Returns -- Year-to-Date Through February 2016

As shown in the "Year-to-Date 2016" line in the chart below, the Covered Calls Advisor Portfolio (CCAP) has outperformed the benchmark Russell 3000 index by 3.39 percentage points for the first two months of calendar year 2016. 

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.  Of course, the actual 'Total Account Value Return Percent' shown also adjusts for any deposits and withdrawals made each month.

If you have any comments or questions, please email me at the address shown in the right sidebar of this blog site.

Regards and Godspeed,
Jeff

Established Two New Put Options Positions

The Covered Calls Advisor Portfolio established two new positions in Apple Inc. (ticker symbol AAPL), and iShares China Large-Cap ETF (FXI). In both cases, 100% cash-secured Put options were sold with Mar2016 options expirations. Conservative out-of-the-money Puts were sold with downside protection to the strike price.

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

As detailed below, the potential returns are:
1. Apple Inc.: +1.0% absolute return in 19 days (equivalent to a +18.4% annualized return-on-investment)
2. iShares China Large-Cap ETF: +1.6% absolute return in 19 days (equivalent to a +30.0% annualized return-on-investment)


Note: the Implied Volatility (IV) of the options at the time they were sold was 25 for Apple Inc. and 37 for iShares China Large-Cap ETF, so both options exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.  


1.  Apple Inc. (AAPL) -- New Position
The transaction was as follows:
02/29//2016  Sold 2 AAPL 100% cash-secured $94.00 Put options @ $.95
Note: The price of AAPL was $97.47 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $18,807.95
= $94.00*200 + $7.95

Net Profit:
(a) Options Income: +$180.55
= ($.95*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL is above $94.00 strike price at Mar2016 expiration): +$0.00
= ($94.00-$94.00)*200 shares

Total Net Profit (If Apple is above $94.00 strike price at Mar2016 options expiration): +$180.55
= (+$180.55 +$0.00 +$0.00)

Absolute Return (If AAPL is above $94.00 strike price at Mar2016 options expiration): +1.0%
= +$180.55/$18,807.95
Annualized Return (If EPD is above $20.00 at expiration): +18.4%
= (+$180.55/$18,807.95)*(365/19 days)

The downside 'breakeven price' at expiration is at $93.05 ($94.00 - $.95), which is 4.5% below the current market price of $97.47.
The 'crossover price' at expiration is $98.42 ($97.47 + $.95).  This is the price above which it would have been more profitable to simply buy-and-hold Apple stock until March 18th (the Mar2016 options expiration date) rather than selling these Put options.


2.  iShares China Large-Cap ETF (FXI) -- New Position

The transaction was as follows:
02/29/2016  Sold 4 FXI 100% cash-secured $29.00 Put options @ $.48
Note: The price of FXI was $30.37 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $11,607.95
= $29.00*400 + $7.95

Net Profit:
(a) Options Income: +$181.05
= ($.48*400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI is above $29.00 strike price at Mar2016 expiration): +$0.00
= ($29.00 -$29.00)*400 shares

Total Net Profit (If FXI is above $29.00 strike price at Mar2016 options expiration): +$181.05
= (+$181.05 +$0.00 +$0.00)

Absolute Return (If FXI is above $29.00 strike price at Mar2016 options expiration): +1.6%
= +$181.05/$11,607.95
Annualized Return (If EEM is above $62.50 at expiration): +30.0%
= (+$181.05/$11,607.95)*(365/19 days)

The downside 'breakeven price' at expiration is at $28.52 ($29.00 - $.48), which is 6.1% below the current market price of $30.37.
The 'crossover price' at expiration is $30.85 ($30.37 + $.48).  This is the price above which it would have been more profitable to simply buy-and-hold FXI shares until March 18th (the Mar2016 options expiration date) rather than selling these Put options.

Criteria for Identifying Dividend Capture Covered Calls Opportunities

Recently, I have received some emails essentially asking: "How do you identify Covered Calls investment opportunities with dividend capture potential?"

The Covered Calls Advisor has established a set of criteria to identify situations that are advantageous for establishing covered calls positions that have the potential to achieve attractive returns from either an early assignment or from assignment upon next month's options expiration.

First, I utilize my broker's (Schwab) stock screener software to identify an initial list of candidates that meet the criteria in items #3, 4, and 5 below.  I then narrow the candidates list to only those that meet criteria #1.  Finally, I evaluate each of the remaining stocks (usually fewer than 10 companies) against all eleven criteria and will seriously consider investing in any that are 'YES' on nine or more of the eleven criteria.

Recently, I established a dividend capture covered calls position in Tesoro Corporation: Link.
The criteria below for this Tesoro position met ten of the eleven criteria for this investment.

As always, feel free to email me (email address shown in right sidebar of this blog) with any comments or questions.

Regards and Godspeed,
Jeff

Worthwhile Reading

Here are the three articles read during the past week that provided the greatest interest and insight:

• Pimco Adviser Sees 'The Trade of a Decade' in Emerging Markets

• Why Bear Markets Are So Painful   


• In Search of the Perfect Recession Indicator                          
  

Enjoy!
Jeff

Established Three New Put Options Positions

The Covered Calls Advisor Portfolio established three new positions in Enterprise Products Partners LP (ticker symbol EPD), iShares MSCI Emerging Markets ETF (EEM), and iShares Nasdaq Biotechnology ETF (IBB). In each instance, 100% cash-secured Put options were sold with Mar2016 expirations. Conservative out-of-the-money Puts were sold with downside protection to the strike price.

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

As detailed below, the potential returns are:
1. Enterprise Product Partners LP: +2.2% absolute return in 24 days (equivalent to a +32.8% annualized return-on-investment)
2. iShares MSCI Emerging Markets ETF: +1.1% absolute return in 24 days (equivalent to a +16.2% annualized return-on-investment)
3. iShares Nasdaq Biotechnology ETF: +2.6% absolute return in 24 days (equivalent to a +39.2% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 52 for Enterprise Products Partners, 32 for iShares MSCI Emerging Markets ETF, and 38 for iShares Nasdaq Biotechnology ETF, so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.  


1.  Enterprise Product Partners LP (EPD) -- New Position
The transaction was as follows:
02/24//2016  Sold 7 EPD 100% cash-secured $20.00 Put options @ $.45
Note: The price of EPD was $21.92 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $14,007.95
= $20.00*700 + $7.95

Net Profit:
(a) Options Income: +$301.80
= ($.45*700 shares) - $13.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EPD is above $20.00 strike price at Mar2016 expiration): +$0.00
= ($20.00-$20.00)*700 shares

Total Net Profit (If EPD is above $20.00 strike price at Mar2016 options expiration): +$301.80
= (+$301.80 +$0.00 +$0.00)

Absolute Return (If EPD is above $20.00 strike price at Mar2016 options expiration): +2.2%
= +$301.80/$14,007.95
Annualized Return (If EPD is above $20.00 at expiration): +32.8%
= (+$301.80/$14,007.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $19.55 ($20.00 - $.45), which is 10.8% below the current market price of $21.92.
The 'crossover price' at expiration is $22.37 ($21.92 + $.45).  This is the price above which it would have been more profitable to simply buy-and-hold EPD stock until March 18th (the Mar2016 options expiration date) rather than selling these Put options.


2.  iShares MSCI Emerging Markets ETF (EEM) -- New Position
The transaction was as follows:
02/24//2016  Sold 20 EEM 100% cash-secured $28.00 Put options @ $.31
Note: The price of EEM was $29.82 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $56,007.95
= $28.00*2,000 + $7.95

Net Profit:
(a) Options Income: +$597.05
= ($.31*2,000 shares) - $22.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EEM is above $28.00 strike price at Mar2016 expiration): +$0.00
= ($28.00 -$28.00)*2,000 shares

Total Net Profit (If EEM is above $28.00 strike price at Mar2016 options expiration): +$597.05
= (+$597.05 +$0.00 +$0.00)

Absolute Return (If EEM is above $28.00 strike price at Mar2016 options expiration): +1.1%
= +$597.05/$56,007.95
Annualized Return (If EEM is above $62.50 at expiration): +16.2%
= (+$597.05/$56,007.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $27.69 ($28.00 - $.31), which is 7.1% below the current market price of $29.82.
The 'crossover price' at expiration is $30.13 ($29.82 + $.31).  This is the price above which it would have been more profitable to simply buy-and-hold EEM shares until March 18th (the Mar2016 options expiration date) rather than selling these Put options.


3.  iShares Nasdaq Biotechnology ETF (IBB) -- New Position
The transaction was as follows:
02/24/2016  Sold 1 IBB 100% cash-secured $245.00 Put option @ $6.40
Note: The price of IBB was $252.58 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $24,507.95
= $245.00*100 + $7.95

Net Profit:
(a) Options Income: +$631.30
= ($6.40*100 shares) - $8.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If IBB is above $245.00 strike price at Mar2016 expiration): +$0.00
= ($245.00-$245.00)*100 shares

Total Net Profit (If IBB is above $245.00 strike price at Mar2016 options expiration): +$631.30
= (+$631.30 +$0.00 +$0.00)

Absolute Return (If IBB is above $245.00 strike price at Mar2016 options expiration): +2.6%
= +$631.30/$24,507.95
Annualized Return (If IBB is above $245.00 at expiration): +39.2%
= (+$631.30/$24,507.95)*(365/24 days)

The downside 'breakeven price' at expiration is at $238.60 ($245.00 - $6.40), which is 5.5% below the current market price of $252.58.
The 'crossover price' at expiration is $258.98 ($252.58 + $6.40).  This is the price above which it would have been more profitable to simply buy-and-hold IIB shares until March 18th (the Mar2016 options expiration date) rather than selling these Put options.

Established Covered Calls Position in Bank of America Corporation

Today, a covered calls position was established in Bank of America Corporation (ticker symbol BAC).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered call position was established with a March 2016 $12.00 strike price below today's stock purchase price of $12.21.  This position also includes consideration of a $.05 quarterly dividend with an upcoming ex-div date of March 2nd. 

The Covered Calls Advisor believes that Bank of America is very underpriced with the current stock price fully 30% below its tangible book value.  With the recent dramatic decline in Bank of America's stock price, another benefit of selling these Call options now is that their implied volatility is high, so the return-on-investment potential, as detailed below, is very attractive.

As detailed below, a potential return-on-investment result is +2.9% absolute return (equivalent to +43.0% annualized return over the next 25 days) if the stock is assigned at the Mar2016 expiration on March 18th.

1. Bank of America Corporation (BAC) -- New Covered Calls Position
The transactions were:
02/23/2016 Bought 700 Bank of America Corporation shares @ $12.21
02/23/2016 Sold 7 BAC Mar2016 $12.00 Call options @ $.55
Note: a simultaneous buy/write transaction was executed.
03/02/2016 Upcoming dividend of $.05 per share

The overall performance result (including commissions) for this Bank of America covered calls position if the stock closes above the $12.00 strike price at expiration is as follows:
Stock Purchase Cost: $8,554.95
= ($12.21*700+$7.95 commission)

Net Profit:
(a) Options Income: +$371.80
= ($.55*700 shares) - $13.20 commissions

(b) Dividend Income: +$35.00
= ($.05 dividend per share x 700 shares)

(c) Capital Appreciation (If BAC assigned at $12.00 at Mar2016 expiration): -$154.95
+($12.00-$12.21)*700 - $7.95 commissions

Total Net Profit (If BAC stock called away at $12.00 at Mar2016 expiration): +251.85
= (+$371.80 +$35.00 -$154.95)

Absolute Return: +2.9%

= +$251.85/$8,554.95

Annualized Return: +43.0%

= (+$251.85/$8,554.95)*(365/25 days)

The downside 'breakeven price' at expiration is at $11.66 ($12.21 - $.55), which is 4.5% below the current market price of $12.21.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the March 18th, 2016 options expiration) for this BAC position is 59%. This compares with a probability of profit of 50.3% for a buy-and-hold of General Motors stock over the same time period. Using this probability of profit of 59%, the Expected Value annualized ROI of this investment (if held until expiration) is +25.4% (+43.0% * 59%).

The 'crossover price' at expiration is $12.81 ($12.21 + $.55 +$.05).  This is the price above which it would have been more profitable to simply buy-and-hold Bank of America stock until March 18th (the Mar2016 options expiration date) rather than establishing this covered calls position.

Covered Calls Continuation Postions Established in Seven Equities

Today, Call options were sold against long shares in each of the seven long equity positions (Alibaba Group Holdings Ltd., General Motors Company, iShares China Large-Cap ETF, iShares MSCI South Korea ETF, JPMorgan Chase & Co., MetLife Inc., and Nationstar Mortgage Holdings Inc.) in the Covered Calls Advisor Portfolio.  These positions are all continuations of positions from Feb2016 options expirations last Friday where the equities closed below their respective strike prices.  These seven covered calls were all established with Mar2016 expirations.  The trade history for each position is described below.  The return-on-investment results for each position will be posted on this Covered Calls Advisor site upon their Mar2016 expiration (or on whatever date each position is closed out).

1. Alibaba Group Holdings Ltd. (BABA) -- Continuation
The transactions to-date are as follows:
12/24/2015  Sold 2 BABA 100% cash-secured $80.00 Put options with Jan2016 expirations @ $1.08
Note: the price of Alibaba was $83.92 today when this transaction was executed.
01/15/2016 2 BABA Puts expired; so 200 shares purchased @ $80.00 each
Note: the price of BABA was $69.59 upon Jan2016 options expiration
01/29/2016 Sold 2 BABA Feb2016 $67.50 Call options @ $3.05
Note: the price of Alibaba was $83.15 today when these two Call options were sold.
02/19/2016 2 BABA Feb2016 $67.50 Call options expired
Note: the price of Alibaba was $67.28 upon Feb2016 options expiration
02/22/2016 Sold 2 BABA Mar2016 $70.00 Call options @ $2.10

2. General Motors Company (GM) -- Continuation
The transactions to-date are as follows:
12/28/2015  Bought 300 General Motors Co. shares @ $34.31
12/28/2015 Sold 3 GM Jan2016 $33.00 Call options @ $1.66
Note: the stock purchase and the sale of these call options was done as a simultaneous buy/write transaction.
01/15/2016 Jan2016 GM Call options expired
01/22/2016 Sold 3 GM Feb2016 $30.00 Call options @ $1.29
Note: the price of GM was $30.62 when these Call options were sold.
02/19/2016 3 GM Feb2016 $30.00 Call options expired
Note: the price of GM stock was $28.78 upon Feb2016 options expiration
02/22/2016 Sold 3 GM Mar2016 $30.00 Call options @ $.53
03/09/2016 Ex-dividend of $114.00 ($.38*300 shares)

2. iShares China Large-Cap ETF (FXI) -- Continuation
The transactions are as follows:
01/22/2016 Bought 300 iShares Large-Cap China ETF shares @ $30.57
01/22/2016 Sold 3 FXI Feb2016 $31.50 Call options @ $1.26
Note: a simultaneous buy/write transaction was executed.
02/19/2016 3 FXI Feb2016 $31.50 Call options expired
Note: the price of iShares China Large-Cap ETF was $30.46 upon Feb2016 options expiration
02/22/2016 Sold 3 FXI Mar2016 $31.00 Call options @ $1.08

3. iShares MSCI South Korea ETF (EWY) -- Continuation
The transactions are as follows:
01/19/2016  Bought 200 EWY shares @ $46.85
01/19/2016 Sold 2 EWY Feb2016 $48.00 Call options @ $.86
02/19/2016 2 EWY Feb2016 $48.00 Call options expired
Note: the price of iShares MSCI South Korea ETF shares was $46.32 upon Feb2016 options expiration
02/22/2016 Sold 2 EWY Mar2016 $48.00 Call options @ $.89

4. JPMorgan Chase & Co. (JPM) -- Continuation
The transactions to-date are as follows:
01/04//2016  Sold 3 JPM 100% cash-secured $62.50 Put options @ $1.05
Note: The price of JPM was $63.28 when this transaction was executed.
01/15/2016 3 JPM $62.50 Puts expired and 300 shares JPM stock purchased @ $62.50 strike price
01/19/2016 Sold 3 JPM Feb2016 $59.00 Call options @ $1.45
02/19/2016 3 JPM Feb2016 $59.00 Call options expired
Note: the price of JPM was $57.82 upon Feb2016 options expiration
02/22/2016 Sold 3 JPM Mar2016 $59.00 Call options @ $1.63

6. MetLife Inc. (MET) -- Continuation
The transactions are as follows:
01/19/2016 Bought 200 MetLife shares @ $43.42
01/19/2016 Sold 2 MET Feb2016 $42.50 Call options @ $2.05
Note: a simultaneous buy/write transaction was executed.
02/03/2016 Ex-distribution of $75.00  ($.375 per share x 200 shares) 
02/19/2016 2 MET Feb2016 $42.50 Call options expired
Note: the price of MetLife stock was $39.11 upon Feb2016 options expiration
02/22/2016 Sold 2 MET Mar2016 $40.00 Call options @ $1.30

7. Nationstar Mortgage Holdings Inc. (NSM) -- Continuation
The transactions are as follows:
12/08/2015  Sold 3 NSM Jan2016 $12.00 100% cash-secured Put options @ $.95
Note: the price of NSM was $11.68 today when this transaction was executed.
01/15/2016 3 NSM Put options expired and 300 shares were purchased at the $12.00 strike price.
Note: the price of NSM was $11.17 upon options expiration
01/22/2016 Sold 3 NSM Feb2016 $11.00 Call options @ $.55
Note: the price of NSM was $10.75 when these Call options were sold.
02/19/2016 3 NSM Feb2016 $11.00 Call options expired
Note: the price of Nationstar Mortgage was $9.36 upon Feb2016 options expiration
02/22/2016 Sold 3 NSM Mar2016 $10.00 Call options @ $.55

February 2016 Option Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained seventeen positions with February 2016 expirations.

I.  Ten of the seventeen positions were closed out at expiration. The overall average annualized return-on-investment for these ten positions was 19.9%.  The return-on-investment results for each position was:

• BB&T Corp. = +1.7% absolute return (+21.6% annualized return)
• Cal-Maine Foods Inc. = +9.4% absolute return (+43.1% annualized return)
• Capital One Financial Corp. = +1.5% absolute return (+29.1% annualized return)
• Delta Air Lines Inc. = +1.2% absolute return (+28.2% annualized return)
• Enterprise Products Partners LP = +5.6% absolute return (+70.7% annualized return)
• General Motors Co. = +2.5% absolute return (+29.8% annualized return)
• iShares MSCI Emerging Markets ETF = -3.9% absolute return (-19.5% annualized return)
• Polaris Industries Inc. = -5.4% absolute return (-22.7% annualized return)
• SPDR S&P 500 ETF = +2.3% absolute return (+26.7% annualized return)
• The Walt Disney Company = -1.2% absolute return (-7.3% annualized return)

As an example of how these returns were calculated, the details for the BB&T covered calls position is shown below.  The cash now available from the closing of these positions will be retained in the Covered Calls Advisor Portfolio until new covered calls and/or 100% cash-secured puts positions are established.  Any new positions will be posted on this site on the same day they occur.

BB&T Corp. -- Covered Calls Position Closed at Expiration
The transactions were as follows:
01/22/2016 Bought 200 BBT shares @ $31.735
01/22/2016 Sold 2 BBT Feb2016 $30.00 Call options @ $2.09
02/10/2016 Ex-dividend of $54.00 ($.27 per share x 200 shares)
02/19/2016 At Feb2016 options expiration, BB&T stock closed above $30 strike price, so 200 shares sold at $30.00

The overall performance result (including commissions) for this BB&T Corp. (BBT) covered calls position was as follows:
Stock Purchase Cost: $6,282.95
= ($31.735*200 +$7.95 commission)

Net Profit:
(a) Options Income: +$408.55
= ($2.09*200 shares) - $9.45 commissions

(b) Dividend Income (BB&T stock assigned at Feb2016 expiration): +$54.00
= ($.27 dividend per share x 200 shares)

(c) Capital Appreciation (Stock assigned at $30.00 at Feb2016 expiration): -$354.95
+($30.00-$31.726)*200 - $7.95 commissions

Total Net Profit (Stock assigned at $30.00 at Feb2016 expiration): +$107.60

= (+$408.55 +$54.00 -$354.95)

Absolute Return (Stock assigned at $30.00 at Feb2016 expiration): +1.7%

= +$107.60/$6,282.95

Annualized Return: +21.6%

= (+$107.60/$6,282.95)*(365/29 days)

II.  Seven of the seventeen positions (Alibaba Group Holdings Ltd., General Motors Company, iShares China Large-Cap ETF, iShares MSCI South Korea ETF, JPMorgan Chase & Co., MetLife Inc., and Nationstar Mortgage Holdings Inc.) ended at expiration with the prices of the stocks below their strike price, so the options expired and the long shares are now retained in the Covered Calls Advisor Portfolio.   Decisions will be made soon to either sell these shares or to establish covered calls positions by selling future Call options against the current long stock holdings. When these decisions are made and the accompanying transactions completed, posts to this blog will be made on the same day they occur along with the detailed transactions to-date for each equity position.

Country Market Value Rankings

The Covered Calls Advisor has just completed an update (previous "Country Market Value Rankings" evaluation was in early December 2015) to determine the relative investing worthiness of twenty-three countries and two regions (Europe and Emerging Markets) around the world.  The "Country Value Rankings" table below is based on a weighted-average ranking system.  The eight indicators used to calculate these rankings are as follows:

Today's ranking, shown in the table below, provides a value-oriented and objective framework that assists this advisor in making decisions regarding overweighting and underweighting specific countries and regions in the Covered Calls Advisor's Portfolio.

 


 


From the chart above, the resulting overall market ratings for individual countries and regions are:
Very Bullish (Above 28 total points) -- China
Bullish (22-28 points) -- None
Slightly Bullish (17-22 points) -- South Korea, Singapore, Emerging Markets, Taiwan, Sweden, Netherlands, and Switzerland
Neutral (12-17 points) -- Hong Kong, Malaysia, Russia, India, Germany, Spain, Europe, Australia, and United Kingdom
Slightly Bearish (8-12 points) --Mexico, USA, and France
Bearish (2-8 points) -- Canada, Italy, and South Africa
Very Bearish (below 2 points) -- Japan and Brazil


An unweighted stocks portfolio allocation would be as follows:

However, future investments in the Covered Calls Advisor Portfolio will overweight higher rated countries/regions and underweight lower rated ones. It should also be noted that the U.S. is currently ranked 19th of the 25 ratings and the overall rating for the U.S. is Slightly Bearish [Note: this is the same rating for the U.S. as was determined from this advisor's Overall Market Meter analysis (see right sidebar)].

This Country Value Rankings spreadsheet is detailed in terms of both the methodology used and the resources used to capture the information for each country. If you would like further information or clarification, please email your comments and questions (to the address in the top right sidebar of this blog). They are always welcomed.

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,
Jeff

Established Covered Calls Position in Tesoro Corporation

Today, a covered calls position was established in Tesoro Corporation (ticker symbol TSO).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established with a March 2016 $65.00 strike price, well below today's stock purchase price of $68.77.  This position also includes consideration of a $.50 quarterly dividend with an upcoming ex-div date of Feb 25th. 

The Covered Calls Advisor believes that TSO is very underpriced now, being both short-term oversold and also longer-term undervalued.  With the recent dramatic decline in Tesoro's stock price, another benefit of selling these Call options now is that their implied volatility is very high, so the return-on-investment potential, as detailed below, is very attractive.

As detailed below, a potential return-on-investment result is +3.5% absolute return (equivalent to +44.3% annualized return over the next 29 days) if the stock is assigned at the Mar2016 expiration on March 18th.

1. Tesoro Corporation (TSO) -- New Covered Calls Position

The transactions were:
02/19/2016 Bought 200 Tesoro Corporation shares @ $68.77
02/19/2016 Sold 2 TSO Mar2016 $65.00 Call options @ $5.78
Note: a simultaneous buy/write transaction was executed.
02/25/2016 Upcoming dividend of $.50 per share

The overall performance result (including commissions) for this Tesoro covered calls position if the stock closes above the $65 strike price at expiration is as follows:
Stock Purchase Cost: $13,761.95
= ($68.77*200+$7.95 commission)

Net Profit:
(a) Options Income: +$1,146.55
= ($5.78*200 shares) - $9.45 commissions

(b) Dividend Income: +$100.00
= ($.50 dividend per share x 200 shares)

(c) Capital Appreciation (If TSO assigned at $65.00 at Mar2016 expiration): -$761.95
+($65.00-$68.77)*200 - $7.95 commissions

Total Net Profit (If Tesoro stock called away at $65.00 at Mar2016 expiration): +484.60
= (+$1,146.55 +$100.00 -$761.95)

Absolute Return: +3.5%

= +$484.60/$13,761.95

Annualized Return: +44.3%

= (+$484.60/$13,761.95)*(365/29 days)

Worthwhile Reading on Stock Market Valuations

Below are two recent articles on current stock market valuations that I found to be particularly insightful.  One is focused on the U.S. market and the other on global markets.

U.S. stock market:
https://www.thefelderreport.com/2016/02/05/mind-the-gaps/

Global stock market:
http://awealthofcommonsense.com/2016/02/when-global-stocks-go-on-sale/

I hope you find the information provided as interesting as I do.

Best regards and Godspeed,
Jeff

Established Covered Calls Position in Delta Air Lines Inc.

Today, a covered calls position was established in Delta Air Lines Inc. (ticker symbol DAL) with a Feb2016 expiration.  This position includes consideration of an upcoming $.135 quarterly dividend with an ex-div date of Feb 12th.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established with the strike price of $41.00 below the stock purchase price of $43.46.

As detailed below, two potential return-on-investment results for this position are:

If Early Assignment: +0.9% absolute return (equivalent to +42.3% annualized return for the next 8 days) if the stock is assigned early (business day prior to Feb 12 ex-date); OR

If Dividend Capture: +1.2% absolute return (equivalent to +28.2% annualized return over the next 16 days) if the stock is assigned at the Feb2016 expiration on February 19th.

1. Delta Air Lines Inc. (DAL) -- New Covered Calls Position

The $.135 dividend of Dec 12th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.45 [$2.91 option premium - ($43.46 stock price - $41.00 strike price)] remaining in the short call option decays substantially by February 11th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Delta Air Lines shares away to capture the dividend.

The transactions were:
02/04/2016 Bought 400 Delta Air Lines shares @ $43.46
02/04/2016 Sold 4 DAL Feb2016 $41.00 Call options @ $2.91
Note: a simultaneous buy/write transaction was executed.
02/12/2016 Upcoming dividend of $.135 per share

Two possible overall performance results (including commissions) for this Delta Air Lines covered calls position are as follows:
Stock Purchase Cost: $17,391.95
= ($43.46*400+$7.95 commission)

Net Profit:
(a) Options Income: +$1,153.05
= ($2.91*400 shares) - $10.95 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 12th ex-dividend date): +$0.00; or
(b) Dividend Income (If DAL assigned at Feb2016 expiration): +$54.00
= ($.135 dividend per share x 400 shares)

(c) Capital Appreciation (If DAL assigned early on Feb 11th): -$991.95
+($41.00-$43.46)*400 - $7.95 commissions; or
(c) Capital Appreciation (If DAL assigned at $41.00 at Feb2016 expiration): -$991.95
+($41.00-$43.46)*400 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 12 ex-div date): +$161.10

= (+$1,153.05 +$0.00 -$991.95); or

Total Net Profit (If PCAR assigned at $45.00 at Jan2016 expiration): +$215.10

= (+$1,153.05 +$54.00 -$991.95)

1. Absolute Return [If option exercised on Feb 11th (business day prior to ex-dividend date)]: +0.9%

= +$161.10/$17,391.95

Annualized Return (If option exercised early): +42.3%

= (+$161.10/$17,391.95)*(365/8 days); OR

2. Absolute Return (If DAL assigned at $41.00 at Feb2016 expiration): +1.2%

= +$215.10/$17,391.95

Annualized Return: +28.2%

= (+$215.10/$17,391.95)*(365/16 days)

Either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $41.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $40.55 ($43.46 -$2.91) provides 6.7% downside protection below today's purchase price.

Overall Market Meter Remains "Slightly Bearish"

Today, the Covered Calls Advisor recalculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The result is that the Covered Calls Advisor's current market viewpoint remains at Slightly Bearish.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.    

The seven factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).
Note: The rating for each of these factors is not subjective.  Each factor is calculated using objective, quantifiable measures.



The current Market Meter average of 2.57 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 2.25 to 2.99).  This overall value of 2.57 is slightly less than the 2.71 value when the prior rating was done last November, but it is still within the 'Slightly Bearish' range. 

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bearish sentiment is to "on-average sell 1% in-the-money covered calls for the next options expiration month".

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

Regards and Godspeed,
Jeff

Established Positions in Capital One Financial Corp. and Energy Select Sector SPDR Fund ETF

Today, positions were established in Capital One Financial Corp.(ticker symbol COF) and the Energy Select Sector SPDR Fund ETF (ticker XLE).  Capital One is a covered calls position with a Feb2016 expiration that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.40 expected on Feb11th.  For XLE, two March 2016 100% cash-secured Put options were sold (in lieu of a comparable covered calls position) since the implied volatility of the Puts exceeded that of the Calls (thus providing a higher potential return-on-investment result).  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, conservative investments were made for both positions (with the strike prices below the stock prices when the positions were established).

As detailed below, the potential returns are:
1. Capital One Financial Corp: +1.5% absolute return in 19 days (equivalent to a +29.1% annualized return-on-investment)
2. Energy Select Sector SPDR Fund ETF: +3.9% absolute return in 47 days (equivalent to a +30.5% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 25 for Capital One and 36 for the Energy Select Sector SPDR Fund ETF, so each option exceeded the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment relative to the conservative risk profile of each position.  


1. Capital One Financial Corp (COF) -- New Covered Call Position

A quarterly dividend is expected on Feb 11th.  The amount has not yet been declared, but a regular $.40 dividend is expected and is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.67 [$3.00 option premium - ($64.83 stock price - $62.50 strike price)] remaining in the short call options decay substantially below the $.40 dividend amount by February 10th (the business day prior to the ex-dividend date), then there is a possibility that the Call options owner would exercise early and therefore call the 200 COF shares away to capture the dividend payment.

As shown below, two potential return-on-investment results for this position are:

If Early Assignment: +0.9% absolute return (equivalent to +32.8% annualized return for the next 10 days) if the stock is assigned early (business day prior to Feb 11 ex date); OR

If Dividend Capture: +1.5% absolute return (equivalent to +29.1% annualized return over the next 19 days) if the stock is assigned at the Feb2016 expiration on February 19th.

The transactions were:
02/01/2016 Bought 200 COF shares @ $64.83
02/01/2016 Sold 2 COF Feb2016 $62.50 Call options @ $3.00
Note: a simultaneous buy/write transaction was executed.
02/11/2016 Upcoming ex-dividend of $.40 per share

Two possible overall performance results (including commissions) for this COF covered calls position are as follows:
Stock Purchase Cost: $12,973.95
= ($64.83*200+$7.95 commission)

Net Profit:
(a) Options Income: +$590.55
= ($3.00*200 shares) - $9.45 commissions
(b) Dividend Income (If option exercised early on business day prior to Feb 11th ex-div date): +$0.00; or
(b) Dividend Income (If COF assigned at Feb2016 expiration): +$80.00
= ($.40 dividend per share x 200 shares)

(c) Capital Appreciation (If COF assigned early on Feb 10th): -$473.95
+($62.50-$64.83)*200 - $7.95 commissions; or
(c) Capital Appreciation (If COF assigned at $62.50 at Feb2016 expiration): -$473.95
+($62.50-$64.83)*200 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Feb 11th ex-dividend date): +$116.60

= (+$590.55 +$0.00 -$473.95); or

Total Net Profit (If COF assigned at $62.50 at Feb2016 expiration): +$196.60

= (+$590.55 +$80.00 -$473.95)

1. Absolute Return [If option exercised on Feb 10th (business day prior to ex-dividend date)]: +0.9%

= +$116.60/$12,973.95

Annualized Return (If option exercised early): +32.8%

= (+$116.60/$12,973.95)*(365/10 days); OR

2. Absolute Return (If COF assigned at $62.50 at Feb2016 expiration): +1.5%

= +$196.60/$12,973.95

Annualized Return: +29.1%

= (+$196.60/$12,973.95)*(365/19 days)

In this instance, early assignment provides a slightly annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $61.83 ($64.83 -$3.00) provides a substantial 4.6% downside protection below today's purchase price.


2. Energy Select Sector SPDR Fund ETF (XLE) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
02/01/2016  Sold 2 XLE Mar2016 $55.00 100% cash-secured Put options @ $2.21
Note: the price of XLE was $56.78 today when this transaction was executed.

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


A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $11,000.00
= $55.00*200
Note: the price of XLE was $56.78 when these options were sold

Net Profit:
(a) Options Income: +$432.55
= ($2.21*200 shares) - $9.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If XLE is above $55.00 strike price at Mar2016 expiration): +$0.00
= ($55.00-$55.00)*200 shares

Total Net Profit (If XLE is above $55.00 strike price at Mar2016 options expiration): +$432.55
= (+$432.55 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If XLE is above $55.00 strike price at Mar2016 options expiration): +3.9%
= +$432.55/$11,000.00
Annualized Return: +30.5%
= (+$432.55/$11,000.00)*(365/47 days)

The downside 'breakeven price' at expiration is at $52.79 ($55.00 - $2.21), which is 7.0% below the current market price of $56.78.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 18th, 2016 options expiration) for this XLE short Puts position is 61%. This compares with a probability of profit of 50.3% for a buy-and-hold of XLE shares over the same time period. Using this probability of profit of 61%, the expected value annualized return-on-investment (if held until expiration) is +18.6% (+30.5% * 61%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $58.99 ($56.78 + $2.21).  This is the price above which it would have been more profitable to simply buy-and-hold XLE until the Mar2016 options expiration date rather than selling these Put options.