88.7%) in the Covered Calls Advisor Portfolio (CCAP) were closed out at a profit. The Covered Calls Advisor Portfolio weighted average annualized-return-on-investment (aroi) was +16.2% during the past year and the average holding period for these 124 closed positions was 22.6 days. In comparison, the benchmark S&P 500 returned -10.0% during the same prior one-year period.
As demonstrated by these past year's results, the Covered Calls strategy can be extraordinarily beneficial during Bearish time periods such as we have experienced during the past year, and especially by selling moderately in-the-money strike prices to provide added downside protection in bearish markets. However, be advised that these return-on-investment results by the Covered Calls Advisor Portfolio above that of the benchmark S&P 500 (i.e. +16.2% versus -10.0%) substantially exceeds that which would normally be expected over a period of several years using the Covered Calls investing strategy. As indicated in this post made in 2021 on this blog site (Link) -- "by exploiting our Covered Calls investing "edges", we can expect to achieve (over a period of several years) an average annualized-return-on-investment above the S&P 500 benchmark index of at least 3 to 5 percentage points on an annualized-return-on-investment basis".
Some subscribers have emailed and asked a very important question for Covered Calls investing, namely "How do you select a strike price?" There is an academic study titled "Which Index Option Should You Sell" that I have found useful when considering this question. This paper provides a very detailed analysis of S&P 500 index data from 1996 to 2015 and I have found it to be a helpful guideline for individual equities as well. I encourage you to consider reading it, which is available here:(link). The primary result from the paper is presented in Figure 4 (shown below) which I would summarize as follows: On average, the highest return-on-investment is achieved using near month (i.e. one month or less) expiration dates at strike prices about -0.5 standard deviations from the current equity price. This -0.5 standard deviations is often equivalent to a moderately in-the-money Covered Calls strike price in the range of about 2% to 4% in-the-money. As an example, the Excel cell formula for determining the approximate
strike price for a $100 equity at -0.5 standard deviations from the current equity price with an implied volatility of 20.0 and of 30 days duration to the options expiration date would be
=100*EXP(-0.5*0.20*SQRT(30/365)) which yields a result of $97.17, so a
$97 strike price (i.e. about 3% in-the-money) would be selected. This formula can be used by
entering any stock price, implied volatility, and days to expiration. I do not use this as a rule to be rigidly followed, but I have found it helpful as one factor among many considerations in my strike price decision-making process.
This Covered Calls Advisor blog is freely available to anyone interested in learning about implementing a successful Covered Calls investing strategy. As always, I also encourage you to email me at partlow@cox.net any time you would like my feedback on your comments or questions on anything related to the Covered Calls investing strategy.
Best Wishes and Godspeed,
Jeff Partlow
Covered Calls Advisor
partlow@cox.net
