Do you make New Year’s Resolutions?
Sometimes I do and sometimes I don’t – but I’ve decided on two for 2008:
1. Lose Weight – As of two months ago, I had reached my highest weight ever at 220 pounds; which is way above my desired weight of 175. I joined a health club on November 1, 2007 and have been exercising every day (except Christmas eve and Christmas day) since. This exercising, along with better nutrition, has enabled me to lose 15 pounds so far and I resolve to continue daily exercise and to return to 175 pounds in 2008. By the way, here’s the best book available on good nutrition: Link to "Eat, Drink, and Be Healthy"
2. Bible Reading – I will be reading the entire Bible beginning on Jan 1, 2008 and completing it on Dec 31, 2008. This might sound like a difficult task, but it is actually surprisingly easy, as it requires a commitment of only 15-20 minutes of reading every day. “The One Year Bible” (Link here) provides conveniently organized readings for each day of the year from the Old Testament, New Testament, Psalms, and Proverbs. There is also an excellent blog (Link to One Year Bible Blog) that is updated daily and provides valuable educational insights related to each day’s readings.
I hope you will consider making your own resolutions for 2008. In any case, my best wishes to you for a happy, healthy, and prosperous 2008!
God Bless You,
Jeff
Saturday, December 29, 2007
Thursday, December 27, 2007
Buy RenaissanceRe Holdings Ltd.
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) as follows:
RenaissanceRe Holdings Ltd. Covered Calls Established for Jan08
12/27/07 Bought 400 RNR @ $60.64
12/27/07 Sold 4 RNR Jan08 60 Calls @ $2.60
Annualized Return If Unchanged: 54.0%
Annualized Return If Exercised: 54.0%
Downside Breakeven Protection: 4.3%
This will be the only financial sector position in the CCAP for January '08 expiration as I continue to be underweighted in financials. I am very pleased to be able to add this in-the-money covered calls position because of its high potential annualized return (54.0%) -- this return will be achieved even if the stock price declines by up to 0.9% by Jan08 expiration. This return potential for an in-the-money covered call position is exceptional given the relatively low 90-day historic volatility of RNR stock, which is currently at 28.1%.
RenaissanceRe Holdings Ltd. Covered Calls Established for Jan08
12/27/07 Bought 400 RNR @ $60.64
12/27/07 Sold 4 RNR Jan08 60 Calls @ $2.60
Annualized Return If Unchanged: 54.0%
Annualized Return If Exercised: 54.0%
Downside Breakeven Protection: 4.3%
This will be the only financial sector position in the CCAP for January '08 expiration as I continue to be underweighted in financials. I am very pleased to be able to add this in-the-money covered calls position because of its high potential annualized return (54.0%) -- this return will be achieved even if the stock price declines by up to 0.9% by Jan08 expiration. This return potential for an in-the-money covered call position is exceptional given the relatively low 90-day historic volatility of RNR stock, which is currently at 28.1%.
Wednesday, December 26, 2007
Buy AT&T, Herbalife, and Seagate Technology
Three new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:
1. AT&T Covered Calls Established for Jan08
12/26/07 Bought 300 T @ 41.49
12/26/07 Sold 3 T Jan08 42.5 Calls @ $.65
Annualized Return If Unchanged: 38.5%
Annualized Return If Exercised: 75.5%
Downside Breakeven Protection: 2.5%
The annualized returns above also include the $.40 quarterly dividend which will go ex-div on 1/8/08.
2. Herbalife Covered Calls Established for Jan08
12/26/07 Bought 500 HLF @ 39.32
12/26/07 Sold 5 HLF Jan08 40 Calls @ $1.40
Annualized Return If Unchanged: 54.1%
Annualized Return If Exercised: 80.5%
Downside Breakeven Protection: 3.6%
3. Seagate Technology Covered Calls Established for Jan08
12/26/07 Bought 800 STX @ 25.84
12/26/07 Sold 8 STX Jan08 27.5 Calls @ $.55
Annualized Return If Unchanged: 32.3%
Annualized Return If Exercised: 130.1%
Downside Breakeven Protection: 2.1%
1. AT&T Covered Calls Established for Jan08
12/26/07 Bought 300 T @ 41.49
12/26/07 Sold 3 T Jan08 42.5 Calls @ $.65
Annualized Return If Unchanged: 38.5%
Annualized Return If Exercised: 75.5%
Downside Breakeven Protection: 2.5%
The annualized returns above also include the $.40 quarterly dividend which will go ex-div on 1/8/08.
2. Herbalife Covered Calls Established for Jan08
12/26/07 Bought 500 HLF @ 39.32
12/26/07 Sold 5 HLF Jan08 40 Calls @ $1.40
Annualized Return If Unchanged: 54.1%
Annualized Return If Exercised: 80.5%
Downside Breakeven Protection: 3.6%
3. Seagate Technology Covered Calls Established for Jan08
12/26/07 Bought 800 STX @ 25.84
12/26/07 Sold 8 STX Jan08 27.5 Calls @ $.55
Annualized Return If Unchanged: 32.3%
Annualized Return If Exercised: 130.1%
Downside Breakeven Protection: 2.1%
Halliburton, Hewlett Packard, and Kinetic Concepts -- Continuation Transactions
1. Halliburton (HAL) Continuation Transaction
The following transaction was made today to continue the covered calls written against the 700 shares of HAL:
12/26/07 Covered Calls Continuation Transaction -- STO 7 Jan08 37.5 Calls @ $1.05
The Transactions History to date is as follows:
10/24/07 Initial Stock Position -- Bought 700 HAL @ 40.01
10/24/07 Initial Call Options -- Sold 7 HAL Nov07 40 Calls @ $1.25
11/17/07 Nov07 Option Expiration Date – HAL closed below the strike price at $37.02
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 37.5 Calls @ $.85
11/29/07 Ex-Dividend Date -- $.09*700
12/22/07 Dec07 Option Expiration Date – HAL closed below the strike price at $37.29
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 37.5 Calls @ $1.05
The overall performance results(including commissions)for the HAL transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $28,016.95
($40.01*700+$9.95 commission)
Net Profit:
(a) Options Income: $2,159.40 (700*$1.25 + 700*.85 + 700*1.05 - 3*15.20 commissions)
(b) Dividend Income: $63.00 ($.09*700)
(c) Capital Appreciation (If stock price unchanged from $37.29): -$1,923.90
= (40.01-37.29)*700 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): -$1,776.90
= (40.01-37.50)*700 - 2*9.95 commissions
Total Net Profit(If stock price unchanged at $37.29): +$298.50
= ($2,159.40+$63.00-$1,923.90)
Total Net Profit(If stock price exercised at $37.50): +$445.50
= ($2,159.40+$63.00-$1,776.90)
Annualized Return If Unchanged (ARIU) +4.5% (+$298.50/$28,016.95)*(365/87)
Annualized Return If Exercised (ARIE) +6.7% (+$445.50/$28,016.95)*(365/87)
2. Hewlett Packard (HPQ) Continuation Transaction
The following transaction was made today to continue the covered calls written against the 500 shares of HPQ:
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 42.5 Calls @ $1.20
The Transactions History to date is as follows:
11/28/07 Initial Stock Position -- Bought 500 HPQ @ 49.96
11/28/07 Initial Call Options -- Sold 5 HPQ Dec07 52.5 Calls @ $.55
12/10/07 Ex-Dividend Date -- $.08*500 shares
12/22/07 Dec07 Option Expiration Date – HPQ closed below the strike price at $52.03
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 52.5 Calls @ $1.20
The overall performance results(including commissions)for the HPQ transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $24,989.95
($49.96*500+$9.95 commission)
Net Profit:
(a) Options Income: $847.60 (500*$.55 + 500*1.20 - 2*13.70 commissions)
(b) Dividend Income: $40.00 ($.08*500)
(c) Capital Appreciation (If stock price unchanged from $52.03): +$1,015.10
= (52.03-49.96)*500 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): +$1,250.10
= (52.50-49.96)*500 - 2*9.95 commissions
Total Net Profit(If stock price unchanged at $52.03): +$1,902.70
= ($847.60+$40.00+$1,015.10)
Total Net Profit(If stock price exercised at $52.50): +$2,137.70
= ($847.60+$40.00+$1,250.10)
Annualized Return If Unchanged (ARIU) +53.4% (+$1,902.70/$24,989.95)*(365/52)
Annualized Return If Exercised (ARIE) +60.0% (+$2,137.70/$24,989.95)*(365/52)
3. Kinetic Concepts Inc (KCI) Continuation Transaction
The following transaction was made today to continue the covered calls written against the 400 shares of KCI:
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95
The Transactions History to date is as follows:
11/20/07 Initial Stock Position -- Bought 400 KCI @ 59.53
11/20/07 Initial Call Options -- Sold 4 KCI Dec07 60 Calls @ $2.35
12/22/07 Dec07 Option Expiration Date – KCI closed below the strike price at $54.25
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95
The overall performance results(including commissions)for the KCI transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $23,821.95
($59.53*400+$9.95 commission)
Net Profit:
(a) Options Income: $1,694.10 (400*$2.35 + 400*1.95 - 2*12.95 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation (If stock price unchanged from $54.25): -$2,131.90
= (54.25-59.53)*400 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): -$1,831.90
= (55.00-59.25)*400 - 2*9.95 commissions
Total Net Profit(If stock price unchanged at $54.25): -$437.80
= ($1,694.10+$0-$2,131.90)
Total Net Profit(If stock price exercised at $55): -$137.80
= ($1,694.10+$0-$1,831.90)
Annualized Return If Unchanged (ARIU) -11.2% (-437.80/$23,821.95)*(365/60)
Annualized Return If Exercised (ARIE) -3.5% (-137.80/$23,821.95)*(365/60)
The following transaction was made today to continue the covered calls written against the 700 shares of HAL:
12/26/07 Covered Calls Continuation Transaction -- STO 7 Jan08 37.5 Calls @ $1.05
The Transactions History to date is as follows:
10/24/07 Initial Stock Position -- Bought 700 HAL @ 40.01
10/24/07 Initial Call Options -- Sold 7 HAL Nov07 40 Calls @ $1.25
11/17/07 Nov07 Option Expiration Date – HAL closed below the strike price at $37.02
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 37.5 Calls @ $.85
11/29/07 Ex-Dividend Date -- $.09*700
12/22/07 Dec07 Option Expiration Date – HAL closed below the strike price at $37.29
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 37.5 Calls @ $1.05
The overall performance results(including commissions)for the HAL transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $28,016.95
($40.01*700+$9.95 commission)
Net Profit:
(a) Options Income: $2,159.40 (700*$1.25 + 700*.85 + 700*1.05 - 3*15.20 commissions)
(b) Dividend Income: $63.00 ($.09*700)
(c) Capital Appreciation (If stock price unchanged from $37.29): -$1,923.90
= (40.01-37.29)*700 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): -$1,776.90
= (40.01-37.50)*700 - 2*9.95 commissions
Total Net Profit(If stock price unchanged at $37.29): +$298.50
= ($2,159.40+$63.00-$1,923.90)
Total Net Profit(If stock price exercised at $37.50): +$445.50
= ($2,159.40+$63.00-$1,776.90)
Annualized Return If Unchanged (ARIU) +4.5% (+$298.50/$28,016.95)*(365/87)
Annualized Return If Exercised (ARIE) +6.7% (+$445.50/$28,016.95)*(365/87)
2. Hewlett Packard (HPQ) Continuation Transaction
The following transaction was made today to continue the covered calls written against the 500 shares of HPQ:
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 42.5 Calls @ $1.20
The Transactions History to date is as follows:
11/28/07 Initial Stock Position -- Bought 500 HPQ @ 49.96
11/28/07 Initial Call Options -- Sold 5 HPQ Dec07 52.5 Calls @ $.55
12/10/07 Ex-Dividend Date -- $.08*500 shares
12/22/07 Dec07 Option Expiration Date – HPQ closed below the strike price at $52.03
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 52.5 Calls @ $1.20
The overall performance results(including commissions)for the HPQ transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $24,989.95
($49.96*500+$9.95 commission)
Net Profit:
(a) Options Income: $847.60 (500*$.55 + 500*1.20 - 2*13.70 commissions)
(b) Dividend Income: $40.00 ($.08*500)
(c) Capital Appreciation (If stock price unchanged from $52.03): +$1,015.10
= (52.03-49.96)*500 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): +$1,250.10
= (52.50-49.96)*500 - 2*9.95 commissions
Total Net Profit(If stock price unchanged at $52.03): +$1,902.70
= ($847.60+$40.00+$1,015.10)
Total Net Profit(If stock price exercised at $52.50): +$2,137.70
= ($847.60+$40.00+$1,250.10)
Annualized Return If Unchanged (ARIU) +53.4% (+$1,902.70/$24,989.95)*(365/52)
Annualized Return If Exercised (ARIE) +60.0% (+$2,137.70/$24,989.95)*(365/52)
3. Kinetic Concepts Inc (KCI) Continuation Transaction
The following transaction was made today to continue the covered calls written against the 400 shares of KCI:
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95
The Transactions History to date is as follows:
11/20/07 Initial Stock Position -- Bought 400 KCI @ 59.53
11/20/07 Initial Call Options -- Sold 4 KCI Dec07 60 Calls @ $2.35
12/22/07 Dec07 Option Expiration Date – KCI closed below the strike price at $54.25
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95
The overall performance results(including commissions)for the KCI transactions through Jan08 expiration would be as follows:
Stock Purchase Cost: $23,821.95
($59.53*400+$9.95 commission)
Net Profit:
(a) Options Income: $1,694.10 (400*$2.35 + 400*1.95 - 2*12.95 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation (If stock price unchanged from $54.25): -$2,131.90
= (54.25-59.53)*400 - 2*9.95 commissions
(c) Capital Appreciation (If exercised): -$1,831.90
= (55.00-59.25)*400 - 2*9.95 commissions
Total Net Profit(If stock price unchanged at $54.25): -$437.80
= ($1,694.10+$0-$2,131.90)
Total Net Profit(If stock price exercised at $55): -$137.80
= ($1,694.10+$0-$1,831.90)
Annualized Return If Unchanged (ARIU) -11.2% (-437.80/$23,821.95)*(365/60)
Annualized Return If Exercised (ARIE) -3.5% (-137.80/$23,821.95)*(365/60)
Monday, December 24, 2007
Travelers -- Closed
The covered call position in Travelers (TRV) expired out-of-the-money last Friday. The investment in TRV was closed today by selling the stock. This decision was made because the annualized return if the stock price is unchanged (ARIU) between today and the Jan08 expiration for all potential TRV covered calls did not reach the required threshold for an investment by the Covered Calls Advisor of >25%. The transactions and results achieved for the TRV covered calls position closed today was as follows:
Transactions History:
11/19/07 Initial Stock Position -- Bought 500 TRV @ 51.23
11/19/07 Initial Call Options -- Sold 5 TRV Dec07 55 Calls @ $.55
12/06/07 Dividend Received -- 500 @ $.29
12/21/07 Call Options Expire
12/24/07 Closing Transaction -- Sold 500 TRV @ 54.67
Performance Results(including commissions):
Stock Purchase Cost: $25,624.95
($51.23*500+$9.95 commission)
Net Profit:
(a) Options Income: +$261.30 ($.55*500-13.70)
(b) Dividend Income: +$145.00 ($.29*500)
(c) Capital Appreciation: +$1,710.05 ($54.67-$51.23)*500-$9.95
Total Net Profit: $2,116.35 (+$261.30+$145.00+$1,710.05)
TRV ANNUALIZED RETURN ON INVESTMENT: +86.1%
($2,116.35/$25,624.95)*(365/35)
A recent article described the opportunity provided by covered calls to obtain profits from three sources -- options income; dividend income; and capital appreciation in the underlying stock. Although it is uncommon to achieve profits from all three sources in a single near-month covered call position, this Travelers investment shows that it can be done. Also, the corresponding annualized return on investment (86.1% in this instance) can be very high when this triple-income result does occur.
Transactions History:
11/19/07 Initial Stock Position -- Bought 500 TRV @ 51.23
11/19/07 Initial Call Options -- Sold 5 TRV Dec07 55 Calls @ $.55
12/06/07 Dividend Received -- 500 @ $.29
12/21/07 Call Options Expire
12/24/07 Closing Transaction -- Sold 500 TRV @ 54.67
Performance Results(including commissions):
Stock Purchase Cost: $25,624.95
($51.23*500+$9.95 commission)
Net Profit:
(a) Options Income: +$261.30 ($.55*500-13.70)
(b) Dividend Income: +$145.00 ($.29*500)
(c) Capital Appreciation: +$1,710.05 ($54.67-$51.23)*500-$9.95
Total Net Profit: $2,116.35 (+$261.30+$145.00+$1,710.05)
TRV ANNUALIZED RETURN ON INVESTMENT: +86.1%
($2,116.35/$25,624.95)*(365/35)
A recent article described the opportunity provided by covered calls to obtain profits from three sources -- options income; dividend income; and capital appreciation in the underlying stock. Although it is uncommon to achieve profits from all three sources in a single near-month covered call position, this Travelers investment shows that it can be done. Also, the corresponding annualized return on investment (86.1% in this instance) can be very high when this triple-income result does occur.
Saturday, December 22, 2007
Triple-Income Potential with Covered Calls Investing
The buy-and-hold investor has two potential sources of profit:
(1) capital appreciation in the price of the stock, and
(2) dividends received.
The covered calls investor has both of these profit sources, but adds a third source of profit -- the income received from selling call options on the underlying stock.
This three-legged stool is symbolic of the solid foundation that can be achieved with a covered calls investing program. Although it is correctly stated that the covered calls investor places an upper limit on the maximum profit that can be achieved, selling call options against ones underlying stock provides the benefit of an immediate source of income that also provides some downside profit protection in the event of a decline in the price of the stock. This advisor's objective remains the same as it was in the first post ever made on this blog site: "Covered calls offer an excellent avenue for obtaining market-beating results while at the same time offering the added benefit of doing so with less overall portfolio risk."
The Covered Calls Advisor Portfolio (CCAP) results-to-date have demonstrated this triple-income principle. The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000. The portfolio has grown to its current value of $259,070.34.
The corresponding annualized return is +13.2%.
[(259,070.34-250,000.00)/250,000.00]*(365/100 days)*100
The three sources of the total profit and the corresponding percentage contribution from each source are as follows:
Options Income is 66.6% of total profit ($6,034.32)
Capital Appreciation is 19.4% of total profit ($1,763.52)
Dividend Income is 14.0% of total profit ($1,272.50)
Of course, future results may vary significantly from these percentages achieved to-date. Nevertheless, the results above show the opportunity that exists for the covered calls investor to obtain profit contributions from each of the three possible income sources.
(1) capital appreciation in the price of the stock, and
(2) dividends received.
The covered calls investor has both of these profit sources, but adds a third source of profit -- the income received from selling call options on the underlying stock.
This three-legged stool is symbolic of the solid foundation that can be achieved with a covered calls investing program. Although it is correctly stated that the covered calls investor places an upper limit on the maximum profit that can be achieved, selling call options against ones underlying stock provides the benefit of an immediate source of income that also provides some downside profit protection in the event of a decline in the price of the stock. This advisor's objective remains the same as it was in the first post ever made on this blog site: "Covered calls offer an excellent avenue for obtaining market-beating results while at the same time offering the added benefit of doing so with less overall portfolio risk."
The Covered Calls Advisor Portfolio (CCAP) results-to-date have demonstrated this triple-income principle. The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000. The portfolio has grown to its current value of $259,070.34.
The corresponding annualized return is +13.2%.
[(259,070.34-250,000.00)/250,000.00]*(365/100 days)*100
The three sources of the total profit and the corresponding percentage contribution from each source are as follows:
Options Income is 66.6% of total profit ($6,034.32)
Capital Appreciation is 19.4% of total profit ($1,763.52)
Dividend Income is 14.0% of total profit ($1,272.50)
Of course, future results may vary significantly from these percentages achieved to-date. Nevertheless, the results above show the opportunity that exists for the covered calls investor to obtain profit contributions from each of the three possible income sources.
December 2007 Expiration Transactions
The Covered Calls Advisor Portfolio (CCAP) contained a total of 9 positions with Dec07 expirations, with the following results:
- 4 positions closed in-the-money and the calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for these positions were:
Celanese -- +122.4%
Honeywell -- +12.9%
Humana -- +77.7%
Intel -- +29.1%
- 5 positions (HAL,HPQ,EWY,KCI, and TRV) ended out-of-the-money. Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Jan08 covered call positions. The related transactions will be made during the upcoming week and the actual transactions will be posted herein on the same day they occur.
Details for each of the four exercised positions were as follows:
1. Celanese -- Closed
A covered calls position in CE was established in the CCAP on 11/20/07 and the stock closed in-the-money yesterday (expiration Friday):
Transactions History:
11/20/07 Initial Stock Position -- Bought 200 CE @ 36.56
11/20/07 Initial Call Options -- Sold 2 CE Dec07 40 Calls @ $.60
12/22/07 Options Exercised -- STC 200 CE @ $40.00
Performance Results(including commissions):
Stock Purchase Cost: $7,321.95
($36.56*200+$9.95 commission)
Net Profit:
(a) Options Income: $108.55 ($.60*200-$11.45 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: $678.05 [($40.00*200-$9.95)-$7,321.95]
Total Net Profit: $786.60 ($108.55+$0+$678.05)
CE ANNUALIZED RETURN ON INVESTMENT: +122.4%
($786.60/$7,321.95)*(365/32)
2. Honeywell -- Closed
A covered calls position in HON was first established in the CCAP on 9/10/07. The stock was retained for writing October, November, and December covered calls. The stock closed in-the-money yesterday (expiration Friday) and the position was closed. The transactions for HON covered calls were as follows:
Transactions History:
9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Options -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct07 Option Expiration Date – HON closed below the strike price at $58.32
10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25
10/30/07 Roll Up Transaction -- (BTC) 5 HON Nov 57.5s @ $3.00
10/30/07 Roll Up Transaction -- (STO) 5 HON Nov 60s @ $1.25 The stock was trading at $59.83 when this roll-up transaction was made.
11/16/07 Dividend Received -- 500 @ $.25
11/17/07 Nov07 Option Expiration Date – HON closed below the strike price at $55.88
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 57.5 Calls @ $.90
12/22/07 Options Exercised -- STC 500 HON @ $57.50
Performance Results(including commissions):
Stock Purchase Cost: $27,124.95
($54.23*500+$9.95 commission)
Net Profit:
(a) Options Income: -$704.80
(b) Dividend Income: $125.00 ($.25*500)
(c) Capital Appreciation: $1,565.10
Total Net Profit: $985.30 (-$704.80+$125.00+$1,565.10)
HON ANNUALIZED RETURN ON INVESTMENT: +12.9%
($985.30/$27,124.95)*(365/103)
3. Humana -- Closed
A covered calls position in HUM was established in the CCAP on 11/20/07 and the stock closed in-the-money yesterday (expiration Friday):
Transactions History:
11/20/07 Initial Stock Position -- Bought 500 HUM @ 71.60
11/20/07 Initial Call Options -- Sold 5 HUM Dec07 75 Calls @ $1.70
12/22/07 Options Exercised -- STC 500 HUM @ $75.00
Performance Results(including commissions):
Stock Purchase Cost: $35,809.95
($71.60*500+$9.95 commission)
Net Profit:
(a) Options Income: $836.30 ($1.70*500-$13.70 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: $1,680.10 [($75.00*500-$9.95)-$35,809.95]
Total Net Profit: $2,516.40 ($836.30+$0+$1,680.10)
HUM ANNUALIZED RETURN ON INVESTMENT: +77.7%
($2,516.40/$35,809.95)*(365/33)
4. Intel -- Closed
A covered calls position in INTC was established in the CCAP on 10/22/07 and the stock closed in-the-money on expiration Friday:
Transactions History:
11/20/07 Initial Stock Position -- Bought 1000 INTC @ 25.59
11/20/07 Initial Call Options -- Sold 10 INTC Dec07 25 Calls @ $1.28
12/22/07 Options Exercised -- STC 1000 INTC @ $25.00
Performance Results(including commissions):
Stock Purchase Cost: $25,599.95
($25.59*1000+$9.95 commission)
Net Profit:
(a) Options Income: $1,262.55 ($1.28*1000-$17.45 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: -$609.90 [($25.00*1000-$9.95)-$25,599.95]
Total Net Profit: $652.65 ($1,262.55+$0-$609.90)
INTC ANNUALIZED RETURN ON INVESTMENT: +29.1%
($652.65/$25,599.95)*(365/32)
The Celanese and Humana results show the large annualized returns that can be achieved by writing deep out-of-the-money calls on rapidly appreciating stocks.
The Honeywell covered calls was a highly-managed holding, including transactions through three sequential expiration months as well as roll-ups. The overall result was satisfactory; however, in this case, a greater return would have been achieved had the roll-up transactions not been transacted.
The Intel position shows that a good annualized return (29.1%) is achievable with in-the-money covered calls when the options expire in-the-money. A good net profit is achieved since the net loss in the stock position is more than offset by the options income received.
- 4 positions closed in-the-money and the calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for these positions were:
Celanese -- +122.4%
Honeywell -- +12.9%
Humana -- +77.7%
Intel -- +29.1%
- 5 positions (HAL,HPQ,EWY,KCI, and TRV) ended out-of-the-money. Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Jan08 covered call positions. The related transactions will be made during the upcoming week and the actual transactions will be posted herein on the same day they occur.
Details for each of the four exercised positions were as follows:
1. Celanese -- Closed
A covered calls position in CE was established in the CCAP on 11/20/07 and the stock closed in-the-money yesterday (expiration Friday):
Transactions History:
11/20/07 Initial Stock Position -- Bought 200 CE @ 36.56
11/20/07 Initial Call Options -- Sold 2 CE Dec07 40 Calls @ $.60
12/22/07 Options Exercised -- STC 200 CE @ $40.00
Performance Results(including commissions):
Stock Purchase Cost: $7,321.95
($36.56*200+$9.95 commission)
Net Profit:
(a) Options Income: $108.55 ($.60*200-$11.45 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: $678.05 [($40.00*200-$9.95)-$7,321.95]
Total Net Profit: $786.60 ($108.55+$0+$678.05)
CE ANNUALIZED RETURN ON INVESTMENT: +122.4%
($786.60/$7,321.95)*(365/32)
2. Honeywell -- Closed
A covered calls position in HON was first established in the CCAP on 9/10/07. The stock was retained for writing October, November, and December covered calls. The stock closed in-the-money yesterday (expiration Friday) and the position was closed. The transactions for HON covered calls were as follows:
Transactions History:
9/10/07 Initial Stock Position -- BTO 500 HON @ 54.23
9/10/07 Initial Call Options -- STO 5 HON Oct07 55 Calls @ 1.80
9/26/07 Roll Up Transaction -- BTC 5 HON Oct 55s @ $4.70
9/26/07 Roll Up Transaction -- STO 5 HON Oct 60s @ $1.10
10/20/07 Oct07 Option Expiration Date – HON closed below the strike price at $58.32
10/22/07 Covered Calls Continuation Transaction -- STO 5 Nov07 57.5 Calls @ $2.25
10/30/07 Roll Up Transaction -- (BTC) 5 HON Nov 57.5s @ $3.00
10/30/07 Roll Up Transaction -- (STO) 5 HON Nov 60s @ $1.25 The stock was trading at $59.83 when this roll-up transaction was made.
11/16/07 Dividend Received -- 500 @ $.25
11/17/07 Nov07 Option Expiration Date – HON closed below the strike price at $55.88
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 57.5 Calls @ $.90
12/22/07 Options Exercised -- STC 500 HON @ $57.50
Performance Results(including commissions):
Stock Purchase Cost: $27,124.95
($54.23*500+$9.95 commission)
Net Profit:
(a) Options Income: -$704.80
(b) Dividend Income: $125.00 ($.25*500)
(c) Capital Appreciation: $1,565.10
Total Net Profit: $985.30 (-$704.80+$125.00+$1,565.10)
HON ANNUALIZED RETURN ON INVESTMENT: +12.9%
($985.30/$27,124.95)*(365/103)
3. Humana -- Closed
A covered calls position in HUM was established in the CCAP on 11/20/07 and the stock closed in-the-money yesterday (expiration Friday):
Transactions History:
11/20/07 Initial Stock Position -- Bought 500 HUM @ 71.60
11/20/07 Initial Call Options -- Sold 5 HUM Dec07 75 Calls @ $1.70
12/22/07 Options Exercised -- STC 500 HUM @ $75.00
Performance Results(including commissions):
Stock Purchase Cost: $35,809.95
($71.60*500+$9.95 commission)
Net Profit:
(a) Options Income: $836.30 ($1.70*500-$13.70 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: $1,680.10 [($75.00*500-$9.95)-$35,809.95]
Total Net Profit: $2,516.40 ($836.30+$0+$1,680.10)
HUM ANNUALIZED RETURN ON INVESTMENT: +77.7%
($2,516.40/$35,809.95)*(365/33)
4. Intel -- Closed
A covered calls position in INTC was established in the CCAP on 10/22/07 and the stock closed in-the-money on expiration Friday:
Transactions History:
11/20/07 Initial Stock Position -- Bought 1000 INTC @ 25.59
11/20/07 Initial Call Options -- Sold 10 INTC Dec07 25 Calls @ $1.28
12/22/07 Options Exercised -- STC 1000 INTC @ $25.00
Performance Results(including commissions):
Stock Purchase Cost: $25,599.95
($25.59*1000+$9.95 commission)
Net Profit:
(a) Options Income: $1,262.55 ($1.28*1000-$17.45 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: -$609.90 [($25.00*1000-$9.95)-$25,599.95]
Total Net Profit: $652.65 ($1,262.55+$0-$609.90)
INTC ANNUALIZED RETURN ON INVESTMENT: +29.1%
($652.65/$25,599.95)*(365/32)
The Celanese and Humana results show the large annualized returns that can be achieved by writing deep out-of-the-money calls on rapidly appreciating stocks.
The Honeywell covered calls was a highly-managed holding, including transactions through three sequential expiration months as well as roll-ups. The overall result was satisfactory; however, in this case, a greater return would have been achieved had the roll-up transactions not been transacted.
The Intel position shows that a good annualized return (29.1%) is achievable with in-the-money covered calls when the options expire in-the-money. A good net profit is achieved since the net loss in the stock position is more than offset by the options income received.
Thursday, December 13, 2007
Market Meter Changes to Slightly Bullish
The Covered Calls Advisor conducts weekly reviews of the six key metrics used to determine its U.S. Market Meter Indicator. Today the indicator has changed from its prior Bullish rating to a current rating of Slightly Bullish.
The current readings for the six metrics are:
1. U.S. Earnings and Bond Yield Spread:
5.299%-4.09%=+1.21% is Slightly Bullish.
2. Rest-of-World Earnings and Bond Yield Spread:
6.115%-3.84%=+2.28% is Bullish.
3. Real Earnings Growth:
(1.0%-2.0%)=-1.0% is Slightly Bearish.
4. Current Vs. Expected P/E Ratios:
(18.6-18.87)/18.87=-1.4% is Neutral.
5. Investor Sentiment (Price Momentum):
a. Longer-Term (for Russell 3000):
(86.02-81.66)/81.66=+5.3% is Slightly Bullish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
(Bullish + Neutral)/2 = Slightly Bullish
Since both the shorter-term and longer-term indicators are Slightly Bullish, then this overall Investor Sentiment rating is also Slightly Bullish.
6. Covered Calls Advisor's Gut Feeling: Neutral
The composite overall average outlook for the six indicators above is SLIGHTLY BULLISH, which is now reflected on the 'U.S. Market Meter' Indicator at the top of the right-side column of this blog. The meter also states the recommended investing strategy for this assessment: "The Covered Calls Advisor says: The Current Overall Stock Market Outlook is: SLIGHTLY BULLISH. The Corresponding Investing Strategy is: SELL SLIGHTLY OUT-OF-THE-MONEY COVERED CALLS."
For further insights into the definitions of each of the six components of the overall market meter, refer to the following two prior articles:
Link to 'Developing an Overall Market Outlook'
Link to 'Changes in Overall Market Outlook'
By 'slightly out-of-the-money', this advisor means that the covered call positions in a portfolio of near-month covered calls should now be established on-average with the stock price between 0.5% below and 1.5% below the options strike price.
A primary macroeconomic factor that will determine the short-term performance of the overall market is whether a recession will be avoided and the desired soft-landing achieved. Historic studies have repeatedly demonstrated that the stock market is bullish during the first six months after an initial Fed rate cut if a recession is, in fact, avoided. This advisor believes that an earnings recession will occur (defined as 2 consecutive quarters of negative corporate quarterly earnings growth), but that a recession based on GDP (two consecutive quarters of negative GDP growth) will be narrowly avoided. This descriptive analysis would tend to confirm the 'Slightly Bullish' overall rating result above.
In addition, it is noted that we are currently in a bull market that began on 10/9/02 and in which we have to date had a 91.4% increase as measured by the S&P 500. (Note: A bull market is defined as a rally exceeding +20% after a period of a 20+% decline).
Prior to this one, there have been five bull markets since 1970. This advisor analyzed the U.S. Earnings Yield to Bond Yield Spread at the end of each of these bull markets and discovered that these bull markets did not end until the U.S. Earnings Yield was more than 1% lower than the 10-Yr Treasury Bond Yield. In fact, the actual yield differences at the end of these five bull markets were -1.29%, -2.06%, -4.27%, -3.24%, and -1.39%. In comparison, as shown in #1 above, the current U.S. yield spread is +1.21%. In this advisor's opinion, this provides further support for the notion that the end of the current bull market is not imminent.
Regards and Godspeed
The current readings for the six metrics are:
1. U.S. Earnings and Bond Yield Spread:
5.299%-4.09%=+1.21% is Slightly Bullish.
2. Rest-of-World Earnings and Bond Yield Spread:
6.115%-3.84%=+2.28% is Bullish.
3. Real Earnings Growth:
(1.0%-2.0%)=-1.0% is Slightly Bearish.
4. Current Vs. Expected P/E Ratios:
(18.6-18.87)/18.87=-1.4% is Neutral.
5. Investor Sentiment (Price Momentum):
a. Longer-Term (for Russell 3000):
(86.02-81.66)/81.66=+5.3% is Slightly Bullish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
(Bullish + Neutral)/2 = Slightly Bullish
Since both the shorter-term and longer-term indicators are Slightly Bullish, then this overall Investor Sentiment rating is also Slightly Bullish.
6. Covered Calls Advisor's Gut Feeling: Neutral
The composite overall average outlook for the six indicators above is SLIGHTLY BULLISH, which is now reflected on the 'U.S. Market Meter' Indicator at the top of the right-side column of this blog. The meter also states the recommended investing strategy for this assessment: "The Covered Calls Advisor says: The Current Overall Stock Market Outlook is: SLIGHTLY BULLISH. The Corresponding Investing Strategy is: SELL SLIGHTLY OUT-OF-THE-MONEY COVERED CALLS."
For further insights into the definitions of each of the six components of the overall market meter, refer to the following two prior articles:
Link to 'Developing an Overall Market Outlook'
Link to 'Changes in Overall Market Outlook'
By 'slightly out-of-the-money', this advisor means that the covered call positions in a portfolio of near-month covered calls should now be established on-average with the stock price between 0.5% below and 1.5% below the options strike price.
A primary macroeconomic factor that will determine the short-term performance of the overall market is whether a recession will be avoided and the desired soft-landing achieved. Historic studies have repeatedly demonstrated that the stock market is bullish during the first six months after an initial Fed rate cut if a recession is, in fact, avoided. This advisor believes that an earnings recession will occur (defined as 2 consecutive quarters of negative corporate quarterly earnings growth), but that a recession based on GDP (two consecutive quarters of negative GDP growth) will be narrowly avoided. This descriptive analysis would tend to confirm the 'Slightly Bullish' overall rating result above.
In addition, it is noted that we are currently in a bull market that began on 10/9/02 and in which we have to date had a 91.4% increase as measured by the S&P 500. (Note: A bull market is defined as a rally exceeding +20% after a period of a 20+% decline).
Prior to this one, there have been five bull markets since 1970. This advisor analyzed the U.S. Earnings Yield to Bond Yield Spread at the end of each of these bull markets and discovered that these bull markets did not end until the U.S. Earnings Yield was more than 1% lower than the 10-Yr Treasury Bond Yield. In fact, the actual yield differences at the end of these five bull markets were -1.29%, -2.06%, -4.27%, -3.24%, and -1.39%. In comparison, as shown in #1 above, the current U.S. yield spread is +1.21%. In this advisor's opinion, this provides further support for the notion that the end of the current bull market is not imminent.
Regards and Godspeed
Monday, December 10, 2007
Changes to Overall Market Outlook Indicators
At the top of the right-hand column of this blog, the Covered Calls Advisor provides an Overall Market Meter that shows this advisor's current overall stock market forecast -- which at any given time can range from very bearish to very bullish or anywhere in between. To date, the Market Meter has been a composite rating of five indicators. These indicators were described in detail in a prior post on this blog link to 'Developing an Overall Stock Market Outlook'.
Today, two changes are being made to the list of five indicators. One is a change of an existing indicator and the other is a completely new indicator:
1. Change 'Inflation' Indicator to 'Real Earnings Growth' Indicator
This advisor has compared annual inflation rates with annual stock market returns going back for the past century and has determined that inflation rates by themselves are not a good predictor of stock returns. Previously, it was surmised that a low inflation (<+2%) environment would normally be bullish for stocks and high rates (>+6%) would be bearish. Regardless of its apparent logic, history does not support this conclusion. However, the first statement on inflation from the prior blog post referenced above is true; namely, "inflation has always been and will remain a critically important factor in evaluating the economy's ability to sustain and support adequate growth."
Corporate earnings growth is key -- annualized % increases in total corporate earnings is superior to interest rates alone as a metric for predicting stock market returns. The 'nominal' corporate earnings percentage increase needs to be adjusted to the extent that inflation reduces the 'real' impact of those earnings. Thus, 'Real Earnings Growth' is calculated as total annual corporate earnings growth percent minus the annual inflation rate percent.
The 'real earnings growth' indicator ratings will be:
>20% Very Bullish
12 to 20% Bullish
7 to 12% Slightly Bullish
2 to 7% Neutral
-2 to 2% Slightly Bearish
-7 to -2% Bearish
< -7% Very Bearish
The difficulty herein lies in being able to reasonably accurately forecast the average corporate earnings growth % for the next six months. This advisor begins with the forecast provided by Standard and Poor's and then adjusts their S&P 500 projection by an amount consistent with the Covered Calls Advisor's own overall assessment. Presently, S&P is forecasting a 2.4% increase in S&P 500 6-month forward operating earnings. This advisor believes the earnings slowdown will be more pronounced, and is forecasting a 1.0% increase. This combined with an 2.0% inflation estimate results in a 'real earnings growth' of -1.0% (+1.0% nominal earnings growth minus 2.0% inflation) which, as shown above, is a 'slightly bearish' rating for this indicator.
2. Add a 'Rest-of-World Earnings and Bond Yield Spread' Indicator
Presently, a 'U.S. Earnings and Bond Yield Spread' indicator is used as one metric of the overall market analysis. This indicator provides an investor's perspective on the desirability of investing in U.S.-based stocks rather than bonds or vice versa. However, since the U.S. market represents less than one-half of the world's market capitalization, a 'Rest-of-World Earnings and Bond Yield Spread' indicator is added to provide the same perspective for non-U.S. companies that is provided by this indicator for U.S.-based companies. The iShares EAFE ETF Index (EFA), a composite of the 21 most highly developed countries in the world (excluding the U.S. and Canada) will be utilized for this purpose. Presently, the relevant spread is 2.03%, which is a 'bullish' rating for this indicator.
Both of these indicators will be used after the market closes tomorrow, when the next weekly analysis is completed, for each of the six indicators now used to determine the Overall Market Meter rating. The results of this analysis will be posted on this blog tomorrow evening and will be reflected on the 'Overall Market Meter' shown at the top of the right-side column at that time.
Today, two changes are being made to the list of five indicators. One is a change of an existing indicator and the other is a completely new indicator:
1. Change 'Inflation' Indicator to 'Real Earnings Growth' Indicator
This advisor has compared annual inflation rates with annual stock market returns going back for the past century and has determined that inflation rates by themselves are not a good predictor of stock returns. Previously, it was surmised that a low inflation (<+2%) environment would normally be bullish for stocks and high rates (>+6%) would be bearish. Regardless of its apparent logic, history does not support this conclusion. However, the first statement on inflation from the prior blog post referenced above is true; namely, "inflation has always been and will remain a critically important factor in evaluating the economy's ability to sustain and support adequate growth."
Corporate earnings growth is key -- annualized % increases in total corporate earnings is superior to interest rates alone as a metric for predicting stock market returns. The 'nominal' corporate earnings percentage increase needs to be adjusted to the extent that inflation reduces the 'real' impact of those earnings. Thus, 'Real Earnings Growth' is calculated as total annual corporate earnings growth percent minus the annual inflation rate percent.
The 'real earnings growth' indicator ratings will be:
>20% Very Bullish
12 to 20% Bullish
7 to 12% Slightly Bullish
2 to 7% Neutral
-2 to 2% Slightly Bearish
-7 to -2% Bearish
< -7% Very Bearish
The difficulty herein lies in being able to reasonably accurately forecast the average corporate earnings growth % for the next six months. This advisor begins with the forecast provided by Standard and Poor's and then adjusts their S&P 500 projection by an amount consistent with the Covered Calls Advisor's own overall assessment. Presently, S&P is forecasting a 2.4% increase in S&P 500 6-month forward operating earnings. This advisor believes the earnings slowdown will be more pronounced, and is forecasting a 1.0% increase. This combined with an 2.0% inflation estimate results in a 'real earnings growth' of -1.0% (+1.0% nominal earnings growth minus 2.0% inflation) which, as shown above, is a 'slightly bearish' rating for this indicator.
2. Add a 'Rest-of-World Earnings and Bond Yield Spread' Indicator
Presently, a 'U.S. Earnings and Bond Yield Spread' indicator is used as one metric of the overall market analysis. This indicator provides an investor's perspective on the desirability of investing in U.S.-based stocks rather than bonds or vice versa. However, since the U.S. market represents less than one-half of the world's market capitalization, a 'Rest-of-World Earnings and Bond Yield Spread' indicator is added to provide the same perspective for non-U.S. companies that is provided by this indicator for U.S.-based companies. The iShares EAFE ETF Index (EFA), a composite of the 21 most highly developed countries in the world (excluding the U.S. and Canada) will be utilized for this purpose. Presently, the relevant spread is 2.03%, which is a 'bullish' rating for this indicator.
Both of these indicators will be used after the market closes tomorrow, when the next weekly analysis is completed, for each of the six indicators now used to determine the Overall Market Meter rating. The results of this analysis will be posted on this blog tomorrow evening and will be reflected on the 'Overall Market Meter' shown at the top of the right-side column at that time.
Wednesday, December 5, 2007
International Investing
Question: Do you have any international investments in your covered calls portfolio?
If you're like many investors, the answer is "No". This article presents a case for not only including exposure to international equities, but also for making them a significant portion of your covered call assets.
The primary basis for including non-U.S. (i.e. International) equities relates to the concept of portfolio diversification. To put diversification in context, here are some related comments from a prior blog post:
"There are three primary components related to diversification: Asset Allocation, Sector Diversification, and Position Sizing -- Each of these will be discussed in greater depth in future postings. For now, this advisor will simply present my own guidelines for diversification:
(a) Asset Allocation
Domestic Equities – 70% (roughly 40% large cap and 30% mid/small cap)
International Equities – 25%
Fixed Income – 0%
Cash – 5%
Note: This advisor maintains an aggressive investing approach. You might be more conservative in your own portfolio with a lower percentage of equities and a higher percentage of fixed income and cash.
(b) Sector Diversification - Invest in at least five of the six sectors listed below:
Consumer (includes both Consumer Staples and Consumer Discretionary)
Energy (including Materials)
Financial
Health Care
Industrial (including Telecom and Utilities)
Information Technology
(c) Position Sizing – No single position more than 20% of total. This is the same guideline used by this advisor’s broker, Charles Schwab & Co."
As you notice above, this advisor previously recommended that approximately 25% of ones portfolio be committed to international equities. This may seem somewhat high to some of you; however, the international component in my current asset allocation recommendation is actually higher, namely:
U.S.-based equities -- 69%
International equities -- 31%
Further breakdown by region:
U.S. Large Cap (>$5 billion market cap) -- 44%
U.S. Small & Mid Cap (<$5 billion) -- 25%
Europe -- 16%
Japan -- 5%
Emerging Markets(primarily Asia/Pacific ex-Japan & Latin America) -- 7%
Canada -- 2%
Australia -- 1%
It is very important to understand that the percentages above are by no means rigid percentages. Rather they are simply a baseline from which adjustments are made based on regional and country-specific valuation judgments. For example, my current asset allocation preferences are:
U.S. Large Cap -- Overweight
U.S. Mid/Small Cap -- Marketweight
Europe -- Underweight
Japan -- Overweight
Emerging Markets -- Overweight
Canada -- Underweight
Australia -- Underweight
Hence, my current target allocations might approximate:
U.S. Large Cap -- 50%
U.S. Mid/Small Cap -- 25%
Europe -- 8%
Japan -- 7%
Emerging Markets -- 10%
The asset allocations in the Covered Calls Advisor Portfolio (CCAP) at the current time are as follows:
U.S. Large Cap -- 70%
U.S. Mid/Small Cap -- 9%
Europe -- 0%
Japan -- 0%
Emerging Markets -- 21%
As you can readily see, there is a large discrepancy between plan and actual allocations in current CCAP holdings. Going forward, I intend to do a much better job of practicing what I preach as far as asset allocation is concerned.
Unfortunately, the options market in international equities is much less liquid than for U.S.-based equities. In addition, the availability of financial information as well as financial analysts' assessments are also much more scarce for most international equities -- but valuable information and analysis is now growing rapidly. Also, regional and single-country ETFs can often be a viable alternative to individual companies in making international investments in our covered calls portfolios.
I would like to re-iterate and expand on this comment from a prior post: "This advisor maintains an aggressive investing approach."
You might be more conservative in your approach to covered calls investing and that is fine. But being more conservative does not imply that international equities should be excluded from ones portfolio. To the contrary, including a generous international investing exposure is a desirable reflection of our increasingly global economy and may actually help to reduce overall portfolio risk.
Finally, if you would like a country-by-country percentage breakdown for Europe and Emerging Markets, email me at partlow@cox.net and I will be happy to forward it to you.
Regards and Godspeed
If you're like many investors, the answer is "No". This article presents a case for not only including exposure to international equities, but also for making them a significant portion of your covered call assets.
The primary basis for including non-U.S. (i.e. International) equities relates to the concept of portfolio diversification. To put diversification in context, here are some related comments from a prior blog post:
"There are three primary components related to diversification: Asset Allocation, Sector Diversification, and Position Sizing -- Each of these will be discussed in greater depth in future postings. For now, this advisor will simply present my own guidelines for diversification:
(a) Asset Allocation
Domestic Equities – 70% (roughly 40% large cap and 30% mid/small cap)
International Equities – 25%
Fixed Income – 0%
Cash – 5%
Note: This advisor maintains an aggressive investing approach. You might be more conservative in your own portfolio with a lower percentage of equities and a higher percentage of fixed income and cash.
(b) Sector Diversification - Invest in at least five of the six sectors listed below:
Consumer (includes both Consumer Staples and Consumer Discretionary)
Energy (including Materials)
Financial
Health Care
Industrial (including Telecom and Utilities)
Information Technology
(c) Position Sizing – No single position more than 20% of total. This is the same guideline used by this advisor’s broker, Charles Schwab & Co."
As you notice above, this advisor previously recommended that approximately 25% of ones portfolio be committed to international equities. This may seem somewhat high to some of you; however, the international component in my current asset allocation recommendation is actually higher, namely:
U.S.-based equities -- 69%
International equities -- 31%
Further breakdown by region:
U.S. Large Cap (>$5 billion market cap) -- 44%
U.S. Small & Mid Cap (<$5 billion) -- 25%
Europe -- 16%
Japan -- 5%
Emerging Markets(primarily Asia/Pacific ex-Japan & Latin America) -- 7%
Canada -- 2%
Australia -- 1%
It is very important to understand that the percentages above are by no means rigid percentages. Rather they are simply a baseline from which adjustments are made based on regional and country-specific valuation judgments. For example, my current asset allocation preferences are:
U.S. Large Cap -- Overweight
U.S. Mid/Small Cap -- Marketweight
Europe -- Underweight
Japan -- Overweight
Emerging Markets -- Overweight
Canada -- Underweight
Australia -- Underweight
Hence, my current target allocations might approximate:
U.S. Large Cap -- 50%
U.S. Mid/Small Cap -- 25%
Europe -- 8%
Japan -- 7%
Emerging Markets -- 10%
The asset allocations in the Covered Calls Advisor Portfolio (CCAP) at the current time are as follows:
U.S. Large Cap -- 70%
U.S. Mid/Small Cap -- 9%
Europe -- 0%
Japan -- 0%
Emerging Markets -- 21%
As you can readily see, there is a large discrepancy between plan and actual allocations in current CCAP holdings. Going forward, I intend to do a much better job of practicing what I preach as far as asset allocation is concerned.
Unfortunately, the options market in international equities is much less liquid than for U.S.-based equities. In addition, the availability of financial information as well as financial analysts' assessments are also much more scarce for most international equities -- but valuable information and analysis is now growing rapidly. Also, regional and single-country ETFs can often be a viable alternative to individual companies in making international investments in our covered calls portfolios.
I would like to re-iterate and expand on this comment from a prior post: "This advisor maintains an aggressive investing approach."
You might be more conservative in your approach to covered calls investing and that is fine. But being more conservative does not imply that international equities should be excluded from ones portfolio. To the contrary, including a generous international investing exposure is a desirable reflection of our increasingly global economy and may actually help to reduce overall portfolio risk.
Finally, if you would like a country-by-country percentage breakdown for Europe and Emerging Markets, email me at partlow@cox.net and I will be happy to forward it to you.
Regards and Godspeed
Saturday, December 1, 2007
Returns -- Through November 2007
The overall performance results of the Covered Calls Advisor Portfolio (CCAP) is presented monthly at the end of each calendar month. Results are based solely on the annualized percent change of the total dollar value of the CCAP.
For comparison purposes, the primary benchmark against which the portfolio’s performance is measured is the Schwab MarketTrack Balanced Portfolio (SWBGX), a worldwide, diversified asset allocation fund. SWBGX typically contains approximately 46% domestic stocks (26% large cap; 20% small cap), 16% international stocks, 34% bonds, and 4% cash.
The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000.
At market close on 11/30/2007, the total portfolio value was $254,495.14, a $4,495.14 increase in overall portfolio value since inception.
CCAP Annualized Return = 8.5%
[(254,495.14-250,000)/250,000]*(365/77 days)*100
Annualized Return for SWBGX Benchmark = 6.8%
[(17.67-17.42)/17.42]*(365/77 days)*100
For comparison purposes, the primary benchmark against which the portfolio’s performance is measured is the Schwab MarketTrack Balanced Portfolio (SWBGX), a worldwide, diversified asset allocation fund. SWBGX typically contains approximately 46% domestic stocks (26% large cap; 20% small cap), 16% international stocks, 34% bonds, and 4% cash.
The CCAP was initiated on 9/14/2007 with an initial total portfolio value of $250,000.
At market close on 11/30/2007, the total portfolio value was $254,495.14, a $4,495.14 increase in overall portfolio value since inception.
CCAP Annualized Return = 8.5%
[(254,495.14-250,000)/250,000]*(365/77 days)*100
Annualized Return for SWBGX Benchmark = 6.8%
[(17.67-17.42)/17.42]*(365/77 days)*100
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