The Covered Calls Advisor conducts monthly reviews of ten key metrics to determine its Overall Market Meter Indicator. Today the indicator has changed from its prior Slightly Bullish rating to a current rating of Neutral.
The indicator has been 'Slightly Bullish' since November 7th, 2008. During these past almost seven months, the overall stock market has been very volatile with both very bearish and most recently very bullish price movements. But overall, the Russell 3000 Index has increased by 1.6% during this period.
The current readings for each of the ten metrics used by the Covered Calls Advisor to determine the overall U.S. Market outlook are:
1. U.S. Earnings Yield and Bond Yield Spread:
4.68%-3.46%=+1.22% is Neutral.
2. Rest-of-World Earnings Yield and Bond Yield Spread:
5.84%-2.14%=+3.70% is Slightly Bullish.
3. Real Earnings Growth:
a. U.S. Actual Earnings Growth (Year-Over-Year) for Latest 2 Quarters: Very Bearish
b. U.S. Estimated GDP Growth: Year-Over-Year GDP Growth for Next 2 Qtrs
(+2.0% GDP Growth - 1.0% Inflation)= +1.0% which is Slightly Bearish.
The average of these two ratings is Bearish.
4. Current Vs. Expected P/E Ratios:
Current trailing 12-months P/E for S&P 500 is 21.4 and the expected P/E with trailing 12-mos. inflation at 2.3% is 18.6:
(18.6-21.4)/21.4 = -13.0% is Bearish.
5. Market Sentiment(Price Momentum):
a. Longer-Term (Price Change vs. 9 months ago for Russell 3000):
(53.81-73.88)/73.88=-27.2% is Very Bearish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
Slightly Bearish.
c. Shorter-Term (Equity-Only Put/Call Ratio):
Average of Most Recent 21-Day Ratio and Last Two Day's Ratio is Bullish.
The average of the longer-term and the two shorter term sentiment indicators provides the result for this metric. Thus, since the first metric is 'very bearish', the second is 'bullish' and the third is 'bullish', the overall Market Sentiment rating averages as Slightly Bearish.
6. Covered Calls Advisor's Gut Feeling: Neutral
The strongly bullish move during the most recent three months places the current S&P 500 averages at slightly-above-the-mean for the expected trading range for 2009.
7. Inflation:
Latest 1-Year Trimmed Mean PCE is 2.30% which is Very Bullish.
8. Money Supply:
Latest 1-Year M2 Growth of 8.5% is Slightly Bearish.
9. Federal Government spending:
Above-average government spending is Bullish.
10. Overall Geopolitical Sentiment:
From a historical comparison basis, current worldwide geopolitical sentiment is Neutral.
The composite overall average outlook for the ten indicators above is NEUTRAL, which is now reflected on the 'Overall Market Meter' Indicator at the upper-right sidebar of this blog. The meter also states the recommended covered calls investing strategy that corresponds with this assessment: "The Covered Calls Advisor says: The Current Overall Stock Market Outlook is NEUTRAL. The Corresponding Investing Strategy is "SELL AT-THE-MONEY COVERED CALLS."
By 'at-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 1.0% below and 1.0% above the options strike price.
Sunday, May 31, 2009
Saturday, May 30, 2009
Returns -- Through May 2009
As shown in the table below, the Covered Calls Advisor Portfolio (CCAP) has outperformed the Russell 3000 benchmark by 19.53 percentage points (23.01% - 3.48%) so far in 2009:
The five primary reasons for the exceptional performance of the CCAP so far in 2009 are as follows:
1. Good Stock Selection: Good stock selection is Job #1 for covered calls investors. Of all the factors that contribute to the CCAP outperformance versus the benchmark, it is difficult to determine a precise incremental benefit attributable to each factor. However, it is certainly safe to say that 'good stock selection' has provided the single greatest contribution to the outperformance that has been achieved. The Covered Calls Advisor Portfolio has done particularly well so far this year by:
- Overweighting international stocks (especially China). The 'normal' weighting of international stocks in the CCAP is 30.0%. Currently, international positions (all in Asian emerging markets) represents 50.1% of total CCAP holdings. The relative outperformance of international emerging markets stocks compared with domestic stocks in 2009 has been substantial. For example, for the first 5 months this year, the iShares MSCI Emerging Markets Index ETF (EEM) has increased by 33.1% whereas the U.S. domestic-based Russell 3000 Index ETF (IWV) has increased by 3.5%.
- Overweighting technology stocks. Technology has been the top performing sector for U.S. companies with a 19.2% year-to-date return so far in 2009. The normal weighting of tech stocks in a domestic portfolio would be about 18%. The CCAP has averaged 26% exposure to the technology sector so far this year.
2. Stick with the Covered Calls Investing Process: Two key elements of this process include:
- Remain fully invested. After a brutal January and February, it was difficult to maintain a fully-invested investment posture. It was definitely tempting to hunker down and 'go into cash' with a signficant portion of the portfolio. But a strong commitment to following the Covered Calls Advisor's investing process, one aspect of which is to maintain a fully-invested portfolio, has paid off during the unexpectedly bullish bounce we have experienced in March, April, and May.
- Stay aligned with the Covered Calls Advisor's Overall Market Meter. This meter is always shown in the upper right sidebar of this blog. After experiencing the huge bear market of 2008 and its continuation into January and February of 2009, it was psychologically difficult to stick with the Covered Call Advisor's current Overall Market Meter rating of 'Slightly Bullish' and the associated covered calls strategy of selling primarily slightly out-of-the-money calls. The natural tendency is to change to a much more conservative deep-in-the-money investing posture. But once again, a strong commitment to following the Covered Calls Advisor's investing process has helped to achieve the substantial outperformance results to-date in 2009. The slightly out-of-the-money positions enabled many stock positions to capture some capital appreciation as prices increased toward and sometimes above their strike prices at expiration.
3. Follow Portfolio Diversification Recommendations: Maintaining adequate portolio diversification is another key concept in the Covered Calls Advisor's investing process. On the right sidebar of this blog is a link to the 'Current Portfolio Diversification Recommendations'. These recommendations are provided for asset classes and, in the case of domestic equities, down to the sector level. These recommendations are revised periodically whenever this advisor's avid reading and research in investing and economic topics leads to the conclusion that adjustments to the recommended portfolio diversification allocations are warranted. It is not intended that the recommended percentages be followed rigidly, but rather used as a general guideline to inform the investor's decision-making process.
4. Active Portfolio Management: The Covered Calls Advisor favors active rather than passive portfolio management. This advisor maintains that modest incremental portfolio returns can be obtained by adjusting existing covered calls positions on a timely basis during the expiration month. As a result of substantial price appreciation since early March, mid-month roll-up transactions have provided opportunities to extract incremental profits from several investments. In this regard, you might also recall that the Covered Calls Advisor has recently fine-tuned the criteria used for triggering roll-up and roll-down decisions.
5. Benefit from High Options Volatility: So far, 2009 has been an especially profitable year to sell options -- the CBOE Volatility Index (VIX) has averaged 41. This average has been substantially higher than the long-term market volatility average, which is closer to 22. Consequently, the options income received this year from selling near-month call options has provided an exceptionally large stream of options income into the Covered Calls Advisor's Portfolio.
The 2009 Year-to-Date results as well as the Prior Years (2007 & 2008) results are as follows:
1. May 2009 Year-to-Date Results:
CCAP Absolute Return (Jan 1st through May 31st, 2009) = +23.01%
= ($245,691.65 - $199,733.10)/$199,733.10
Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through May 31st,2009) = +3.48%
= ($53.81 - $52.00)/$52.00
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:
Note: This Covered Calls Advisor uses a single performance measure 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.
Regards and Godspeed,
Jeff
"Stick with Covered Calls"!
The five primary reasons for the exceptional performance of the CCAP so far in 2009 are as follows:
1. Good Stock Selection: Good stock selection is Job #1 for covered calls investors. Of all the factors that contribute to the CCAP outperformance versus the benchmark, it is difficult to determine a precise incremental benefit attributable to each factor. However, it is certainly safe to say that 'good stock selection' has provided the single greatest contribution to the outperformance that has been achieved. The Covered Calls Advisor Portfolio has done particularly well so far this year by:
- Overweighting international stocks (especially China). The 'normal' weighting of international stocks in the CCAP is 30.0%. Currently, international positions (all in Asian emerging markets) represents 50.1% of total CCAP holdings. The relative outperformance of international emerging markets stocks compared with domestic stocks in 2009 has been substantial. For example, for the first 5 months this year, the iShares MSCI Emerging Markets Index ETF (EEM) has increased by 33.1% whereas the U.S. domestic-based Russell 3000 Index ETF (IWV) has increased by 3.5%.
- Overweighting technology stocks. Technology has been the top performing sector for U.S. companies with a 19.2% year-to-date return so far in 2009. The normal weighting of tech stocks in a domestic portfolio would be about 18%. The CCAP has averaged 26% exposure to the technology sector so far this year.
2. Stick with the Covered Calls Investing Process: Two key elements of this process include:
- Remain fully invested. After a brutal January and February, it was difficult to maintain a fully-invested investment posture. It was definitely tempting to hunker down and 'go into cash' with a signficant portion of the portfolio. But a strong commitment to following the Covered Calls Advisor's investing process, one aspect of which is to maintain a fully-invested portfolio, has paid off during the unexpectedly bullish bounce we have experienced in March, April, and May.
- Stay aligned with the Covered Calls Advisor's Overall Market Meter. This meter is always shown in the upper right sidebar of this blog. After experiencing the huge bear market of 2008 and its continuation into January and February of 2009, it was psychologically difficult to stick with the Covered Call Advisor's current Overall Market Meter rating of 'Slightly Bullish' and the associated covered calls strategy of selling primarily slightly out-of-the-money calls. The natural tendency is to change to a much more conservative deep-in-the-money investing posture. But once again, a strong commitment to following the Covered Calls Advisor's investing process has helped to achieve the substantial outperformance results to-date in 2009. The slightly out-of-the-money positions enabled many stock positions to capture some capital appreciation as prices increased toward and sometimes above their strike prices at expiration.
3. Follow Portfolio Diversification Recommendations: Maintaining adequate portolio diversification is another key concept in the Covered Calls Advisor's investing process. On the right sidebar of this blog is a link to the 'Current Portfolio Diversification Recommendations'. These recommendations are provided for asset classes and, in the case of domestic equities, down to the sector level. These recommendations are revised periodically whenever this advisor's avid reading and research in investing and economic topics leads to the conclusion that adjustments to the recommended portfolio diversification allocations are warranted. It is not intended that the recommended percentages be followed rigidly, but rather used as a general guideline to inform the investor's decision-making process.
4. Active Portfolio Management: The Covered Calls Advisor favors active rather than passive portfolio management. This advisor maintains that modest incremental portfolio returns can be obtained by adjusting existing covered calls positions on a timely basis during the expiration month. As a result of substantial price appreciation since early March, mid-month roll-up transactions have provided opportunities to extract incremental profits from several investments. In this regard, you might also recall that the Covered Calls Advisor has recently fine-tuned the criteria used for triggering roll-up and roll-down decisions.
5. Benefit from High Options Volatility: So far, 2009 has been an especially profitable year to sell options -- the CBOE Volatility Index (VIX) has averaged 41. This average has been substantially higher than the long-term market volatility average, which is closer to 22. Consequently, the options income received this year from selling near-month call options has provided an exceptionally large stream of options income into the Covered Calls Advisor's Portfolio.
The 2009 Year-to-Date results as well as the Prior Years (2007 & 2008) results are as follows:
1. May 2009 Year-to-Date Results:
CCAP Absolute Return (Jan 1st through May 31st, 2009) = +23.01%
= ($245,691.65 - $199,733.10)/$199,733.10
Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through May 31st,2009) = +3.48%
= ($53.81 - $52.00)/$52.00
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:
Note: This Covered Calls Advisor uses a single performance measure 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.
Regards and Godspeed,
Jeff
Friday, May 29, 2009
Roll-Up -- Sohu.com Inc
A Covered Calls Advisor Portfolio (CCAP) covered calls position in Sohu.com Inc(SOHU) was rolled-up today (05/29/09) from the Jun09 $55s to the Jun09 $60s. The debit-spread transaction was executed as follows:
05/29/09 Buy-to-Close (BTC) 4 SOHU Jun09 $55s @ $5.84
05/29/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $2.51
Net Debit-Spread upon Roll-Up was $3.33 ($5.84 - $2.51)
Note: The price of SOHU was $59.85 today when the debit-spread was transacted, so the remaining time-value was $.99 [$5.84-($59.85-$55.00)] when this transaction was executed.
The transactions history to date is as follows:
05/19/09 Initial Stock Purchase Transaction -- Bought 400 SOHU @ $54.50
05/19/09 Inital Calls Sold Transaction -- Sold 4 SOHU Jun09 $55.00 Calls @ $3.00
A debit-spread transaction was executed as follows:
05/29/09 Buy-to-Close (BTC) 4 SOHU Jun09 $55s @ $5.84
05/29/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $2.51
Note: The price of SOHU was $59.85 today when the debit-spread was transacted.
The overall performance results(including commissions) for the SOHU transactions would be as follows:
Stock Purchase Cost: $21,808.95
($54.50*400+$8.95 commission)
Net Profit:
(a) Options Income: -$155.90
= (400*($3.00-$5.84+$2.51) - 2*$11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $59.85): +$2,131.05
= ($59.85-$54.50)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$2,191.05
= ($60.00-$54.50)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $59.85): +$1,975.15
= (-$155.90 +$0.00 +$2,131.05)
Total Net Profit(If stock price exercised at $60.00): +$2,035.15
= (-$155.90 +$0.00 +$2,191.05)
Absolute Return if Unchanged at $59.85: +9.1%
= +$1,975.15/$21,808.95
Annualized Return If Unchanged (ARIU) +103.3%
= (+$1,975.15/$21,808.95)*(365/32 days)
Absolute Return if Exercised at $60.00: +9.3%
= +$2,035.15/$21,808.95
Annualized Return If Exercised (ARIE) +106.4%
= (+$2,035.15/$21,808.95)*(365/32 days)
It should also be noted that this maximum potential annualized return (after the roll-up) of 106.4% is higher than the 73.3% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the original $55.00 strike price upon Jun09 expiration.
05/29/09 Buy-to-Close (BTC) 4 SOHU Jun09 $55s @ $5.84
05/29/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $2.51
Net Debit-Spread upon Roll-Up was $3.33 ($5.84 - $2.51)
Note: The price of SOHU was $59.85 today when the debit-spread was transacted, so the remaining time-value was $.99 [$5.84-($59.85-$55.00)] when this transaction was executed.
The transactions history to date is as follows:
05/19/09 Initial Stock Purchase Transaction -- Bought 400 SOHU @ $54.50
05/19/09 Inital Calls Sold Transaction -- Sold 4 SOHU Jun09 $55.00 Calls @ $3.00
A debit-spread transaction was executed as follows:
05/29/09 Buy-to-Close (BTC) 4 SOHU Jun09 $55s @ $5.84
05/29/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $2.51
Note: The price of SOHU was $59.85 today when the debit-spread was transacted.
The overall performance results(including commissions) for the SOHU transactions would be as follows:
Stock Purchase Cost: $21,808.95
($54.50*400+$8.95 commission)
Net Profit:
(a) Options Income: -$155.90
= (400*($3.00-$5.84+$2.51) - 2*$11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $59.85): +$2,131.05
= ($59.85-$54.50)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$2,191.05
= ($60.00-$54.50)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $59.85): +$1,975.15
= (-$155.90 +$0.00 +$2,131.05)
Total Net Profit(If stock price exercised at $60.00): +$2,035.15
= (-$155.90 +$0.00 +$2,191.05)
Absolute Return if Unchanged at $59.85: +9.1%
= +$1,975.15/$21,808.95
Annualized Return If Unchanged (ARIU) +103.3%
= (+$1,975.15/$21,808.95)*(365/32 days)
Absolute Return if Exercised at $60.00: +9.3%
= +$2,035.15/$21,808.95
Annualized Return If Exercised (ARIE) +106.4%
= (+$2,035.15/$21,808.95)*(365/32 days)
It should also be noted that this maximum potential annualized return (after the roll-up) of 106.4% is higher than the 73.3% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the original $55.00 strike price upon Jun09 expiration.
Thursday, May 28, 2009
Roll-Up -- Noble Corp
The Covered Calls Advisor Portfolio (CCAP) covered calls position in Noble Corp (NE) was rolled-up today (05/28/09) from the Jun09 $27.50s to the Jun09 $32.50s. The debit-spread transaction was executed as follows:
05/28/09 Buy-to-Close (BTC) 5 NE Jun09 $27.50s @ $5.20
05/28/09 Sell-to-Open (STO) 5 NE Jun09 $32.50s @ $1.50
Net Debit-Spread upon Roll-Up was $3.70 ($5.20 - $1.50)
Note: The price of NE was $32.51 today when the debit-spread was transacted, so the remaining time-value was $.19 [$5.20-($32.51-$27.50)] when this transaction was executed.
This spreadsheet shows the current CCAP positions. The thresholds required to trigger a roll-up decision are:
1. Annualized Return if Unchanged for New Position(ARIUN) minus Annualized Return if Unchanged for Current Position(ARIUC)is > 50.0%. As shown on the spreadsheet, this metric was 56.1% for NE. The second threshold requirement for a roll-up is:
2. Payback % is > 20%. The payback % represents the net incremental option premium that will be retained if the new position is exercised upon the expiration date as a percent of the difference in the strike prices which in this instance is [($32.50-$27.50)-($5.20-$1.50)]/($32.50-$27.50) = $1.30/$5.00 = 26.0%. You'll notice that the spreadsheet shows 23.0% rather than the 26.0% actually achieved. The 23.0% represents the ask price for buying back the original $27.50 strike option and the bid price for selling the $32.50 strike option. However, more advantageous pricing closer to the bid/ask mid-points was actually achieved when the debit-spread transaction was executed.
The transactions history to date is as follows:
05/18/09 Initial Stock Purchase Transaction -- Bought 500 NE @ $29.000
05/18/09 Inital Calls Sold Transaction -- Sold 5 NE Jun09 $27.50 Calls @ $2.52
A debit-spread transaction was executed as follows:
05/28/09 Buy-to-Close (BTC) 5 NE Jun09 $27.50s @ $5.20
05/28/09 Sell-to-Open (STO) 5 NE Jun09 $32.50s @ $1.50
Note: The price of NE was $32.51 today when the debit-spread was transacted.
The overall performance results(including commissions) for the NE transactions would be as follows:
Stock Purchase Cost: $14,508.95
($29.00*500+$8.95 commission)
Net Profit:
(a) Options Income: -$615.40
= (500*($2.52-$5.20+$1.50) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised at $32.50): +$1,741.05
= ($32.50-$29.00)*500 - $8.95 commissions
Total Net Profit(If stock price exercised at $32.50): +$1,125.65
= (-$615.40 +$0.00 +$1,741.05)
Absolute Return if Exercised at $32.50: +7.8%
= +$1,125.65/$14,508.95
Annualized Return If Exercised (ARIE) +85.8%
=(+$1,125.65/$14,508.95)*(365/33 days)
It should also be noted that this potential annualized return (after the roll-up) of 85.8% is substantially higher than the 38.9% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the original $27.50 strike price upon Jun09 expiration.
05/28/09 Buy-to-Close (BTC) 5 NE Jun09 $27.50s @ $5.20
05/28/09 Sell-to-Open (STO) 5 NE Jun09 $32.50s @ $1.50
Net Debit-Spread upon Roll-Up was $3.70 ($5.20 - $1.50)
Note: The price of NE was $32.51 today when the debit-spread was transacted, so the remaining time-value was $.19 [$5.20-($32.51-$27.50)] when this transaction was executed.
This spreadsheet shows the current CCAP positions. The thresholds required to trigger a roll-up decision are: 1. Annualized Return if Unchanged for New Position(ARIUN) minus Annualized Return if Unchanged for Current Position(ARIUC)is > 50.0%. As shown on the spreadsheet, this metric was 56.1% for NE. The second threshold requirement for a roll-up is:
2. Payback % is > 20%. The payback % represents the net incremental option premium that will be retained if the new position is exercised upon the expiration date as a percent of the difference in the strike prices which in this instance is [($32.50-$27.50)-($5.20-$1.50)]/($32.50-$27.50) = $1.30/$5.00 = 26.0%. You'll notice that the spreadsheet shows 23.0% rather than the 26.0% actually achieved. The 23.0% represents the ask price for buying back the original $27.50 strike option and the bid price for selling the $32.50 strike option. However, more advantageous pricing closer to the bid/ask mid-points was actually achieved when the debit-spread transaction was executed.
The transactions history to date is as follows:
05/18/09 Initial Stock Purchase Transaction -- Bought 500 NE @ $29.000
05/18/09 Inital Calls Sold Transaction -- Sold 5 NE Jun09 $27.50 Calls @ $2.52
A debit-spread transaction was executed as follows:
05/28/09 Buy-to-Close (BTC) 5 NE Jun09 $27.50s @ $5.20
05/28/09 Sell-to-Open (STO) 5 NE Jun09 $32.50s @ $1.50
Note: The price of NE was $32.51 today when the debit-spread was transacted.
The overall performance results(including commissions) for the NE transactions would be as follows:
Stock Purchase Cost: $14,508.95
($29.00*500+$8.95 commission)
Net Profit:
(a) Options Income: -$615.40
= (500*($2.52-$5.20+$1.50) - 2*$12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If exercised at $32.50): +$1,741.05
= ($32.50-$29.00)*500 - $8.95 commissions
Total Net Profit(If stock price exercised at $32.50): +$1,125.65
= (-$615.40 +$0.00 +$1,741.05)
Absolute Return if Exercised at $32.50: +7.8%
= +$1,125.65/$14,508.95
Annualized Return If Exercised (ARIE) +85.8%
=(+$1,125.65/$14,508.95)*(365/33 days)
It should also be noted that this potential annualized return (after the roll-up) of 85.8% is substantially higher than the 38.9% potential annualized return that would have been achieved if no roll-up transaction had been executed today and if the original position had been allowed to be exercised at the original $27.50 strike price upon Jun09 expiration.
Thursday, May 21, 2009
Establish Bally Technologies Inc Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Bally Technologies Inc (BYI) covered calls as follows:
Established Bally Technologies(BYI) Covered Calls for Jun09:
05/21/09 Bought 500 BYI @ $26.63
05/21/09 Sold 5 BYI Jun09 $25.00 Calls @ $2.80
This will be the final new covered calls position established for Jun09 expiration. The remaining available cash in the CCAP is 6% which will be used to effect roll-up transactions prior to expiration as appropriate.
Bally Technologies, Inc. engages in the design, manufacture, distribution, and operation of gaming devices and computerized monitoring and accounting systems for gaming industry worldwide. Bally is maintaining its year-over-year sales and earnings results despite the current very deep recession being experienced by the gaming industry. Bally continues to expand its new product development offerings which enables it to be very well positioned to benefit from an expected improvement in consumer sentiment in the upcoming months.
Below is this Advisor's 'Buy Alerts' spreadsheet for BYI. It scores well overall at 21.35 total points. Note: A score above 20 is required for any company to be given further consideration as a potential covered calls investment.
A potential result from this Bally Technologies covered calls transaction is:
Absolute Return if Exercised at $25.00: +4.4%
=[$2.80+($26.63-$25.00)]/$26.63
Annualized Return If Exercised (ARIE): +53.4%
Downside Breakeven Price Point: $23.83
Downside Breakeven Protection: 10.5%
Establish iShares Russell 2000 Small Cap 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 Small Cap Index ETF (IWM) covered calls.
The iShares Russell 2000 Small Cap Index ETF (ticker symbol IWM) is an index fund that represents the small cap sector of the U.S. equity market. This ETF was selected in order to obtain additional portfolio diversification in the Covered Calls Advisor Portfolio through greater exposure to small cap companies. Historically, small cap stocks have slightly outperformed large cap stocks and this outperformance is especially pronounced in the early stages of a post-recession economic recovery.
Established iShares Russell 2000 Value Index ETF Covered Calls for Jun09:
05/21/09 Bought 500 IWM @ $48.22
05/21/09 Sold 5 IWM Jun09 $47.00 Calls @ $2.87
A potential result from this transaction is:
Absolute Return if Exercised at $47.00: +3.4%
=[$2.87-($48.22-$47.00)]/$48.22
Annualized Return If Exercised (ARIE): +41.6%
Downside Breakeven Price Point: $45.35
Downside Breakeven Protection: 6.0%
Wednesday, May 20, 2009
Continuation Transaction -- Endo Pharmaceutical Holdings Inc
This past Friday was expiration Friday for May 2009. Since Endo Pharmaceuticals is buy-rated by both stock advisory services used by the Covered Calls Advisor and it continues to rate favorably on the 'buy alerts' valuation metrics, it was decided to keep ENDP and to establish a July 2009 covered calls position against the 500 shares currently owned as follows:
05/20/09 Sell-to-Open (STO) 5 ENDP Jul09 $17.50s @ $.55
Normally, near-month calls are sold, which in this instance would be the Jun09s. However, this advisor prefers to receive a minimum of $.40 per option sold. The available premium for the Jun09 $17.5s was only $.25, so the decision was made to sell the Jul09 $17.5s for $.55.
The Transactions History to date is as follows:
04/21/09 Bought 500 ENDP @ $17.61
04/21/09 Sold 5 ENDP May09 $17.50 Calls @ $.85
05/16/09 May09 Options Expired
Note: The closing price of ENDP was $15.83 on expiration Friday.
05/20/09 Sell-to-Open (STO) 5 ENDP Jul09 $17.50 @ $.55
Note: The price of ENDP was $16.72 today when the call options were sold.
The overall performance results(including commissions) for the ENDP transactions would be as follows:
Stock Purchase Cost: $8,813.95
($17.61*500+$8.95 commission)
Net Profit:
(a) Options Income: +$674.60 [500*($.85+$.55) - 2*$12.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $16.72): -$453.95
= ($16.72-$17.61)*500 - $8.95 commissions
(c) Capital Appreciation (If exercised at $17.50): -$63.95
= ($17.50-$17.61)*500 - $8.95 commissions
Total Net Profit(If stock price unchanged at $16.72): +$220.65
= (+$674.60 +$0.00 -$453.95)
Total Net Profit(If stock price exercised at $17.50): +$610.65
= (+$674.60 +$0.00 -$63.95)
Absolute Return if Stock Price Unchanged at $16.72: +2.5%
= +$220.65/$8,813.95
Annualized Return If Stock Price Unchanged (ARIU) +10.4%
= (+$220.65/$8,813.95)*(365/88 days)
Absolute Return if Exercised at $17.50: +7.7%
= +$674.60/$14,693.95
Annualized Return If Exercised (ARIE) +31.7%
= (+$674.60/$14,693.95)*(365/88 days)
05/20/09 Sell-to-Open (STO) 5 ENDP Jul09 $17.50s @ $.55
Normally, near-month calls are sold, which in this instance would be the Jun09s. However, this advisor prefers to receive a minimum of $.40 per option sold. The available premium for the Jun09 $17.5s was only $.25, so the decision was made to sell the Jul09 $17.5s for $.55.
The Transactions History to date is as follows:
04/21/09 Bought 500 ENDP @ $17.61
04/21/09 Sold 5 ENDP May09 $17.50 Calls @ $.85
05/16/09 May09 Options Expired
Note: The closing price of ENDP was $15.83 on expiration Friday.
05/20/09 Sell-to-Open (STO) 5 ENDP Jul09 $17.50 @ $.55
Note: The price of ENDP was $16.72 today when the call options were sold.
The overall performance results(including commissions) for the ENDP transactions would be as follows:
Stock Purchase Cost: $8,813.95
($17.61*500+$8.95 commission)
Net Profit:
(a) Options Income: +$674.60 [500*($.85+$.55) - 2*$12.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $16.72): -$453.95
= ($16.72-$17.61)*500 - $8.95 commissions
(c) Capital Appreciation (If exercised at $17.50): -$63.95
= ($17.50-$17.61)*500 - $8.95 commissions
Total Net Profit(If stock price unchanged at $16.72): +$220.65
= (+$674.60 +$0.00 -$453.95)
Total Net Profit(If stock price exercised at $17.50): +$610.65
= (+$674.60 +$0.00 -$63.95)
Absolute Return if Stock Price Unchanged at $16.72: +2.5%
= +$220.65/$8,813.95
Annualized Return If Stock Price Unchanged (ARIU) +10.4%
= (+$220.65/$8,813.95)*(365/88 days)
Absolute Return if Exercised at $17.50: +7.7%
= +$674.60/$14,693.95
Annualized Return If Exercised (ARIE) +31.7%
= (+$674.60/$14,693.95)*(365/88 days)
Covered Calls Versus Cash-Secured Puts
Is it preferable to invest via covered calls(CCs) or cash-secured puts(CSPs)? Many books and website resources on options correctly indicate that these two strategies are 'synthetically equivalent'. In other words, the profit and loss profiles of the two strategies are essentially identical when positions in the same underlying security are established at the same moment in time, at the same strike price, and for the same expiration date.
The equivalence of these two strategies can be demonstrated mathematically. The symbols used below are:
S=Stock
C=Call
P=Put
Further, being long a position is indicated with the + symbol and being short a position is indicated with a - symbol. For example, owning a stock would be +S.
The foundational equation that describes the relationship between stocks, calls, and puts is:
+S = +C - P
That is, a long stock position is equivalent to owning one call and shorting one put (when the strike price and expiration date are identical for the call and put).
Looking at the equation above, we can determine this as logically true since at expiration:
- If the long call is in-the-money(ITM), the call is exercised and converted into long stock at the exercise price. The out-of-the-money short put expires worthless.
- On the other hand, if the long call is out-of-the-money(OTM), it expires worthless. In this case, the short put is in-the-money and it is exercised and converted into long stock at the exercise price.
Also from the equation above, after moving the +C to the other side of the equation, we would have:
+S -C = -P
Voila! The mathematical equivalence between the two strategies is now evident since the left side of the equation is a covered call (i.e. long stock with at short call) and the right side is a short put.
During the past several weeks, there has been a lively discussion on the Yahoo!Groups JustCoveredCalls site on the relative merits of covered calls versus cash-secured puts. This discussion has motivated this Covered Calls Advisor to take a fresh look at the circumstances that might cause one strategy to be slightly preferable to the other. Although this advisor has maintained a long-running commitment to covered calls investing, it is important to remain open-minded to the possibility of a better investing process. First however, to improve clarity in advance of the remainder of this article, let's consider the difference between a 'cash-secured put'(CSP) and a 'naked put'(NP). A 'cash-secured put' assumes that the investor maintains sufficient cash collateral in their account to fully fund the purchase of the stock if the put is assigned to them. On the other hand, if margin is used because the investor chooses to leverage their short put position with less than 100% cash collateral, then the term 'naked put' is appropriate.
Although the math above demonstrates the essential equivalence of covered calls with cash-secured puts, there are some subtle distinctions that slightly favor CSPs and others that slightly favor CCs. They are:
I. Advantages of Selling Puts
A. Applies to Selling Naked Puts (On Margin)
1. In a taxable account, leverage can be used by investing via margin, which enables a significantly lower initial investment than for either a cash-secured put position or a covered call.
2. In a taxable account, if margin is used, no margin interest is involved.
B. Applies to Both Naked Puts and Cash-Secured Puts
1. Primarily as result of the cognitive bias known as 'loss aversion' (or fear factor), the implied volatility of the put option (IV-Puts) will often be somewhat higher than the implied volatility for its counterpart call option (IV-Calls) and thus offers a somewhat higher potential return-on-investment(ROI) %. Note: 'Loss aversion' is the tendency for people to have a stronger preference for avoiding losses compared with acquiring gains. Research has shown that losses can have as much as twice the psychological power as gains. It should be clearly understood however that any put-call parity deviations are normally relatively slight since any persistent substantial differences would present an arbitrage opportunity to be taken advantage of with a risk-free trade.
2. Slightly lower commissions – One transaction to establish a short put position, but two to establish a covered call position.
3. Earn money-market return on secured cash balances.
4. For OTM CSPs – lower initial investment provides somewhat higher potential ROI % if exercised.
5. Advantageous if want to buy a stock only if there is a price pullback.
II. Advantages of Covered Calls
1. Primarily as result of the greed factor, IV-Calls will sometimes be somewhat higher than IV-Puts thus offering a somewhat higher potential ROI %. Of course, the disclaimer described above regarding put-call parity deviations for CSPs also applies as well for CCs.
2. There is:
a. A positive abnormal performance in stocks with relatively expensive calls (IV-Calls > IV-Puts); and
b. A negative abnormal performance in stocks with relatively expensive puts (IV-Puts > IV-Calls).
Source: "Deviations from Put-Call Parity and Stock Return Predictability" by Cremers and Weinbaum.
3. Simplicity— That is, use only one strategy (CCs) rather than two (CCs and CSPs). For this Covered Calls Advisor, it is more difficult to easily re-orient my thinking between the two strategies -- while one strategy is in-the-money, its equivalent counterpart strategy is out-of-the-money. In thinking about a particular position, the mental gymnastics to convert between CCs and CSPs is inconvenient at best. For me, it is simply easier to conceptualize CC positions than for CSPs.
4. Better clarity in understanding available cash balances in brokerage accounts – thus a reduced chance of:
a) Unintentionally dipping into margin; and
b) Unintentionally overextending your margin limits.
5.Potential for dividend income (although dividend amount already included in option premium).
6.For OTM CCs – lower initial investment provides somewhat higher potential ROI % if exercised.
7. Advantageous if want to own the stock at its current price.
8. No need to wait 3 days for cash settlement from prior transactions before establishing new covered calls positions.
9. Better pricing visibility on our online brokerage accounts: (a) CSPs do not show on account portfolio diversification tables; and (b) With CSPs, we only see option prices. Not seeing the current price of the underlying security makes position management (such as rolling) decision-making more difficult.
Almost all of the items presented above provide only a modest relative advantage of one strategy over the other. However, the one item that potentially provides a more significant advantage is the selling of Naked Puts. All other factors being equal, by using margin, the NP investor has an opportunity to increase a CC or CSP return by a few incremental percentage points. And this approach might be acceptable for some investors -- but, as indicated in a prior post (link), "the Covered Calls Advisor is strongly opposed to margin account investing." From my experience, margin investing imposes unnecessary additional stress on the investor. This tends to distort the calm, dispassionate temperament needed for our investment decision-making process. For this advisor, the potential for returns deterioration associated with this disadvantage more than offsets the potential incremental returns advantage that might otherwise accrue from leveraging NPs.
A direct comparison of the advantages of CSPs and CCs listed above does not reveal a clear advantage to either strategy. But based on the preponderance of the evidence, the Covered Calls Advisor continues to be more comfortable investing with covered calls.
This topic is more complex than most postings on this blog. If you have questions or comments, please feel free to submit them -- they are always welcomed. Click the 'comments' link below or post them on the justcoveredcalls Yahoo!Group site. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site.
So for now, this blog site motto remains: "Stick With Covered Calls"!
Regards and Godspeed to All,
Jeff
Tuesday, May 19, 2009
Establish Sohu.com Inc Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Sohu.com Inc (SOHU) covered calls. This investment doubles the CCAP position in SOHU from 400 to 800 shares.
Sohu is an internet services provider to consumers and businesses in China. Their services include brand advertising, sponsored search, online games, and wireless services. It ranks very high on the Covered Calls Advisor 'Buy Alerts' worksheet with positive ratings in 8 of the 9 metrics. Most compelling is the relatively modest current P/E ratio of 11.7 for a company with 20%+ expected annual growth rate. In addition, the balance sheet is very strong with high cash levels and no debt.
A summary of the transactions is as follows:
Established Sohu.com Inc Covered Calls for Jun09:
05/19/09 Bought 400 SOHU @ $54.50
05/19/09 Sold 4 SOHU Jun09 $55.00 Calls @ $3.00
Absolute Return if Stock Price Unchanged at $54.50: +5.5%
Annualized Return If Unchanged (ARIU): +62.7%
Absolute Return if Exercised at $55.00: +6.4%
Annualized Return If Exercised (ARIE): +73.3%
Downside Breakeven Price Point: $51.50
Downside Breakeven Protection: 5.5%
Monday, May 18, 2009
Establish Covered Calls Positions -- Hewlett-Packard, iShares MSCI China ETF, and Noble Corp
This past Friday was expiration Friday for May 2009. In this Covered Calls Advisor blog's most recent post, it was noted that of the twelve covered calls positions for May 2009, eight were exercised and the stock was called away. The remaining four May09 positions expired out-of-the-money.
Today it was decided to re-establish covered calls positions in the Covered Calls Advisor Portfolio(CCAP) in three of the eight positions that were called away at May09 expiration; namely Hewlett-Packard(HPQ), iShares MSCI China ETF(FXI), and Noble Corp(NE). The fundamentals for each of these three remain strong, so Jun09 covered calls positions were established as follows:
1. Establish Hewlett-Packard Company(HPQ) Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Hewlett-Packard Company(HPQ) covered calls as follows:
Established Hewlett-Packard Company(HPQ) Covered Calls for Jun09:
05/18/09 Bought 600 HPQ @ $35.28
05/18/09 Sold 6 HPQ Jun09 $36.00 Calls @ $1.40
Some potential results from this Hewlett-Packard covered calls transaction are as follows:
Absolute Return if Unchanged at $35.28: +4.0%
= +$1.40/$35.28
Annualized Return If Unchanged (ARIU): +43.9%
= (+$1.40/$35.28)*(365/33 days)
Absolute Return if Exercised at $36.00: +6.0%
= [$1.40+($36.00-$35.28)]/$35.28
Annualized Return If Exercised (ARIE): +66.5%
Downside Breakeven Price Point: $33.88
Downside Breakeven Protection: 4.0%
2. Establish iShares MSCI China ETF(FXI) Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares MSCI China ETF(FXI) covered calls as follows:
Established iShares MSCI China ETF(FXI) Covered Calls for Jun09:
05/18/09 Bought 1500 FXI @ $34.98
05/18/09 Sold 15 FXI Jun09 $35.00 Calls @ $1.75
Some potential results from this iShares MSCI China ETF covered calls transaction are as follows:
Absolute Return if Unchanged at $34.98: +5.0%
= $1.75/$34.98
Annualized Return If Unchanged (ARIU): +55.3%
= ($1.75/$34.98)*(365/33 days)
Absolute Return if Exercised at $35.00: +5.1%
= [$1.75+($35.00-$34.98)]/$34.98
Annualized Return If Exercised (ARIE): +56.0%
= ($1.75+($35.00-$34.98]//$34.98)*(365/33 days)
Downside Breakeven Price Point: $33.23
Downside Breakeven Protection: 5.0%
3. Establish Noble Corp(NE) Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Noble Corp(NE) covered calls as follows:
Established Noble Corp(NE) Covered Calls for Jun09:
05/18/09 Bought 500 NE @ $29.00
05/18/09 Sold 5 NE Jun09 $27.50 Calls @ $2.52
Some potential results from this Noble Corp covered calls transaction is as follows:
Absolute Return if Exercised at $27.50: +3.5%
= [$2.52+($29.00-$27.50)]/$29.00
Annualized Return If Exercised (ARIE): +38.9%
= ($2.52+($29.00-$27.50])/$34.98)*(365/33 days)
Downside Breakeven Price Point: $26.48
Downside Breakeven Protection: 8.7%
Today it was decided to re-establish covered calls positions in the Covered Calls Advisor Portfolio(CCAP) in three of the eight positions that were called away at May09 expiration; namely Hewlett-Packard(HPQ), iShares MSCI China ETF(FXI), and Noble Corp(NE). The fundamentals for each of these three remain strong, so Jun09 covered calls positions were established as follows:
1. Establish Hewlett-Packard Company(HPQ) Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Hewlett-Packard Company(HPQ) covered calls as follows:
Established Hewlett-Packard Company(HPQ) Covered Calls for Jun09:
05/18/09 Bought 600 HPQ @ $35.28
05/18/09 Sold 6 HPQ Jun09 $36.00 Calls @ $1.40
Some potential results from this Hewlett-Packard covered calls transaction are as follows:
Absolute Return if Unchanged at $35.28: +4.0%
= +$1.40/$35.28
Annualized Return If Unchanged (ARIU): +43.9%
= (+$1.40/$35.28)*(365/33 days)
Absolute Return if Exercised at $36.00: +6.0%
= [$1.40+($36.00-$35.28)]/$35.28
Annualized Return If Exercised (ARIE): +66.5%
Downside Breakeven Price Point: $33.88
Downside Breakeven Protection: 4.0%
2. Establish iShares MSCI China ETF(FXI) Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares MSCI China ETF(FXI) covered calls as follows:
Established iShares MSCI China ETF(FXI) Covered Calls for Jun09:
05/18/09 Bought 1500 FXI @ $34.98
05/18/09 Sold 15 FXI Jun09 $35.00 Calls @ $1.75
Some potential results from this iShares MSCI China ETF covered calls transaction are as follows:
Absolute Return if Unchanged at $34.98: +5.0%
= $1.75/$34.98
Annualized Return If Unchanged (ARIU): +55.3%
= ($1.75/$34.98)*(365/33 days)
Absolute Return if Exercised at $35.00: +5.1%
= [$1.75+($35.00-$34.98)]/$34.98
Annualized Return If Exercised (ARIE): +56.0%
= ($1.75+($35.00-$34.98]//$34.98)*(365/33 days)
Downside Breakeven Price Point: $33.23
Downside Breakeven Protection: 5.0%
3. Establish Noble Corp(NE) Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Noble Corp(NE) covered calls as follows:
Established Noble Corp(NE) Covered Calls for Jun09:
05/18/09 Bought 500 NE @ $29.00
05/18/09 Sold 5 NE Jun09 $27.50 Calls @ $2.52
Some potential results from this Noble Corp covered calls transaction is as follows:
Absolute Return if Exercised at $27.50: +3.5%
= [$2.52+($29.00-$27.50)]/$29.00
Annualized Return If Exercised (ARIE): +38.9%
= ($2.52+($29.00-$27.50])/$34.98)*(365/33 days)
Downside Breakeven Price Point: $26.48
Downside Breakeven Protection: 8.7%
Continuation Transactions -- Amgen, China Mobile, and Sohu.com
This past Friday was expiration Friday for May 2009. In this Covered Calls Advisor blog's most recent post, it was noted that of the twelve covered calls positions for May 2009, eight were exercised and the stock was called away. The remaining four May09 positions expired out-of-the-money. Today it was decided to retain the stocks of three of these four companies (AMGN,CHL, and SOHU) and to establish Jun09 covered calls for each one. Further analysis will be conducted regarding the fundamentals for the other company retained after last Friday's expiration, Endo Pharmaceuticals (ENDP) and the decision will be posted on this blog when it occurs. The transactions history to date and the profit potential for each of these companies is detailed below.
1. Amgen Inc (AMGN) -- Continuation Transaction
The following transaction was made today to establish a covered calls position against the 300 shares owned in Amgen Inc (AMGN):
05/18/09 Sell-to-Open (STO) 3 AMGN Jun09 $50s @ $1.12
The Transactions History to date is as follows:
03/23/09 Initial Stock Purchase Transaction -- Bought 300 AMGN @ $48.95
03/23/09 Inital Calls Sold Transaction -- Sold 3 AMGN Apr09 $50.00 Calls @ $1.70
04/18/09 Apr09 Options Expired
04/24/09 Continuation Transaction -- Sell-to-Open (STO) 3 AMGN May09 $50s @ $1.05
Note: The price of AMGN was $48.95 today when the call options were sold.
05/16/09 May09 Options Expired
Note: The closing price of AMGN was $48.16 on expiration Friday.
05/18/09 Sell-to-Open (STO) 3 AMGN Jun09 $50s @ $1.12
Note: The price of AMGN was $48.30 today when the call options were sold.
The overall performance results(including commissions) for the AMGN transactions would be as follows:
Stock Purchase Cost: $14,693.95
($48.95*300+$8.95 commission)
Net Profit:
(a) Options Income: +$1,127.40 [300*($1.70+$1.05+$1.12) - 3*$11.20 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $48.30): -$203.95
= ($48.30-$48.95)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$501.05
= ($50.00-$48.30)*300 - $8.95 commissions
Total Net Profit(If stock price unchanged at $48.30): +$923.45
= (+$1,127.40 +$0.00 -$203.95)
Total Net Profit(If stock price exercised at $50.00): +$1,628.45
= (+$1,127.40 +$0.00 +$501.05)
Absolute Return if Stock Price Unchanged at $48.30: +6.3%
= +$923.45/$14,693.95
Annualized Return If Stock Price Unchanged (ARIU) +25.8%
= (+$1,127.40/$14,693.95)*(365/89 days)
Absolute Return if Exercised at $50.00: +11.1%
= +$1,628.45/$14,693.95
Annualized Return If Exercised (ARIE) +45.5%
= (+$1,628.45/$14,693.95)*(365/89 days)
2. China Mobile LTD ADR (CHL) -- Continuation Transaction
The following transaction was made today to establish a covered calls position against the 400 shares owned in China Mobile LTD ADR (CHL):
05/18/09 Sell-to-Open (STO) 4 CHL Jun09 $50s @ $1.25
The transactions history to date is as follows:
04/20/09 Initial Stock Purchase Transaction -- Bought 400 CHL @ $45.65
04/20/09 Inital Calls Sold Transaction -- Sold 4 CHL May09 $45.00 Calls @ $2.40
A debit-spread transaction was executed as follows:
05/06/09 Buy-to-Close (BTC) 4 CHL May09 $45s @ $3.70
05/06/09 Sell-to-Open (STO) 4 CHL May09 $50s @ $.65
Note: The price of CHL was $48.51 today when the debit-spread was transacted.
05/11/09 Ex-Div of $362.32($.9058 * 400 shares)
05/16/09 May09 Options Expired
Note: The closing price of CHL was $46.06 on expiration Friday.
05/18/09 Sell-to-Open (STO) 4 CHL Jun09 $50s @ $1.25
Note: The price of CHL was $47.30 today when the call options were sold.
The overall performance results(including commissions) for the CHL transactions would be as follows:
Stock Purchase Cost: $18,268.95
($45.65*400+$8.95 commission)
Net Profit:
(a) Options Income: +$204.15
= (400*($2.40-$3.70+$.65+$1.25) - 3*$11.95 commissions)
(b) Dividend Income: +$362.32 ($.9058 * 400 shares)
(c) Capital Appreciation (If stock price unchanged at $47.30): +$651.05
= ($47.30-$45.65)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$1,731.05
= ($50.00-$45.65)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $47.30): +$1,217.52
= (+$204.15 +$362.32 +$651.05)
Total Net Profit(If stock price exercised at $50.00): +$2,297.52
= (+$204.15 +$362.32 +$1,731.05)
Absolute Return if Stock Price Unchanged at $47.30: +6.7%
= +$1,217.52/$18,268.95
Annualized Return If Stock Price Unchanged (ARIU) +39.9%
= (+$1,213.47/$18,268.95)*(365/61 days)
Absolute Return if Exercised at $50.00: +12.6%
= +$2,297.52/$18,268.95
Annualized Return If Exercised (ARIE): +75.3%
= (+$2,297.52/$18,268.95)*(365/61 days)
3. Sohu.com Inc (SOHU) -- Continuation Transaction
The following transaction was made today to establish a covered calls position against the 400 shares owned in Sohu.com Inc (SOHU):
05/18/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $1.25
The transactions history to date is as follows:
02/24/09 Bought 400 SOHU @ $44.617
02/24/09 Sold 4 SOHU Mar09 $45.00 Calls @ $3.20
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 4 SOHU Apr $45s @ $1.45
Note: The price of SOHU was $40.10 today when the call options were sold.
04/13/09 Buy-to-Close (BTC) 4 SOHU Apr09 $45.00s @ $5.20
04/13/09 Sell-to-Open (STO) 4 SOHU May09 $50.00s @ $4.30
Net Debit-Spread upon Roll-Up-and-Forward was $.90 ($5.20 - $4.30)
Note: The price of SOHU was $49.90 today when the call options were sold.
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the call options were sold.
05/16/09 May09 Options Expired
Note: The closing price of SOHU was $52.58 on expiration Friday.
05/18/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $1.25
Note: The price of CHL was $53.98 today when the call options were sold.
The overall performance results(including commissions) for the SOHU transactions are as follows:
Stock Purchase Cost: $17,855.75
($44.617*400+$8.95 commission)
Net Profit:
(a) Options Income: -$852.25 (400*($3.20+$1.45-$5.20+$4.30-$8.95+$1.95+$1.25) - 5*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $53.98): +$3,736.25
= ($53.98-$44.617)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$6,144.25
= ($60.00-$44.617)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $53.98): +$2,884.00
= (-$852.25 +$0.00 +$3,736.25)
Total Net Profit(If stock price exercised at $60.00): +$5,292.00
= (-$852.25 +$0.00 +$6,144.25)
Absolute Return if Stock Price Unchanged at $53.98: +16.2%
= +$2,884.00/$17,855.75
Annualized Return If Stock Price Unchanged (ARIU): +50.8%
= (+$4,262.45/$17,855.75)*(365/116 days)
Absolute Return if Exercised at $60.00: +29.6%
= +$5,292.00/$17,855.75
Annualized Return If Exercised (ARIE) +93.3%
= (+$5,292.00/$17,855.75)*(365/116 days)
1. Amgen Inc (AMGN) -- Continuation Transaction
The following transaction was made today to establish a covered calls position against the 300 shares owned in Amgen Inc (AMGN):
05/18/09 Sell-to-Open (STO) 3 AMGN Jun09 $50s @ $1.12
The Transactions History to date is as follows:
03/23/09 Initial Stock Purchase Transaction -- Bought 300 AMGN @ $48.95
03/23/09 Inital Calls Sold Transaction -- Sold 3 AMGN Apr09 $50.00 Calls @ $1.70
04/18/09 Apr09 Options Expired
04/24/09 Continuation Transaction -- Sell-to-Open (STO) 3 AMGN May09 $50s @ $1.05
Note: The price of AMGN was $48.95 today when the call options were sold.
05/16/09 May09 Options Expired
Note: The closing price of AMGN was $48.16 on expiration Friday.
05/18/09 Sell-to-Open (STO) 3 AMGN Jun09 $50s @ $1.12
Note: The price of AMGN was $48.30 today when the call options were sold.
The overall performance results(including commissions) for the AMGN transactions would be as follows:
Stock Purchase Cost: $14,693.95
($48.95*300+$8.95 commission)
Net Profit:
(a) Options Income: +$1,127.40 [300*($1.70+$1.05+$1.12) - 3*$11.20 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $48.30): -$203.95
= ($48.30-$48.95)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$501.05
= ($50.00-$48.30)*300 - $8.95 commissions
Total Net Profit(If stock price unchanged at $48.30): +$923.45
= (+$1,127.40 +$0.00 -$203.95)
Total Net Profit(If stock price exercised at $50.00): +$1,628.45
= (+$1,127.40 +$0.00 +$501.05)
Absolute Return if Stock Price Unchanged at $48.30: +6.3%
= +$923.45/$14,693.95
Annualized Return If Stock Price Unchanged (ARIU) +25.8%
= (+$1,127.40/$14,693.95)*(365/89 days)
Absolute Return if Exercised at $50.00: +11.1%
= +$1,628.45/$14,693.95
Annualized Return If Exercised (ARIE) +45.5%
= (+$1,628.45/$14,693.95)*(365/89 days)
2. China Mobile LTD ADR (CHL) -- Continuation Transaction
The following transaction was made today to establish a covered calls position against the 400 shares owned in China Mobile LTD ADR (CHL):
05/18/09 Sell-to-Open (STO) 4 CHL Jun09 $50s @ $1.25
The transactions history to date is as follows:
04/20/09 Initial Stock Purchase Transaction -- Bought 400 CHL @ $45.65
04/20/09 Inital Calls Sold Transaction -- Sold 4 CHL May09 $45.00 Calls @ $2.40
A debit-spread transaction was executed as follows:
05/06/09 Buy-to-Close (BTC) 4 CHL May09 $45s @ $3.70
05/06/09 Sell-to-Open (STO) 4 CHL May09 $50s @ $.65
Note: The price of CHL was $48.51 today when the debit-spread was transacted.
05/11/09 Ex-Div of $362.32($.9058 * 400 shares)
05/16/09 May09 Options Expired
Note: The closing price of CHL was $46.06 on expiration Friday.
05/18/09 Sell-to-Open (STO) 4 CHL Jun09 $50s @ $1.25
Note: The price of CHL was $47.30 today when the call options were sold.
The overall performance results(including commissions) for the CHL transactions would be as follows:
Stock Purchase Cost: $18,268.95
($45.65*400+$8.95 commission)
Net Profit:
(a) Options Income: +$204.15
= (400*($2.40-$3.70+$.65+$1.25) - 3*$11.95 commissions)
(b) Dividend Income: +$362.32 ($.9058 * 400 shares)
(c) Capital Appreciation (If stock price unchanged at $47.30): +$651.05
= ($47.30-$45.65)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$1,731.05
= ($50.00-$45.65)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $47.30): +$1,217.52
= (+$204.15 +$362.32 +$651.05)
Total Net Profit(If stock price exercised at $50.00): +$2,297.52
= (+$204.15 +$362.32 +$1,731.05)
Absolute Return if Stock Price Unchanged at $47.30: +6.7%
= +$1,217.52/$18,268.95
Annualized Return If Stock Price Unchanged (ARIU) +39.9%
= (+$1,213.47/$18,268.95)*(365/61 days)
Absolute Return if Exercised at $50.00: +12.6%
= +$2,297.52/$18,268.95
Annualized Return If Exercised (ARIE): +75.3%
= (+$2,297.52/$18,268.95)*(365/61 days)
3. Sohu.com Inc (SOHU) -- Continuation Transaction
The following transaction was made today to establish a covered calls position against the 400 shares owned in Sohu.com Inc (SOHU):
05/18/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $1.25
The transactions history to date is as follows:
02/24/09 Bought 400 SOHU @ $44.617
02/24/09 Sold 4 SOHU Mar09 $45.00 Calls @ $3.20
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 4 SOHU Apr $45s @ $1.45
Note: The price of SOHU was $40.10 today when the call options were sold.
04/13/09 Buy-to-Close (BTC) 4 SOHU Apr09 $45.00s @ $5.20
04/13/09 Sell-to-Open (STO) 4 SOHU May09 $50.00s @ $4.30
Net Debit-Spread upon Roll-Up-and-Forward was $.90 ($5.20 - $4.30)
Note: The price of SOHU was $49.90 today when the call options were sold.
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the call options were sold.
05/16/09 May09 Options Expired
Note: The closing price of SOHU was $52.58 on expiration Friday.
05/18/09 Sell-to-Open (STO) 4 SOHU Jun09 $60s @ $1.25
Note: The price of CHL was $53.98 today when the call options were sold.
The overall performance results(including commissions) for the SOHU transactions are as follows:
Stock Purchase Cost: $17,855.75
($44.617*400+$8.95 commission)
Net Profit:
(a) Options Income: -$852.25 (400*($3.20+$1.45-$5.20+$4.30-$8.95+$1.95+$1.25) - 5*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $53.98): +$3,736.25
= ($53.98-$44.617)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$6,144.25
= ($60.00-$44.617)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $53.98): +$2,884.00
= (-$852.25 +$0.00 +$3,736.25)
Total Net Profit(If stock price exercised at $60.00): +$5,292.00
= (-$852.25 +$0.00 +$6,144.25)
Absolute Return if Stock Price Unchanged at $53.98: +16.2%
= +$2,884.00/$17,855.75
Annualized Return If Stock Price Unchanged (ARIU): +50.8%
= (+$4,262.45/$17,855.75)*(365/116 days)
Absolute Return if Exercised at $60.00: +29.6%
= +$5,292.00/$17,855.75
Annualized Return If Exercised (ARIE) +93.3%
= (+$5,292.00/$17,855.75)*(365/116 days)
Saturday, May 16, 2009
May 2009 Expiration Transactions
The Covered Calls Advisor Portfolio (CCAP) contained a total of twelve positions with May 2009 expirations, with the following results:
- Eight positions (ADM,ESRX,GE,HPQ,FXI,IWM,NE, and UNH) closed in-the-money. The calls were exercised and the stock was called away. It is especially rewarding to the Covered Calls Advisor that the closing prices of seven of the eight positions were such that the covered calls positions achieved a greater return-on-investment than would have been achieved from comparable buy-and-hold positions. The sole exception was UNH, where simply owning the stock would have yielded a higher ROI than was achieved with the covered calls position. The annualized percent return-on-investment(ROI) results for the eight exercised positions were:
Archer Daniels Midland Co (ADM): +76.5%
Express Scripts, Inc( ESRX): +87.6%
General Electric Company (GE): +173.8%
Hewlett-Packard Company (HPQ): +40.8%
iShares MSCI China ETF (FXI): +118.4%
iShares MSCI Russell 2000 Small Cap Index ETF (IWM): +78.6%
Noble Corp (NE): +116.6%
UnitedHealth Group Inc (UNH): +133.6%
- Four positions in the CCAP (AMGN,CHL,ENDP,and SOHU) ended out-of-the-money. Decisions will be made to either sell the equities, or to keep them and sell calls to establish Jun09 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.
Detailed results for the eight positions that were assigned (called away) upon May09 expiration are as follows:
1. Archer Daniels Midland Co(ADM) -- Closed
The transactions history to date for the ADM covered calls is as follows:
04/20/09 Initial Stock Purchase Transaction -- Bought 400 ADM @ $25.27
04/20/09 Inital Calls Sold Transaction -- Sold 4 ADM May09 $25.00 Calls @ $1.70
05/16/09 May09 Options Exercised (400 shares of ADM called away)
Note: Closing price of ADM was $25.17 on expiration Friday.
The overall performance results(including commissions) for the ADM transactions through the May09 expiration are as follows:
Stock Purchase Cost: $10,116.95
($25.27*400+$8.95 commission)
Net Profit:
(a) Options Income: +$668.05 (400*$1.70 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$116.95
= ($25.00-$25.27)*400 - $8.95 commissions
Total Net Profit: +$511.10
= (+$668.05 +$0.00 -$116.95)
Absolute Return: +5.4%
= +$511.10/$10,116.95
Annualized Return: +76.5%
= (+$511.10/$10,116.95)*(365/26 days)
2. Express Scripts Inc.(ESRX) -- Closed
The transactions history to date for the ESRX covered calls is as follows:
03/23/09 Initial Stock Purchase Transaction -- Bought 200 ESRX @ $47.05
03/23/09 Inital Calls Sold Transaction -- Sold 2 ESRX Apr09 $50.00 Calls @ $1.40
Roll-Up-and-Forward debit-spread transaction:
04/14/09 Buy-to-Close (BTC) 2 ESRX Apr09 $50.00s @ $9.60
04/14/09 Sell-to-Open (STO) 2 ESRX May09 $55.00s @ $6.50
05/16/09 May09 Options Exercised (200 shares of ESRX called away)
Note: Closing price of ESRX was $58.67 on expiration Friday.
The overall performance results(including commissions) for the ESRX transactions through the May09 expiration are as follows:
Stock Purchase Cost: $9,418.95
($47.05*200+$8.95 commission)
Net Profit:
(a) Options Income: -$360.90 (200*($1.40-$9.60+$6.50) - 2*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(Stock called away at $55.00): +$1,581.05
= ($55.00-$47.05)*200 - $8.95 commissions
Total Net Profit: +$1,220.15
= (-$360.90 +$0.00 +$1,581.05)
Absolute Return: +13.0%
= +$1,220.15/$9,418.95
Annualized Return: +87.6%
= (+$1,220.15/$9,418.95)*(365/54 days)
3. General Electric Company(GE) -- Closed
The transactions history to date for the GE covered calls is as follows:
02/23/09 Initial Stock Purchase Transaction -- Bought 1000 GE @ $8.96
02/23/09 Inital Calls Sold Transaction -- Sold 10 GE Mar09 $10.00 Calls @ $.63
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 10 GE Apr $10s @ $.99
Note: The price of GE was $10.09 today when the call options were sold.
Roll-Up-and-Forward debit-spread transaction:
04/13/09 Buy-to-Close (BTC) 10 GE Apr09 $10.00s @ $2.34
04/13/09 Sell-to-Open (STO) 10 GE May09 $12.00s @ $1.24
Net Debit-Spread upon Roll-Up-and-Forward was $1.10 ($2.34 - $1.24)
Note: The price of GE was $12.20 today when the transaction was completed.
05/16/09 May09 Options Exercised (1000 shares of GE called away)
Note: Closing price of GE was $12.86 on expiration Friday.
The overall performance results(including commissions) for the GE transactions through the May09 expiration are as follows:
Stock Purchase Cost: $8,968.95
($8.96*1000+$8.95 commission)
Net Profit:
(a) Options Income: +$470.65 (1000*($.63+$.99-$2.34+$1.24) - 3*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $12.00): +$3,031.05
= ($12.00-$8.96)*1000 - $8.95 commissions
Total Net Profit: +$3,501.70
= (+$470.65 +$0.00 +$3,031.05)
Absolute Return: +39.0%
= +$3,501.70/$8,968.95
Annualized Return: +173.8%
= (+$3,501.70/$8,968.95)*(365/82 days)
4. Hewlett-Packard Company(HPQ) -- Closed
The transactions history to date for the HPQ covered calls is as follows:
01/20/09 Initial Stock Purchase Transaction -- Bought 300 HPQ @ $33.89
01/20/09 Inital Calls Sold Transaction -- Sold 3 HPQ Feb09 $37.50 Calls @ $.80
02/21/09 Feb09 Options Expired
02/25/09 Bought 300 HPQ @ $29.79
02/25/09 Sell-to-Open (STO) 6 HPQ Mar09 $32.50s @ $.55
03/09/09 $48.00 Ex-dividend ($.08 * 600 shares)
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 6 HPQ Apr $32.50s @ $.55
Note: The price of HPQ was $30.24 today when the call options were sold.
Roll-Up-and-Forward debit-spread transaction:
04/17/09 Buy-to-Close (BTC) 6 HPQ Apr09 $32.50s @ $3.10
04/17/09 Sell-to-Open (STO) 6 HPQ May09 $35.00s @ $1.95
05/16/09 May09 Options Exercised (600 shares of HPQ called away)
Note: Closing price of HPQ was $35.01 on expiration Friday.
The overall performance results(including commissions) for the HPQ transactions are as follows:
Stock Purchase Cost: $19,121.90
($33.89*300+$29.79*300+2*$8.95 commission)
Net Profit:
(a) Options Income: +$158.45 = (300*$.80 + 600*($.55+$.55-$3.10+$1.95) - $51.55 commissions)
(b) Dividend Income: +$48.00
(c) Capital Appreciation (Stock exercised at $35.00): +$1,887.05
= [$35.00-$31.84(avg cost basis)]*600 - $8.95 commissions
Total Net Profit(Stock price exercised at $35.00): +$2,093.50
= (+$158.45 +$48.00 +$1,887.05)
Absolute Return: +10.9%
= +$2,093.50/$19,121.90
Annualized Return: +40.8%
= (+$1,296.95/$19,121.90)*(365/(116+80)/2 days)
5. iShares MSCI China ETF(FXI) -- Closed
The transactions history to date for the FXI covered calls is as follows:
04/21/09 Initial Stock Purchase Transaction -- Bought 1200 FXI @ $31.52
04/21/09 Inital Calls Sold Transaction -- Sold 12 FXI May09 $33.00 Calls @ $1.10
05/16/09 May09 Options Exercised (1200 shares of FXI called away)
Note: Closing price of FXI was $33.68 on expiration Friday.
The overall performance results(including commissions) for the FXI transactions are as follows:
Stock Purchase Cost: $37,832.95
($31.52*1200+$8.95 commission)
Net Profit:
(a) Options Income: +$1,302.05 = (1200*$1.10 - $17.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $33.00): +$1,767.05
= ($33.00-$31.52)*1200 - $8.95 commissions
Total Net Profit(Stock exercised at $33.00): +$3,069.10
= (+$1,302.05 +$0.00 +$1,767.05)
Absolute Return: +8.1%
= +$3,069.10/$37,832.95
Annualized Return: +118.4%
= (+$3,069.10/$37,832.95)*(365/25 days)
6. iShares MSCI Russell 2000 Small Cap ETF(IWM) -- Closed
The transactions history to date for the IWM covered calls is as follows:
04/23/09 Initial Stock Purchase Transaction -- Bought 400 IWM @ $46.62
04/23/09 Inital Calls Sold Transaction -- Sold 4 IWM May09 $47.00 Calls @ $1.98
05/16/09 May09 Options Exercised (400 shares of IWM called away)
Note: Closing price of IWM was $47.76 on expiration Friday.
The overall performance results(including commissions) for the IWM transactions are as follows:
Stock Purchase Cost: $18,656.95
= ($46.62*400+$8.95 commission)
Net Profit:
(a) Options Income: +$780.05 = (400*$1.98 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $47.00): +$144.05
= ($47.00-$46.62)*400 - $8.95 commissions
Total Net Profit(Stock exercised at $47.00): +$924.10
= (+$780.05 +$0.00 +$144.05)
Absolute Return: +5.0%
= +$924.10/$18,656.95
Annualized Return: +78.6%
= (+$924.10/$18,656.95)*(365/23 days)
7. Noble Corp (NE) -- Closed
The transactions history to date for the NE covered calls is as follows:
04/21/09 Bought 500 NE @ $26.37
04/21/09 Sold 5 NE May09 $27.50 Calls @ $1.02
05/16/09 May09 Options Exercised (500 shares of NE called away)
Note: Closing price of NE was $27.92 on expiration Friday.
The overall performance results(including commissions) for the NE transactions are as follows:
Stock Purchase Cost: $13,193.95
= ($26.37*500+$8.95 commission)
Net Profit:
(a) Options Income: +$497.30
= (500*$1.02 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $27.50): +$556.05
= ($27.50-$26.37)*500 - $8.95 commissions
Total Net Profit(Stock exercised at $27.50): +$1,053.35
= (+$497.30 +$0.00 +$556.05
Absolute Return: +8.0%
= +$1,053.35/$13,193.95
Annualized Return: +116.6%
= (+$1,053.35/$13,193.95)*(365/25 days)
8. UnitedHealth Group Inc (UNH) -- Closed
The transactions history to date for the UNH covered calls is as follows:
03/10/09 Bought 300 UNH @ $18.96
03/10/09 Sold 3 UNH Mar09 $19.00 Calls @ $1.20
Roll-Up-and-Forward debit-spread transaction:
03/19/09 Buy-to-Close (BTC) 3 UNH Mar09 $19.00s @ $3.05
03/19/09 Sell-to-Open (STO) 3 UNH Apr09 $45s @ $1.75
03/31/09 $9.00 Ex-Dividend ($.03*300 shares)
Roll-Up-and-Forward debit-spread transaction:
04/15/09 Buy-to-Close (BTC) 3 UNH Apr09 $22.00s @ $3.11
04/15/09 Sell-to-Open (STO) 3 UNH May09 $25.00s @ $1.94
05/16/09 May09 Options Exercised (300 shares of UNH called away)
Note: Closing price of UNH was $27.51 on expiration Friday.
The overall performance results(including commissions) for the UNH transactions are as follows:
Stock Purchase Cost: $5,696.95
($18.96*300+$8.95 commission)
Net Profit:
(a) Options Income: -$414.60
= (300*($1.20-$3.05+$1.75-$3.11+$1.94) - 3*$11.20 commissions)
(b) Dividend Income: +$9.00
(c) Capital Appreciation (Stock exercised at $25.00): +$1,803.05
= ($25.00-$18.96)*300 - $8.95 commissions
Total Net Profit(Stock exercised at $25.00): +$1,397.45
= (-$414.60 +$9.00 +$1,803.05)
Absolute Return: +24.5%
= +$1,397.45/$5,696.95
Annualized Return: +133.6%
= (+$1,397.45/$5,696.95)*(365/67 days)
- Eight positions (ADM,ESRX,GE,HPQ,FXI,IWM,NE, and UNH) closed in-the-money. The calls were exercised and the stock was called away. It is especially rewarding to the Covered Calls Advisor that the closing prices of seven of the eight positions were such that the covered calls positions achieved a greater return-on-investment than would have been achieved from comparable buy-and-hold positions. The sole exception was UNH, where simply owning the stock would have yielded a higher ROI than was achieved with the covered calls position. The annualized percent return-on-investment(ROI) results for the eight exercised positions were:
Archer Daniels Midland Co (ADM): +76.5%
Express Scripts, Inc( ESRX): +87.6%
General Electric Company (GE): +173.8%
Hewlett-Packard Company (HPQ): +40.8%
iShares MSCI China ETF (FXI): +118.4%
iShares MSCI Russell 2000 Small Cap Index ETF (IWM): +78.6%
Noble Corp (NE): +116.6%
UnitedHealth Group Inc (UNH): +133.6%
- Four positions in the CCAP (AMGN,CHL,ENDP,and SOHU) ended out-of-the-money. Decisions will be made to either sell the equities, or to keep them and sell calls to establish Jun09 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.
Detailed results for the eight positions that were assigned (called away) upon May09 expiration are as follows:
1. Archer Daniels Midland Co(ADM) -- Closed
The transactions history to date for the ADM covered calls is as follows:
04/20/09 Initial Stock Purchase Transaction -- Bought 400 ADM @ $25.27
04/20/09 Inital Calls Sold Transaction -- Sold 4 ADM May09 $25.00 Calls @ $1.70
05/16/09 May09 Options Exercised (400 shares of ADM called away)
Note: Closing price of ADM was $25.17 on expiration Friday.
The overall performance results(including commissions) for the ADM transactions through the May09 expiration are as follows:
Stock Purchase Cost: $10,116.95
($25.27*400+$8.95 commission)
Net Profit:
(a) Options Income: +$668.05 (400*$1.70 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$116.95
= ($25.00-$25.27)*400 - $8.95 commissions
Total Net Profit: +$511.10
= (+$668.05 +$0.00 -$116.95)
Absolute Return: +5.4%
= +$511.10/$10,116.95
Annualized Return: +76.5%
= (+$511.10/$10,116.95)*(365/26 days)
2. Express Scripts Inc.(ESRX) -- Closed
The transactions history to date for the ESRX covered calls is as follows:
03/23/09 Initial Stock Purchase Transaction -- Bought 200 ESRX @ $47.05
03/23/09 Inital Calls Sold Transaction -- Sold 2 ESRX Apr09 $50.00 Calls @ $1.40
Roll-Up-and-Forward debit-spread transaction:
04/14/09 Buy-to-Close (BTC) 2 ESRX Apr09 $50.00s @ $9.60
04/14/09 Sell-to-Open (STO) 2 ESRX May09 $55.00s @ $6.50
05/16/09 May09 Options Exercised (200 shares of ESRX called away)
Note: Closing price of ESRX was $58.67 on expiration Friday.
The overall performance results(including commissions) for the ESRX transactions through the May09 expiration are as follows:
Stock Purchase Cost: $9,418.95
($47.05*200+$8.95 commission)
Net Profit:
(a) Options Income: -$360.90 (200*($1.40-$9.60+$6.50) - 2*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(Stock called away at $55.00): +$1,581.05
= ($55.00-$47.05)*200 - $8.95 commissions
Total Net Profit: +$1,220.15
= (-$360.90 +$0.00 +$1,581.05)
Absolute Return: +13.0%
= +$1,220.15/$9,418.95
Annualized Return: +87.6%
= (+$1,220.15/$9,418.95)*(365/54 days)
3. General Electric Company(GE) -- Closed
The transactions history to date for the GE covered calls is as follows:
02/23/09 Initial Stock Purchase Transaction -- Bought 1000 GE @ $8.96
02/23/09 Inital Calls Sold Transaction -- Sold 10 GE Mar09 $10.00 Calls @ $.63
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 10 GE Apr $10s @ $.99
Note: The price of GE was $10.09 today when the call options were sold.
Roll-Up-and-Forward debit-spread transaction:
04/13/09 Buy-to-Close (BTC) 10 GE Apr09 $10.00s @ $2.34
04/13/09 Sell-to-Open (STO) 10 GE May09 $12.00s @ $1.24
Net Debit-Spread upon Roll-Up-and-Forward was $1.10 ($2.34 - $1.24)
Note: The price of GE was $12.20 today when the transaction was completed.
05/16/09 May09 Options Exercised (1000 shares of GE called away)
Note: Closing price of GE was $12.86 on expiration Friday.
The overall performance results(including commissions) for the GE transactions through the May09 expiration are as follows:
Stock Purchase Cost: $8,968.95
($8.96*1000+$8.95 commission)
Net Profit:
(a) Options Income: +$470.65 (1000*($.63+$.99-$2.34+$1.24) - 3*$16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $12.00): +$3,031.05
= ($12.00-$8.96)*1000 - $8.95 commissions
Total Net Profit: +$3,501.70
= (+$470.65 +$0.00 +$3,031.05)
Absolute Return: +39.0%
= +$3,501.70/$8,968.95
Annualized Return: +173.8%
= (+$3,501.70/$8,968.95)*(365/82 days)
4. Hewlett-Packard Company(HPQ) -- Closed
The transactions history to date for the HPQ covered calls is as follows:
01/20/09 Initial Stock Purchase Transaction -- Bought 300 HPQ @ $33.89
01/20/09 Inital Calls Sold Transaction -- Sold 3 HPQ Feb09 $37.50 Calls @ $.80
02/21/09 Feb09 Options Expired
02/25/09 Bought 300 HPQ @ $29.79
02/25/09 Sell-to-Open (STO) 6 HPQ Mar09 $32.50s @ $.55
03/09/09 $48.00 Ex-dividend ($.08 * 600 shares)
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 6 HPQ Apr $32.50s @ $.55
Note: The price of HPQ was $30.24 today when the call options were sold.
Roll-Up-and-Forward debit-spread transaction:
04/17/09 Buy-to-Close (BTC) 6 HPQ Apr09 $32.50s @ $3.10
04/17/09 Sell-to-Open (STO) 6 HPQ May09 $35.00s @ $1.95
05/16/09 May09 Options Exercised (600 shares of HPQ called away)
Note: Closing price of HPQ was $35.01 on expiration Friday.
The overall performance results(including commissions) for the HPQ transactions are as follows:
Stock Purchase Cost: $19,121.90
($33.89*300+$29.79*300+2*$8.95 commission)
Net Profit:
(a) Options Income: +$158.45 = (300*$.80 + 600*($.55+$.55-$3.10+$1.95) - $51.55 commissions)
(b) Dividend Income: +$48.00
(c) Capital Appreciation (Stock exercised at $35.00): +$1,887.05
= [$35.00-$31.84(avg cost basis)]*600 - $8.95 commissions
Total Net Profit(Stock price exercised at $35.00): +$2,093.50
= (+$158.45 +$48.00 +$1,887.05)
Absolute Return: +10.9%
= +$2,093.50/$19,121.90
Annualized Return: +40.8%
= (+$1,296.95/$19,121.90)*(365/(116+80)/2 days)
5. iShares MSCI China ETF(FXI) -- Closed
The transactions history to date for the FXI covered calls is as follows:
04/21/09 Initial Stock Purchase Transaction -- Bought 1200 FXI @ $31.52
04/21/09 Inital Calls Sold Transaction -- Sold 12 FXI May09 $33.00 Calls @ $1.10
05/16/09 May09 Options Exercised (1200 shares of FXI called away)
Note: Closing price of FXI was $33.68 on expiration Friday.
The overall performance results(including commissions) for the FXI transactions are as follows:
Stock Purchase Cost: $37,832.95
($31.52*1200+$8.95 commission)
Net Profit:
(a) Options Income: +$1,302.05 = (1200*$1.10 - $17.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $33.00): +$1,767.05
= ($33.00-$31.52)*1200 - $8.95 commissions
Total Net Profit(Stock exercised at $33.00): +$3,069.10
= (+$1,302.05 +$0.00 +$1,767.05)
Absolute Return: +8.1%
= +$3,069.10/$37,832.95
Annualized Return: +118.4%
= (+$3,069.10/$37,832.95)*(365/25 days)
6. iShares MSCI Russell 2000 Small Cap ETF(IWM) -- Closed
The transactions history to date for the IWM covered calls is as follows:
04/23/09 Initial Stock Purchase Transaction -- Bought 400 IWM @ $46.62
04/23/09 Inital Calls Sold Transaction -- Sold 4 IWM May09 $47.00 Calls @ $1.98
05/16/09 May09 Options Exercised (400 shares of IWM called away)
Note: Closing price of IWM was $47.76 on expiration Friday.
The overall performance results(including commissions) for the IWM transactions are as follows:
Stock Purchase Cost: $18,656.95
= ($46.62*400+$8.95 commission)
Net Profit:
(a) Options Income: +$780.05 = (400*$1.98 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $47.00): +$144.05
= ($47.00-$46.62)*400 - $8.95 commissions
Total Net Profit(Stock exercised at $47.00): +$924.10
= (+$780.05 +$0.00 +$144.05)
Absolute Return: +5.0%
= +$924.10/$18,656.95
Annualized Return: +78.6%
= (+$924.10/$18,656.95)*(365/23 days)
7. Noble Corp (NE) -- Closed
The transactions history to date for the NE covered calls is as follows:
04/21/09 Bought 500 NE @ $26.37
04/21/09 Sold 5 NE May09 $27.50 Calls @ $1.02
05/16/09 May09 Options Exercised (500 shares of NE called away)
Note: Closing price of NE was $27.92 on expiration Friday.
The overall performance results(including commissions) for the NE transactions are as follows:
Stock Purchase Cost: $13,193.95
= ($26.37*500+$8.95 commission)
Net Profit:
(a) Options Income: +$497.30
= (500*$1.02 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (Stock exercised at $27.50): +$556.05
= ($27.50-$26.37)*500 - $8.95 commissions
Total Net Profit(Stock exercised at $27.50): +$1,053.35
= (+$497.30 +$0.00 +$556.05
Absolute Return: +8.0%
= +$1,053.35/$13,193.95
Annualized Return: +116.6%
= (+$1,053.35/$13,193.95)*(365/25 days)
8. UnitedHealth Group Inc (UNH) -- Closed
The transactions history to date for the UNH covered calls is as follows:
03/10/09 Bought 300 UNH @ $18.96
03/10/09 Sold 3 UNH Mar09 $19.00 Calls @ $1.20
Roll-Up-and-Forward debit-spread transaction:
03/19/09 Buy-to-Close (BTC) 3 UNH Mar09 $19.00s @ $3.05
03/19/09 Sell-to-Open (STO) 3 UNH Apr09 $45s @ $1.75
03/31/09 $9.00 Ex-Dividend ($.03*300 shares)
Roll-Up-and-Forward debit-spread transaction:
04/15/09 Buy-to-Close (BTC) 3 UNH Apr09 $22.00s @ $3.11
04/15/09 Sell-to-Open (STO) 3 UNH May09 $25.00s @ $1.94
05/16/09 May09 Options Exercised (300 shares of UNH called away)
Note: Closing price of UNH was $27.51 on expiration Friday.
The overall performance results(including commissions) for the UNH transactions are as follows:
Stock Purchase Cost: $5,696.95
($18.96*300+$8.95 commission)
Net Profit:
(a) Options Income: -$414.60
= (300*($1.20-$3.05+$1.75-$3.11+$1.94) - 3*$11.20 commissions)
(b) Dividend Income: +$9.00
(c) Capital Appreciation (Stock exercised at $25.00): +$1,803.05
= ($25.00-$18.96)*300 - $8.95 commissions
Total Net Profit(Stock exercised at $25.00): +$1,397.45
= (-$414.60 +$9.00 +$1,803.05)
Absolute Return: +24.5%
= +$1,397.45/$5,696.95
Annualized Return: +133.6%
= (+$1,397.45/$5,696.95)*(365/67 days)
Thursday, May 14, 2009
Establish Hawaiian Holdings Inc Covered Calls
A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Hawaiian Holdings Inc(HA) covered calls as follows:
Established Hawaiian Holdings Inc(HA) Covered Calls for Jun09:
05/14/09 Bought 500 HA @ $4.7896
05/14/09 Sold 5 HA Jun09 $5.00 Calls @ $.70
Hawaiian Airlines offers daily service on transpacific routes between Hawaii and Los Angeles, Sacramento, San Diego, San Francisco, San Jose, Las Vegas, Phoenix, Portland, and Seattle, as well as daily service among the Hawaiian Islands, and additional service to Australia, American Samoa, and Tahiti. Just this week they announced an agreement with Korean Airlines for service between Hawaii and Korea and including flights from Korea to Japan, Malaysia, and Thailand. The Covered Calls Advisor views this agreement with Korean Air as the first step in an ongoing expansion to Asia/Pacific destinations. This is an excellent foundation around which future growth should be achieved.
Below is this Advisor's 'Buy Alerts' spreadsheet for HA. It has a very high 'Total Points', rating very high in every category (except for its relatively high debt).
I hope the spreadsheet is large enough for you to see the details for each rating factor. I can only attribute this visual problem to my limited computer skills. Also, the returns below show the extremely attractive potential for this covered calls position. I was fortunate to purchase the stock as it was drifting upwards. Then I placed a limit order to sell the calls at the 'ask' price and was fortunate that the stock continued to move slightly higher to a point where the options were transacted a few minutes later. I agree that "sometimes it is better to be lucky than good." If you are a careful reader of this blog, you might recall that this investment is contrary to a comment made just one week ago on this blog, that "going forward, this advisor will be avoiding taking covered calls positions in any equity that is priced below $10." Well, to that I'll simply say that the adage must be true that "old habits die hard" -- Note to self: I need to resolve this conflict in my process!Some potential results from this Hawaiian Holdings covered calls transaction are as follows:
Absolute Return if Unchanged at $4.7896: +14.6%
= $.70/$4.7896
Annualized Return If Unchanged (ARIU): +143.2%
= ($.70/$4.7896)*(365/37 days)
Absolute Return if Exercised at $5.00: +19.0%
=[$.70+($5.00-$4.7896)]/$4.7896
Annualized Return If Exercised (ARIE): +187.5%
Downside Breakeven Price Point: $4.0896
Downside Breakeven Protection: 14.6%
Tuesday, May 12, 2009
Roll-Up-and-Out -- Fluor Corporation
The Covered Calls Advisor Portfolio (CCAP) covered calls position in Fluor Corporation(FLR) was rolled-up-and-out today (05/12/09) from the May09 $40.00s to the Jun09 $45.00s. The transactions were executed as follows:
05/12/09 Buy-to-Close (BTC) 5 FLR May09 $40.00s @ $6.10
05/12/09 Sell-to-Open (STO) 5 FLR Jun09 $45.00s @ $3.90
Note: The price of FLR was $46.02 today when these transactions were completed.
The Transactions History to date for the FLR covered calls is as follows:
04/24/09 Initial Stock Purchase Transaction -- Bought 500 FLR @ $39.975
04/24/09 Inital Calls Sold Transaction -- Sold 5 FLR May09 $40.00 Calls @ $2.40
Roll-Up-and-Out transactions:
05/12/09 Buy-to-Close (BTC) 5 FLR May09 $40.00s @ $6.10
05/12/09 Sell-to-Open (STO) 5 FLR Jun09 $45.00s @ $3.90
Fluor issued a quarterly earnings report this morning that was significantly above the consensus forecast. The company also identified a sequential improvement in quarterly contract bookings. Investors will likely focus on the conservative guidance for the full year and the prospect for further contract awards given the recent firmness of crude oil pricing. So, with the stock moving higher this morning, the implied volatility increasing to around 54, and only $.08 time-value remaining in the current May09 $40 option, the Covered Calls Advisor decided to roll-up-and-out to the Jun09 $45 covered calls position.
The overall performance results(including commissions) for the FLR transactions through the Jun09 expiration would be as follows:
Stock Purchase Cost: $19,996.45
($39.975*500+$8.95 commission)
Net Profit:
(a) Options Income: +$61.90 (500*($2.40-$6.10+$3.90) - 3*$12.70 commissions)
(b) Dividend Income: +$62.50 Ex-Div on 6/3/09 ($.125*500 shares)
(c) Capital Appreciation (If exercised at $45.00): +$2,503.55
= ($45.00-$39.975)*500 - $8.95 commissions
Total Net Profit(If stock price exercised at $45.00): +$2,627.95
= (+$61.90 +$62.50 +$2,503.55)
Absolute Return If Exercised = +13.1%
+$2,627.95/$19,996.45
Annualized Return If Exercised (ARIE) +84.2%
(+$2,627.95/$19,996.45)*(365/57 days)
05/12/09 Buy-to-Close (BTC) 5 FLR May09 $40.00s @ $6.10
05/12/09 Sell-to-Open (STO) 5 FLR Jun09 $45.00s @ $3.90
Note: The price of FLR was $46.02 today when these transactions were completed.
The Transactions History to date for the FLR covered calls is as follows:
04/24/09 Initial Stock Purchase Transaction -- Bought 500 FLR @ $39.975
04/24/09 Inital Calls Sold Transaction -- Sold 5 FLR May09 $40.00 Calls @ $2.40
Roll-Up-and-Out transactions:
05/12/09 Buy-to-Close (BTC) 5 FLR May09 $40.00s @ $6.10
05/12/09 Sell-to-Open (STO) 5 FLR Jun09 $45.00s @ $3.90
Fluor issued a quarterly earnings report this morning that was significantly above the consensus forecast. The company also identified a sequential improvement in quarterly contract bookings. Investors will likely focus on the conservative guidance for the full year and the prospect for further contract awards given the recent firmness of crude oil pricing. So, with the stock moving higher this morning, the implied volatility increasing to around 54, and only $.08 time-value remaining in the current May09 $40 option, the Covered Calls Advisor decided to roll-up-and-out to the Jun09 $45 covered calls position.
The overall performance results(including commissions) for the FLR transactions through the Jun09 expiration would be as follows:
Stock Purchase Cost: $19,996.45
($39.975*500+$8.95 commission)
Net Profit:
(a) Options Income: +$61.90 (500*($2.40-$6.10+$3.90) - 3*$12.70 commissions)
(b) Dividend Income: +$62.50 Ex-Div on 6/3/09 ($.125*500 shares)
(c) Capital Appreciation (If exercised at $45.00): +$2,503.55
= ($45.00-$39.975)*500 - $8.95 commissions
Total Net Profit(If stock price exercised at $45.00): +$2,627.95
= (+$61.90 +$62.50 +$2,503.55)
Absolute Return If Exercised = +13.1%
+$2,627.95/$19,996.45
Annualized Return If Exercised (ARIE) +84.2%
(+$2,627.95/$19,996.45)*(365/57 days)
Monday, May 11, 2009
Buy Alerts Spreadsheet -- Updated
The Covered Calls Advisor uses a 'Buy Alerts' spreadsheet as an important tool in the stock selection process. The original spreadsheet was introduced in a prior post on this blog: (link).
Some aspects of this spreadsheet have been recently updated. Two of the most significant modifications are:
(1) More emphasis on factors related to the cash flow statement are now included. This provides a more comprehensive view of a company's financial position and performance trend; and
(2) This spreadsheet is a multi-factor model containing eleven factors. Now, each rating factors is weighted in accordance with this advisor's perception as to its relative importance in the overall analysis.
Excellent research presented in Richard Tortoriello's recent book "Quantitative Strategies for Achieving Alpha" provided the impetus for some of the modifications included in this updated model.
Below is a sample of the updated Buy Alerts spreadsheet which is used as a preliminary analysis of any company that is under consideration for possible investment (Note: Click on 'Full-Screen View' to view entire spreadsheet):
Any company with a Total Points score greater than 20.0 becomes a viable candidate for further analysis as a possible investment.
To date, the Buy Alerts spreadsheet has been a very useful screening method. Hopefully, this updated spreadsheet will be a further improvement for the Covered Calls Advisor's stock selection methodology; and you are certainly welcome to incorporate this approach into your own process. Any comments or questions regarding this article are also welcomed.
Regards and Godspeed,
Jeff
Some aspects of this spreadsheet have been recently updated. Two of the most significant modifications are:
(1) More emphasis on factors related to the cash flow statement are now included. This provides a more comprehensive view of a company's financial position and performance trend; and
(2) This spreadsheet is a multi-factor model containing eleven factors. Now, each rating factors is weighted in accordance with this advisor's perception as to its relative importance in the overall analysis.
Excellent research presented in Richard Tortoriello's recent book "Quantitative Strategies for Achieving Alpha" provided the impetus for some of the modifications included in this updated model.
Below is a sample of the updated Buy Alerts spreadsheet which is used as a preliminary analysis of any company that is under consideration for possible investment (Note: Click on 'Full-Screen View' to view entire spreadsheet):
Any company with a Total Points score greater than 20.0 becomes a viable candidate for further analysis as a possible investment.
To date, the Buy Alerts spreadsheet has been a very useful screening method. Hopefully, this updated spreadsheet will be a further improvement for the Covered Calls Advisor's stock selection methodology; and you are certainly welcome to incorporate this approach into your own process. Any comments or questions regarding this article are also welcomed.
Regards and Godspeed,
Jeff
Thursday, May 7, 2009
American Oriental Bioengineering (AOB) -- Closed
The Covered Calls Advisor Portfolio (CCAP) position in American Oriental Bioengineering(AOB) was closed out today (5/07/09). This advisor has not written any calls against AOB since Feb09 expiration since the stock was wallowing in the low-$4 range and the $5 option premiums available were very small. Since AOB has participated fully in the market's recent bull move, this advisor has decided to take profits in AOB and move on to something else. Although I continue to be bullish on AOB's valuation and future prospects, there are two factors that caused me to decide to exit the position at this time:
1. The primary reason is the difficulty of finding a suitable strike price to sell on a low-priced stock holding. By 'low-priced', I'm referring to stocks below about $10. The "% difference" between the strike-price-spreads is simply too wide, which makes covered calls position management very difficult. For example, the '% difference' between the $5.00 and the next available strike which is $7.50 is a very large 50% [($7.50-$5.00)/$5.00]. Contrast this against a stock where the nearest strikes are $60.00 and $65.00 -- the % difference is 8.33% [($65-$60)/$60]. The lower the '% difference' the greater our flexibility in covered calls position management. Going forward, this advisor will be avoiding taking covered calls positions in any equity that is priced below $10.
2. A second reason for selling out now is that AOB will be releasing quarterly earnings next Monday. Although a good earnings report is the most likely scenario, the added uncertainty makes exiting the position now a prudent course of action.
The transactions history was as follows:
01/20/09 Initial Stock Purchase Transaction -- Bought 500 AOB @ $4.66
01/20/09 Inital Calls Sold Transaction -- Sold 5 AOB Feb09 $5.00 Calls @ $.30
02/21/09 Feb09 Options expiration. Stock priced at $4.14 upon expiration.
05/07/09 Closing Transaction -- Sold 500 AOB @ $5.3024
The overall performance results(including commissions) for the AOB transactions are as follows:
Stock Purchase Cost: $2,338.95
($4.66*500+$8.95 commission)
Net Profit:
(a) Options Income: +$137.30 (500*$.30 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$312.25
= ($5.3024-$4.66)*500 - $8.95 commissions
Total Net Profit: +$449.55
= (+$137.30 +$0.00 +$312.25)
Absolute Return = +19.2%
+$449.55/$2,338.95
Annualized Return: +65.6%
= (+$449.55/$2,338.95)*(365/107 days)
1. The primary reason is the difficulty of finding a suitable strike price to sell on a low-priced stock holding. By 'low-priced', I'm referring to stocks below about $10. The "% difference" between the strike-price-spreads is simply too wide, which makes covered calls position management very difficult. For example, the '% difference' between the $5.00 and the next available strike which is $7.50 is a very large 50% [($7.50-$5.00)/$5.00]. Contrast this against a stock where the nearest strikes are $60.00 and $65.00 -- the % difference is 8.33% [($65-$60)/$60]. The lower the '% difference' the greater our flexibility in covered calls position management. Going forward, this advisor will be avoiding taking covered calls positions in any equity that is priced below $10.
2. A second reason for selling out now is that AOB will be releasing quarterly earnings next Monday. Although a good earnings report is the most likely scenario, the added uncertainty makes exiting the position now a prudent course of action.
The transactions history was as follows:
01/20/09 Initial Stock Purchase Transaction -- Bought 500 AOB @ $4.66
01/20/09 Inital Calls Sold Transaction -- Sold 5 AOB Feb09 $5.00 Calls @ $.30
02/21/09 Feb09 Options expiration. Stock priced at $4.14 upon expiration.
05/07/09 Closing Transaction -- Sold 500 AOB @ $5.3024
The overall performance results(including commissions) for the AOB transactions are as follows:
Stock Purchase Cost: $2,338.95
($4.66*500+$8.95 commission)
Net Profit:
(a) Options Income: +$137.30 (500*$.30 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$312.25
= ($5.3024-$4.66)*500 - $8.95 commissions
Total Net Profit: +$449.55
= (+$137.30 +$0.00 +$312.25)
Absolute Return = +19.2%
+$449.55/$2,338.95
Annualized Return: +65.6%
= (+$449.55/$2,338.95)*(365/107 days)
Wednesday, May 6, 2009
Roll-Up -- China Mobile LTD ADR
The Covered Calls Advisor Portfolio (CCAP) covered calls position in China Mobile LTD ADR (CHL) was rolled-up today (05/06/09) from the May09 $45s to the May09 $50s. The debit-spread transaction was executed as follows:
05/06/09 Buy-to-Close (BTC) 4 CHL May09 $45s @ $3.70
05/06/09 Sell-to-Open (STO) 4 CHL May09 $50s @ $.65
Net Debit-Spread upon Roll-Up was $3.05 ($3.70 - $.65)
Note: The price of CHL was $48.51 today when the debit-spread was transacted, so the remaining time-value was $.19 [$3.70-($48.51-$45.00)] when this transaction was executed.
CHL goes ex-dividend next Monday (5/11/09) at $.9058. With the remaining time-value on the May09 $45 strike at only $.19, these options would almost assuredly be exercised between now and the close of business this Friday, 5/8/09. Since the Covered Calls Advisor remains bullish on China Mobile, it was decided that retaining the stock to ensure capturing the dividend would be the best course of action. So, the May09 $45 strike was closed out and a roll-up to a new May09 $50 strike covered calls position was established. This will ensure that the CHL dividend payment will be received while simultaneously retaining a covered calls position for May09 expiration on 5/16.
The transactions history to date is as follows:
04/20/09 Initial Stock Purchase Transaction -- Bought 400 CHL @ $45.65
04/20/09 Inital Calls Sold Transaction -- Sold 4 CHL May09 $45.00 Calls @ $2.40
A debit-spread transaction was executed as follows:
05/06/09 Buy-to-Close (BTC) 4 CHL May09 $45s @ $3.70
05/06/09 Sell-to-Open (STO) 4 CHL May09 $50s @ $.65
Note: The price of CHL was $48.51 today when the debit-spread was transacted.
The overall performance results(including commissions) for the CHL transactions would be as follows:
Stock Purchase Cost: $18,268.95
($45.65*400+$8.95 commission)
Net Profit:
(a) Options Income: -$283.90
= (400*($2.40-$3.70+$.65) - 2*$11.95 commissions)
(b) Dividend Income: +$362.32 ($.9058 * 400 shares)
(c) Capital Appreciation (If stock price unchanged at $48.51): +$1,135.05
= ($48.51-$45.65)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$1,731.05
= ($50.00-$45.65)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $48.51): +$1,213.47= (-$283.90 +$362.32 +$1,135.05)
Total Net Profit(If stock price exercised at $50.00): +$1,809.47
= (-$283.90 +$362.32 +$1,731.05)
Absolute Return if Stock Price Unchanged at $48.51: +6.6%
= +$1,213.47/$18,268.95
Annualized Return If Stock Price Unchanged (ARIU) +93.2%
=(+$1,213.47/$18,268.95)*(365/26 days)
Absolute Return if Exercised at $50.00: +9.9%
= +$1,809.47/$18,268.95
Annualized Return If Exercised (ARIE) +139.0%
=(+$1,809.47/$18,268.95)*(365/26 days)
05/06/09 Buy-to-Close (BTC) 4 CHL May09 $45s @ $3.70
05/06/09 Sell-to-Open (STO) 4 CHL May09 $50s @ $.65
Net Debit-Spread upon Roll-Up was $3.05 ($3.70 - $.65)
Note: The price of CHL was $48.51 today when the debit-spread was transacted, so the remaining time-value was $.19 [$3.70-($48.51-$45.00)] when this transaction was executed.
CHL goes ex-dividend next Monday (5/11/09) at $.9058. With the remaining time-value on the May09 $45 strike at only $.19, these options would almost assuredly be exercised between now and the close of business this Friday, 5/8/09. Since the Covered Calls Advisor remains bullish on China Mobile, it was decided that retaining the stock to ensure capturing the dividend would be the best course of action. So, the May09 $45 strike was closed out and a roll-up to a new May09 $50 strike covered calls position was established. This will ensure that the CHL dividend payment will be received while simultaneously retaining a covered calls position for May09 expiration on 5/16.
The transactions history to date is as follows:
04/20/09 Initial Stock Purchase Transaction -- Bought 400 CHL @ $45.65
04/20/09 Inital Calls Sold Transaction -- Sold 4 CHL May09 $45.00 Calls @ $2.40
A debit-spread transaction was executed as follows:
05/06/09 Buy-to-Close (BTC) 4 CHL May09 $45s @ $3.70
05/06/09 Sell-to-Open (STO) 4 CHL May09 $50s @ $.65
Note: The price of CHL was $48.51 today when the debit-spread was transacted.
The overall performance results(including commissions) for the CHL transactions would be as follows:
Stock Purchase Cost: $18,268.95
($45.65*400+$8.95 commission)
Net Profit:
(a) Options Income: -$283.90
= (400*($2.40-$3.70+$.65) - 2*$11.95 commissions)
(b) Dividend Income: +$362.32 ($.9058 * 400 shares)
(c) Capital Appreciation (If stock price unchanged at $48.51): +$1,135.05
= ($48.51-$45.65)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $50.00): +$1,731.05
= ($50.00-$45.65)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $48.51): +$1,213.47= (-$283.90 +$362.32 +$1,135.05)
Total Net Profit(If stock price exercised at $50.00): +$1,809.47
= (-$283.90 +$362.32 +$1,731.05)
Absolute Return if Stock Price Unchanged at $48.51: +6.6%
= +$1,213.47/$18,268.95
Annualized Return If Stock Price Unchanged (ARIU) +93.2%
=(+$1,213.47/$18,268.95)*(365/26 days)
Absolute Return if Exercised at $50.00: +9.9%
= +$1,809.47/$18,268.95
Annualized Return If Exercised (ARIE) +139.0%
=(+$1,809.47/$18,268.95)*(365/26 days)
Monday, May 4, 2009
Roll-Up -- Sohu.com Inc
The Covered Calls Advisor Portfolio (CCAP) covered calls position in Sohu.com Inc (SOHU) was rolled-up today (05/04/09) from the May09 $50s to the May09 $60s. The debit-spread transaction was executed as follows:
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the debit-spread was transacted, so the remaining time-value was $.30 [$8.95-($58.65-$50.00)] when this transaction was executed.
Sohu.com reported quarterly earnings today that were substantially better than even the most optimistic analysts' projections. This Chinese internet stock has been very bullish since originally purchased in February for the CCAP, and has reacted with a further move upward today in reaction to the positive earnings report.
This is the Roll-Up Analysis table that is currently under development for use by the Covered Calls Advisor to aid in analyzing roll-up and roll-down decisions. The table shown here pertains to this Sohu.com roll-up transaction.
The two key variables are:
(1) aRIU: This stands for 'Annualized Return If Unchanged'. The 83.6% represents the incremental annualized return that would be achieved for the next 12 days until May09 expiration by rolling-up from the $50 to the $60 strike, assuming that the current $58.65 price of SOHU remains at $58.65 upon expiration on May 15th.
(2) Payback: This 16.5% represents the additional absolute profit percent that would be achieved if the new position is exercised upon May09 expiration. The 16.5% can also be thought of in terms of dollars; that is, $165 additional profit per 100 shares owned. So with 400 shares of SOHU, this roll-up provides the potential to increase the return on this covered calls position by $660 ($1.65*400 shares) between today and May09 expiration 12 days from now on 5/16/09.
The transactions history to date is as follows:
02/24/09 Bought 400 SOHU @ $44.617
02/24/09 Sold 4 SOHU Mar09 $45.00 Calls @ $3.20
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 4 SOHU Apr $45s @ $1.45
Note: The price of SOHU was $40.10 today when the call options were sold.
04/13/09 Buy-to-Close (BTC) 4 SOHU Apr09 $45.00s @ $5.20
04/13/09 Sell-to-Open (STO) 4 SOHU May09 $50.00s @ $4.30
Net Debit-Spread upon Roll-Up-and-Forward was $.90 ($5.20 - $4.30)
Note: The price of SOHU was $49.90 today when the call options were sold.
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the call options were sold.
The overall performance results(including commissions) for the SOHU transactions are as follows:
Stock Purchase Cost: $17,855.75
($44.617*400+$8.95 commission)
Net Profit:
(a) Options Income: -$1,341.80 (400*($3.20+$1.45-$5.20+$4.30-$8.95+$1.95) - 4*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $58.65): +$5,604.25
= ($58.65-$44.617)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$6,144.25
= ($60.00-$44.617)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $58.65): +$4,262.45
= (-$1,341.80 +$0.00 +$5,604.25)
Total Net Profit(If stock price exercised at $60.00): +$4,802.45
=(-$1,341.80 +$0.00 +$6,144.25)
Absolute Return if Stock Price Unchanged at $58.65: +23.9%
= +$4,262.45/$17,855.75
Annualized Return If Stock Price Unchanged (ARIU) +107.6%
=(+$4,262.45/$17,855.75)*(365/81 days)
Absolute Return if Exercised at $60.00: +26.9%
= +$4,802.45/$17,855.75
Annualized Return If Exercised (ARIE) +121.2%
=(+$4,802.45/$17,855.75)*(365/81 days)
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the debit-spread was transacted, so the remaining time-value was $.30 [$8.95-($58.65-$50.00)] when this transaction was executed.
Sohu.com reported quarterly earnings today that were substantially better than even the most optimistic analysts' projections. This Chinese internet stock has been very bullish since originally purchased in February for the CCAP, and has reacted with a further move upward today in reaction to the positive earnings report.
This is the Roll-Up Analysis table that is currently under development for use by the Covered Calls Advisor to aid in analyzing roll-up and roll-down decisions. The table shown here pertains to this Sohu.com roll-up transaction. The two key variables are:
(1) aRIU: This stands for 'Annualized Return If Unchanged'. The 83.6% represents the incremental annualized return that would be achieved for the next 12 days until May09 expiration by rolling-up from the $50 to the $60 strike, assuming that the current $58.65 price of SOHU remains at $58.65 upon expiration on May 15th.
(2) Payback: This 16.5% represents the additional absolute profit percent that would be achieved if the new position is exercised upon May09 expiration. The 16.5% can also be thought of in terms of dollars; that is, $165 additional profit per 100 shares owned. So with 400 shares of SOHU, this roll-up provides the potential to increase the return on this covered calls position by $660 ($1.65*400 shares) between today and May09 expiration 12 days from now on 5/16/09.
The transactions history to date is as follows:
02/24/09 Bought 400 SOHU @ $44.617
02/24/09 Sold 4 SOHU Mar09 $45.00 Calls @ $3.20
03/21/09 Mar09 Options Expired
03/23/09 Continuation Transaction -- Sell-to-Open (STO) 4 SOHU Apr $45s @ $1.45
Note: The price of SOHU was $40.10 today when the call options were sold.
04/13/09 Buy-to-Close (BTC) 4 SOHU Apr09 $45.00s @ $5.20
04/13/09 Sell-to-Open (STO) 4 SOHU May09 $50.00s @ $4.30
Net Debit-Spread upon Roll-Up-and-Forward was $.90 ($5.20 - $4.30)
Note: The price of SOHU was $49.90 today when the call options were sold.
05/04/09 Buy-to-Close (BTC) 4 SOHU May09 $50s @ $8.95
05/04/09 Sell-to-Open (STO) 4 SOHU May09 $60s @ $1.95
Net Debit-Spread upon Roll-Up was $7.00 ($8.95 - $1.95)
Note: The price of SOHU was $58.65 today when the call options were sold.
The overall performance results(including commissions) for the SOHU transactions are as follows:
Stock Purchase Cost: $17,855.75
($44.617*400+$8.95 commission)
Net Profit:
(a) Options Income: -$1,341.80 (400*($3.20+$1.45-$5.20+$4.30-$8.95+$1.95) - 4*$10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $58.65): +$5,604.25
= ($58.65-$44.617)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $60.00): +$6,144.25
= ($60.00-$44.617)*400 - $8.95 commissions
Total Net Profit(If stock price unchanged at $58.65): +$4,262.45
= (-$1,341.80 +$0.00 +$5,604.25)
Total Net Profit(If stock price exercised at $60.00): +$4,802.45
=(-$1,341.80 +$0.00 +$6,144.25)
Absolute Return if Stock Price Unchanged at $58.65: +23.9%
= +$4,262.45/$17,855.75
Annualized Return If Stock Price Unchanged (ARIU) +107.6%
=(+$4,262.45/$17,855.75)*(365/81 days)
Absolute Return if Exercised at $60.00: +26.9%
= +$4,802.45/$17,855.75
Annualized Return If Exercised (ARIE) +121.2%
=(+$4,802.45/$17,855.75)*(365/81 days)
Saturday, May 2, 2009
Counteracting the Disposition Effect
It is very important for covered calls investors to understand the investing-related term 'disposition effect'. In short, the disposition effect is the tendency of investors to sell winners too quickly and to keep losers too long.
The disposition effect is a topic of academic research in the field of behavioral finance, within the specialty area of cognitive biases. The abstract of an especially well-researched and well-written study on this concept is found here: (link). To read the entire paper: from the SSRN abstract link, first click 'Download', then click on 'SSRN New York,USA'.
From detailed empirical analyses, researchers have been able to demonstrate a tendency of investors to sell winners too quickly and to keep losers too long. The primary reason they identified for this behavior is a greater psychological willingness to accept profitable positions (sell out at a profit if you will); with a corresponding reduced willingness to accept a losing position. People want their investment positions to end as winners, not losers, and will forego their reasoning to make that happen. Said another way, investors have a greater need to repair losing positions and to attempt to return them to profitability before selling them. Researchers have also shown that this tendency has a net negative effect since it reduces return-on-investment performance.
At this point you might be thinking: "Okay, this disposition effect concept seems logical enough; But why does it need to be highlighted on a blog focused on covered calls?" The answer is that covered calls investors are more likely to be adversely impacted by the disposition effect than typical buy-and-hold investors. Why? While the decision to sell an existing underlying stock can of course be made at any time, the overwhelming majority of the keep-or-sell decisions made by covered calls investors are normally made close to the monthly options expiration dates. As expiration Friday approaches, the easiest approach for a covered calls investor keep-or-sell decision is to do nothing. Unfortunately, since it is the easiest approach, it is too often the default. With this approach, the following will automatically occur:
1. Virtually all in-the-money (ITM) positions will be called away (a.k.a. ‘assigned’ or ‘exercised’) and the underlying stock will be sold for the strike price value; and
2. For all out-of-the-money (OTM) positions, the options will expire worthless and the underlying stock will be retained in the portfolio.
This passive approach is absolutely not the technique recommended by this advisor. This strategy results in the investor selling the strongest performers in the portfolio (the winners if you will); and holding the weakest performers (i.e. the losers). Thus, this passive covered calls approach produces a natural result, one that makes covered calls investors inordinately susceptible to the adverse consequences of the disposition effect.
Automatically keeping the securities that expire out-of-the-money is bad enough. But the Covered Calls Advisor has noticed that many covered calls investors compound this disposition effect further by immediately transitioning into a repair strategy, in an attempt to nurse the sick patient (losing stock) back to health (profitability). Unfortunately, this frequently leads to an exceedingly prolonged period of managing a losing position. At this point, the investor is neck-deep in the disposition effect quicksand. With sufficient patience, the investor might eventually manage the position back to minimal profitability. Then, after months (and even years) of frustration, the investor is so relieved to be back to breakeven that the position is quickly sold. If this approach sounds all too familiar, please reconsider your thought process. This is precisely the "keep losers too long" disposition effect that we should avoid.
What can covered calls investors do to counteract the disposition effect? The primary answer lies in the investor's mental perspective. Most investors view their current positions primarily in relation to the purchase price, and make decisions with that price in mind. Unfortunately, this is a biased mindset; one that distorts the clarity of our decision-making perspective as it pertains to the stock as it is, at its current price. Researchers have determined that more successful investors have an ability to largely disregard the purchase price; they have the ability to view the primary reference point of the security at its current price. Using this current price perspective negates the disposition effect. Fortunately, cognitive bias research has also determined that "for individuals who are aware of their reluctance to sell losers, they can more completely evaluate the consequences of their decisions over time, leading to modification of their behavior... and investor groups with potentially better access to information and sophistication about the financial markets have a significantly lower disposition effect than other investors." So the good news is that we can use our awareness of the disposition effect to improve our covered calls decision-making processes through a committed effort to counteract the disposition effect.
To demonstrate how covered calls investors can use an awareness of the disposition effect to improve their covered calls decision-making process, consider the decisions we make to "Keep-or-Sell" or to "Roll-Up or Roll-Down."
Keep-or-Sell Decisions --
There are two methods that aid in counteracting the disposition effect regarding which securities to keep and which to sell:
(1) Because the Covered Calls Advisor favors near-month covered calls positions, relatively frequent keep-or-sell decisions are made. This frequency can have a beneficial effect in countering disposition effect bias in comparison with a more passive long-term buy-and-hold strategy; and
(2) Generally, most keep or sell decision-making is done during the final week prior to expiration. To intentionally counteract the disposition effect at that time, a keep-or-sell decision should be made on each existing covered calls position on its own individual merit, irrespective of the relative moneyness of each position (that is whether a position is in-the-money, at-the-money, or out-of-the-money) at that particular time. Additional comments that present a specific process to aid decision-making on existing positions is contained in this prior article (link) from this Covered Calls Advisor blog.
Roll-Up and Roll-Down Decisions --
A prior article (link), also from this blog (especially the section describing key concept #1) offers an approach to counteract the disposition effect in our rolling decisions by completely disregarding our initial purchase prices and considering only current prices.
This topic is more complex than most prior postings on this blog. If you would like further clarification, please submit your comments and questions. They are always welcomed. Click the 'comments' link below or post them on the justcoveredcalls Yahoo!Group site. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site.
Regards and Godspeed to All,
Jeff
The disposition effect is a topic of academic research in the field of behavioral finance, within the specialty area of cognitive biases. The abstract of an especially well-researched and well-written study on this concept is found here: (link). To read the entire paper: from the SSRN abstract link, first click 'Download', then click on 'SSRN New York,USA'.
From detailed empirical analyses, researchers have been able to demonstrate a tendency of investors to sell winners too quickly and to keep losers too long. The primary reason they identified for this behavior is a greater psychological willingness to accept profitable positions (sell out at a profit if you will); with a corresponding reduced willingness to accept a losing position. People want their investment positions to end as winners, not losers, and will forego their reasoning to make that happen. Said another way, investors have a greater need to repair losing positions and to attempt to return them to profitability before selling them. Researchers have also shown that this tendency has a net negative effect since it reduces return-on-investment performance.
At this point you might be thinking: "Okay, this disposition effect concept seems logical enough; But why does it need to be highlighted on a blog focused on covered calls?" The answer is that covered calls investors are more likely to be adversely impacted by the disposition effect than typical buy-and-hold investors. Why? While the decision to sell an existing underlying stock can of course be made at any time, the overwhelming majority of the keep-or-sell decisions made by covered calls investors are normally made close to the monthly options expiration dates. As expiration Friday approaches, the easiest approach for a covered calls investor keep-or-sell decision is to do nothing. Unfortunately, since it is the easiest approach, it is too often the default. With this approach, the following will automatically occur:
1. Virtually all in-the-money (ITM) positions will be called away (a.k.a. ‘assigned’ or ‘exercised’) and the underlying stock will be sold for the strike price value; and
2. For all out-of-the-money (OTM) positions, the options will expire worthless and the underlying stock will be retained in the portfolio.
This passive approach is absolutely not the technique recommended by this advisor. This strategy results in the investor selling the strongest performers in the portfolio (the winners if you will); and holding the weakest performers (i.e. the losers). Thus, this passive covered calls approach produces a natural result, one that makes covered calls investors inordinately susceptible to the adverse consequences of the disposition effect.
Automatically keeping the securities that expire out-of-the-money is bad enough. But the Covered Calls Advisor has noticed that many covered calls investors compound this disposition effect further by immediately transitioning into a repair strategy, in an attempt to nurse the sick patient (losing stock) back to health (profitability). Unfortunately, this frequently leads to an exceedingly prolonged period of managing a losing position. At this point, the investor is neck-deep in the disposition effect quicksand. With sufficient patience, the investor might eventually manage the position back to minimal profitability. Then, after months (and even years) of frustration, the investor is so relieved to be back to breakeven that the position is quickly sold. If this approach sounds all too familiar, please reconsider your thought process. This is precisely the "keep losers too long" disposition effect that we should avoid.
What can covered calls investors do to counteract the disposition effect? The primary answer lies in the investor's mental perspective. Most investors view their current positions primarily in relation to the purchase price, and make decisions with that price in mind. Unfortunately, this is a biased mindset; one that distorts the clarity of our decision-making perspective as it pertains to the stock as it is, at its current price. Researchers have determined that more successful investors have an ability to largely disregard the purchase price; they have the ability to view the primary reference point of the security at its current price. Using this current price perspective negates the disposition effect. Fortunately, cognitive bias research has also determined that "for individuals who are aware of their reluctance to sell losers, they can more completely evaluate the consequences of their decisions over time, leading to modification of their behavior... and investor groups with potentially better access to information and sophistication about the financial markets have a significantly lower disposition effect than other investors." So the good news is that we can use our awareness of the disposition effect to improve our covered calls decision-making processes through a committed effort to counteract the disposition effect.
To demonstrate how covered calls investors can use an awareness of the disposition effect to improve their covered calls decision-making process, consider the decisions we make to "Keep-or-Sell" or to "Roll-Up or Roll-Down."
Keep-or-Sell Decisions --
There are two methods that aid in counteracting the disposition effect regarding which securities to keep and which to sell:
(1) Because the Covered Calls Advisor favors near-month covered calls positions, relatively frequent keep-or-sell decisions are made. This frequency can have a beneficial effect in countering disposition effect bias in comparison with a more passive long-term buy-and-hold strategy; and
(2) Generally, most keep or sell decision-making is done during the final week prior to expiration. To intentionally counteract the disposition effect at that time, a keep-or-sell decision should be made on each existing covered calls position on its own individual merit, irrespective of the relative moneyness of each position (that is whether a position is in-the-money, at-the-money, or out-of-the-money) at that particular time. Additional comments that present a specific process to aid decision-making on existing positions is contained in this prior article (link) from this Covered Calls Advisor blog.
Roll-Up and Roll-Down Decisions --
A prior article (link), also from this blog (especially the section describing key concept #1) offers an approach to counteract the disposition effect in our rolling decisions by completely disregarding our initial purchase prices and considering only current prices.
This topic is more complex than most prior postings on this blog. If you would like further clarification, please submit your comments and questions. They are always welcomed. Click the 'comments' link below or post them on the justcoveredcalls Yahoo!Group site. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site.
Regards and Godspeed to All,
Jeff
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