Returns for January 2015

January was a very good month for the Covered Calls Advisor Portfolio (CCAP).  As shown in the chart below, CCAP outperformed compared with the benchmark Russell 3000 Index by 4.08 percentage points.  In a month when the Russell 3000 declined by 2.72%, the CCAP increased by 1.36%.  

The primary factors contributing to this outperformance were:             
1.  Overweighted technology and underweighted energy and financials
2.  Overweighted international stocks (especially China and Germany), which outperformed U.S.-based companies
3.  Establishing conservative in-the-money covered calls which provided greater downside protection in the down market during January; and 
4.  Obtained additional protection against a downside move in the market by purchasing an inverse ETF on the S&P 500.

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.

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

A Commentary on Weekly Options -- January 30th Expiration Results

The Covered Calls Advisor Portfolio (CCAP) contained two positions (in Apple Inc. and Alibaba Group Holding ADR) with January 30th, 2015 expirations.  The Covered Covered Calls Advisor normally establishes monthly options positions, but these two positions were established in the very short-term weekly options.  The Chicago Board Options Exchange (CBOE) calls them 'weeklys', so although I prefer the spelling 'weeklies', I will comply with their preference.  Weeklys are a relatively recent creation, having begun in 2005.  They have continued to grow quickly to the point where there are now over 400 equity weeklys along with an additional approximately 60 ETF weeklys.  But another important requirement (at least for the Covered Calls Advisor) is that there is sufficient open interest  to obtain a reasonably narrow spread between the bid and ask prices in any specific option contract.  The Covered Calls Advisor will only consider selling an option when the bid-ask spread is no more than $.15, so this normally means that there is an existing open interest greater than 250 contracts.  Fortunately, there are now numerous weekly equity and ETF options that meet this threshold.

The decision to sell Weekly or Monthly options is a classic risk versus reward scenario.  When compared with Monthly options, Weeklys offer greater potential annualized return-on-investment possibilities, but can also result in greater annualized ROI losses.  This occurs because of the rate of time decay in the time value (aka extrinsic value) of options.  Note: time value is the dollar value of the option above parity.  The chart below shows that as an option gets closer to expiration, the daily rate of decay in time value increases and continues to increase daily until the date of expiration.     

The Covered Calls Advisor's two January 30, 2015 positions clearly demonstrates the dramatic risk-reward outcomes that can result from Weekly option positions.  Based on annualized return-on-investment results detailed below, the Apple Inc. position (+152.5%) was a great success whereas the Alibaba position (-67.7%) was a failure.  It should be noted that these results were more dramatic than would normally occur with Weeklys since there were quarterly earnings results issued by both Apple and Alibaba during the period when these two positions were held.  Apple had a blowout quarter resulting primarily from the huge sales of the iPhone 6 and 6 Plus and the stock surged higher; whereas in Alibaba's case, both the earnings report (revenues below analysts' expectations) along with China's SAIC report related to a problem with the amount of 'faked goods' on Alibaba's website resulted in a 10% fall in market value.  The increased uncertainty from an upcoming earnings report means increased implied volatility in the options premiums, thus larger return-on-investment outcomes (both positive and negative) than would be the case if there had been no earnings reports during the days when the positions were held.

1. Apple Inc. (AAPL) -- Closed
The transactions are as follows:
01/21/2015 Sold 2 Apple Inc. Jan 30, 2015 $112.00 Puts @ $5.20
Note: the price of AAPL was $108.50 when this transaction was executed
01/30/2015 Two AAPL Put options expired
Note: the price of AAPL stock was $117.16 upon options expiration yesterday

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

The purchase cost (including commissions) for this transaction was as follows:
100% Cash-Secured Cost Basis: $22,400.00
= $112.00*200
Note:  the price of AAPL was $108.50 when these Put options were sold.

Net Profit:
(a) Options Income: +$1,029.55
= ($5.20*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (AAPL closed above $112.00 strike price at Jan 30th, 2015 expiration): +$0.00
= ($112.00 liquidation price since options expired -$112.00 cash-secured cost basis)*200 shares

Total Net Profit (AAPL closed above $112.00 strike so the short options expired worthless): +$1,029.55
= +$1,029.55 options income +$0.00 dividend income +$0.00 capital appreciation

Absolute Return (AAPL closed above $112.00 strike price at Jan 30th, 2015 expiration): +4.6%
= +$1,029.55/$22,400.00
Annualized Return:  +152.5%
=  (+$1,029.55/$22,400.00)*(365/11 days)


2.  Alibaba Group Holding ADR (BABA) -- Closed
The transaction was as follows:
01/14/2015 Sold 1 Alibaba Group ADR Jan30th,2015 $95.00 Put option @ $3.00
Note: the price of BABA was $98.55 today when this transaction was executed.
01/30/2015 One BABA Put option assigned, so 100 shares of Alibaba purchased at $95.00 strike price
Note: the price of BABA was $89.08 upon options expiration yesterday

The purchase cost for this transaction was as follows:
100% Cash-Secured Cost Basis: $9,500.00
= $95.00*100

Net Profit:
(a) Options Income: +$292.30
= ($3.00*100 shares) - $9.70 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If BABA is above $95.00 strike price at Feb2015 expiration): -$592.00
= ($89.08 current market price -$95.00 purchase cost)*100 shares

Total Net Profit: -$299.70
= (+$292.30 +$0.00 -$592.00)

Absolute Return: -3.2%
= -$299.70/$9,500.00
Annualized Return (If BABA is above $95.00 at expiration): -67.7%
= (-$299.70/$9,500.00)*(365/17 days)

Established New Short 100% Cash-Secured Puts Position in Avis Budget Group Inc.

Today, the Covered Calls Advisor established a new position in the Avis Budget Group Inc. (ticker symbol CAR) by selling 2 Feb2015 $55.00 Put options.  This advisor has been waiting for the stock to decline below $60 before establishing a position.  With the large decline in the overall market today, this opportunity was realized.  A conservative (8% out-of-the-money) short Puts position  was established because of the increased uncertainty surrounding Avis Budget's 4th quarter earnings report, which will be issued a couple of days prior to the Feb2015 expiration date.  Of course, a potential benefit accompanying this uncertainty is the increased implied volatility (and thus enhanced return-on-investment potential) now available.   

As detailed below, this investment will yield a +1.5% absolute return in 26 days (which is equivalent to a +21.1% annualized return-on-investment) if Avis Budget stock closes above the $55.00 strike price on the Feb 20th options expiration date.


1.  Avis Budget Group Inc. (CAR) -- New Position
The transaction was as follows:
01/27/2015 Sold 2 Avis Budget Group Inc. Feb2015 $55.00 Puts @ $.88
Note: The price of CAR was $59.90 when this transaction was executed.

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 two Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $11,000.00
= $55.00*200
Note:  the price of CAR was $59.90 when these Put options were sold.

Net Profit:
(a) Options Income: +$165.55
= ($.88*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CAR is above $55.00 strike price at Feb2015 expiration): +$0.00
= ($55.00-$55.00)*200 shares

Total Net Profit (If CAR is above $55.00 strike price at Feb2015 options expiration): +$165.55
= (+$165.55 +$0.00 +$0.00)

Absolute Return (If CAR is above $55.00 strike price at Feb2015 options expiration): +1.5%
= +$165.55/$11,000.00
Annualized Return (If CAR is above $55.00 at expiration): +21.1%
= (+$165.55/$11,000.00 )*(365/26 days)

The downside 'breakeven price' at expiration is at $54.12 ($55.00 - $.88), which is 9.6% below the current market price of $59.90.
The 'crossover price' at expiration is $60.78 ($59.90 + $.88).  This is the price above which it would have been more profitable to simply buy-and-hold Avis Budget stock until Feb 20th (the Feb2015 options expiration date) rather than selling these Put options.

Established Short 100% Cash-Secured Puts Position in Apple Inc

The Covered Calls Advisor established a short position by selling two Apple Inc. (Symbol AAPL) Jan30th, 2015 $112.00 Put options.  This position expires after the Jan 27th earnings report, so the implied volatility of the options was substantially higher than would be the case if there was not an earnings release prior to expiration.  Preliminary indications from several sources presage that iPhone 6 sales exceeded analyst expectations during the December-ending quarter, so an aggressive in-the-money short Puts position was established.
As detailed below, this investment will yield a +1.0% absolute return in 11 days (which is equivalent to a +34.0% annualized return-on-investment) if Apple closes at the $108.50 price when this position was established today.  If it rises to close above the $112.00 strike price, a +4.6% absolute return (equivalent to a +152.5% annualized return-on-investment) will be achieved.
The details are provided below.

1. Apple Inc. (AAPL)
The transaction was as follows:
01/21/2015 Sold 2 Apple Inc. Jan 30, 2015 $112.00 Puts @ $5.20
Note: The price of AAPL was $108.50 when this transaction was executed

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

The purchase cost (including commissions) for this transaction was as follows:
100% Cash-Secured Cost Basis: $22,400.00
= $112.00*200
Note:  the price of AAPL was $108.50 when these Put options were sold.

Net Profit:
(a) Options Income: +$1,029.55
= ($5.20*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If AAPL closes unchanged at $108.50 at Jan 30th, 2015 expiration): -$800.00
= ($108.50 if price unchanged at expiration -$112.00 cash-secured cost basis)*200 shares; OR
(c) Capital Appreciation (If AAPL closes above $112.00 strike price at Jan 30th, 2015 expiration): +$0.00
= ($112.00 liquidation price if assigned -$112.00 cash-secured cost basis)*200 shares

1. Total Net Profit (If AAPL closes unchanged at $108.50 at Jan 30th, 2015 expiration): +$229.55
= (+$1,029.55 options income +$0.00 dividend income -$800.00 capital appreciation); OR
2. Total Net Profit (AAPL closed above $112.00 strike so the short options expired worthless): +$1,029.55
= (+$1,029.55 options income +$0.00 dividend income +$0.00 capital appreciation)

1. Absolute Return (If AAPL closes unchanged at $108.50 at Jan 30th, 2015 expiration): +1.0%
= +$229.55/$22,400.00
Annualized Return:  +34.0%
=  (+$229.55/$22,400.00)*(365/11 days); OR
2. Absolute Return (If AAPL closes above $112.00 strike price at Jan 30th, 2015 expiration): +4.6%
= +$1,029.55/$22,400.00
Annualized Return:  +152.5%
=  (+$1,029.55/$22,400.00)*(365/11 days)