Roll Up and Out -- Noble Corp. (NE)

Today is expiration Friday for January 2010. A decision was made to retain Noble Corp.(NE) in the Covered Calls Advisor Portfolio and to roll-up-and-out to the Feb2010 expiration at the $45.00 strike price. With about 15 minutes remaining in the trading day, the Jan2010 $43.00 covered calls were in-the-money (with NE at $43.67), and since the time value remaining in the options was only $.03 [$.70-($43.67-$43.00)], a roll-up-and-out credit spread transaction was executed as follows:
01/15/2010 Buy-to-Close (BTC) 3 NE Jan2010 $43.00s @ $.70
01/15/2010 Sell-to-Open (STO) 3 NE Feb2010 $45.00s @ $1.30
Note: Net Credit-Spread upon Roll-Up-and-Out was $.60 ($1.30 - $.70)

The transactions history to date for Noble Corp.(NE) is as follows:
09/02/09 Bought 300 NE @ $33.98
09/02/09 Sold 3 NE Sep09 $34.00 Calls @ $1.30
Roll-Up-and-Out Transaction:
09/17/09 Buy-to-Close (BTC) 3 NE Sep09 $34.00s @ $5.22
09/17/09 Sell-to-Open (STO) 3 NE Oct09 $36.00s @ $3.87
Note: The price of NE was $39.19 today when this debit-spread was transacted and the remaining time value in the Sep09 option was only $.03 [$5.22-($39.19-$34.00)].
Roll-Up-and-Out Transaction:
10/16/09 Buy-to-Close (BTC) 3 NE Oct09 $36.00s @ $5.60
10/16/09 Sell-to-Open (STO) 3 NE Nov09 $42.00s @ $1.75
Note: The price of NE was $41.56 today when this transaction occurred.
11/05/09 Ex-Dividend = $14.70 (300 shares*$.049)
11/21/09 Nov09 Options Expired
11/23/09 Sell-to-Open (STO) 3 NE Dec09 $42.00s @ $1.45
Note: Price of NE was $41.30 when the Dec09 options were sold.
12/19/09 Dec09 Options Expired
12/21/09 Sell-to-Open (STO) 3 NE Jan2010 $43.00s @ $.90
Note: Price of NE was $41.75 when the Jan2010 options were sold.
01/15/2010 Buy-to-Close (BTC) 3 NE Jan2010 $43.00s @ $.70
01/15/2010 Sell-to-Open (STO) 3 NE Feb2010 $45.00s @ $1.30
Note: Price of NE was $43.67 when the Feb2010 options were sold.

Some possible overall performance results(including commissions) for the NE transactions would be as follows:
Stock Purchase Cost: $10,202.95
($33.98*300+$8.95 commission)

Net Profit:
(a) Options Income: -$352.20
= (300*($1.30-$5.22+$3.87-$5.60+$1.75+$1.45+$.90-$.70+$1.30) - 6*$11.20 commissions)
(b) Dividend Income: +$14.70
(c) Capital Appreciation (If stock price unchanged at $43.67): +$2,898.05
= ($43.67-$33.98)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $45.00): +$3,297.05
= ($45.00-$33.98)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $43.67): +$2,560.55
= (-$352.20 +$14.70 +$2,898.05)
Total Net Profit(If stock price exercised at $45.00): +$2,959.55
= (-$352.20 +$14.70 +$3,297.05)

Absolute Return if Stock Price Unchanged at $43.67: +25.1%
= +$2,560.55/$10,202.95
Annualized Return If Unchanged (ARIU) +53.6%
= (+$2,560.55/$10,202.95)*(365/171 days)

Absolute Return if Exercised at $45.00: +29.0%
= +$2,959.55/$10,202.95
Annualized Return If Exercised (ARIE) +61.9%
= (+$2,959.55/$10,202.95)*(365/171 days)

Staying Slightly Bullish

Each month during expiration week, the Covered Calls Advisor re-calculates the current values for the nine factors used to determine the "Overall Market Meter" rating. Some of the individual factors have changed from last month but, as shown in the chart below, the new Market Meter Average rating (blue bar at the bottom of the chart) remains unchanged at "Slightly Bullish":





















As shown in the right sidebar, the covered calls investing strategy corresponding to this Slightly Bullish sentiment is to "on-average sell 2% Out-of-the-Money Covered Calls for the nearest expiration month." So as Jan2010 options expire this week, new positions for Feb2010 expiration will be established in accordance with this guideline.

This advisor admits to having hoped that the Overall Market Meter rating would have changed this month -- but the Slightly Bullish overall rating persists. Now I can count on continuing to hear my wife and daughters' oft-repeated (but fortunately good-natured) kidding regarding my Overall Market Meter:
"He's Still Slightly Bullish!"

For a more detailed explanation of each of the Covered Calls Advisor's nine indicators, please refer to this prior blog post on that topic -- link.

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

Regards and Godspeed,
Jeff

Establish Packaging Corporation of America Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Packaging Corporation of America (PKG) covered calls as follows:

Established Packaging Corporation of America (PKG) Covered Calls for Jan2010:
01/08/2010 Bought 300 PKG @ $23.89
01/08/2010 Sold 3 PKG Feb2010 $25.00 Calls @ $.80

Packaging Corporation of America produces containerboard and corrugated products in the United States. Its corrugated packaging products include conventional shipping containers used to protect and transport manufactured goods; and multi-color boxes and displays to merchandise the packaged products in retail locations, as well as meat boxes and wax-coated boxes for the agricultural industry. Packaging Corporation offers its products through a direct sales and marketing organization. The company was founded in 1867 and is headquartered in Lake Forest, Illinois.

Credit Suisse recently issued a very bullish analysis of containerboard stocks in which they highlighted the following catalysts: (1) containerboard pricing is poised to increase as the overall economy improves since the industry is already operating at 95% of capacity while current inventories are at 15-year lows; and (2) analysts' current average earnings estimates are low in comparison to likely results for the next several quarters.
More specifically for Packaging Corp., it is poised to benefit dramatically from higher containerboard prices while controlling costs from the expected relatively modest increases in its raw material inputs which come almost exclusively from softwood trees (as opposed to the more expensive alternative of recycled boxes). PKG has solidly defensive characteristics since over 80% of revenues come from food and other non-durable categories. As shown in the "Buy Alerts" spreadsheet below, its current fundamentals are strong and it is led by a highly-regarded management team. This advisor believes that there is minimal downside risk for this stock -- so a moderately deep-out-of-the-money (4.4% OTM) covered calls position was established.

The 'Buy Alerts' spreadsheet below shows that PKG has a 'Total Points' rating of 20.04 which meets the Covered Calls Advisor's desired threshold of 20.0 points.






















Note: For expanded view, left click on the spreadsheet above.


Some possible overall performance results(including commissions) for the PKG transactions would be as follows:
Stock Purchase Cost: $7,175.95
= ($23.89*300+$8.95 commission)

Net Profit:
(a) Options Income: +$228.80
= (300*$.80 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $23.89):
-$8.95 = ($23.89-$23.89)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $25.00): +$324.05
= ($25.00-$23.89)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $23.89): +$219.85
= (+$228.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $25.00): +$552.85
= (+$228.80 +$0.00 +$324.05)

Absolute Return if Unchanged at $23.89: +3.1%
= +$219.85/$7,175.95
Annualized Return If Unchanged (ARIU) +26.0%
= (+$219.85/$7,175.95)*(365/43 days)

Absolute Return if Exercised at $25.00: +7.7%
= +$552.85/$7,175.95
Annualized Return If Exercised (ARIE) +65.4%
= (+$552.85/$7,175.95)*(365/43 days)

Returns -- For Calendar Year 2009

Wow! What a difference a year makes!
At the end of 2008, we stated that "we have to go back to the Great Depression to find a stock market performance that was worse than this year." Fortunately, in 2009 the stock market made a comeback. The Russell 3000 benchmark used by the Covered Calls Advisor increased by 25.5% in 2009; which is its best overall result since 2003. In comparison, the Covered Calls Advisor Portfolio increased by 37.9% in 2009, thereby outperforming the Russell 3000 benchmark by 12.4 percentage points (37.9% minus 25.5%).

It is a well-accepted premise that the covered calls investing strategy generally outperforms an overall market benchmark in neutral and bearish years. A slight outperformance by covered calls might also be expected in slightly bullish years. But in a strongly bullish market such as 2009 (when the market benchmark increased by 25.5%), a common belief is that covered calls should underform versus a buy-and-hold benchmark. Thus the Covered Calls Advisor Portfolio's significant outperformance in 2009 is especially satisfying to this advisor.

The Covered Calls Advisor Portfolio (CCAP) was begun in September, 2007. The annualized returns achieved for 2007, 2008, and 2009 compared with the Russell 3000 benchmark results were as follows:




The Covered Calls Advisor's motto is:
"Stick with Covered Calls!"





The underlying premise of this blog is to demonstrate that "with a well-managed covered calls portfolio, we can achieve market-beating returns." However, the annual double-digit percentage points outperformance that has been achieved since this blog was started in 2007 should not be misinterpreted by readers of this blog. The Covered Calls Advisor cautions all readers that the levels of outperformance achieved to-date should not be considered as an expectation as to the level of future outperformance, either by the Covered Calls Advisor Portfolio in particular or by the covered calls strategy in general. Although this advisor continues to expect a disciplined, well-managed covered calls portfolio to outperform the Russell 3000 overall market benchmark over the long-term, it is likely that the long-term outperformance by the Covered Calls Advisor Portfolio will be closer to a mid-single-digits (perhaps +3% to +7%) outperformance rather than the double-digit outperformance that has been achieved each year so far.

As a further caveat to readers of this Covered Calls Advisor blog, I would now like to reiterate the disclaimer always shown in the lower right sidebar:
"Disclaimer: The content of this site is for informational and educational purposes only. If you invest using information contained here, do so at your own risk."

As a reminder, the single measure used by the Covered Calls Advisor to determine overall portfolio investment performance results is called 'Total Account Value Return Percent' -- a simple example demonstrates how this measure is calculated:
If the total CCAP portfolio value was $100,000 at the beginning of the calendar year and $110,000 at the end of that year (and with no deposits or withdrawals having been made), then the 'Total Account Value Return Percent' would be +10.0% [($110,000-$100,000)/$100,000]*100.

As always, I welcome any comments or questions you might have. Please feel free to submit them by clicking the 'comments' link below. If you prefer more confidential correspondence, my email address is listed at the top-right sidebar of this blog site.


Sincerely Wishing You a Happy, Healthy, and Prosperous New Year in 2010!

Regards and Godspeed to All,
Jeff