Returns -- Through May 2011

1. May 2011 Year-to-Date Results:

As shown in the chart below, the Covered Calls Advisor Portfolio (CCAP) has increased by +6.18% over the first five months of calendar year 2011. This performance compares with an increase of +7.78% for the benchmark Russell 3000 index for the same five-month period.











CCAP Absolute Return (Jan 1st through May 31st, 2011) = +6.18%
($305,217.97-$287,453.75)/$287,453.75

Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through May 31st, 2011) = +7.78% ($80.78-$74.95)/$74.95


2. Prior Years Results:

The Covered Calls Advisor Portfolio (CCAP) began in September, 2007. The annualized returns achieved each year for 2007 through 2010 compared with the Russell 3000 benchmark were as follows:












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

The Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. Here's an example to aid understanding of how the overall portfolio performance is determined: If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100. As shown in the right sidebar near the top of this page, the Covered Calls Advisor's current Overall Market Meter rating remains "SLIGHTLY BULLISH". The corresponding investing strategy is to, on-average, sell 2% out-of-the-money covered calls for the nearest expiration month.

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

Regards and Godspeed,
Jeff

Covered Calls Continuation Transactions

Upon May2011 options expiration, several covered calls positions in the Covered Calls Advisor Portfolio (CCAP) expired. Today, a decision was made to re-establish covered calls -- one with a Jun2011 and three with Jul2011 expirations. The detailed transactions history for these positions as well as possible results for these investments are as follows:

1. Apple Inc.(AAPL) -- Continuation
The transactions history is as follows:
12/20/2010 Bought 100 AAPL @ $321.10
12/21/2010 Sold 1 AAPL Jan2011 $330.00 Call @ $6.10
Note: The call option was sold today when the AAPL stock was trading at $324.10.
01/22/2011 Jan2011 AAPL options expired
Note: The price of AAPL was $326.72 at closing on expiration Friday.
01/24/2011 Sold 1 AAPL Feb2011 $340.00 Call @ $5.50
Note: The price of AAPL was $333.72 when this Call option was sold.
02/19/2011 Feb2011 AAPL options expired
02/28/2011 Sold 1 AAPL Apr2011 $360.00 Call @ $10.80
Note: The price of AAPL was $354.32 when this Call option was sold.
04/16/2011 Apr2011 AAPL options expired.
04/26/2011 Sold 1 AAPL May2011 $350.00 Call @ $8.95
Note: The price of AAPL was $353.06 when this call option was sold.
05/31/2011 Sold 1 AAPL Jun2011 $360.00 Call @ $.90
Note: The price of AAPL was $343.63 when this call option was sold.

Two possible overall performance results(including commissions) for the Apple Inc.(AAPL) transactions would be as follows:
Stock Purchase Cost: $32,118.95
= ($321.10*100+$8.95 commission)

Net Profit:
(a) Options Income: +$3,176.50
= [100*($6.10+$5.50+$10.80+$8.95+$.90) - 5*$9.70 commissions]
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $343.63): +$2,244.05
= ($343.63-$321.10)*100 - $8.95 commissions
(c) Capital Appreciation (If assigned at $360.00): +$3,881.05
= ($360.00-$321.10)*100 - $8.95 commissions

Total Net Profit(If stock price unchanged at $343.63): +$5,420.55
= (+$3,176.50 +$0.00 +$2,244.05)
Total Net Profit(If stock assigned at $360.00): +$7,057.55
= (+$3,176.50 +$0.00 +$3,881.05)

Absolute Return if Unchanged at $343.63: +16.9%
= +$5,420.55/$32,118.95
Annualized Return If Unchanged (ARIU): +34.2%
= (+$5,420.55/$32,118.95)*(365/180 days)

Absolute Return if Assigned at $360.00: +22.0%
= +$7,057.55/$32,118.95
Annualized Return If Assigned (ARIA): +44.6%
= (+$7,057.55/$32,118.95)*(365/180 days)


2. China Mobile Ltd.(CHL) -- Continuation
The transactions history is as follows:
02/23/2011 Bought 200 CHL @ $46.479
02/23/2011 Sold 2 CHL Mar2011 $47.50 Calls @ $.60
03/19/2011 Mar2011 Options Expired
03/30/2011 Sold 2 CHL May2011 $47.50 Calls @ $.55
Note: price of CHL was $46.22 when these options were sold.
05/10/2011 Ex-dividend payment of approximately $.9128 per share expected.
05/21/2011 May2011 Options Expiration will occur.
05/31/2011 Sold 2 CHL Jul2011 $47.50 Calls @ $.35
Note: The price of CHL was $45.59 when these call options were sold.

Two possible overall performance results(including commissions) for the China Mobile Ltd ADR (CHL) transactions would be as follows:

Stock Purchase Cost: $9,304.75
= ($46.479*200+$8.95 commission)

Net Profit:
(a) Options Income: +$268.65
= ($.60 + $.55 + $.35)*200 shares - 3*$10.45 commissions
(b) Dividend Income: +$182.56 = $.9128 * 200 shares
(c) Capital Appreciation (If stock price unchanged at $45.59): -$186.75
= ($45.59 -$46.479)*200 - $8.95 commissions
(c) Capital Appreciation (If CHL assigned at $47.50 at Jul2011 expiration): +$195.25
+($47.50 -$46.479)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $45.59): +$264.46
= (+$268.65 +$182.56 -$186.75)
Total Net Profit(If stock price above $47.50 at Jul2011 options expiration): +$646.46= (+$268.65 +$182.56 +$195.25)

Absolute Return if Unchanged at $45.59: +2.8%
= +$264.46/$9,304.75
Annualized Return If Unchanged (ARIU): +7.3%
= (+$264.46/$9,304.75)*(365/143 days)

Absolute Return (If stock assigned at $47.50 upon Jul2011 options expiration): +6.9%
= +$646.46/$9,304.75
Annualized Return if stock assigned at expiration (ARIA): +17.7%
= (+$646.46/$9,304.75)*(365/143 days)


3. iShares MSCI China ETF (FXI) -- Continuation
The transactions history is as follows:
04/18/2011 Bought 1,000 FXI @ $44.80
04/20/2011 Sold 10 FXI May2011 $47.00 Calls @ $.49
Note: the price of FXI was $45.88 when the calls were sold.
05/31/2011 Sold 10 FXI Jul2011 $47.00 Calls @ $.37
Note: The price of FXI was $45.18 when these call options were sold.

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

Net Profit:
(a) Options Income: +$834.60
= (1,000*($.49+$.37) - 2*$12.70 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $45.18 at expiration): +$371.05
= ($45.18-$44.80)*1,000 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $47.00): +$2,191.05
= ($47.00-$44.80)*1,000 - $8.95 commissions

Total Net Profit (If stock price unchanged at $45.18 at expiration): +$1,205.65
= (+$834.60 +$0.00 +371.05)
Total Net Profit (If stock assigned at $47.00): +$3,025.65
= (+$834.60 +$0.00 +$2,191.05)

1. Absolute Return (If stock unchanged at $45.18 at expiration): +2.7%
= +$1,205.65/$44,808.95
Annualized Return (If stock unchanged at expiration): +11.0%
= (+$1,205.65/$44,808.95)*(365/89 days)

2. Absolute Return (If stock assigned at $47.00 at expiration): +6.8%
= +$3,025.65/$44,808.95
Annualized Return If Assigned (ARIA): +27.7%
= (+$3,025.65/$44,808.95)*(365/89 days)


4. Microsoft Corp.(MSFT) -- Continuation
The transactions history is as follows:
01/24/2011 Bought 700 MSFT @ $28.15
02/17/2011 Ex-Dividend Date $112.00 = $.16 per share x 700 shares
01/24/2011 Sell-to-Open(STO) 7 MSFT Feb2011 $29.00 CallS @ $.40
02/19/2011 Feb 2011 Options Expired
03/21/2011 Sell-to-Open(STO) 7 MSFT Apr2011 $26.00 Calls @ $.31
Note: the price of MSFT was $25.47 today when the options were sold.
04/16/2011 Apr2011 MSFT options expired.
04/26/2011 Sold 7 MSFT May2011 $26.00 Calls @ $.66
Note: The price of MSFT was $26.06 when these call options were sold.
05/17/2011 Ex-Dividend Date $112.00 = $.16 per share x 700 shares
05/31/2011 Sold 7 MSFT Jul2011 $26.00 Calls @ $.29
Note: The price of MSFT was $25.05 when these call options were sold.

Two possible overall performance results(including commissions) for the Microsoft Corp.(MSFT) transactions would be as follows:
Stock Purchase Cost: $19,713.95
= ($28.15*700+$8.95 commission)

Net Profit:
(a) Options Income: +$1,105.20
= 700*($.40+$.31+$.66+$.29) - 4*$14.20 commissions)
(b) Dividend Income: +$224.00 ($.16/share * 700 shares * 2 payments)
(c) Capital Appreciation (If stock price unchanged at $25.05): -$2,178.95
= ($25.05-$28.15)*700 - $8.95 commissions
(c) Capital Appreciation (If assigned at $26.00): -$1,513.95
= ($26.00-$28.15)*700 - $8.95 commissions

Total Net Profit(If stock price unchanged at $25.05): -$849.75
= (+$1,105.20 +$224.00 -$2,178.95)
Total Net Profit(If stock assigned at $26.00): -$184.75
= (+$1,105.20 +$224.00 -$1,513.95)

Absolute Return if Stock Unchanged at $25.05: -4.3%
= -$849.75/$19,713.95
Annualized Return If Unchanged (ARIU): -13.5%
= (-$849.75/$19,713.95)*(365/173 days)

Absolute Return if Assigned at $26.00: -0.9%
= -$184.75/$19,713.95
Annualized Return If Assigned (ARIA): -2.0%
= (-$184.75/$19,713.95)*(365/173 days)

Covered Calls Continuation Transactions

Upon May2011 options expiration, several covered calls positions in the Covered Calls Advisor Portfolio (CCAP) expired. Last Friday, a decision was made to re-establish covered calls for three positions with June 2011 expirations. The detailed transactions history for these positions as well as possible results for these investments are as follows:

1. Freeport McMoRan Copper and Gold Inc.(FCX) -- Continuation
The transactions history is as follows:
01/28/2011 Sold 3 Freeport-McMoRan Copper and Gold Inc.(FCX) Feb2011 $110.00 Puts @ $6.35
Note: the price of FCX stock was $106.10 when these puts were sold.
The 100% cash-secured put position in Freeport McMoRan (FCX) ended out-of-the-money and was assigned for purchase. The stock underwent a 2-for-1 split since original sale of the three FCX puts at $110.00 strike price. So the assignment was for the purchase of 600 shares of FCX stock at half of the the original $110 strike price value which is $55.00.
03/17/2011 Sold 6 FCX Apr2011 $55.00 Calls @ $1.43
Note: The price of FCX was $52.15 when these call options were sold.
04/16/2011 Apr2011 FCX Options Expired.
Note: the price of FCX was $51.17 upon options expiration.
04/20/2011 Sold 6 FCX May2011 $55.00 Calls @ $1.95
Note: the price of FCX was $54.73 when these call options were sold.
05/11/2011 $150.00 Ex-Dividend ($.250 per share * 600 shares)
05/15/2011 Supplementary Dividend ($.50 per share) for shares of record on 5/15/2011.
05/21/2011 May2011 Options Expiration Date
05/27/2011 Sold 6 FCX May2011 $55.00 Calls @ $.44
Note: the price of FCX was $51.60 when the calls were sold.

Two possible overall performance results(including commissions) for the Freeport-McMoRan Copper and Gold Inc.(FCX) transactions would be as follows:
Stock Purchase Cost: $33,008.95
= ($110.00*300+$8.95 commission)

Net Profit:
(a) Options Income: +$3,921.30
= [300*$6.35 + 600*($1.43+$1.95+$.44) - 3*$11.20 - 3*6*$13.45 commissions]
(b) Dividend Income: +$450.00 [($.50 + $.25) * 600 shares]
(c) Capital Appreciation (If stock price unchanged at $51.60):
-$2,048.95 = ($51.60-$55.00)*600 - $8.95 commissions
(c) Capital Appreciation (If assigned at $55.00): -$8.95
= ($55.00-$55.00)*600 - $8.95 commissions

Total Net Profit(If stock price unchanged at $51.60): +$2,322.35
= (+$3,921.30 +$450.00 -$2,048.95)
Total Net Profit(If stock assigned at $55.00): +$4,362.35
= (+$3,921.30 +$450.00 -$8.95)

Absolute Return if Unchanged at $51.60: +7.0%
= +$2,322.35/$33,008.95
Annualized Return If Unchanged (ARIU): +18.2%
= (+$2,322.35/$33,008.95)*(365/141 days)

Absolute Return if Assigned at $55.00: +13.2%
= +$4,362.35/$33,008.95
Annualized Return If Assigned (ARIA): +34.2%
= (+$4,362.35/$33,008.95)*(365/141 days)


2. iShares MSCI Emerging Markets ETF (EEM) -- Continuation
The transactions history is as follows:
04/18/2011 Bought 500 EEM @ $47.81
04/19/2011 Sold 5 EEM May2011 $49.00 Calls @ $.83
Note: the price of EEM was $48.32 when the calls were sold.
05/27/2011 Sold 5 EEM Jun2011 $49.00 Calls @ $.44
Note: the price of EEM was $47.83 when the calls were sold.

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

Net Profit:
(a) Options Income: +$564.60
= [500*($.83 +$.35) - 2*$12.70 commissions]
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $47.83 at expiration): +1.05
= ($47.83-$47.81)*500 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $49.00): +$586.05
= ($49.00-$47.81)*500 - $8.95 commissions

Total Net Profit (If stock price unchanged at expiration): +$565.65
= (+$564.60 +$0.00 +$1.05)
Total Net Profit (If stock assigned at $49.00): +$1,150.65
= (+$564.60 +$0.00 +$586.05)

1. Absolute Return (If stock unchanged at $47.83 at expiration): +2.4%
= +$565.65/$23,913.95
Annualized Return (If stock unchanged at expiration): +14.2%
= (+$565.65/$23,913.95)*(365/61 days)

2. Absolute Return (If stock assigned at $49.00 at expiration): +4.8%
= +$1,150.65/$23,913.95
Annualized Return (If stock assigned at $49.00): +28.8%
= (+$1,150.65/$23,913.95)*(365/61 days)


3. iShares MSCI South Korea ETF (EWY) -- Continuation
The transactions history is as follows:
04/18/2011 Bought 600 EWY @ $64.17
04/19/2011 Sold 6 EWY May2011 $66.00 Calls @ $1.39
Note: the price of EWY was $65.20 when the calls were sold.
05/27/2011 Sold 6 EWY Jun2011 $67.00 Calls @ $.59
Note: the price of EWY was $64.84 when the calls were sold.

Two possible overall performance results(including commissions) for these iShares MSCI South Korea ETF (EWY) transactions would be as follows:
Stock Purchase Cost: $38,510.95
= ($64.17*600+$8.95 commission)

Net Profit:
(a) Options Income: +$1,161.10
= [600*($1.39+$.59) - 2*$13.45 commissions]
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $64.84 at expiration): +$393.05
= ($64.84-$64.17)*600 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $67.00): +$1,287.05
= ($67.00-$64.84)*600 - $8.95 commissions

Total Net Profit (If stock price unchanged at expiration): +$1,554.15
= (+$1,161.10 +$0.00 +$393.05)
Total Net Profit (If stock assigned at $67.00): +$2,715.25
= (+$1,161.10 +$0.00 +$1,554.15)

1. Absolute Return (If stock unchanged at $64.84 at expiration): +4.0%
= +$1,554.15/$38,510.95
Annualized Return (If stock unchanged at expiration): +24.1%
= (+$1,554.15/$38,510.95)*(365/61 days)

2. Absolute Return (If stock assigned at $67.00 at expiration): +7.1%
= +$2,715.25/$38,510.95
Annualized Return (If stock assigned at $67.00): +42.2%
= (+$2,715.25/$38,510.95)*(365/61 days)

May 2011 Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained a total of twelve covered calls positions with May 2011 expirations, with the following results:

- One covered calls position (International Paper) was exercised early at a nice profit. That occurrence was reported on the day it occurred here.

- Nine covered calls positions in the CCAP (Apple Inc., China Mobile Ltd., Freeport McMoRan Copper and Gold Inc., iShares MSCI China ETF, iShares MSCI Emerging Markets ETF, iShares MSCI South Korea ETF, Microsoft Corp., Petrobras, and ProShares UltraShort 20+ Year Treasury ETF) ended out-of-the-money. Decisions will be made to either sell the equities, or to keep them and sell calls to establish June2011 covered call positions. The related transactions will be made this week and the actual transactions will be posted on this blog site on the same day they occur.

- The remaining two covered calls positions (Best Buy Corp. and UnitedHealth Group Inc.) were in-the-money on option expiration Friday. The Covered Calls Advisor decided to retain both stocks, so both positions were rolled-out to June 2011 covered calls. The transactions history for each of these positions are as follows:

1. Best Buy Corp.(BBY)
The transactions history is as follows:
01/24/2011 Bought 300 BBY @ $35.13
01/24/2011 Sell-to-Open(STO) 3 BBY Feb2011 $36.00 Calls @ $.57
02/19/2011 Feb 2011 Options Expired
03/21/2011 Sell-to-Open(STO) 3 BBY Apr2011 $34.00 Calls @ $.49
Note: the price of BBY was $31.92 today when the options were sold.
04/16/2011 Apr2011 BBY options expired.
04/26/2011 Sold 3 BBY May2011 $31.00 Calls @ $.60
Note: The price of BBY was $30.59 when these call options were sold.
05/20/2011 Bought-to-Close(BTC) 3 BBY May3011 $31.00 Calls @ $.36
Note: The price of BBY was $31.31 when the options were bought back.
05/20/2011 Sell-to-Open(STO) 3 BBY Jun2011 $32.00 Calls @ $.94
Note: The price of BBY was $31.43 when these options were sold.

Two possible overall performance results(including commissions) for the Best Buy Corp.(BBY) transactions would be as follows:
Stock Purchase Cost: $10,547.95
= ($35.13*300+$8.95 commission)

Net Profit:
(a) Options Income: +$616.00
= (300*($.57+$.49+$.60-$.36+$.94) - 5*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $31.43):
-$1,118.95 = ($31.43-$35.13)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $32.00): -$947.95
= ($32.00-$35.13)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $31.43): -$502.95
= (+$616.00 +$0.00 -$1,118.95)
Total Net Profit(If stock assigned at $32.00): -$331.95
= (+$616.00 +$0.00 -$947.95)

1. Absolute Return if Unchanged at $31.43: -4.8%
= -$502.95/$10,547.95
Annualized Return If Unchanged (ARIU): -12.0%
= (-$502.95/$10,547.95)*(365/145 days)

2. Absolute Return if Assigned at $32.00: -3.1%
= -$331.95/$10,547.95
Annualized Return If Assigned (ARIA): -7.9%
= (-$331.95/$10,547.95)*(365/145 days)

2. UnitedHealth Group Inc.(UNH)
The transactions history is as follows:
04/18/2011 Bought 300 UNH @ $43.97
04/20/2011 Sell-to-Open(STO) 3 UNH May2011 $45.00 CallS @ $1.03
Note: the price of UNH was $44.60 when the call options were sold.
05/20/2011 Bought-to-Close(BTC) 3 UNH May3011 $45.00 Calls @ $5.05
Note: The price of UNH was $50.08 when the options were bought back.
05/20/2011 Sell-to-Open(STO) 3 UNH Jun2011 $50.00 Calls @ $1.43
Note: The price of UNH was $50.28 when these options were sold.

A possible overall performance result(including commissions) for these UnitedHealth Group Inc.(UNH) transactions would be as follows:
Stock Purchase Cost: $13,199.95
= ($43.97*300+$8.95 commission)

Net Profit:
(a) Options Income: -$810.60
= (300*($1.03-$5.05+$1.43) - 3*$11.20 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock assigned at $50.00): +$1,800.05
= ($50.00-$43.97)*300 - $8.95 commissions

Total Net Profit (If stock assigned at $50.00): +$989.45
= (-$810.60 +$0.00 +$1,800.05)

Absolute Return (If stock assigned at $50.00 at expiration): +7.5%
= +$989.45/$13,199.95
Annualized Return If Assigned (ARIA): +44.9%
= (+$989.45/$13,199.95)*(365/61 days)

Overall Market Meter Rating Remains "Slightly Bullish"

Each month during options expiration week, the Covered Calls Advisor re-calculates each of the current values for the nine factors used to determine the "Overall Market Meter" rating. These nine factors can be categorized into macroeconomic (the first 3 indicators in the chart below), momentum (next 2 indicators in the chart), value (next 3 indicators), and growth (the last indicator). As shown in the chart below, the new Overall Market Meter Average rating (blue bar at the bottom of the chart) remains unchanged at "Slightly Bullish":















The current Market Meter Average of 4.11 is slightly lower than the 4.22 of last month, but nevertheless remains at Slightly Bullish (Note: the range for Slightly Bullish is from 3.5 to 4.5) for establishing covered calls investing positions for the next options expiration month of June 2011. Of the nine factors used, six remained unchanged from last month. The three indicators that changed were:
(1) Leading Economic Index -- from Very Bullish to Bullish; and
(2) Business Cycle and Unemployment Claims -- from Slightly Bearish to Neutral; and
(3) Interest Rates -- from Bullish to Slightly Bullish

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bullish sentiment is to "on-average sell 2% out-of-the-money covered calls for the nearest expiration month." So with the May 2011 options expiration this week, newly established positions for June 2011 expiration will be established in accordance with this guideline.

In the field of behavioral finance, there is substantial academic research on cognitive biases. As investors, our emotional feelings about the current state of the stock market tends to fluctuate daily with the ups and downs of the market and also with the bullish and bearish investing-related information we read. A prior blog post describing my investing process states: "The greatest benefit of a well-defined, detailed investing process is that it enables us to be objective in our decision-making and to therefore counteract the negative impact that often occurs if we allow our emotions to influence our decisions. I am convinced that emotionally-driven decisions are the primary culprit that causes investors to often buy high (often accompanied by greed) and sell low (often accompanied by fear), the exact opposite of what they had intended to do." So, the Covered Calls Advisor attempts to replace emotional decision-making with objective decision-making wherevever possible. The 9-factor Overall Market Meter accomplishes this very nicely. Plug in the current numbers for each factor and the current resulting Overall Market Meter rating is automatically calculated. The specific factors that make up the model are occasionally updated (tweaked if you will) as new and better forecasting information is obtained. The Overall Market Meter model itself is, of course, not perfect. But generally speaking, I am pleased with it, and I love the fact that it removes the emotional roller coaster effect that each of us investors are prone to be adversely affected by.

Your comments or questions regarding this post are welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Regards and Godspeed,
Jeff

Establish International Paper Co.(IP) Covered Calls

The Covered Calls Advisor had a May2011 covered calls position in IP that was exercised early at the end of last week. (Link to IP early exercise blog post)

Today, the Covered Calls Advisor decided to establish another covered calls position in International Paper with the proceeds received from the early assignment of the previous IP postion. The recent quarterly earnings report for IP was outstanding, and the future revenue and earnings expectations continue to make IP a very strong value-oriented investment at its current price. The transactions today were as follows:
05/17/2011 Bought 500 IP @ $31.26
05/17/2011 Sold 5 IP Jun2011 $32.00 Calls @ $.82

International Paper Company operates as a paper and packaging company with operations in North America, Europe, Latin America, the Russian Federation, Asia, and north Africa. Its Printing Papers segment produces uncoated printing and writing papers, including uncoated papers, market pulp, and uncoated bristols. The company's Industrial Packaging segment manufactures containerboards. Its products include linerboard, medium, whitetop, recycled linerboard, recycled medium, and saturated kraft. Its Consumer Packaging segment produces coated paperboard for various packaging and commercial printing end uses. The company's Distribution segment provides services and products to various customer markets, supplying commercial printers with printing papers and graphic pre-press, printing presses, and post-press equipment; the building services and away-from-home markets with facility supplies; and manufacturers with packaging supplies and equipment, as well as offers warehousing and delivery services. Its Forest Products segment owns and manages forest lands primarily in the United States.

Two possible overall performance results(including commissions) for the International Paper Co.(IP) transactions would be as follows:
Stock Purchase Cost: $15,638.95
= ($31.26*500+$8.95 commission)

Net Profit:
(a) Options Income: +$397.30
= (500*$.82 - $12.70 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $31.26 at expiration): -$8.95
= ($31.26-$31.26)*500 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $32.00): +$361.05
= ($32.00-$31.26)*500 - $8.95 commissions

Total Net Profit (If stock price unchanged at $31.26 at expiration): +$388.35
= (+$397.30 +$0.00 -$8.95)
Total Net Profit (If stock assigned at $32.00): +$758.35
= (+$397.30 +$0.00 +$361.05)

1. Absolute Return (If stock unchanged at $31.26 at expiration): +2.5%
= +$388.35/$15,638.95
Annualized Return (If stock unchanged at expiration): +28.3%
= (+$388.35/$15,638.95)*(365/32 days)

2. Absolute Return (If stock assigned at $32.00 at expiration): +4.8%
= +$758.35/$15,638.95
Annualized Return (If stock assigned at $32.00): +55.3%
= (+$758.35/$15,638.95)*(365/32 days)

The downside breakeven price at expiration is at $30.44 ($31.26 - $.82). Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Jun2011 options expiration) for this International Paper Co.(IP) covered calls position is 61.6%. This compares with a probability of profit of 50.5% for a buy-and-hold of International Paper Co.(IP) over the same time period.

Early Exercise -- International Paper Company

The Covered Calls Advisor received an email notification overnight that the five call options in International Paper Company (IP) were exercised yesterday -- hence, the 500 shares owned in IP were assigned (sold) at the $31.00 strike price. The closing price of IP yesterday was $32.32 and the May2011 $31.00 call options were trading then at an ask price of $1.37, hence there was $.05[($1.37-($32.32-$31.00)] of time value remaining in the options. The options owner likely exercised their option early to purchase the stock and thus capture today's ex-dividend date payment of $.2625 per share. This early exercise is a desirable outcome for the Covered Calls Advisor since: (1) the maximum potential return was realized on this covered calls position and it was achieved seven days earlier than would have otherwise occurred; (2) this early exercise frees up cash in the Covered Calls Advisor Portfolio which opens the possibility of establishing a new covered calls position with no need to wait until the Monday after May2011 options expiration to do so; and (3) it was the Covered Calls Advisor's intention to allow the shares in IP to be called away at May2011 expiration, so the early exercise is a welcomed event.

The transactions history is as follows:
04/20/2011 Bought 500 IP @ $30.09
04/20/2011 Sold 5 IP May2011 $31.00 Calls @ $.51

The performance result (including commissions) for the covered calls position in International Paper Company (IP) is as follows:
Stock Purchase Cost: $15,053.95
= ($30.09*500+$8.95 commission)

Net Profit:
(a) Options Income: +$267.70
= (500*$.51 - $12.70 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (Stock assigned at $31.00): +$446.05
= ($31.00-$30.09)*500 - $8.95 commissions

Total Net Profit (Stock assigned at $31.00): +$713.75
= (+$267.70 +$0.00 +$446.05)

Absolute Return (Stock assigned at $31.00): +4.7%
= +$713.75/$15,053.95
Annualized Return: +75.2%
= (+$713.75/$15,053.95)*(365/23 days)

It is not often that covered calls investors are fortunate enough to benefit from an early exercise by an options owner, but the +75.2% annualized return-on-investment outcome in this instance is indicative of the exceptionally lucrative result that often occurs when this does happen.

Country Value Rankings

Below is a the Covered Calls Advisor's current 'Country Value Rankings' table. This table provides a value-oriented perspective that assists this advisor make objective decisions regarding overweighting and underweighting specific countries and regions in the Covered Calls Advisor's portfolio. A comprehensive approach to asset allocation goes beyond diversification solely by asset classes (i.e. stocks, bonds, real estate, commodities, etc.); it should also include diversification by global geography. Behavioral finance research has clearly identified the profound tendency of most investors to succumb to "home-country bias". Also in this regard, legendary investor John Templeton was a leader in advocating the importance of developing a global-oriented value investing perspective to aid us in achieving investing outperformance.






Note: For expanded view, left click on this spreadsheet










The Country Value Rankings table above is based on a weighted-average ranking system. You will notice that there are eight categories (and one factor for each category) used in the analysis of each country as follows:










The next-to-last column on the Country Value Rankings spreadsheet shows the Weighted Average Summation Total for each country. It is interesting that the Top 5 countries are Asian. Thus, new investments in the Covered Calls Advisor Portfolio (shown in the right sidebar of this blog) will be substantially overweighted in these higher rated countries. Also of note is the U.S. ranking of 15th out of the 19 countries rated.

This Country Value Rankings spreadsheet is detailed in terms of both the methodolgy used and the resources used to capture the information for each country. If you are interested in these details and would like further information or clarification, please share your comments and questions in writing. They are always welcomed. Click the 'comments' link below to post your feedback. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog.

Hope this information is helpful in your thinking about your own equities selection methods in your covered calls investing process!

Regards and Godspeed to All,

Jeff

Establish ProShares UltraShort 20+ Year Treasury ETF Covered Calls

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

Established ProShares UltraShort 20+ Year Treasury ETF (TBT) Covered Calls for May2011:
05/02/2011 Bought 200 TBT @ $35.75
05/02/2011 Sold 2 TBT May2011 $37.00 Calls @ $.36

TBT seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index.

Some readers will ask: Why establish an out-of-the-money position in an inverse ETF instead of simply an in-the-money position in a direct investment (such as TLT)? In short, an out-of-the-money position in the inverse TBT ETF enables for the possibility of capital appreciation in the underlying ETF and thus a substantially higher potential return-on-investment than could be achieved from an in-the-money TLT position (since in-the-money covered calls positions eliminate the possibility of capital appreciation in the underlying equity) if interest rates do in fact trend slightly higher.

Two possible overall performance results(including commissions) for the TBT transactions would be as follows:
Stock Purchase Cost: $7,158.95
= ($35.75*200+$8.95 commission)

Net Profit:
(a) Options Income: +$61.55
= 200*$.36 - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TBT unchanged at $35.75):
-$8.95 = ($35.75-$35.75)*300 - $8.95 commissions
(c) Capital Appreciation (If TBT exercised at $37.00): +$241.05
= ($37.00-$35.75)*300 - $8.95 commissions

Total Net Profit(If TBT unchanged at $35.75): +$52.60
= (+$61.55 +$0.00 -$8.95)
Total Net Profit(If TBT exercised at $37.00): +$302.60
= (+$61.55 +$0.00 +$241.05)

Absolute Return if Unchanged at $35.75: +0.9%
= +$61.55/$7,158.95
Annualized Return If Unchanged (ARIU) +16.5%
= (+$61.55/$7,158.95)*(365/19 days)

Absolute Return if Assigned at $37.00: +4.2%
= +$302.60/$7,158.95
Annualized Return If Assigned (ARIA) +81.2%
= (+$336.85/$9,533.95)*(365/24 days)

The downside breakeven price at expiration is at $35.39 ($35.75 - $.36).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until May2011 options expiration) for this ProShares UltraShort 20+ Year Treasury ETF (TBT) covered calls position is 58.3%. This compares with a probability of profit of 51.2% for a buy-and-hold of ProShares UltraShort 20+ Year Treasury ETF (TBT) over the same time period.

Returns -- Through April 2011

1. April 2011 Year-to-Date Results:

As shown in the chart below, the Covered Calls Advisor Portfolio (CCAP) has increased by +6.74% over the first four months of calendar year 2011. This performance compares with an increase of +9.03% for the benchmark Russell 3000 index for the same four-month period.










CCAP Absolute Return (Jan 1st through Apr 30th, 2011) = +6.74%
($306,827.56-$287,453.75)/$287,453.75

Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through Apr 30th, 2011) = +9.03% ($81.72-$74.95)/$74.95


2. Prior Years Results:

The Covered Calls Advisor Portfolio (CCAP) began in September, 2007. The annualized returns achieved each year for 2007 through 2010 compared with the Russell 3000 benchmark were as follows:












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

The Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. Here's an example to aid understanding of how the overall portfolio performance is determined: If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100. As shown in the right sidebar near the top of this page, the Covered Calls Advisor's current Overall Market Meter rating remains "SLIGHTLY BULLISH". The corresponding investing strategy is to, on-average, sell 2% out-of-the-money covered calls for the nearest expiration month.

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

Regards and Godspeed,
Jeff