Returns -- January 2009

Unfortunately, January 2009 in many ways seemed just like a continuation of the lousy stock market of 2008. In fact, January 2009's overall stock market result was the single worst January performance ever. Yes, EVER!

Fortunately, the Covered Calls Advisor Portfolio (CCAP) performed substantially better than the Russell 3000 benchmark in January 2009. Selling call options against our stock holdings provides us covered calls investors with a clear relative advantage over the typical buy-and-hold investor; this is especially true during bearish markets (such as we are currently experiencing) as well as for range-bound markets.

Below is the Covered Calls Advisor Portfolio results for January 2009. First, a single performance measure is used to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. A simple example demonstrates how it is calculated:
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.

1. January 2009 Results:

CCAP Absolute Return (Jan 1st through Jan 31st, 2009)
= -2.41%
($194,919.53-$199,733.10)/$199,733.10

Benchmark Russell 3000(IWV) January 2009 Absolute Return = -8.37%
($47.65-$52.00)/$52.00

Although negative, the CCAP performed substantially better than the Russell 3000 benchmark in Jan09.

2. Prior Years Results:

The Covered Calls Advisor Portfolio (CCAP) was begun in September, 2007. The annualized returns achieved for 2007 and 2008 compared with the Russell 3000 benchmark results were as follows:









For establishing new covered calls positions at this time, the Covered Calls Advisor's Overall Market Meter (shown in the right sidebar near the top of this page) shows that a SLIGHTLY BULLISH investment posture is recommended.
The corresponding covered calls investing approach is to write near-month primarily slightly out-of-the-money covered calls. By 'slightly out-of-the-money', this advisor means that for a covered calls portfolio, on average covered calls positions should be established somewhere between 1.0% and 2.5% below the strike price.

Fluor Corporation -- Continuation Transaction

The following transaction was made to establish a covered calls position against the 600 shares owned in Fluor Corporation (FLR):
01/28/09 Sell-to-Open (STO) 6 FLR Feb09 $45s @ $2.10

The transactions history to date is as follows:
11/24/08 Initial Stock Purchase Transaction -- Bought 600 FLR @ $35.35
11/24/08 Initial Calls Sold Transaction -- Sold 6 FLR Dec08 $35 Calls @ $3.50
12/03/08 Ex-Dividend of $75.00 ($.125*600 shares)
12/05/08 Roll-Up-And-Out Transaction:
Bought to Close 6 FLR Dec08 $35 Calls @ $10.10
Sold to Open 6 FLR Jan09 $45 Calls @ $5.30
01/17/09 Jan09 Options Expired
01/28/09 Continuation Transaction -- Sell-to-Open (STO) 6 FLR Feb09 $45s @ $2.10
Note: The price of FLR was $43.35 when the calls were sold.

The overall performance results(including commissions) for the FLR transactions are as follows:
Stock Purchase Cost: $21,218.95
($35.35*600+$8.95 commission)

Net Profit:
(a) Options Income: +$439.65 (600*($3.50-$10.10+$5.30+$2.10) - 3*$13.45 commissions)
(b) Dividend Income: +$75.00 ($.125*600 shares)
(c) Capital Appreciation (If stock price unchanged): +$4,791.05
= ($43.35-$35.35)*600 - $8.95 commissions
(d) Capital Appreciation (If exercised): +$5,781.05
= ($45.00-$35.35)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $43.35): +$5,305.70
= (+439.65 +$75.00 +$4,791.05)
Total Net Profit(If stock price exercised at $45.00): +$6,295.70
= (+$439.65 +$75.00 +$5,781.05)

Absolute Return if Unchanged: +25.0%
Annualized Return If Unchanged (ARIU): +102.55%
(+$5,305.70/$21,218.95)*(365/89 days)

Absolute Return if Exercised: +29.7%
Annualized Return If Exercised (ARIE) +121.7%
(+$6,295.70/$21,218.95)*(365/89 days)

Microsoft Corp -- Continuation Transaction

The following transaction was made today to establish a covered calls position against the 500 shares owned in Microsoft Corp (MSFT):
01/28/09 Sell-to-Open (STO) 5 MSFT Feb09 $18s @ $.70

The Transactions History to date is as follows:
08/18/08 Initial Stock Purchase Transaction -- Bought 500 MSFT @ $27.95
08/18/08 Inital Calls Sold Transaction -- Sold 5 MSFT Sep08 $28.00 Calls @ $.81
09/11/08 $55.00 Dividend Received ($.11*500 shares)
09/20/08 Sep08 Options Expired
09/26/08 Covered Calls Continuation Transaction -- STO 5 Oct08 $28.00 Calls @ $.55
10/18/08 Oct08 Options Expired
10/20/08 Sold 5 MSFT Nov08 $22.50 Calls @ $1.75
11/22/08 Nov08 Options Expired
11/24/08 Sold 5 MSFT Dec08 $20 Calls @$.80
12/11/08 $65.00 Dividend Received ($.13*500 shares)
12/20/08 Dec08 Options Expired
12/23/08 Covered Calls Continuation Transaction -- STO 5 Jan09 $21.00 Calls @ $.36
01/17/09 Jan09 Options Expired
01/28/09 Continuation Transaction -- Sell-to-Open (STO) 5 MSFT Feb09 $18s @ $.70
Note: The price of MSFT was $18.10 today when the calls were sold.
02/17/09 $65.00 Ex-Dividend ($.13*500 shares)

The overall performance results(including commissions) for the MSFT transactions are as follows:
Stock Purchase Cost: $13,983.95
($27.95*500+$8.95 commission)

Net Profit:
(a) Options Income: +$2,503.80 (500*($.81+$.55+$1.75+$.80+$.36+$.70) - 6*$12.70 commissions)
(b) Dividend Income: +$185.00 ($55.00+$65.00+$65.00)
(c) Capital Appreciation (If exercised): -$4,983.95
= ($18.00-$27.95)*500 - $8.95 commissions

Total Net Profit(If stock price exercised at $18.00): -$2,295.15
= (+$2,503.80 +$185.00 -$4,983.95)

Annualized Return If Exercised (ARIE) -32.0%
(-$2,295.15/$13,983.95)*(365/187 days)

Establish Home Depot Inc Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Home Depot Inc (HD) covered calls.

This position definitely qualifies as a contrarian investment. Today, the Conference Board reported that their monthly U.S. Consumer Confidence Index declined to 37.7, the lowest level ever in the 42 years they have been tracking this indicator. So why invest in a U.S. consumer discretionary company in the face of this horrendous backdrop?

First, Home Depot and Lowe's have developed, for all practical purposes, into a North American duopoly in the retail home improvement market. Home Depot is a well-managed company and is performing reasonably well so far during this severe recession. During the first half of 2009, they will be a direct beneficiary and recipient of a portion of the extra dollars that will be available to consumers from the substantially lower gasoline prices compared with the comparable period in 2008. Also, people are spending less on their nice-to-haves (such as an expensive vacation) and more on the items they consider more essential (such as maintaining their homes). There are also strong indications that both the Obama stimulus package and the remaining TARP spending will be highly targeted to attempt to directly benefit consumers. These positive factors will take months to manifest themselves as tangible benefits to consumers, but consumer confidence could likely soon begin to become somewhat more positive.

Home Depot used to be considered as a growth stock. But its stock price has now declined to the point where it is now a compelling value-oriented investment. For example, its price-to-book value, price-to-cash flow, price-to-earnings, and price-to-sales metrics are at or near historic lows. HD could very well prove to be a very attractive long-term investment if purchased now at its current price.


A summary of the transactions is as follows:

Established Home Depot Inc Covered Calls for Feb09:
01/27/09 Bought 300 HD @ $21.95
01/27/09 Sold 3 HD Feb09 $22.50 Calls @ $.89

Absolute Return if Unchanged: +4.1%
Annualized Return If Unchanged (ARIU): +59.1%
Absolute Return if Exercised: +6.6%
Annualized Return If Exercised (ARIE): +95.8%
Downside Breakeven Price Point: $21.06
Downside Breakeven Protection: 4.1%

Establish j2 Global Communications Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of j2 Global Communications Inc (JCOM) covered calls.

j2 Global Communications Inc (JCOM) is a small ($735M market cap), Los Angeles-based value-added and internet-based email, efax, and evoice services company. It provides global telephony/internet protocol network services to individuals and businesses spanning 3000 cities in 42 countries on 5 continents.

It is very unusual for a company to meet all nine of the key criteria on the Covered Calls Advior's 'Buy Alerts' worksheet, but JCOM does:



Fortunately, this position was established near the lowest trading price of the day. A summary of the transactions is as follows:

Established j2 Global Communications Inc Covered Calls for Feb09:
01/23/09 Bought 300 JCOM @ $16.76
01/23/09 Sold 3 JCOM Feb09 $17.50 Calls @ $1.00

Absolute Return if Unchanged: +6.0%
Annualized Return If Unchanged (ARIU): +74.9%
Absolute Return if Exercised: +8.0%
Annualized Return If Exercised (ARIE): +130.7%
Downside Breakeven Price Point: $15.76
Downside Breakeven Protection: 6.0%

Potash Corp -- Continuation Transaction

The following transaction was made today to establish a covered calls position against the 200 shares owned in Potash Corp of Saskatchewan Inc(POT):
01/22/09 Sell-to-Open (STO) 2 POT Feb09 $70s @ $7.20

The Transactions History to date is as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 200 POT @ $65.84
12/22/08 Inital Calls Sold Transaction -- Sold 2 POT Jan09 $65.00 Calls @ $5.90
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
01/17/09 Jan09 Options Expired
01/22/09 Continuation Transaction -- Sell-to-Open (STO) 2 POT Feb09 $70s @ $7.20
Note: The price of POT was $72.36 today when the calls were sold.


The overall performance results(including commissions) for the POT transactions are as follows:
Stock Purchase Cost: $13,176.95
($65.84*200+$8.95 commission)

Net Profit:
(a) Options Income: +$1,188.65
(200*($5.90-$11.35+$4.35+$7.20) - 3*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$823.05
= ($70.00-$65.84)*200 - $8.95 commissions

Total Net Profit(If stock price exercised at $70.00): +$2,011.70
= (+$1,188.65 +$0.00 +$823.05)

Annualized Return If Exercised (ARIE) +91.4%
(+$2,011.70/$13,176.95)*(365/61 days)

iShares MSCI South Korea Index ETF -- Continuation Transaction

The following transaction was made today to establish a covered calls position against the 600 shares owned in iShares MSCI South Korea Index ETF (EWY):
01/22/09 Sell-to-Open (STO) 6 EWY Feb09 $28s @ $1.00

The Transactions History to date is as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 600 EWY @ $28.50
12/22/08 Inital Calls Sold Transaction -- Sold 6 EWY Jan09 $30.00 Calls @ $1.10
01/17/09 Jan09 Options Expired
01/22/09 Continuation Transaction -- Sell-to-Open (STO) 6 EWY Feb09 $28s @ $1.00
Note: The price of EWY was $25.45 today when the Feb09 options were sold.


The overall performance results(including commissions) for the EWY transactions are as follows:
Stock Purchase Cost: $17,108.95
($28.50*600+$8.95 commission)

Net Profit:
(a) Options Income: +$1,233.10 (600*($1.10+$1.00) - 2*$13.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $25.45): -$1,838.95
= ($25.45-$28.50)*600 - $8.95 commissions
(c) Capital Appreciation (If exercised): -$308.95
= ($28.00-$28.50)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $25.45): -$605.85
= (+$1,233.10 +$0.00 -$1,838.95)

Total Net Profit(If stock price exercised at $28.00): +924.15
= (+$1,233.10 +$0.00 -$308.95)

Annualized Return If Stock Price Unchanged (ARIU) -21.2%
(-$605.85/$17,108.95)*(365/61 days)

Annualized Return If Exercised (ARIE) +32.3%
(+$924.15/$17,108.95)*(365/61 days)

Express Scripts Inc -- Continuation Transaction

The following transaction was made today to establish a covered calls position against the 200 shares owned in Express Scripts Inc.(ESRX):
01/22/09 Sell-to-Open (STO) 2 ESRX Feb09 $55s @ $2.10

The Transactions History to date is as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 200 ESRX @ $59.86
12/22/08 Inital Calls Sold Transaction -- Sold 2 ESRX Jan09 $60.00 Calls @ $2.90
01/17/09 Jan09 Options Expired
01/22/09 Continuation Transaction -- Sell-to-Open (STO) 2 ESRX Feb09 $55s @ $2.10
Note: The price of ESRX was $52.40 today when the Feb09 options were sold.


The overall performance results(including commissions) for the ESRX transactions are as follows:
Stock Purchase Cost: $11,980.95
($59.86*200+$8.95 commission)

Net Profit:
(a) Options Income: +$979.10 (200*($2.90+$2.10) - 2*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $52.40): -$1,483.05
= ($52.40-$59.86)*200 - $8.95 commissions
(c) Capital Appreciation (If exercised): -$980.95
= ($55.00-$59.86)*1000 - $8.95 commissions

Total Net Profit(If stock price unchanged at $32.87): -$503.95
= (+$979.10 +$0.00 -$1,483.05)

Total Net Profit(If stock price exercised at $55.00): -$1.85
= (+$979.10 +$0.00 -$980.95)

Annualized Return If Stock Price Unchanged (ARIU) -25.2%
(-$503.95/$11,980.95)*(365/61 days)

Annualized Return If Exercised (ARIE) -0.1%
(-$1.85/$11,980.95)*(365/61 days)

Humana Inc -- Continuation Transaction

The following transaction was made today to establish a covered calls position against the 1000 shares owned in Humana Inc.(HUM):
01/21/09 Sell-to-Open (STO) 10 HUM Feb09 $35s @ $1.40

The Transactions History to date is as follows:
11/24/08 Initial Stock Purchase Transaction -- Bought 1000 HUM @ $25.55
11/24/08 Inital Calls Sold Transaction -- Sold 10 HUM Dec08 $25.00 Calls @ $2.90
Roll-Up-And-Out Spread Transaction:
12/08/08 Buy-to-Close (BTC) 10 HUM Dec08 $25s @ $5.50
12/08/08 Sell-to-Open (STO) 10 HUM Jan09 $30s @ $3.10
Roll-Up Spread Transaction:
12/30/08 Buy-to-Close (BTC) 10 HUM Jan09 $30s @ $5.30
12/30/08 Sell-to-Open (STO) 10 HUM Jan09 $35s @ $1.90
01/17/09 Jan09 Options Expired
01/21/09 Sell-to-Open (STO) 10 HUM Feb09 $35s @ $1.40
Note: Price of HUM was $32.87 when this transaction was executed.


The overall performance results(including commissions) for the HUM transactions are as follows:
Stock Purchase Cost: $25,558.95
($25.55*1000+$8.95 commission)

Net Profit:
(a) Options Income: -$1,565.80 (1000*($2.90-$5.50+$3.10-$5.30+$1.90+$1.40) - 4*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $32.89): +$7,331.05
= ($32.89-$25.55)*1000 - $8.95 commissions
(c) Capital Appreciation (If exercised): +$9,441.05
= ($35.00-$25.55)*1000 - $8.95 commissions

Total Net Profit(If stock price unchanged at $32.87): +$5,765.25
= (-$1,565.80 +$0.00 +$7,331.05)

Total Net Profit(If stock price exercised at $35.00): +$7,875.25
= (-$1,565.80 +$0.00 +$9,441.05)

Annualized Return If Stock Price Unchanged (ARIU) +92.5%
(+$5,765.25/$25,558.95)*(365/89 days)

Annualized Return If Exercised (ARIE) +126.4%
(+$7,875.25/$25,558.95)*(365/89 days)

Establish iShares Russell 2000 Value Index ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares Russell 2000 Value Index ETF (IWN) covered calls.

The iShares Russell 2000 Value Index ETF (ticker symbol IWN) is an index fund that represents the small cap sector of the U.S. equity market. The companies in the index are those approximately two-thirds of the Russell 2000 companies with the lower price-to-book value ratios. This ETF was selected in order to obtain additional portfolio diversification in the Covered Calls Advisor Portfolio through greater exposure to small cap companies. Also, historically, small cap stocks have slightly outperformed large cap stocks and value-oriented stocks have outperformed growth-oriented stocks.

Established iShares Russell 2000 Value Index ETF Covered Calls for Feb09:
01/21/09 Bought 300 IWN @ $42.56
01/21/09 Sold 3 IWN Feb09 $45.00 Calls @ $1.60

Absolute Return if Unchanged: +3.8%
Annualized Return If Unchanged (ARIU): +44.2%
Absolute Return if Exercised: +9.5%
Annualized Return If Exercised (ARIE): +111.8%
Downside Breakeven Price Point: $40.96
Downside Breakeven Protection: 3.8%

Establish Hewlett-Packard Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Hewlett-Packard (HPQ) covered calls.

Hewlett-Packard is a leading worldwide provider of personal computers, printers, and servers. With their recent acquisition of EDS they are now also a leading provider of information technology services. The company has demonstrated continual improvement in its operating performance under the excellent leadership of its CEO, Mark Hurd. HPQ's financials are strong, and for a company of such high quality and profitability, the stock currently provides an especially attractive valuation relative to its peers with its price/sales ratio at a relatively low 0.7.


Established Hewlett-Packard Covered Calls for Feb09:
01/20/09 Bought 300 HPQ @ $33.89
01/20/09 Sold 3 HPQ Feb09 $37.50 Calls @ $.80

Absolute Return if Unchanged: +2.4%
Annualized Return If Unchanged (ARIU): +29.6%
Absolute Return if Exercised: +13.0%
Annualized Return If Exercised (ARIE): +151.1%
Downside Breakeven Price Point: $33.09
Downside Breakeven Protection: 2.6%

Establish American Oriental Bioengineering Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of American Oriental Bioengineering (AOB) covered calls.

American Oriental Bioengineering is a consumer healthcare products company in China. They manufacture and distribute more than 40 State Food and Drug Administration approved prescription pharmaceutical products as well as several over-the-counter medications primarily in the areas of women's health, anti-virus, and respiratory conditions.

AOB has grown revenues at a 60%+ compounded annual growth rate for the past 4 years from a combination of organic growth as well as from seven acquisitions. They expect an additional organic growth rate of 30% in 2009. Yet the stock is priced attractively for a value-oriented investor. The balance sheet is very strong with cash exceeding total debt and strong free cash flow. The current price/earnings ratio is a relatively modest 7 and profitability is impressive at 25% return-on-equity.

AOB should continue to benefit from the Chinese government's ongoing commitment to improving the healthcare of its citizens -- in fact, healthcare reform is one of the target areas of China's large economic stimulus plan. The demographics favor healthcare as well since currently only 8% of the population is 65 years of age or older -- this percentage will increase in upcoming years.

Established American Oriental Bioengineering Covered Calls for Feb09:
01/20/09 Bought 500 AOB @ $4.66
01/20/09 Sold 5 AOB Feb09 $5.00 Calls @ $.30

Absolute Return if Unchanged: +6.4%
Annualized Return If Unchanged (ARIU): +72.9%
Absolute Return if Exercised: +13.7%
Annualized Return If Exercised (ARIE): +156.7%
Downside Breakeven Price Point: $4.36
Downside Breakeven Protection: 6.4%

United States Oil Fund ETF Continuation Transaction

The following transaction was made today to establish a covered calls position against the 200 shares owned in US Oil Fund ETF (USO):

The Transactions History to date is as follows:
12/19/08 Initial Stock Purchase Transaction -- Bought 200 USO @ $32.33
12/19/08 Initial Calls Sold Transaction -- Sold 2 USO Jan09 $34.00 Calls @ $2.40
01/17/09 Jan09 Options Expired
01/20/09 Covered Calls Continuation Transaction -- STO 2 Feb09 $32.00 Calls @ $1.90

The overall performance results(including commissions) for the USO transactions are as follows:
Stock Purchase Cost: $6,474.95
($32.33*200+$8.95 commission)

Net Profit:
(a) Options Income: +$839.10 (200*($2.40+$1.90) - 2*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): -$74.95
= ($32.00-$32.33)*200 - $8.95 commissions

Total Net Profit(If stock price exercised at $32.00): +$764.15
= (+$839.10 +$0.00 -$74.95)

Annualized Return If Exercised (ARIE) +67.3%
(+$764.15/$6,474.95)*(365/64 days)

Altria Group Inc. Continuation Transaction

The following transaction was made today to establish a covered calls position against the 500 shares owned in Altria Group Inc(MO):
01/20/09 Covered Calls Continuation Transaction -- STO 5 Feb09 $18.00 Calls @ $.40

The Transactions History to date is as follows:
08/19/08 Initial Stock Purchase Transaction -- Bought 500 MO @ $20.91
08/19/08 Initial Calls Sold Transaction -- Sold 5 MO Sep08 $21.00 Calls @ $.51
09/11/08 Ex-Dividend of $145.00 ($.29 * 500 shares)
09/20/08 Sep08 Options Expired
09/25/08 Covered Calls Continuation Transaction -- STO 5 Oct08 $21.00 Calls @ $.43
10/18/08 Oct08 Options Expired
10/20/08 Covered Calls Continuation Transaction -- STO 5 Nov08 $21.00 Calls @ $.67
11/22/08 Nov08 Options Expired
11/24/08 Covered Calls Continuation Transaction -- Sold 3 MO Dec08 $16 Calls at $.63
12/19/08 Dec08 Options Expired
12/22/08 Ex-Dividend of $160.00 ($.32 * 500 shares)
12/22/08 Covered Calls Continuation Transaction -- Sold 3 MO Jan09 $17 Calls at $.32
01/17/09 Jan09 Options Expired
01/20/09 Covered Calls Continuation Transaction -- Sold 3 MO Feb09 $18 Calls at $.40


The overall performance results(including commissions) for the MO transactions are as follows:
Stock Purchase Cost: $10,463.95
($20.91*500+$8.95 commission)

Net Profit:
(a) Options Income: +$1,403.80 (500*($.51+$.43+$.67+$.63+$.32+$.40) - 6*$12.70 commissions)
(b) Dividend Income: +$305.00 ($145.00+$160.00)
(c) Capital Appreciation (If exercised): -$1,463.95
= ($18.00-$20.91)*500 - $8.95 commissions

Total Net Profit(If stock price exercised at $18.00): +$244.85
= (+$1,403.80 +$305.00 -$1,463.95)

Annualized Return If Exercised (ARIE) +4.6%
(+$244.85/$10,463.95)*(365/186 days)

January 2009 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 12 positions with January 2009 expirations, with the following results:
- 2 position (RTN & SY) closed in-the-money. The calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results were:

Raytheon Co. +31.7%
Sybase Inc. +133.4%

- 10 positions in the CCAP (MO,ESRX,FLR,GU,HUM,FXI,EWY,MSFT,POT, and USO) ended out-of-the-money. Decisions will be made to either sell the equities, or to keep them and sell calls to establish Feb09 covered call positions. The related transactions will be made during the next few days and the actual transactions will be posted on this blog site on the same day they occur.


Details for the Raytheon and Sybase exercised positions are as follows:

1. Raytheon Company -- Closed
The Transactions History was as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 300 RTN @ $49.20
12/22/08 Initial Calls Sold Transaction -- Sold 3 RTN Jan09 $47.50 Calls @ $2.60
12/30/08 $84.00 Ex-Dividend ($.28 * 300 shares)
01/17/09 Jan09 Options Exercised -- 300 shares RTN called away
Note: Closing price of RTN was $52.67 on expiration Friday

The overall performance results(including commissions) for the RTN transactions through the Jan09 expiration were as follows:
Stock Purchase Cost: $14,768.95
($49.20*300+$8.95 commission)

Net Profit:
(a) Options Income: +$768.80 (300*$2.60 - $11.20 commissions)
(b) Dividend Income: +$84.00
(c) Capital Appreciation: -$518.95
= ($47.50-$49.20)*300 - $8.95 commissions

Total Net Profit: +$333.85
= (+$768.80 +$84.00 -$518.95)

RTN Annualized Return on Investment +31.7%
(+$333.85/$14,768.95)*(365/26 days)


2. Sybase Inc. -- Closed
The Transactions History was as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 300 SY @ $23.36
12/22/08 Initial Calls Sold Transaction -- Sold 3 SY Jan09 $25.00 Calls @ $.65
01/17/09 Jan09 Options Exercised -- 300 shares SY called away
Note: Closing price of SY was $25.04 on expiration Friday

The overall performance results(including commissions) for the SY transactions through the Jan09 expiration were as follows:
Stock Purchase Cost: $7,016.95
($23.36*300+$8.95 commission)

Net Profit:
(a) Options Income: +$183.80 (300*$.65 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$483.05
= ($25.00-$23.36)*300 - $8.95 commissions

Total Net Profit: +$666.85
= (+$183.80 +$0.00 +$483.05)

SY Annualized Return on Investment +133.4%
(+$666.85/$7,016.95)*(365/26 days)

Establish Bank of America Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Bank of America covered calls.

This advisor has had Bank of America on my watchlist for a couple of months with a 'buy' target if the price descended to below $10, which occurred today. The recent precipitous decline in the prices of all major bank stocks continues. News late yesterday that BofA was seeking additional capital from the Federal government sent the stock down another 20+% in this morning's trading. With the implied volatility of the call options spiking to above 190, while the one-month historic volatility of the stock was a substantially lower 76, I have the sense that fear and panic were firmly established and that in hindsight this could be a capitulation moment. I thought about Warren Buffett's maxim regarding the courage to buy in times of maximum fear. I also thought about a recent interview I saw in which bond maven Bill Gross talked about investing in areas where the Federal government is investing. Being a Washington observer, I believe the Feds will invest in BofA with additional capital from the TARP(Troubled Assets Recovery Program) and other guarantees sufficient to facilitate its acquisition of Merrill Lynch and in support of its ongoing business model. The extent of BofA's losses and writedowns for the 4th quarter as well as the extent to which it will further reduce or eliminate its dividend remain as two of the many yet unanswered questions until its earnings are released next Tuesday. But with the panic today, this advisor feels there is now adequate opportunity to benefit significantly by selling one-month in-the-money covered calls. As shown below, this high-risk but potentially very high-reward strategy has the potential for a 200+% annualized return-on-investment while providing 26.2% downside breakeven protection. Is the risk worth the potential reward? As always, time will tell.

Established Bank of America Corp Covered Calls for Feb09:
01/15/09 Bought 500 BAC @ $7.929
01/15/09 Sold 5 BAC Feb09 $7.50 Calls @ $2.08

Absolute Return if Exercised: +20.8%
Annualized Return If Exercised (ARIE): +204.6%
Downside Breakeven Price Point: $5.91
Downside Breakeven Protection: 26.2%

Four for Your Bookshelf

Recently I have been spending some time re-reading some books on investing that I believe are especially insightful and valuable resources to us as investors. This article is titled "Four for Your Bookshelf" because these books are worthwhile to keep in a permanent and prominent place on your bookshelf. That is, keep them in a handy location so they can be periodically referenced and re-read because of the timeless wisdom they impart. So without further ado, they are: 

1. The Only Investment Guide You'll Ever Need by Andrew Tobias I prefer this easy-to-read, common-sense guide to personal finance above some of the more comprehensive and voluminous alternatives. It is especially valuable for novice investors (for example, my daughter who has recently begun her first job after graduating from college liked it because of its easy-to-understand and witty writing style). But even more experienced investors will also benefit greatly from his excellent advice on saving, investing, taxes, and insurance. 

 

 

2. One Up on Wall Street by Peter Lynch From the legendary manager of the multi-billion dollar Magellan Fund, this is the single best book on stock picking I have ever read. The heart of the book is chapters 12 and 13 where his analytical methods for stock-picking are presented. An excellent foundation for these two chapters is obtained by reading chapter 7 where he describes his six categories of companies. In addition, I have found that practicing the advice from Chapter 7: "The Two-Minute Drill" has been an invaluable addition to my investing approach. 

 

3. Investing the Templeton Way: The Market-Beating Strategies of Value Investing's Legendary Bargain Hunter Considered by many to be the greatest investor ever, John Templeton's dedication to ethical and spiritual principles also qualifies him as a great human being. This book provides valuable insights into the man and his timeless global value-investing principles and techniques. 

 

 

 

 

4. Options In Volatile Markets by Lehman and McMillan Since this blog is dedicated primarily to covered calls investing, I am including this book since it is the single best book written to-date that is dedicated primarily to the topic of Covered Calls.

 

 

Enjoy your reading! Jeff

Roll-Up -- Potash Corp of Saskatchewan Inc (POT)

The Covered Calls Advisor Portfolio (CCAP) covered call position in Potash Corp of Saskatchewan Inc(POT) was rolled-up today (01/02/09) from the Jan09 $65s to the Jan09 $75s.

The spread transaction was executed as follows:
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
Net Debit on Roll Up $7.00 ($11.35-$4.35)

The ‘net debit to strike price difference ratio’ was 70% [($11.35-$4.35)/($75-$65)]*100, which achieved the Covered Calls Advisor's desired threshold criteria which is to roll up only when this ratio is <75%. The decision to roll-up POT was a difficult one -- Potash is a volatile stock and the dramatic increase in the value of the stock in only the past few days could easily be matched by an equally dramatic move the other way in a short time period. Ultimately, it was decided that this risk was worth it considering the substantial additional time value in the remaining option premium that is achieved by transacting the roll-up.

A summary of the POT transactions so far is as follows:
12/22/08 Initial Stock Purchase Transaction -- Bought 200 POT @ $65.84
12/22/08 Inital Calls Sold Transaction -- Sold 2 POT Jan09 $65.00 Calls @ $5.90
01/02/09 Buy-to-Close (BTC) 2 POT Jan09 $65s @ $11.35
01/02/09 Sell-to-Open (STO) 2 POT Jan09 $75s @ $4.35
The overall performance results(including commissions) for the POT transactions through the Jan09 expiration would be as follows:

Stock Purchase Cost: $13,176.95 ($65.84*200+$8.95 commission)
Net Profit:
(a) Options Income: -$188.65 (200*($5.90-$11.35+$4.35) - 3*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised): +$1,982.10 = ($75.00-$65.00)*200 - 2*$8.95 commissions

Total Net Profit(If stock price exercised at $75.00): +$1,793.45
= (-$188.65 +$0.00 +$1,982.10)

Absolute Return If Exercised = +13.6%
+$1,793.45/$13,176.95
Annualized Return If Exercised (ARIE) +191.1%
(+$1,793.45/$13,176.95)*(365/26 days)

Stick With Covered Calls

One of the most important investing lessons I've learned is to select an investing strategy that you are most comfortable with and stay with it. That is, do not try to be "a jack-of-all-trades and a master of none." Instead, try to continually increase your knowledge related to the strategy you are using and seek to become an expert at it. This doesn't imply that we should become rigid and inflexible in the application of our methods. To the contrary, it is essential to be a life-long learner and to seek new knowledge to continually refine our approach. This is the mindset I try to maintain as it applies to my preferred investing strategy, namely Covered Calls investing. 

In my very first blog post on this Covered Calls Advisor blog site in 2007, I stated that the essential reason why I believe in Covered Calls investing is that "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." My intention is to demonstrate the truthfulness of this objective over the next several years.

First, let me affirm that I do believe in the generally accepted personal financial planning principle that we should maintain a money-market account with 3-6 months of living expenses as an emergency buffer. But once the emergency fund is fully funded, additional money available for wealth creation can be committed to our preferred investing method, Covered Calls investing. 

But why not use additional investing strategies beyond just Covered Calls? From time to time there is a tendency to want to augment Covered Calls investing with alternative investment strategies. Some of the alternatives that have some similarities to Covered Calls and that sometimes seem appealing include: (1) Buy-and-Hold Stock Investing; (2) Covered Calls With Collars; (3) Selling Calls against LEAPs; and (4) Selling Cash-Secured Puts.  Early in my investing career, I experimented by paper trading and also by investing cash in these (and other) various approaches to investing -- but after about a year of avid reading everything I could find on investing strategies, thinking deeply about them, and experimenting with them, I settled on Covered Calls as the best match for me.  Below is a short explanation for each of these alternative strategies that explains why I prefer Covered Calls investing.

1. Buy-and-Hold Stock Investing: There is some research which has simulated (back-tested) over a multi-year period the results that would have been obtained by investing in Covered Calls via a diversified index (such as the S&P 500) and by subsequently mechanically reinvesting each month in slightly out-of-the-money, near-month Covered Calls. The conclusions generally support the notion that the annualized return-on-investment results (when comparing buy-and-hold with this type of Covered Calls investing) are very comparable between these two investment approaches. However, the studies also show that Covered Calls have only about 70% of the risk of buy-and-hold investing. It is this Advisor's contention that Covered Call returns can outpace those of buy-and-hold investing through a well-informed and disciplined approach to the Covered Calls strategy including astute stock and strike-price selections as well as from several other nuances that provide "edges" versus a basic buy-and-hold stocks investing strategy.

2. Covered Calls With Collars: This strategy is simply a Covered Call in combination with the purchase of a protective Put option. This strategy is popular with very conservative investors who purchase the Put option as insurance against a significant decline in the price of the underlying stock. I have analyzed this strategy several times (especially during the 2008 bear market we've just experienced), but each time I come to the same conclusion -- the cost of buying the Put option is just not worth the price we have to pay for the additional insurance. Note: I say 'additional insurance' since the Call we sold to establish the Covered Calls position already provides some protection (i.e. a hedge) against a decline in the underlying stock price. The cost of buying a Put option to achieve a second level of insurance is just too high a price to pay, especially if we are at all successful in our objective of selecting stocks that are neutral or bullish -- then we achieve significantly better overall returns over time with Covered Calls. Remember also that our objective as investors is to 'buy' assets that tend to appreciate in value over time (such as stocks) and to 'sell' assets that depreciate over time (which is the case with both Put and Call options because of their time value decay).  So, we want to 'buy' stocks which over time are appreciating assets and 'sell' Call options (depreciating assets) -- which is our Covered Calls strategy; but also not 'buy' a Put option (depreciating asset).

3. Selling Calls Against LEAPs: This strategy is sometimes referred to as the Poor Man's Covered Call.  Many years ago, this was a strategy I used for several months before returning to Covered Calls. This is an alluring strategy, but it is both a more risky and, over time, less profitable strategy than Covered Calls. The reason(s) for this are not readily apparent, but the primary reason this is true is the same line of reasoning as described above for Collars, namely we want to buy appreciating assets and sell depreciating assets. The decline of time value embedded in all options (including LEAPs -- even though they do decay slowly) ultimately makes LEAPs a less desirable asset to buy than stocks (which of course have no time value decay inherent in their purchase price and also tend to appreciate in value over time).  Finally, when owning stocks we have the possibility of capturing their dividends, which we do not with LEAPs 

4. Selling Cash-Secured Puts: This strategy is a synthetically equivalent strategy to Covered Calls (because of the Put/Call parity concept), so in theory one should be indifferent to using either approach. In that regard, there is some appeal to the notion that one should begin a position by selling a Cash-Secured Put and then if the Put is exercised you would then be obligated to purchase the stock at the agreed upon strike price. Then, since you now own the stock you would then simply keep the stock and sell a Call option against it, thereby establishing a Covered Calls position. (Note: this approach is sometimes referred to as the Wheel Strategy).  If this Covered Call is in-the-money on the expiration date and the stock is called away, then the natural course of action would be to then sell another Cash-Secured Put. So the investor moves naturally to-and-fro using both Covered Calls and Cash-Secured Puts as the results at each expiration unfold.  Occasionally there will be temporary occasions when the Implied Volatility of Puts exceeds (albeit only slightly) that of their comparable Calls (and sometimes vice versa), but normally their time values and thus their return-on-investment profiles is so close that establishing either one provides an essentially equivalent position.  So, given this virtual equivalence, I have opted to normally establish Covered Calls in the interest of clarity and simplicity. Owning Covered Calls in your brokerage account makes it crystal clear at all times what the current cash balance is in your account. Not so with Cash-Secured Puts since at any given time it is more difficult to distinguish between the total amount of cash that is committed to securing the Put options and the cash that is truly available for use. In this regard, one is more likely to oversell Puts and to then be in a position where we are forced to sell out of a position or to trade on margin (Note: the Covered Calls Advisor is strongly opposed to margin account investing).

The four alternatives to Covered Calls investing described above are certainly not intended to be a comprehensive list. But they do represent the types of strategies that investors have periodically mentioned to me.

Although the Covered Calls Advisor is uncommonly committed to Covered Calls investing, from time to time even I have flirted with other possible investing approaches. But there is a lot to be said for not over-complicating our investment decision-making processes. And the more strategies we are willing to use in our portfolio, the more complicated our investing becomes, and the more difficult it is to decide what strategy to use for what stock in what situation. And these complications just beget more confusion and second-guessing which can become psychologically debilitating. Committing to a single investing process (hopefully you'll agree that it should be Covered Calls), gives us a much better chance of achieving a characteristic shared by all great investors -- a calm, dispassionate big-picture perspective; and the possibility of enjoying the time we spend on our investing research and analysis.

As always I welcome your comments.

Regards and Godspeed to All,

Jeff