Returns -- Through October 2009

This report presents the Covered Calls Advisor Portfolio (CCAP) performance results through October 2009.

1. Month of October 2009 Result:

The Covered Calls Advisor Portfolio decreased by 1.66% for the month of October 2009. In comparison, the benchmark Russell 3000 index (IWV) decreased by 2.60% for the month.


2. Year-to-Date Through October 2009 Results:

The 2009 Year-to-Date results are as follows:

CCAP Absolute Return (Jan 1st through October 31, 2009) = +31.15%
= ($261,949.96 - $199,733.10)/$199,733.10

Benchmark Russell 3000(IWV) Absolute Return (Jan 1st through October 31,2009) = +16.12%
= ($60.38 - $52.00)/$52.00

For the first ten months of 2009, the table below shows that CCAP has outperformed the Russell 3000 benchmark by 15.03 percentage points (31.15% - 16.12%):

"Stick with Covered Calls"!

3. Prior Years Results:

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










Note: This Covered Calls Advisor uses a bottom-line performance measure to determine overall portfolio investment performance results -- it is called 'Total Account Value Return Percent'. A simple example demonstrates how it 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.

If you have any comments or questions, 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.

Regards and Godspeed,

Jeff

Establish ProShares Short S&P 500 ETF Covered Calls

With the cash from the today's early exercise of Paychex and also from closing out the Cal Dive covered calls position, it was decided to increase the Covered Calls Advisor Portfolio(CCAP) position in ProShares Short S&P 500 ETF (SH) covered calls as follows:

Established ProShares Short S&P 500 ETF (SH) Covered Calls for Nov09:
10/29/09 Bought 300 SH @ $56.05
10/29/09 Sold 3 SH Nov09 $57.00 Calls @ $.90

The ProShares Short S&P 500 ETF position has now been increased so that it now represents approximately 19% of the assets in the Covered Calls Advisor Portfolio(CCAP). As a result, the CCAP for the Nov09 expiration is now 75% long, 19% short, and 6% cash in the underlying equities. The 6% cash buffer is for position management purposes in the event that this advisor decides to transact a net debit spread roll-up of an existing position prior to Nov09 expiration.

Some possible overall performance results(including commissions) for this SH investment would be as follows:
Equity Purchase Cost: $16,823.95
= ($56.05*300+$8.95 commission)

Net Profit:
(a) Options Income: +$258.80
= (300*$.90 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If price unchanged at $56.05): -$8.95
= ($56.05-$56.05)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $57.00): +$276.05
= ($57.00-$56.05)*300 - $8.95 commissions

Total Net Profit(If price unchanged at $56.05): +$249.85
= (+$258.80 +$0.00 -$8.95)
Total Net Profit(If exercised at $57.00): +$535.30
= (+258.80 +$0.00 +$276.05)

Absolute Return if Price Unchanged at $56.05: +1.5%
= +$249.85/$16,823.95
Annualized Return If Unchanged (ARIU): +23.6%
= (+$249.85/$16,823.95)*(365/23 days)

Absolute Return if Exercised at $57.00: +3.2%
= +$535.30/$16,823.95
Annualized Return If Exercised (ARIE): +50.5%
= (+$1,615.60/$33,560.95)*(365/23 days)

The downside breakeven price for this out-of-the-money position is $55.15 ($56.05-$.90), and as such provides a downside profit protection of up to 1.5% below the purchase price.

Cal Dive International (DVR) -- Closed

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Cal Dive International (DVR) was closed out today (10/29/09).

The transactions history was as follows:
10/26/09 Bought 500 DVR @ $10.21
10/26/09 Sold 5 DVR Nov09 $10.00 Calls @ $.55
10/29/09 Bought-to-Close 5 DVR Nov09 $10.00 Calls @ $.15
10/29/09 Sold 500 DVR @ $8.64

Cal Dive reported quarterly earnings today that were very disappointing. Earnings per share were $.03 lower than expected and revenue numbers missed analysts' forecast by an alarming 20.7%. Moreover, the company stated that "the fourth quarter is shaping up to be slower as our customers look to avoid the winter weather in the Gulf of Mexico and have already spent the majority of their capital budgets for the year". For this advisor, this represents a fundamental breakdown in the company's prospects, and as such is a sufficient reason to immediately exit the position despite the fact that this position was established only three days ago. Fortunately, this position was only 2.0% of the the overall Covered Calls Advisor Portfolio.

The overall performance results(including commissions) for the DVR transactions were as follows:
Stock Purchase Cost: $5,113.95
($10.21*500+$8.95 commission)

Net Profit:
(a) Options Income: +$174.60 [500*($.55 - $.15)- 2*($8.95 + 5*$.75)] commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$793.95
= ($8.64-$10.21)*500 - $8.95 commissions

Total Net Profit: -$619.35
= (+$174.60 +$0.00 -$793.95)

Absolute Return = -12.1%
= -$619.35/$5,113.95

Paychex Inc (PAYX) -- Closed by Early Exercise

The Covered Calls Advisor Portfolio (CCAP) covered calls position in Paychex Inc (PAYX) was closed out today (10/29/09) when the short call options were assigned early which resulted in the stock position being sold at the $27.50 strike price.

The transactions history for this covered calls position was as follows:
10/13/09 Bought 500 PAYX @ $28.38
10/13/09 Sold 5 PAYX Nov09 $27.50 Calls @ $1.28
10/29/09 Positions Closed by Early Exercise (Options exercised and stock sold at $27.50)

This is the Covered Calls Advisor's first use of a covered calls "ex-dividend early exercise strategy". The Covered Calls Advisor originally entered this position with the full knowledge that early exercise was a likely occurrence since PAYX goes ex-dividend today and it was in the call options owner's economic interest to exercise early to obtain the stock and thus capture the dividend. This is true since the $.31 dividend payment exceeds the very minimal [approximately $.01=($27.50-($29.04-$1.55))] time value remaining in the call option. As described when this covered calls position was originally established (link), this outcome was the one preferred by this advisor since it results in a larger annualized return-on-investment than would occur if the original position was held until expiration.

The overall performance result(including commissions) for the PAYX transactions was as follows:
Stock Purchase Cost: $14,198.95
($28.38*500+$8.95 commission)

Net Profit:
(a) Options Income: +$627.30 [500*$1.28 - ($8.95 + 5*$.75)] commissions)
Note: the commissions shown is upon selling the options initially. There are no additional options commissions upon assignment.
(b) Dividend Income: +$0.00
(c) Capital Appreciation: -$448.95
= ($27.50-$28.38)*500 - $8.95 commissions

Total Net Profit: +$178.35
= (+$627.30 +$0.00 -$448.95)

Absolute Return = +1.3%
= +$178.35/$14,198.95

Annualized Return: +28.7%
= (+$178.35/$14,198.95)*(365/16 days)

With early exercise, this PAYX covered calls position is now completely closed and an absolute return-on-investment of +1.3% so far during this Nov09 expiration month has been obtained. Now, the $13,741.05 cash received from selling the 500 shares of PAYX is available for re-use and will be applied today to establish another covered calls position with another Nov09 expiration. The net effect is that we will be using the same investment capital twice in one expiration month, which will provide an opportunity for a possible profit double-dip. That is, a second Nov09 covered calls position will provide an opportunity to increase the +1.3% absolute return already achieved so far this month from the closed PAYX position. A separate post will be made on this blog later today after the new position has been established.