Returns -- Through February 2012

1. 2012 Year-to-Date Results:

As shown in the "Year-to-Date 2012" line in the chart below, the Covered Calls Advisor Portfolio (CCAP) has outperformed the benchmark Russell 3000 index by 2.59 percentage points (+12.04% minus +9.45%) over the first two months of calendar year 2012.








The financial results were as follows:

CCAP Absolute Return (Jan 1st through Feb 29th, 2012) = +12.04%
($328,987.52-$293,634.14)/$293,634.14

Benchmark Russell 3000(IWV) Absolute Return(Jan 1st through Feb 29th, 2012) = +9.45%
($81.19-$74.18)/$74.18

As a reminder, 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.


2. Prior Years Results:

This Covered Calls Advisor blog began in September 2007. The performance results for 2007 through 2011 is summarized as follows:
















This table shows that the Covered Calls Advisor Portfolio has outperformed the Russell 3000 benchmark by a total of 16.94% over the 4.3 years from the start of this blog in Sepember 2007 and the end of 2011. As shown, the corresponding average compound annual return-on-investment outperformance has averaged +3.85% per year. This average is within the Covered Calls Advisor's expected range of +3% to +5% average annual outperformance for long-term results achieved from a well-managed covered calls investing program.

Also 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.

As shown in the right sidebar near the top of this page, the Covered Calls Advisor's current Overall Market Meter rating is "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

Sold 100% Cash-Secured Puts -- iPath S&P 500 VIX Short-Term Futures ETN

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in iPath S&P 500 VIX Short-Term Futures ETN (Symbol VXX) with a Mar2012 expiration.

The transaction was as follows:
02/24/2012 Sold 3 iPath S&P 500 VIX Short-Term Futures ETN (VXX) Mar2012 $25.00 Put Options @ $2.49
Note: the price of VXX was $23.76 today when these Puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

Two possible overall performance results(including commissions) for this iPath S&P 500 VIX Short-Term Futures ETN (VXX) transaction would be as follows:
100% Cash-Secured Cost Basis: $7,500.00
= $25.00*300

Net Profit:
(a) Options Income: +$735.80
= ($2.49*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If VXX price unchanged at $23.76 at expiration): -$380.95
= ($23.76-$25.00)*300 - $8.95 commissions
(c) Capital Appreciation (If VXX above $25.00 at Mar2012 expiration): +$0.00
= ($25.00-$25.00)*300

Total Net Profit(If VXX price unchanged at $23.76): +$354.85
= (+$735.80 options income +$0.00 dividends -$380.95 capital appreciation)
Total Net Profit(If VXX above $25.00 at Mar2012 options expiration): +$735.80
= (+$735.80 +$0.00 +$0.00)

1. Absolute Return if Unchanged at $23.76: +4.7%
= +$354.85/$7,500.00
Annualized Return If Unchanged (ARIU): +78.5%
= (+$354.85/$7,500.00)*(365/22 days)

2. Absolute Return (If VXX above $25.00 at Mar2012 options expiration and Put options thus expire worthless): +9.8%
= +$735.80/$7,500.00
Annualized Return (If stock price above $19.00 at expiration): +162.8%
= (+$735.80/$7,500.00)*(365/22 days)

These very high potential returns are a direct result of the very high implied volatility currently available in the VXX options. The Mar2012 $25.00 put options implied volatility was at 74.0 when this position was established.

The downside 'breakeven price' at expiration is at $22.51 ($25.00 - $2.49).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Mar2012 options expiration) for this iPath S&P 500 VIX Short-Term Futures ETN (VXX) cash-secured Puts position is 65.1%. This compares with a probability of profit of 53.6% for a buy-and-hold of VXX over the same time period.

The 'crossover price' at expiration is $26.25 ($23.76 + $2.49).
This is the price above which it would have been more profitable to simply buy-and-hold VXX until March 17, 2012 (the Mar2012 options expiration date) rather than holding the short Put options. The probability of exceeding this crossover price at expiration is 32.4%.

Closed -- Transocean Inc.

The covered calls position in Transocean Inc.(RIG) was established as a 'possible early assignment' position. A description of this position when it was established is here: "link".

Today is the ex-dividend date for Transocean. I was somewhat surprised that the stock was not assigned overnight since the stock was well in-the-money and there was only about $.16 [$4.55-($49.39-$45.00)] of time value remaining in the options at market close yesterday. The options owner could have received the $.79 ex-div payment if exercised. So, I was pleased to be able to capture the dividend payment and to sell the stock today with a +1.6% absolute return-on-investment in 8 days.

The transactions history was as follows:
02/14/2012 Bought 200 RIG @ $47.58
02/14/2012 Sold 2 RIG Mar2012 $45.00 Calls @ $3.50
02/22/2012 Ex-div date. Will receive $158.00 ($.79 * 200 shares) dividend payment.
02/22/2012 Bought-to-Close 2 RIG Mar2012 $45.00 Calls @ $4.70
02/22/2012 Sold 200 RIG @ $48.90

The overall performance result (including commissions) for the Transocean Inc.(RIG) transactions was as follows:
Stock Purchase Cost: $9,524.95
= ($47.58*200+$8.95 commission)

Net Profit:
(a) Options Income: -$260.90
= ($3.50-$4.70)*200 shares - 2*$10.45 commissions
(b) Dividend Income (Stock ex-div on 2/22/2012): +$158.00
= $.79 per share x 200 shares
(c) Capital Appreciation (Stock sold at $48.90): +$255.05
+($48.90-$47.58)*200 - $8.95 commissions

Total Net Profit: +$152.15
= (-$260.90 +$158.00 +$255.05)

Absolute Return: +1.6%
= +$152.15/$9,524.95
Annualized Return: +72.9%
= (+$152.15/$9,524.95)*(365/8 days)

Establish Rio Tinto PLC ADR Covered Calls (Possible Early Assignment)

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Rio Tinto PLC ADR (Ticker Symbol RIO) covered calls as follows:

Established Rio Tinto PLC ADR (RIO) Covered Calls for Mar2012:
02/21/2012 Bought 300 RIO @ $58.24
02/21/2012 Sold 3 RIO Mar2012 $57.50 Calls @ $1.80

This covered calls investment is a strategic one that explicitly considers the upcoming dividend of $.91 with an ex-dividend date of Feb 29th. If the current $1.06 [$1.80-($58.24-$57.50)] time value (i.e. extrinsic value) remaining in the short call option decays to less than $.91 by Feb 28th (the day prior to the ex-div date), then there is some possibility that the call options owner will exercise early and will call the stock away (i.e. early assignment) to capture the dividend. As shown below, two potential returns for this position are:
+45.8% annualized return if the stock is assigned at Mar2012 expiration
+77.7% annualized return if the stock is assigned early

Based on these returns, the Covered Calls Advisor prefers that the options owner is enticed to exercise early -- which would result in a higher annualized return-on-investment for this position. In short, it is better to earn a $1.06 profit per share in 8 days (average of $.1325/day) than a $1.97 profit ($1.06 options premium plus $.91 dividend income) in 26 days (average of $.076/day).

As shown on the table below, this investment meets all 10 criteria established by the Covered Calls Advisor for establishing a Potential Early Assignment covered calls position:










Two possible overall performance results(including commissions) for the Rio Tinto PLC ADR (RIO) transactions would be as follows:
Stock Purchase Cost: $17,480.95
= ($58.24*300+$8.95 commission)

Net Profit:
(a) Options Income: +$528.80
= ($1.80*300 shares) - $11.20 commissions
(b) Dividend Income (If stock assigned at Mar2012 expiration): +$273.00
= $.91 per share x 300 shares
(b) Dividend Income (If option exercised early on day prior to Feb 29th ex-div date): +$0.00
(c) Capital Appreciation (If stock assigned at $57.50): -$230.95
+($57.50-$58.24)*300 - $8.95 commissions

Total Net Profit(If stock assigned at Mar2012 expiration): +$570.85
= (+$528.80 +$273.00 -$230.95)
Total Net Profit(If option exercised on day prior to Feb 29th ex-div date): +$297.85
= (+$528.80 +$0.00 -$230.95)

1. Absolute Return (If stock assigned at Mar2012 expiration): +3.3%
= +$570.85/$17,480.95
Annualized Return (If stock assigned at Mar2012 expiration): +45.8%
= (+$570.85/$17,480.95)*(365/26 days)

2. Absolute Return (If option exercised on day prior to Feb 29th ex-div date): +1.7% = +$297.85/$17,480.95
Annualized Return (If option exercised early): +77.7%
= (+$297.85/$17,480.95)*(365/8 days)

The downside breakeven price at expiration is $56.44 ($58.24 - $1.80).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Mar2012 options expiration) for this Rio Tinto covered calls position is 68.5%. This compares with a probability of profit of 50.2% for a buy-and-hold of Rio Tinto over the same time period. Using this probability of profit of 68.5%, the Expected Value annualized ROI of this investment (if held until expiration) is a very attractive +31.4% (+45.8% * 68.5%).

The potential annualized return of +45.8% if the stock price remains above the $57.50 strike price on the Mar2012 options expiration date is a very attractive annualized ROI. It widely exceeds the Covered Calls Advisor's minimum threshold of +20%. The Implied Volatility (IV) in these RIO call options was 25.0 when these options were sold today.

The upside crossover price at expiration is $60.21 ($57.50 + $1.80 +$.91 dividend).
This is the price above which it would have been more profitable to simply buy-and-hold Rio Tinto stock until Mar 17, 2012 (the Mar2012 options expiration date) rather than establishing this covered calls position.

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 in the right sidebar of this blog site.

Country Value Rankings

Once a quarter, the Covered Calls Advisor calculates the eight factors used to determine the current "Country Value Rankings" for 21 countries. Today's results (shown in the table below), provides a value-oriented and objective framework that assists this advisor to make decisions regarding overweighting and underweighting specific countries and regions in the Covered Calls Advisor's portfolio.

A comprehensive approach to asset allocation extends 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". Legendary investor John Templeton was a leader in advocating for developing a global-oriented value investing perspective to achieve 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. As was the case when these rankings were last done in December 2011, the top 5 countries are Asian (Hong Kong, China, South Korea, Malaysia, and Taiwan). Thus, investments in the Covered Calls Advisor Portfolio (shown in the right sidebar of this blog) will be substantially overweighted in these higher rated countries. It should also be noted that the U.S. is ranked 14th of the 21 countries rated, so U.S.-based companies selected for investment will be those with significant exposure to sales in countries/regions with relatively high expected GDP Growth in 2012.

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.

Hopefully, this information is helpful in your thinking and analysis of your own equities selection methods related to your covered calls investing process!

Regards and Godspeed to All,
Jeff

Continuation Transactions -- iShares MSCI Emerging Markets ETF and iShares MSCI South Korea ETF

Today, continuation transactions were completed to re-establish covered calls with Mar2012 expirations in two existing positions (iShares MSCI Emerging Markets ETF and iShares MSCI South Korea ETF). The detailed transactions history for these covered calls positions as well as possible performance results are as follows:

1. 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.
06/18/2011 Jun2011 Options Expired
Note: the price of EEM was $45.34 upon options expiration.
6/22/2011 Distribution Income $.46092 per share.
06/28/2011 Sold 5 EEM Jul2011 $47.00 Calls @ $.62
Note: price of EEM was $46.42 when these options were sold.
07/16/2011 Jul2011 EEM options expired.
07/18/2011 Sold 5 EEM Aug2011 $47.00 Calls @$.99
Note: The price of EEM was $46.55 when these call options were sold.
08/20/2011 Aug2011 EEM options expired.
08/22/2011 Sold 5 EEM Sep2011 $42.00 Calls @ $.71
09/17/2011 Sep2011 EEM options expired.
09/20/2011 Sold 5 EEM Oct2011 $42.00 Calls @ $.63
Note: The price of EEM was $39.68 when these call options were sold.
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 5 EEM Nov2011 $41.00 Calls @ $.78
11/19/2011 Nov2011 EEM options expired.
11/30/2011 Sold 5 EEM Dec2011 $41.00 Calls @ $.59
Note: the price of EEM was $39.71 today when these call options were sold.
12/20/2011 Ex-Distribution $173.48 = $.34696 * 500 shares
01/20/2012 Bought-to-Close 5 EEM Jan2012 $39.00 Calls @ $2.43
Note: the price of EEM was $41.41 when these call options were bought.
01/20/2012 Sold 5 EEM Feb2012 $42.00 Calls @ $.80
Note: the price of EEM was $41.50 today when these call options were sold.
02/17/2012 Bought-to-Close 5 EEM Feb2012 $42.00 Calls @ $1.97
Note: the price of EEM was $43.95 when these call options were bought-to-close.
02/20/2012 Sold 5 EEM Feb2012 $43.00 Calls @ $1.83
Note: the price of EEM was $44.02 when these call options were sold.

A possible overall performance result(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: +$1,725.30
= [500*($.83 +$.35+$.62+$.99+$.71+$.63+$.78+$.59-$2.43+$.80-$1.97+$1.83) - 11*$12.70 commissions]
(b) Distribution Income: $403.94 = ($.46092+$.34696) * 500 shares
(c) Capital Appreciation (If stock assigned at $43.00): -$2,396.05
= ($43.00-$47.81)*500 - $8.95 commissions

Total Net Profit (If EEM assigned at $43.00): -$266.81
= (+$1,725.30 +$403.94 -$2,396.05)

Absolute Return (If EEM assigned at $43.00 at expiration): -1.1%
= -$266.81/$23,913.95
Annualized Return If Assigned (ARIA): -1.2%
= (-$266.81/$23,913.95)*(365/335 days)


2. iShares MSCI South Korea ETF (EWY) -- Continuation
The transactions history is as follows:
10/25/2011 Bought 800 EWY @ $54.62
10/25/2011 Sold 8 EWY Nov2011 $54.00 Calls @ $2.59
Note: these call options were sold with the price of EWY at $54.62
11/19/2011 Nov2011 EWY options expired.
11/30/2011 Sold 8 EWY Dec2011 $56.00 Calls @ $1.48
Note: the price of EWY was $55.38 today when these call options were sold.
12/20/2011 Ex-Distribution $298.41 = $.37301 * 800 shares
01/20/2012 Bought-to-Close 8 EWY Jan2012 $55.00 Calls @ $1.75
Note: the price of EWY was $56.73 when these call options were bought.
01/20/2012 Sold 8 EWY Feb2012 $57.00 Calls @ $1.50
Note: the price of EWY was $56.73 when these call options were sold.
02/17/2012 Bought-to-Close 8 EWY Feb2012 $57.00 Calls @ $2.48
Note: the price of EWY was $59.46 when these call options were bought-to-close.
02/20/2012 Sold 8 EWY Mar2012 $59.00 Calls @ $1.85
Note: the price of EWY was $59.32 when these call options were sold.

Two possible overall performance results(including commissions) for the EWY position would be as follows:
Stock Purchase Cost: $43,704.95
= ($54.62*800+$8.95 commission)

Net Profit:
(a) Options Income: +$2,477.25
= (800*($2.59+$1.48-$1.75+$1.50-$2.48+$1.85) - 5*$14.95 commissions)
(b) Dividend Income: +$298.41 = $.37301* 800 shares
(c) Capital Appreciation (If EWY assigned at $59.00): +$3,495.05
= ($59.00-$54.62)*800 - $8.95 commissions

Total Net Profit(If EWY assigned at $59.00): +$6,270.71
= (+$2,477.25 +$298.41 +$3,495.05)

Absolute Return if Assigned at $59.00: +14.3%
= +$6,270.71/$43,704.95
Annualized Return If Assigned (ARIA): +36.1%
= (+$6,270.71/$43,704.95)*(365/145 days)

February 2012 Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained eleven covered calls positions with February 2012 expirations. A summary of the results were as follows:
- As posted on this blog two days ago on expiration Friday, two in-the-money positions (Apple Inc. and iShares MSCI China ETF) were rolled out to Mar2012 covered calls.
- Two positions (Valero Energy Corp. and Xilinx Inc.) were closed earlier this month prior to the options expiration date because of early assignment.
- Two short options (iShares MSCI Emerging Markets ETF and iShares MSCI South Korea ETF) were bought-to-close on options expiration Friday. The long positions in these two underlying equities remain and Mar2012 options will be sold early this week as continuation transactions to re-establish Mar2012 covered calls positions and to continue the investments in these ETFs.
- One position in ProShares UltraShort S&P 500 ETF expired out-of-the-money. A decision will be made early this week as to which Mar2012 strike price will be sold to re-establish covered calls positions against this SDS equity. The related transaction will be posted on this blog site on the same day the transaction occurs.
- Four positions (Hartford Financial Services Group Inc., Market Vectors Gold Miners ETF, Mylan Inc., and ProShares UltraShort 20+ Years Treasury ETF) were in-the-money upon Feb2012 options expiration; so the equities were assigned (i.e. equities called away). The annualized return-on-investment financial results for these closed positions is:
Hartford Financial Services Group Inc. -- +111.8%
Market Vectors Gold Miners ETF -- +41.6%
Mylan Inc. -- +30.9%
ProShares UltraShort 20+ Years Treasury ETF -- +87.7%

The detailed transactions history and results for these four positions are as follows:

1. Hartford Financial Services Group Inc.(HIG) -- Closed
The transaction history was as follows:
01/30/2012 Sold 3 Hartford Financial Services Group Inc.(HIG) Feb2012 $18.00 Put Options @ $1.14
Note: the price of The Hartford was $17.28 today when these Puts were sold.
02/19/2012 Feb2012 Options Expired.
Note: the price of HIG was $21.65 upon options expiration.

The overall performance result (including commissions) for the Hartford Financial Services Group Inc.(HIG) transactions was as follows:
100% Cash-Secured Cost Basis: $5,400.00
= $18.00*300

Net Profit:
(a) Options Income: +$330.80
= ($1.14*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (HIG price above $18.00 at Feb2012 expiration): +$0.00
= ($18.00-$18.00)*300

Total Net Profit(HIG stock above $18.00 at Feb2012 options expiration): +$330.80
= (+$330.80 +$0.00 +$0.00)

Absolute Return (HIG above $18.00 at Feb2012 options expiration and Put options thus expire worthless): +6.1%
= +$330.80/$5,400.00
Annualized Return: +111.8%
= (+$330.80/$5,400.00)*(365/20 days)


2. Market Vectors Gold Miners ETF (GDX) -- Closed
The transaction history was as follows:
01/24/2012 Sold 3 Market Vectors Gold Miners ETF (GDX) Feb2012 $52.00 Put Options @ $1.58
Note: the price of GDX was $51.99 today when these puts were sold.
02/19/2012 Feb2012 Options Expired.
Note: the price of GDX was $54.15 upon options expiration.

The overall performance result (including commissions) for the Market Vectors Gold Miners ETF (GDX) transactions was as follows:
100% Cash-Secured Cost Basis: $15,600.00
= $52.00*300

Net Profit:
(a) Options Income: +$462.80
= ($1.58*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (GDX price above $52.00 at Feb2012 expiration): +$0.00
= ($52.00-$52.00)*300

Total Net Profit(GDX above $52.00 at Feb2012 options expiration): +$462.80
= (+$462.80 +$0.00 -$5.95)

Absolute Return (GDX above $52.00 at Feb2012 options expiration and put options thus expire worthless): +3.0%
= +$462.80/$15,600.00
Annualized Return (If stock price above $22.00 at expiration): +41.6%
= (+$462.80/$15,600.00)*(365/26 days)


3. Mylan Inc.(MYL) -- Closed
The transaction history was as follows:
01/27/2012 Sold 7 Mylan Inc. (MYL) Feb2012 $20.00 Put Options @ $.41
Note: the price of MYL stock was $20.92 today when these puts were sold.
02/19/2012 Feb2012 Options Expired.
Note: the price of MYL was $23.42 upon options expiration.

The overall performance result (including commissions) for the Mylan Inc.(MYL) transactions was as follows:
100% Cash-Secured Cost Basis: $14,000.00
= $20.00*700

Net Profit:
(a) Options Income: +$272.80
= ($.41*700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (MYL stock above $20.00 at Feb2012 expiration): +$0.00
= ($20.00-$20.00)

Total Net Profit(Stock price above $20.00 at Feb2012 options expiration): +$272.80
= (+$272.80 +$0.00 +$0.00)

Absolute Return (If stock price above $20.00 at Feb2012 options expiration and put options thus expire worthless): +1.9%
= +$272.80/$14,000.00
Annualized Return (If stock price above $23.00 at expiration): +30.9%
= (+$272.80/$14,000.00)*(365/23 days)


4. ProShares UltraShort 20+ Treasury ETF (TBT) -- Closed
The transaction history was as follows:
01/30/2012 Bought 300 TBT @ $18.34
01/30/2012 Sold 3 TBT Feb2012 $19.00 Calls @ $.29
Note: the price of TBT was $18.34 when these call options were sold.
02/19/2012 Feb2012 Options Expired.
Note: the price of TBT was $19.21 upon options expiration.

The overall performance result (including commissions) for the ProShares UltraShort 20+ Treasury ETF (TBT) transactions was as follows:
Stock Purchase Cost: $5,510.95
= ($18.34*300+$8.95 commission)

Net Profit:
(a) Options Income: +$75.80
= ($.29*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (TBT above $19.00 at Feb2012 expiration): +$189.05
+($19.00-$18.34)*300 - $8.95 commissions

Total Net Profit(TBT above $19.00 at Feb2012 options expiration): +$264.85
= (+$75.80 +$0.00 +$189.05)

Absolute Return (TBT price above $19.00 at Feb2012 options expiration): +4.8%
= +$264.85/$5,510.95
Annualized Return (If TBT above $19.00 at expiration): +87.7%
= (+$264.85/$5,510.95)*(365/20 days)

Roll Out -- Apple Inc. and iShares MSCI China ETF

Today was Feb2012 options expiration. With less than 30 minutes before the market close, two existing covered calls were rolled out to Mar2012 covered calls.
The advantage of waiting until this afternoon to roll these positions was to extract almost all of the extrinsic value from the short options before establishing the position for the next expiration month.

The detailed transactions history for these covered calls positions as well as possible performance results are as follows:

1. Apple Inc.(AAPL) -- Continuation
The transaction history is as follows:
09/19/2011 Bought 100 shares AAPL at $396.544
09/19/2011 Sold 1 AAPL Oct2011 $410 Call Option @ $10.15
10/22/2011 Oct2011 option expired.
Note: the AAPL price was $392.87 at option expiration.
10/24/2011 Sold 1 AAPL Nov2011 $410 Call Option @ $7.20
Note: the price of AAPL was $399.10 when the option was sold.
11/19/2011 Nov2011 AAPL options expired.
11/30/2011 Sold 1 AAPL Dec2011 $400.00 Call @ $4.40
Note: the price of AAPL was $392.94 today when this call option was sold.
12/17/2011 Dec2011 AAPL options expired.
Note: the price of AAPL was $381.02 upon Dec2012 options expiration.
2/1/2012 Sold 1 AAPL Feb2012 $465 Call @ $3.85
Note: the price of AAPL was $456.91 today when this call option was sold.
02/17/2012 Bought-to-Close 1 AAPL Feb2012 $465.00 Call @ $37.05
02/17/2012 Sold-to-Open 1 AAPL Mar2012 $485.00 Call @ $26.95
Note: the price of AAPL was $502.03 when these transactions were made.

A possible performance result(including commissions) for this AAPL position is as follows:
Stock Purchase Cost: $39,663.35
= ($396.544*100+$8.95 commission)

Net Profit:
(a) Options Income: +$1,501.50
= (100*($10.15+$7.20+$4.40+$3.85-$37.05+$26.95) - 5*$9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock assigned at $485.00 at expiration): +$8,836.65
= ($485.00-$396.544)*100 - $8.95 commissions

Total Net Profit (If stock assigned at $485.00): +$10,338.15
= (+$1,501.50 +$0.00 +$8,836.65)

Absolute Return (If stock assigned at $485.00 strike price at Mar2012 options expiration): +26.1%
= +$10,338.15/$39,663.35
Annualized Return If Assigned (ARIA): +52.9%
= (+$10,338.15/$39,663.35)*(365/180 days)


2. iShares MSCI China ETF (FXI) -- Continuation
The transaction 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.
06/21/2011 FXI ETF distribution of $.68555 per share
07/16/2011 Jul2011 FXI options expired.
07/18/2011 Sold 10 FXI Aug2011 $42.00 Calls @$.71
08/20/2011 Aug2011 FXI options expired.
08/22/2011 Sold 10 FXI Sep2011 $42.00 Calls @ $.65
09/17/2011 Sep2011 FXI options expired.
09/20/2011 Sold 10 FXI Oct2011 $38.00 Calls @ $.47
10/22/2011 Oct2011 options expired.
10/26/2011 Sold 10 FXI Nov2011 $37.00 Calls @ $.86
11/19/2011 Nov2011 FXI options expired.
11/30/2011 Sold 10 FXI Jan2012 $38.00 Calls @ $1.10
Note: the price of FXI was $36.42 today when these call options were sold.
12/20/2011 Ex-Distribution $79.40 = $.0794 * 1,000 shares
01/20/2012 Bought-to-Close 10 FXI Jan2012 $38.00 Calls @ $.68
Note: the price of FXI was $38.67 when these call options were bought.
01/20/2012 Sold 10 FXI Feb2012 $40.00 Calls @ $.49
Note: the price of FXI was $38.72 today when these call options were sold.
02/17/2012 Bought-to-Close 10 FXI Feb2012 $40.00 Calls @ $.27
02/17/2012 Sold-to-Open 10 FXI Mar2012 $40.00 Calls @ $1.30
Note: the price of FXI was $40.25 when these transactions were made.

A possible overall performance result(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: +$5,375.70
= (1,000*($.49+$.37+$.71+$.65+$.47+$.86+$1.10-$.68+$.49-$.27+$1.30) - 9*$12.70 commissions)
(b) Distribution Income: $767.95 = ($.68555+$.0794) * 1,000 shares
(c) Capital Appreciation (If FXI assigned at $40.00 at expiration): -$4,808.95
= ($40.00-$44.80)*1,000 - $8.95 commissions

Total Net Profit (If FXI assigned at $40.00): +$1,334.70
= (+$5,375.70 +$767.95 -$4,808.95)

Absolute Return (If FXI assigned at $40.00 at expiration): +3.0%
= +$1,334.70/$44,808.95
Annualized Return If Assigned (ARIA): +3.3%
= (+$1,334.70/$44,808.95)*(365/334 days)

Sold 100% Cash-Secured Puts -- ProShares UltraShort 20+ Year Treasury ETF (TBT)

Today, the Covered Calls Advisor established a new 100% Cash-Secured Puts position in ProShares UltraShort 20+ Year Treasury ETF (Ticker Symbol TBT) with a Mar2012 expiration.

The transaction was as follows:
02/16/2012 Sold 3 ProShares UltraShort 20+ Year Treasury ETF (TBT) Mar2012 $19.00 Put Options @ $.70
Note: the price of TBT was $18.94 today when these Puts were sold.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

Two possible overall performance results(including commissions) for this ProShares UltraShort 20+ Year Treasury ETF (TBT) transaction would be as follows:
100% Cash-Secured Cost Basis: $5,700.00
= $19.00*300

Net Profit:
(a) Options Income: +$198.80
= ($.70*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If TBT price unchanged at $18.94 at expiration): -$26.95
= ($18.94-$19.00)*300 - $8.95 commissions
(c) Capital Appreciation (If TBT above $19.00 at Mar2012 expiration): +$0.00
= ($19.00-$19.00)*300

Total Net Profit(If TBT price unchanged at $18.94): +$171.85
= (+$198.80 options income +$0.00 dividends -$26.95 capital appreciation)
Total Net Profit(If TBT above $19.00 at Mar2012 options expiration): +$198.80
= (+$198.80 +$0.00 +$0.00)

1. Absolute Return if Unchanged at $18.94: +3.0%
= +$171.85/$5,700.00
Annualized Return If Unchanged (ARIU): +36.7%
= (+$171.85/$5,700.00)*(365/30 days)

2. Absolute Return (If TBT above $19.00 at Mar2012 options expiration and Put options thus expire worthless): +3.5%
= +$198.80/$5,700.00
Annualized Return (If stock price above $19.00 at expiration): +42.4%
= (+$198.80/$5,700.00)*(365/30 days)

The downside 'breakeven price' at expiration is at $18.30 ($19.00 - $.70).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Mar2012 options expiration) for this ProShares UltraShort 20+ Year Treasury ETF (TBT) cash-secured Puts position is 66.9%. This compares with a probability of profit of 51.8% for a buy-and-hold of TBT over the same time period.

The 'crossover price' at expiration is $19.64 ($18.94 + $.70).
This is the price above which it would have been more profitable to simply buy-and-hold TBT until March 17, 2012 (the Mar2012 options expiration date) rather than holding the short Put options. The probability of exceeding this crossover price at expiration is 35.7%.

Overall Market Meter Rating Remains "Slightly Bullish"

Each month during options expiration week, the Covered Calls Advisor recalculates the current values for each of the eight factors used to determine the "Overall Market Meter" rating. This month, the Overall Market Meter rating is unchanged at Slightly Bullish.

The eight factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next three indicators), and
- growth (the last indicator).
















The current Market Meter Average of 3.63 (see blue line in chart above) is slightly lower than the 3.75 of last month. The 3.63 is a Slightly Bullish rating (range from 3.5 to 4.5), which is unchanged from the prior month. Five of the eight factors used to determine the Overall Market Meter rating changed from the prior analysis last month. These changes were:
- Bank Lending improved from Neutral to Slightly Bullish
- Business Cycle and Unemployment declined from Neutral to Slightly Bearish
- Total Market Index/GDP declined from Neutral to Slightly Bearish
- P/E Ratios declined from Bullish to Slightly Bullish
- Future Earnings improved from Neutral 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 February 2012 options expiration this week, newly established positions for March 2012 expiration will be established in accordance with this guideline.

Your comments or questions regarding this post (or the details related to any of the eight factors used in this model) are welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Godspeed,
Jeff

Buy Alerts Spreadsheet -- Updated

Good stock selection is Job #1 for a successful covered calls investing process -- and the Covered Calls Advisor's 'Buy Alerts' spreadsheet is a critically important tool in that process. This spreadsheet provides a disciplined quantitative method for determining if a particular stock exceeds a desired minimum threshold before it qualifies as a potential investment.

This 'Buy Alerts' spreadsheet has been continually revised and updated over the past several years to reflect this advisor's best understanding of the factors that are important for identifying stocks that will most likely outperform. The spreadsheet is a testament to the importance of discipline and adaptability in the stock selection process -- discipline and adaptability being two of the five key characteristics in the Covered Calls Advisor's "Investing Pyramid of Success"(See "link ").

An example of the current spreadsheet is shown below using the Covered Calls Advisor's current largest holding -- Apple Inc. Apple has had a dramatic price rise on the heels of its outstanding results reported in the most recent quarterly earnings report; so this spreadsheet is used to assess whether Apple still meets the 'Buy Alerts' minimum threshold of 17.0 total points, or whether it has run up too far, too fast. At 21.48 total points, Apple remains as a solid investment opportunity and will be maintained as a core holding in the Covered Calls Advisor Portfolio.







Note: Left-click on this image to expand view.













It is this advisor's strong conviction that no one or two factors are sufficient to screen for stock investments. Factors that work well during one time period are replaced by other factors that work in other timeframes. Consequently, a multi-factor approach that includes a variety of indicators is preferable. As shown in the spreadsheet above, the nine factors come from a variety of financial categories (analysts' ratings, liquidity, value, growth, etc.) In this balanced approach, each rating factors is weighted in accordance with this advisor's perception as to its relative importance in the overall analysis. Taken together, the weighted-average total provides a comprehensive view of a company's financial position and performance trend.

To date, the Buy Alerts spreadsheet has been a useful stock screening method. It is a detailed and somewhat time-consuming process (it takes about 25 minutes to complete a Buy Alerts spreadsheet for each company evaluated). But stock selection is critically important to covered calls investing decisions, just as it is to buy-and-hold investing (or for any investing decisions for that matter). You are certainly welcome to (and encouraged to) incorporate any of these factors into your own stock selection process.

As always, any comments or questions regarding this article are welcomed.

Regards and Godspeed,
Jeff

Establish Transocean Inc. Covered Calls (Possible Early Assignment)

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Transocean Inc.(Ticker Symbol RIG) covered calls as follows:

Established Transocean Inc.(RIG) Covered Calls for Mar2012:
02/14/2012 Bought 200 RIG @ $47.58
02/14/2012 Sold 2 RIG Mar2012 $45.00 Calls @ $3.50

This covered calls investment is a strategic one that explicitly considers the upcoming quarterly dividend of $.79 with an ex-dividend date of Feb 22nd. If the current $.92 [$3.50-($47.58-$45.00)] time value (i.e. extrinsic value) remaining in the short call option decays to less than $.79 by Feb 21st (the day prior to the ex-div date), then there is some possibility that the call options owner will exercise early and will call the stock away (i.e. early assignment) to capture the dividend. As shown below, two potential returns for this position are:
+38.6% annualized return if the stock is assigned at Mar2012 expiration
+78.8% annualized return if the stock is assigned early
Based on these returns, the Covered Calls Advisor prefers that the options owner is enticed to exercise early -- which would result in a higher annualized return-on-investment for this position. In short, it is better to earn a $.92 profit per share in 8 days (average of $.115/day) than a $1.71 profit ($.92 options premium plus $.79 dividend income) in 32 days (average of $.053/day).


Two possible overall performance results(including commissions) for the Transocean Inc.(RIG) transactions would be as follows:
Stock Purchase Cost: $9,524.95
= ($47.58*200+$8.95 commission)

Net Profit:
(a) Options Income: +$689.55
= ($3.50*200 shares) - $10.45 commissions
(b) Dividend Income (If stock assigned at Mar2012 expiration): +$158.00
= $.79 per share x 200 shares
(b) Dividend Income (If option exercised early on day prior to Feb 22nd ex-div date): +$0.00
(c) Capital Appreciation (If stock assigned at $45.00): -$524.95
+($45.00-$47.58)*200 - $8.95 commissions

Total Net Profit(If stock assigned at Mar2012 expiration): +$322.60
= (+$689.55 +$158.00 -$524.95)
Total Net Profit(If option exercised on day prior to Feb 22nd ex-div date): +$164.60
= (+$689.55 +$0.00 -$524.95)

1. Absolute Return (If stock assigned at Mar2012 expiration): +3.4%
= +$322.60/$9,524.95
Annualized Return (If stock assigned at Mar2012 expiration): +38.6%
= (+$322.60/$9,524.95)*(365/32 days)

2. Absolute Return (If option exercised on day prior to Feb 22nd ex-div date): +1.7% = +$164.60/$9,524.95
Annualized Return (If option exercised early): +78.8%
= (+$164.60/$9,524.95)*(365/8 days)

The downside breakeven price at expiration is $43.29 ($47.58 - $3.50 - $.79 dividend).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Mar2012 options expiration) for this Transocean Inc.(RIG) covered calls position is 81.3%. This compares with a probability of profit of 50.0% for a buy-and-hold of Transocean over the same time period. Using this probability of profit of 81.3%, the Expected Value annualized ROI of this investment (if held until expiration) is a very attractive +31.4% (+38.6% * 81.3%).

The potential annualized return of +38.6% if the stock price is unchanged on the Mar2012 options expiration date in this position is very attractive, exceeding the Covered Calls Advisor's desired minimum threshold of +25% annualized ROI. The Implied Volatility (IV) in these RIG call options was 37.9 when these options were sold today.

The upside crossover price at expiration is $49.29 ($45.00 + $3.50 +$.79 dividend).
This is the price above which it would have been more profitable to simply buy-and-hold RIG stock until Mar 17, 2012 (the Mar2012 options expiration date) rather than holding the covered calls position.

Early Assignment -- Valero Energy Corp.

Overnight, the Covered Calls Advisor received email notification from my broker that the 4 call options in Valero Energy Corp.(Ticker Symbol VLO) were exercised early and therefore the 400 shares assigned (sold). This early exercise by the call options owner was done yesterday (Friday), which was the final trading day prior to next Monday's ex-dividend date (with a $.15 dividend from Valero).

With VLO well in the money ($24.81 price versus a $22.00 strike price) and with only about $.02 extrinsic value remaining in the option, it was expected that the options owner would exercise on the day prior to the ex-div date in order to obtain the stock shares and to then capture the dividend payment.

The transactions history was as follows:
10/25/2011 Sold 4 Valero Energy Corp.(VLO) Nov2011 $22.00 Put Options @ $1.75
Note: the price of VLO stock was $21.26 today when these puts were sold.
11/19/2011 Nov2011 VLO put options exercised -- 400 shares VLO purchased @ $22.00.
11/30/2011 Sold 4 VLO Dec2011 $23.00 Calls @ $.61
Note: the price of VLO was $22.27 today when these call options were sold.
12/17/2011 Dec2011 Options Expired.
Note: the price of VLO was $20.52 upon options expiration.
01/03/2012 Sold 4 VLO Feb2012 $22.00 call options @ $.84
Note: the price of VLO was $21.04 when these options were sold.
02/11/2012 4 VLO Feb2012 $22.00 Call Options Exercised Early and thus 400 shares of VLO sold at $22.00.
Note: Upon Friday's market close, the price of VLO was $24.81.

The overall performance result (including commissions) for the Valero Energy Corp.(VLO) transactions was as follows:
100% Cash-Secured Cost Basis: $8,800.00
= $22.00*400

Net Profit:
(a) Options Income: +$1,244.15
= ($1.75+$.61+$.84)*400 shares - 3*$11.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (VLO stock sold at $22.00 strike price): -$8.95
= ($22.00-$22.00)*400 -$8.95 commissions

Total Net Profit: +$1,235.20
= (+$1,244.15 +$0.00 -$8.95)

Absolute Return (Stock sold at $22.00): +14.0%
= +$1,235.20/$8,800.00
Annualized Return: +47.0%
= (+$1,235.20/$8,800.00)*(365/109 days)

This position demonstrated that a large return-on-investment can be achieved from covered calls even when the stock price is unchanged. The stock was purchased at $22.00 and also subsequently sold at $22.00 but the relatively high options premiums enabled the Covered Calls Advisor to obtain a +14.0% absolute return (equivalent to a +47.0% annualized ROI) from this position.

Closed -- Fusion-io Inc.

The Feb2012 short 100% cash-secured puts position in Fusion-io Inc.(FIO) was established at the beginning of last week. Today, this position was exited at a small profit. There are two primary reasons for closing this position now. First, the largest company in the cloud storage space (EMC) announced this week a new product that will likely enable them to compete more directly and effectively against FIO's technology-leading open-architecture data storage structure. EMC's new product offering signals a significant threat to FIO's current technology advantage when considered in conjunction with EMC's existing large customer base. Second, the lock-up period on FIO's initial public offering expires on Feb 15th and this could trigger some selling pressure on the stock.

The detailed transactions history for this Fusion-io Inc.(FIO) position was as follows:
01/30/2012 Sold 3 Fusion-io Inc.(FIO) Feb2012 $25.00 Put Options @ $1.90
Note: the price of FIO was $24.36 today when these Puts were sold.
02/09/2012 Bought-to-Close 3 FIO Feb2012 $25.00 Puts @ $1.75
Note: the price of FIO was $24.15 today when these Puts were bought to close out the position.

The performance result(including commissions) for these Fusion-io Inc.(FIO) transactions was as follows:
100% Cash-Secured Cost Basis: $7,500.00
= $25.00*300

Net Profit:
(a) Options Income: +$22.60
= (300*($1.90 - $1.75)-2*$11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00

Total Net Profit: +$22.60
= (+$22.60 +$0.00 +$0.00)

Absolute Return: +0.3%
= +$22.60/$7,500.00
Annualized Return: +11.0%
= (+$22.60/$7,500.00)*(365/10 days)

Best Book on Covered Calls

Three years ago, this Covered Calls Advisor blog wrote an article (See "Four for Your Bookshelf") that recommended 4 books that deserve a permanent place on any investor's bookshelf. One of those books was "New Insights on Covered Call Writing" by Lehman & McMillan, a book that the Covered Calls Advisor believed was the single best book available at that time dedicated primarily to covered calls investing.

Fortunately, the authors have now released a 2nd Edition of this book titled "Options for Volatile Markets". This book is a significant improvement over the first edition and should definitely be obtained and read carefully by anyone with an interest in covered calls.

The Covered Calls Advisor has read the book twice and also written a book review (published at Amazon.com), which for your convenience is duplicated here:

4.0 out of 5 stars Much to Praise -- But Also a Major Flaw, January 11, 2012
By Jeff Partlow (Annandale, VA United States)

This review is from: Options for Volatile Markets: Managing Volatility and Protecting Against Catastrophic Risk (Bloomberg Financial) (Hardcover)

PRAISE: First and foremost, I confidently assert that this book is the single best resource now available that is focused primarily on the subject of covered calls investing. To those who have read the 1st Edition of this book (titled "New Insights on Covered Call Writing"), this 2nd Edition is a substantial improvement. It is written with great clarity throughout and is worthwhile reading for anyone (from novice to expert) interested in covered calls and other closely-related hedging strategies. Some of the best features are:
1. Excellent definitions and explanations of options terminology; and especially insightful discussions of important topics such as time value decay, skews, implied volatility, and historic volatility.
2. A very good explanation of why a fear common to many newbie covered calls investors, namely early exercise, is largely unwarranted.
3. Thorough discussions related to position management (the authors call this "follow-up actions"), including various types of "rolling".
4. The section on "Basic Tax Rules for Options" is the best concise description I've seen anywhere on this topic.
5. Why it is critically important that investors develop knowledge of how "risk" and "volatility" should inform our investment decision-making process. Consideration of specific "traps" to be avoided is another especially strong feature of this book.
6. For investors interested in modifications to the basic covered calls strategy, hedging with protective puts, collars, and option spreads are also presented. Thankfully, the authors present these alternatives in a well-balanced manner, taking time to present both the pros and cons of each strategy.

CONCERNS:
1. I share the concern of some other reviewers that the revised title of this 2nd Edition is overly generic and therefore somewhat misleading. A more appropriate title would be something like "Covered Calls and Related Hedging Strategies".
2. Figure 6.4 is a very nice, visual way to portray the "Behavioral Impact of Covered Call Writing". But the stock price ranges are incorrect: "Good decision offset..." should be <$47, etc., etc.
3. Weekly options now exist for over 100 equities/ETFs and they continue to grow in both availability and popularity. Including commentary on the possible role of weeklies in the several instances when expiration timeframes are addressed throughout the book would definitely enhance the readers' overall understanding.

MAJOR FLAW: On pages 162-164, the authors present results from their own study of four strategies during 2007-2010. The results are summarized in Table 8.3. Unfortunately, there are errors in the "Total Period" column which will cause naïve readers to falsely conclude that the collar strategy provides substantially better returns than the other three strategies. Two of these errors are:
1. The actual overall performance of SPY over these 3 3/4 years was -13.1%, not -17.3%.
2. The +15.2% return claimed for the collar strategy defies basic common sense when compared with the returns presented for its related component parts, that is a covered calls return of +3.1% in combination with a put hedge return of -5.2%. We can also conclude that the +15.2% is also clearly inaccurate from a different viewpoint, since a time-weighted average of the flat period (+5.8%), down period(+0.4%), and up period (+16.7%) is much closer to +8.4% -- but definitely not +15.2%.
This major flaw should be corrected prior to the next printing of this book. Further, to improve the validity of the results, the current 3 3/4 years backtest should be extended to a more rigorous minimum of 20 years.
-------------------------------------------------------------------------

Note: The overall rating of 4 Stars will be upgraded to 5 Stars if the authors correct the indicated problems in a subsequent printing of this book.

Early Assignment -- Xilinx, Inc.

Overnight, the Covered Calls Advisor received email notification from my broker that the 3 call options in Xilinx, Inc.(Ticker Symbol XLNX) were exercised early and therefore the 300 shares assigned (sold). This early exercise by the call options owner was done yesterday (Friday), which was the final trading day prior to next Monday's ex-dividend date (with a $.19 dividend from Xilinx).

As explained in this post (See "Establish Xilinx Inc. Covered Calls"), when this covered calls position was established 10 calendar days ago, the Covered Calls Advisor was hoping for this early exercise outcome since it provides the highest possible annualized return-on-investment result for this investment. As detailed below, this early exercise resulted in a +20.0% annualized ROI, slightly better than the +18.2% that would have been achieved if the early exercise had not occurred early, but instead if the stock remained above the $34.00 strike price and would therefore be assigned two weeks from now on the February 17th options expiration date. In short, it is better to earn a $.30 profit per share in 12 days (average of $.0250/day) than a $.49 profit ($.30 options premium plus $.19 dividend income) in 26 days (average of $.0188/day).

Often (as is true in this instance), when the extrinsic value (i.e. time value) remaining in the call options is less than the dividend amount, the options owner is enticed to exercise on the day prior to the ex-div date in order to obtain the stock shares and to capture the dividend payment. In this instance the Xilinx dividend payment is $.19 per share, which is greater than the current $.06 extrinsic value [$2.98 current Asked Price - ($36.92 current stock price minus $34.00 strike price)]. In essence, the options owner was enticed to exercise early. Fortunately for the Covered Calls Advisor, the early exercise immediately closes out the covered calls position and the full remaining $.06 extrinsic value is immediately captured as profit. This profit along with the cash from the sale of the 300 shares of Xilinx will be available as early as market opening on Monday morning for establishing any new covered calls investment in the Covered Calls Advisor Portfolio.

The transactions history was as follows:
01/25/2012 Bought 300 XLNX @ $35.30
01/25/2012 Sold 3 XLNX Feb2012 $34.00 Calls @ $1.60
02/04/2012 3 XLNX Feb2012 $34.00 Call Options Exercised Early and thus 300 shares of XLNX sold at $34.00.
Note: Upon Friday's market close, the price of XLNX was $36.92 and the associated Ask price of the call options was $2.98.

The overall performance result (including commissions) for the Xilinx, Inc.(XLNX) transactions was as follows:
Stock Purchase Cost: $10,598.95
= ($35.30*300+$8.95 commission)

Net Profit:
(a) Options Income: +$468.80
= ($1.60*300 shares) - $11.20 commissions
(b) Dividend Income: $0.00 Note: Call options exercised on day prior to Feb 6th ex-div date.
(c) Capital Appreciation (Stock assigned at $34.00): -$398.95
+($34.00-$35.30)*300 - $8.95 commissions

Total Net Profit: +$69.85
= (+$468.80 +$0.00 -$398.95)

Absolute Return (Options assigned early -- on day prior to Feb 6th ex-div date):
+0.7% = +$69.85/$10,598.95
Annualized Return: +20.0%
= (+$69.85/$10,598.95)*(365/12 days)

Continuation Transaction -- Apple Inc.

Today, a decision was made to retain the 100 shares held in Apple Inc.(AAPL) and to establish a Feb2011 covered call position. The decision by the Covered Calls Advisor to hold the long AAPL position uncovered after the Dec2012 option expired was fortuitous. The stock was at $381.02 at Dec2012 options expiration and has increased to $456.91 as of today when this covered call position was re-established. The dramatic increase in Apple's stock price resulted primarily from Apple's outstanding 1st quarter earnings report issued in January.

The detailed transactions as well as some possible results for this investment are as follows:

Apple Inc.(AAPL) -- Continuation
The transactions history is as follows:
09/19/2011 Bought 100 shares AAPL at $396.544
09/19/2011 Sold 1 AAPL Oct2011 $410 Call Option @ $10.15
10/22/2011 Oct2011 option expired.
Note: the AAPL price was $392.87 at option expiration.
10/24/2011 Sold 1 AAPL Nov2011 $410 Call Option @ $7.20
Note: the price of AAPL was $399.10 when the option was sold.
11/19/2011 Nov2011 AAPL options expired.
11/30/2011 Sold 1 AAPL Dec2011 $400.00 Call @ $4.40
Note: the price of AAPL was $392.94 today when this call option was sold.
12/17/2011 Dec2011 AAPL options expired.
Note: the price of AAPL was $381.02 upon Dec2012 options expiration.
2/1/2012 Sold 1 AAPL Feb2012 $465 Call @ $3.85
Note: the price of AAPL was $456.91 today when this call option was sold.

Two possible performance results(including commissions) for this AAPL position are as follows:
Stock Purchase Cost: $39,663.35
= ($396.544*100+$8.95 commission)

Net Profit:
(a) Options Income: +$2,521.20
= (100*($10.15+$7.20+$4.40+$3.85) - 4*$9.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $456.91): +$6,027.65
= ($456.91-$396.544)*100 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $465.00 at expiration): +$6,836.65
= ($465.00-$396.544)*100 - $8.95 commissions

Total Net Profit (If stock price unchanged at $456.91): +$8,548.85
= (+$2,521.20 +$0.00 +$6,027.65)
Total Net Profit (If stock assigned at $465.00): +$9,357.85
= (+$2,521.20 +$0.00 +$6,836.65)

1. Absolute Return (If stock price unchanged at $456.91 at Feb2012 options expiration): +21.6%
= +$8,548.85/$39,663.35
Annualized Return If Unchanged (ARIU): +51.8%
= (+$8,548.85/$39,663.35)*(365/152 days)

2. Absolute Return (If stock assigned at $465.00 strike price at Feb2012 options expiration): +23.6%
= +$9,357.85/$39,663.35
Annualized Return If Assigned (ARIA): +56.7%
= (+$9,357.85/$39,663.35)*(365/152 days)