Country Market Value Rankings

The Covered Calls Advisor has just completed an update of the methodology for determining the relative investing worthiness of twenty-three countries and two regions (Europe and Emerging Markets) around the world.  The updated "Country Market 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) -- None
Bullish (22-28 points) -- China
Slightly Bullish (17-22 points) -- Singapore, South Korea, Taiwan, and Emerging Markets
Neutral (12-17 points) -- Sweden, Malaysia, Switzerland, Germany, Hong Kong, Netherlands, India, Mexico, and Australia
Slightly Bearish (8-12 points) --Spain, USA, Europe, Canada, Russia, and United Kingdom
Bearish (2-8 points) -- France, South Africa, Italy, and Japan
Very Bearish (below 2 points) -- 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 16th of the 25 ratings and the overall rating for the U.S. is Slightly Bearish.

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!  Going forward, it is my intention to update this information quarterly.

Regards and Godspeed to All,
Jeff

Established New Position in AmTrust Financial Services Inc.

Today, the Covered Calls Advisor established a new position in AmTrust Financial Services Inc. (ticker symbol AFSI) by selling three Dec2015 Put options at the $60.00 strike price. This position is a conservative one since it was established with 4.1% downside protection to the strike price.

As detailed below, the AmTrust Financial Services Inc. investment will yield a +1.0% absolute return in 16 days (which is equivalent to a +24.3% annualized return-on-investment) if AFSI closes above the $60.00 strike price on the Dec 18th options expiration date. 

This potential return is very nice given the downside protection (from the $62.55 stock price to the $60.00 strike price) when the position was established.  The implied volatility in the options was 30 when this position was established; so the $.65 price per share received when the Puts were sold is a nice premium to receive for us option sellers.     

1. AmTrust Financial Services Inc.(AFSI) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/03/2015  Sold 3 AFSI Dec2015 $60.00 100% cash-secured Put options @ $.65
Note: the price of AFSI was $62.55 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: $18,000.00
= $60.00*300
Note: the price of AmTrust Financial was $62.55 when these options were sold

Net Profit:
(a) Options Income: +$184.80
= ($.65*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AFSI is above $60.00 strike price at Dec2015 expiration): +$0.00
= ($60.00-$60.00)*300 shares

Total Net Profit (If AFSI is above $60.00 strike price at Dec2015 options expiration): +$184.80
= (+$184.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If AFSI is above $60.00 strike price at Dec2015 options expiration): +1.0%
= +$184.80/$18,000.00
Annualized Return: +23.4%
= (+$184.80/$18,000.00)*(365/16 days)

The downside 'breakeven price' at expiration is at $59.35 ($60.00 - $.65), which is 5.1% below the current market price of $62.55.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this AFSI short Puts position is 74%. This compares with a probability of profit of 50.3% for a buy-and-hold of AmTrust stock over the same time period. Using this probability of profit of 74%, the expected value annualized return-on-investment (if held until expiration) is +18.0% (+24.3% * 74%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $63.20 ($62.55 + $.65).  This is the price above which it would have been more profitable to simply buy-and-hold AmTrust Financial until the Dec2015 options expiration date rather than selling these Put options.

Exploiting Our Covered Calls Investing "Edges"

Below is a reprint of an article I wrote for this blog over 5 years ago. I believe the concepts discussed continue to be as valid today as they were then.
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For any given investing strategy, the investor should try to identify any and all discernible advantages that particular strategy has when compared against a basic buy-and-hold approach. Once these potential advantages are identified, it is important to establish an investing process that attempts to exploit these advantages. The term that this Covered Calls Advisor prefers for the specific advantages identified is our investing "edges". Identifying and then establishing a disciplined investing process to exploit these "edges" is what enables us to attain additional profit beyond that which would otherwise be obtained through a passive buy-and-hold strategy. 

So what are our "edges" as Covered Calls investors? It is this advisor's belief that there are six edges, each of which enhances our opportunity to achieve excess returns:

1. Specialize in Covered Calls Investing -- Here is the introduction to one of my prior blog posts: "One of the most important investing lessons I've learned is to select an investing strategy that you are most comfortable with and stay with it. That is, do not try to be "a jack-of-all-trades and a master of none." Instead, try to continually increase your knowledge related to the strategy you are using and seek to become an expert at it." This fundamental belief in combination with the performance results achieved is what has sustained my commitment to covered calls investing during the past three decades -- thus this Covered Calls Advisor's investing motto of "Stick with Covered Calls."
I was recently reminded of my uncommon commitment to covered calls (and the investing edge it provides) while reading this article: (See "7 Things To Do To Improve"). Charles Kirk concludes in item #7 titled "Become a specialist, not a jack of all trades", by saying "So, find something that interests you more than anything else and concentrate all of your time and focus on that one thing. That path will lead you to developing a clear edge that will provide huge profits to you down the line." I hope you agree with me and will consider making covered calls investing "that one thing" you will "focus on" to achieve a "clear edge".

2. Active Management -- The typical buy-and-hold investing strategy is a passive investing approach since stocks or mutual funds are normally purchased and held for a period of years. Likewise, covered calls investing can also be deployed passively, and passive covered-calls-related indices (for example BXM, BXY, and PUT) have been developed. Research has shown that the long-term returns performance of these indices are approximately equivalent to that of a comparable buy-and-hold investment. But as individual investors, we have the opportunity to be "active" (contrasted with "passive") managers of our covered calls portfolios. As active managers, an associated "edge" comes from making timely adjustments (for example, position rolling decisions) related to our existing covered calls positions.

3. Value-Oriented Stock Selection -- Good stock selection is Job #1 for the covered calls investor. Unlike broad-based indices such as the S&P 500 or BXM, we seek to purchase only value-oriented individual equities, which are likely to continue in the future (as they have historically), to outperform the broader indices (such as the S&P 500).

4. Adjust Moneyness of Strike Prices -- As active covered calls investors, we have the flexibility to sell out-of-the-money covered calls when our outlook is more bullish and in-the-money when bearish; whereas the mechanical indices sell the same moneyness every month (for example, only at-the-money calls in the case of BXM). With even modest success at adjusting moneyness to coincide with our overall market outlook, incremental return results are achieved.

5. Sell Higher-Than-Average Volatility -- Because of the large cap nature and the diversification inherent in the S&P 500 index, its Volatility Index(VIX) is lower than most individual stocks. Selling options on individual equities (with somewhat higher implied volatility than VIX) provides covered calls investors with somewhat higher options income (and thus somewhat higher overall portfolio returns) than would be achieved by either (1) buy-and-hold investing directly in the S&P 500; or (2) selling S&P 500 options (such as is done with the BXM, BXY, and PUT indices).

6. Exploiting the Volatility Risk Premium -- Academic research has demonstrated that the implied volatility of option prices is, on average, higher than the actual realized volatility. Thus, by selling options to establish our covered calls positions (NOT buying options), we Covered Calls investors exploit this effect (another "edge" versus buy-and-hold investors) and profit from it.

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From my experience, my best estimate is that over a long-term investing horizon (say 10+ years), a disciplined covered calls investor that is cognizant of the six "edges" described above, and works to take advantage of them might expect (on average over the years), to outperform a buy-and-hold benchmark by about 3% to 5% per year. This extra return might not sound especially impressive, but the power of compounding investment returns is substantial. Suppose that over the next decade a buy-and-hold S&P 500 investor averages an 8% annualized return; and a covered calls investor averages a 12% return. Then, an initial $100,000 portfolio would grow (excluding taxes) over the next 10 years, to about $215,900 for a buy-and-hold portfolio; but to $310,600 for the covered calls portfolio. Whereas individually, each of the six "edges" described above provides only a small advantage, together they can provide a very significant advantage for covered calls investors.
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"We believe that while investors need to focus great attention on the fundamentals, they must simultaneously answer the question: What's your edge? To succeed in today's overcrowded environment, investors need an edge, an advantage over the competition, to help them allocate their scarce time. Since most everyone has access to complete and accurate databases, powerful computers, and well-trained analytical talent, these resource provide less and less of a competitive edge; they are necessary but not sufficient. You cannot have an edge doing what everyone else is doing; to add value you must stand apart from the crowd. And when you do, you benefit from watching the competition at work." -- Seth Klarman

If you have any comments or questions on this article or on any of the six "edges" presented, please email me at the address shown in the top-right sidebar of this blog. Your comments are always welcomed.

Regards and Godspeed,
Jeff

Established Two New Positions

Today, positions were established in iShares China Large-Cap ETF (ticker symbol FXI) and Cal-Maine Foods Inc. (CALM).  FXI is a covered calls position with a Jan2016 expiration that explicitly considers the potential for capturing the upcoming semi-annual ex-distribution expected on Dec 18th.  For Cal-Maine, Dec2015 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. iShares China Large-Cap ETF: +2.3% absolute return in 46 days (equivalent to a +18.1% annualized return-on-investment)
2. Cal-Maine Foods Inc.: +2.3% absolute return in 18 days (equivalent to a +47.6% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 25 for iShares China Large-Cap ETF and 43 for Cal-Maine Foods Inc., 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. iShares China Large-Cap ETF (FXI) -- New Covered Call Position

A semi-annual distribution is expected on December 18th.  The amount of the distribution has not yet been declared, but a best estimate of $.50 is included in the potential results analysis below.  Although very unlikely, if the current time value (i.e. extrinsic value) of $.42 [$2.02 option premium - ($37.60 stock price - $36.00 strike price)] remaining in the short call option decays substantially below the approximately $.50 distribution amount by December 17th (the business day prior to the ex-distribution date), then there is a possibility (although unlikely) that the call option owner would exercise early and call FXI away to capture the distribution.

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

If Early Assignment: +1.0% absolute return (equivalent to +20.5% annualized return for the next 17 days) if the stock is assigned early (business day prior to Dec 18 ex date); OR

If Dividend Capture: +2.3% absolute return (equivalent to +18.1% annualized return over the next 46 days) if the stock is assigned at Jan2016 expiration on January 15th.

The transactions were:
12/01/2015 Bought 300 FXI shares @ $37.60
12/01/2015 Sold 3 FXI Jan2016 $36.00 Call options @ $2.02
Note: a simultaneous buy/write transaction was executed.
12/18/2015 Upcoming semi-annual distribution estimated at $.50 per share

Two possible overall performance results (including commissions) for this FXI covered calls position are as follows:
Stock Purchase Cost: $11,287.95
= ($37.60*300+$7.95 commission)

Net Profit:
(a) Options Income: +$595.80
= ($2.02*300 shares) - $10.20 commissions
(b) Distribution Income (If option exercised early on business day prior to Dec 18th ex-distribution date): +$0.00; or
(b) Distribution Income (If FXI assigned at Jan2016 expiration): +$150.00
= ($.50 dividend per share x 300 shares)

(c) Capital Appreciation (If FXI assigned early on Dec 17th): -$487.95
+($36.00-$37.60)*300 - $7.95 commissions; or
(c) Capital Appreciation (If FXI assigned at $36.00 at Jan2016 expiration): -$487.95
+($36.00-$37.60)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Dec 18 ex-distribution date): +$107.85

= (+$595.80 +$0.00 -$487.95); or

Total Net Profit (If FXI assigned at $36.00 at Jan2016 expiration): +$257.85

= (+$595.80 +$150.00 -$487.95)

1. Absolute Return [If option exercised on Dec 17th (business day prior to ex-distribution date)]: +1.0%

= +$107.85/$11,287.95

Annualized Return (If option exercised early): +20.5%

= (+$107.85/$11,287.95)*(365/17 days); OR

2. Absolute Return (If FXI assigned at $36.00 at Jan2016 expiration): +2.3%

= +$257.85/$11,287.95

Annualized Return: +18.1%

= (+$257.85/$11,287.95)*(365/46 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 $36.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $35.58 ($37.60 -$2.02) provides a substantial 5.4% downside protection below today's purchase price.


2. Cal-Maine Foods Inc. (CALM) -- New 100% Cash-Secured Puts Position

The transaction was as follows:
12/01/2015  Sold 4 CALM Dec2015 $50.00 100% cash-secured Put options @ $1.20
Note: the price of CALM was $52.10 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.

This morning there was some aggressive selling of Cal-Maine stock in reaction (this advisor believes it is an over-reaction) to some BB&T commentary about pricing softness in the current quarter for shell eggs (Cal-Maine is the leading U.S. producer).   The Covered Calls Advisor has been analyzing Cal-Maine for several weeks and decided to use today's price weakness accompanied by an increase in CALM's implied volatility to 43 for the Dec2015 $50.00 Puts as an opportunity to enter this position in Cal-Maine. 

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $20,000.00
= $50.00*400
Note: the price of Cal-Maine was $52.10 when these options were sold

Net Profit:
(a) Options Income: +$469.05
= ($1.20*400 shares) - $10.95 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CALM is above $50.00 strike price at Dec2015 expiration): +$0.00
= ($50.00-$50.00)*400 shares

Total Net Profit (If CALM is above $50.00 strike price at Dec2015 options expiration): +$469.05
= (+$469.05 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If CALM is above $50.00 strike price at Dec2015 options expiration): +2.3%
= +$469.05/$20,000.00
Annualized Return: +47.6%
= (+$469.05/$20,000.00)*(365/18 days)

The downside 'breakeven price' at expiration is at $48.80 ($50.00 - $1.20), which is 6.3% below the current market price of $52.10.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Dec 18th, 2015 options expiration) for this Cal-Maine short Puts position is 65%. This compares with a probability of profit of 50.2% for a buy-and-hold of Cal-Maine stock over the same time period. Using this probability of profit of 65%, the expected value annualized return-on-investment (if held until expiration) is +30.9% (+47.60% * 65%), a very attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $53.30 ($52.10 + $1.20).  This is the price above which it would have been more profitable to simply buy-and-hold CALM until the Dec2015 options expiration date rather than selling these Put options.