Initial Transaction - Genco Shipping & Trading (GNK)

An initial position in GNK was established on March 30, 2009. This position was actually found using a free option analyzer that I found earlier in the week which shows you the covered call stock/option combinations with the highest possible return. Using this I looked for a stock in an industry area which I did not currently have in my portfolio and that I believed would not add a lot of risk. The first stock on the list which met this criteria was Genco Shipping which is company which mostly charters its boats to charterers who transport dry goods. All stocks in this space have been battered in the recession, and Genco was not immune as it has dropped 86% from its peak. It was decided to establish a position and sell an at-the-money call, as the stock market has increased substantially since its bottom on March 9, it was my assumption that by options expiration on April 17, there was a possibility for the market to start moving downward or stagnate.

3/30/2009 -- Bought 100 GNK @ 12.635
3/30/2009 -- Sold To Open 1 GNK April $12.50 Call @ 1.36


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1263.50


Downside Coverage: 10.76%
Possible Max Upside: 10.47%

Annualized Max Upside: 125.6%

Initial Transaction - Direxion Large Cap Bull 3x Shares

A position in Direxion Large Cap Bull 3x Shares was established on March 24, 2009. This ETF returns 300% of the Russell 1000 index.

3/24/2009 -- Bought 100 BGU @ 25.395
3/24/2009 -- Sold To Open 1 BGU April $29 Call @ 1.20


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $2539.50


Downside Coverage: 4.7%
Possible Max Upside: 19.9%

Annualized Max Upside: 238.3%

Initial Transaction - Direxion Small Cap Bull 3x (TNA)

A position in Direxion Small Cap Bull 3x Shares was established on March 23, 2009. This ETF returns 300% of the Russell 2000 index. Since a position was established in BGU, an ETF which returns 3x large cap stocks with a relatively far out-of-the-money call, it was determined that the call for this position should be at the money to minimize overall risk of utilizing leveraged ETFs.

3/24/2009 -- Bought 100 TNA @ 17.545
3/24/2009 -- Sold To Open 1 TNA April $17.50 Call @ 2.2


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1754.50


Downside Coverage: 12.54%
Possible Max Upside: 13.75%

Annualized Max Upside: 165%

Initial Transaction - General Electric (GE)

A position in General Electric was established on March 23, 2009. This is essentially a continuation of the position that was held last month, restarted after the previous options expired. As opposed to the previous month, this call was established out of the money.

3/23/2009 -- Bought 100 GE @ 10.185
3/23/2009 -- Sold To Open 1 GE April $11 Call @ 0.47


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1018.50


Downside Coverage: 4.61%
Possible Max Upside: 12.76%

Annualized Max Upside: 153.17%

Continuing Transaction - Direxion Financial Bull 3x

The position in Direxion Financial Bull 3x was continued after expiring out-of-the-money in March. The new profit/loss projections are below:

3/18/2009 -- Bought 100 FAS @ 5.58
3/18/2009 -- Sold To Open 1 FAS March $6 Call @ .21
3/20/2009 -- March Option Expired
3/23/2009 -- Sold To Open 1 FAS April $6 Call @ 1.25


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $557.50


Downside Coverage: 26%
Possible Max Upside: 35%

Annualized Max Upside: 210.1%

March 2009 Expiration Day ... Closing Transactions

The Covered Calls Investor Portfolio contained a total of 7 positions with March 2009 expirations, and 5 positions either with a Non-March expiration or no current covered call. The 7 positions with March expirations had the following results:
- 5 positions (GE, VLO, CAT, AA, AFL) closed in-the-money. The calls were exercised and the stock was sold. Quite a few of these investments ended quite a bit in the money. The annualized gain/loss results (after commissions) were:

General Electric (GE) => +91.3%
Valero Energy Corporation (VLO) => +81.97%
Caterpillar (CAT) => +63.6%
Alcoa (AA) => +57.1
Aflac (AFL) => +67.1%

- 2 positions in the portfolio (FAS and X) ended out-of-the-money. New calls will most likely be established on Monday, barring a large market decline. Both of these positions sitll offer quite large time premiums, and it is therefore the intention of this investor to sell slightl out of the money calls.

The positions in the portfolio which did not have March expirations include AT&T (T), Morgan Stanley (MS), Foster Wheeler (FWLT), Mack-Cali Realty (CLI), Johnson Controls (JCI). These positions are the following:

AT&T
200 Shares Owned
1 April $26 Call
100 shares are currently not covered

Morgan Stanley
100 Shares Owned
1 July $10 Call

Foster Wheeler
100 Shares Owned
1 August $12.50 Call

Mack-Cali Realty
600 Shares Owned
1 April $17.50 Call
1 July $22.50 Call
400 Shares Not Currently Covered

Johnson Controls
100 Shares Owned
1 April $10 Call


After Mack-Cali Realty and AT&T pass their ex-dividend dates, out-of-the money calls will be sold.

Initial Purchase - Johnson Controls

A position in Johnson Controls was established on March 18, 2009. This purchase is due to the fact that this stock has been beaten down as a result of its overexposure to the architectural and automotive industries. As these markets are currently nearing their bottom (if they are not already there), Johnson is poised for an upside move. Additionally, from a long term perspective, Johnson Controls will benefit from its JV with Saft to manufacture many of the lithium ion batteries which will be used in upcoming hybrid vehicles.

3/18/2009 -- Bought 100 FAS @ 10.1049
3/18/2009 -- Sold To Open 1 FAS April $10 Call @ .90


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1010.49


Downside Coverage: 8.91%
Possible Max Upside: 8.15%

Annualized Max Upside: 97.8%

Direxion Financial Bull 3x Shares

A position in Direxion Financial Bull 3x Shares was established on March 18, 2009. This covered call purchase was simply to use the current volatility in financial share prices to make a quick profit, and if the etf did not end in the money, then a plan is in place to sell an at-the-money call on monday. This ETF returns 300% of the Russell 1000 Financial services index.

3/18/2009 -- Bought 100 FAS @ 5.58
3/18/2009 -- Sold To Open 1 FAS March $6 Call @ .21


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $553.00


Downside Coverage: 3.8%
Possible Max Upside: 11.7%

Annualized Max Upside: 140.7%

Change In Measuring Upside

I just wanted to make a note here, that the way that upside has been presented in the posts thus far was based on the stock price at which the initial position was created. However, it is my opinion that in fact the potential upside should be measured as a percentage of the original stock price minus the option sale price, as this was actually the original investment. In order to calculate the potential upside, you would then do the following:

(Strike Price - (Stock Price-Option Price))/(Stock Price - Option Price)

I would be interested to know if anyone else has an opinion on this topic.

Aflac - Initial Transaction

A position in Aflac was established on March 3, 2009. This covered call purchase was more of a speculative play than a neutral-bullish stance on the stock. Aflac has had increased volatility as a result of the general market mood regarding the financial industry, including insurers. This position was established due to the large downside coverage with a relatively modest upside.

3/3/2009 -- Bought 100 AFL @ 15.7359
3/2/2009 -- Sold To Open 1 AFL March $12.5 Call @ 3.99


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1573.59


Downside Coverage: 25.37%
Possible Max Upside: 4.17%

Annualized Max Upside: 50.18%

Foster Wheeler - Intial Transaction

A Foster Wheeler (FWLT) covered call position was established on March 2, 2009. The rationale behind this purchase is based upon this investor's opinion that infrastructure stocks as a whole have been battered as a result of the decrease in construction spending around the world, as well as a lack of focus within the recent stimulus bill on infrastructure spending as was originally intended. In regards to this stock specifically, Foster Wheeler had recently touched a new 52-week low in part due to its large decrease in backlog orders. Although a drop in the stock may have been warranted due to this fact, it should have already been priced into the stock, as it is simply a fact of the recession. However, this investor at the time this trade was executed was unsure if the economy would get even worse before it gets better, and so a relatively long position was established with an in-the-money call:

3/2/2009 -- Bought 100 FWLT @ 15.295
3/2/2009 -- Sold To Open 1 FWLT August $12.50 Call @ 4.95


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1529.50


Downside Coverage: 32.4%
Possible Max Upside: 13.8%

Annualized Max Upside: 27.6%

General Electric (Position #2)

An additional position was established in General Electric on March 2, 2009. See previous GE purchase for rationalization. This covered call purchase was initially made based on the idea, that it was possible at the time for GE to go the way of Citi, and plummet to an unreasonable level. As such, the call was sold more than 35% in the money. However, as positive news began to emerge regarding GE, the call was rolled up to an earlier expiration and higher strike price.

3/2/2009 -- Bought 100 GE @ 8.0685
3/2/2009 -- Sold To Open 1 GE June $5 Call @ 3.60
3/12/2009 -- Bought To Close 1 GE June $5 Call @ 4.45
3/12/2009 -- Sold To Open 1 GE March $9 Call @ 0.53

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $806.85


Downside Coverage: 44.62% -> None After New Call Sold
Possible Max Upside: 6.03% -> 7.02% (This is the upside after factoring in initial cost, sale price of original option, cost to buy back option, and sale price of more recent option)

Annualized Max Upside: 18.09% -> 84.24%

AT&T - Roll Up Transactions

Due to the extreme upward movement of the AT&T stock, along with its continued high yield, a few transactions were made to increase the possible upside potential of the covered call, namely buying back an April $25 strike call, and selling an April $26 strike call:

Transaction History:
Various Dates Initial Stock Purchase -- Bought 100 T @ 25.125
2/21/2009 -- Additional Stock Purchased -- Bought T @ 23
2/25/2009 -- Initial Calls Sold -- Sold 1 T March $24 Call @ .895
2/27/2009 -- Additional Calls Sold -- Sold 1 T April $20 Call @ 3.95
3/6/2009 -- Bought To Close 1 T March $24 Call @ .3874
3/10/2009 -- Bought To Close 1 T April $20 Call @ 2.93
3/10/2009 -- Sold to Open 1 T April $25 Call @ .34
3/13/2009 -- Bought To Close 1 T April $25 Call @ .84
3/13/2009 -- Sold To Open 1 T April $26 Call @ .39

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $4,812.50
Cost-Averaged Share Purchase Price: $24.06

After these changes, the downside coverage, and the upside changes, the new values are in bold:

Downside Coverage: 9.26% -> 2.94%
Possible Max Upside: 3.03% -> 6.97% (based on sale of the 100 shares which are still covered)

As can be seen the downside coverage has been extremely reduced, though this is due to the fact that 100 shares are currently not covered. It has been decided that there may still be some more upside left in the stock, before the market turns back around, and so a covered call will most likely be sold in the next week or so on the remaining 100 shares.

General Electric (Position #1)

A position was established in General Electric on March 2, 2009. The rational behind this position is that the company has simply been battered down due to the viability of the financial group. The underlying industrial conglomerate is the key part of this company, and can be especially competitive in the "green" economy being pushed by the new administration. For this particular position, the decision was made to at first establish a 2 month covered call position, due to the relative uncertainty regarding possible ratings cuts.

3/2/2009 -- Bought 100 GE @ 7.83
3/2/2009 -- Sold To Open 1 GE April $8 Call @ 1.09
3/12/2009 -- Bought To Close 1 GE April $8 Call @ 2.18
3/12/2009 -- Sold To Open 1 GE March $9 Call @ 0.85

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $783.00


Downside Coverage: None After New Call Sold
Possible Max Upside: 11.87% (This is the upside after factoring in initial cost, sale price of original option, cost to buy back option, and sale price of more recent option)

Initial Purchase - Morgan Stanley

A position was established in Morgan Stanley on March 2, 2009. The rational behind this position is that Morgan Stanley is one of the better positioned "bank" stocks to whether the rest of the credit crisis. It is also one of the few investment banks which has made it through the recession without being acquired either out of necessity or otherwise. For this particular stock, the decision was made to establish a relatively long covered call position mainly because of the large volatility inherent in financial stocks. The goal here was to provide a large amount of downside coverage while still yielding a worthwhile profit.

3/2/2009 -- Bought 100 MS @ 18.71
3/2/2009 -- Sold 1 MS July $10 Call @ 9.95

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $1,871.00


Downside Coverage: -53.18%
Possible Max Upside: 6.39%-9.51% (The lower estimate is if the call is exercised before payment of any dividends, the higher estimate is if the stock is held through expiration and two dividends are payed)

AT&T - Transactions to Date

Over the last few months, 200 shares of AT&T have been purchased, to establish a covered call position, the transactions to date are as follows:


Various Dates Initial Stock Purchase -- Bought 100 T @ 25.125
2/21/2009 Additional Stock Purchased -- Bought T @ 23
2/25/2009 Initial Calls Sold -- Sold 1 T March $24 Call @ .895
2/27/2009 Additional Calls Sold -- Sold 1 T April $20 Call @ 3.95
3/6/2009 Bought To Close 1 T March $24 Call @ .3874

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Stock Purchase Cost: $4,812.50
Cost-Averaged Share Purchase Price: $24.06

Downside Coverage: 9.26%
Possible Max Upside: 3.03% (based on sale of the 100 shares which are still covered)

A new covered call will be sold on the 100 shares which are no longer covered, when the stock recovers slightly. This call will most likely be out of the money, due to the current depressed share price.

Choosing A Stock From Those That Have Met Your "Quality" Screen

Once you have a list of possible choices for stocks, then you have to determine which of the stocks have the best risk/return profile. In order to do this, the following steps are used:

1) Create an excel sheet for each stock, for the upcoming option expiration date which would look like the following:

March 2009 Covered Call (PDE)
Current Price	$15.49	Company	Date	Strike Price	Bid	Ask	Average	Dividend	Total Proceeds/Share	Total Proceeds	% Downside Coverage	% Max Upside	$ Max Upside	Annualized Downside	Annualized Upside
# o Shares	100	PDE	Mar-09	$10.00	5.5	5.7	$5.60		$5.45	$545.00	35.18%	-0.26%	-$4.00	422.21%	-3.10%
Total Cost	$1,549	PDE	Mar-09	$12.50	3.2	3.4	$3.30		$3.15	$315.00	20.34%	1.03%	$16.00	244.03%	12.40%
52-week Low	11.38	PDE	Mar-09	$15.00	1.45	1.6	$1.53		$1.38	$137.50	8.88%	5.71%	$88.50	106.52%	68.56%
% Above 52-Week Low	26.53%	PDE	Mar-09	$17.50	0.45	0.55	$0.50		$0.35	$35.00	2.26%	15.24%	$236.00	27.11%	182.83%
		PDE	Mar-09	$20.00	0.05	0.15	$0.10		-$0.05	-$5.00	-0.32%	28.79%	$446.00	-3.87%	345.51%

This table includes the current price of the stock, strike prices both in-the-money, out-of-the-money, and at-the-money. It includes any dividends paid between the purchase date of the stock and the option expiration, and the current option bid/ask spread. These values allow you to calculate the "downside coverage" as well as the "maximum upside." As you can see, the greater your downside coverage (or the further the stock can fall without you losing money overall) the smaller your possible upside.

2) Once these charts are made for each of your stocks, then you have two options depending on both your time horizon for holding the stock, and your appetite for risk. If you are afraid that the stock could go down quite a bit in the short term, it may be better to sell a call which is more "in-the money" in order to have more protection in case the stock goes down. On the other hand, if you think it is more likely the stock will go up, it is better to sell an at-the-money or out-of-the-money call and reap the benefit of the call premium, as well as part of the appreciation of the stock. For the purposes of my portfolio, I do not favor one of these options over the other, it purely depends on my view of the future growth prospects of the company.

3) Now that you have an idea of which stocks have the best risk/reward profile, you must choose how long you want to hold them for. In my view, this is based on the current market conditions. In a bear market such as the one we are currently in, I am of the opinion that for short term options, it is better to sell in-the-money calls, and benefit from high downside protection, while for long term options, selling at or out of the money options, which will both decrease quickly in value (which is good for you) due to the time premium, and allow you to profit somewhat from the appreciation of the stock.

4) A key point in all of this, is to make sure that your portfolio is also somewhat diversified, so that you do not have large exposure to one area.

Covered Call Investing Strategy

There are a few key measures which must be met in order for me to choose a particular stock/etf for a covered call strategy (those which are Bold are necessary, those which are not make a stock more likely to be chosen but would not exclude a stock either):

1) I first screen all stocks for those which have either a S&P rating of 3,4 or 5, or have a hold, buy or strong buy average analyst rating. This screen is simply to weed out those companies which are not at least considered to be worthy enough to be held by those industry analysts which cover the stock. It is important to keep in mind when using this screen, that often times analysts are wrong. And will often continue to rate a stock as a buy, as it decreases in value, simply continuing to to lower their price targets. By using a covered call strategy, you effectively counter this fact, with a certain level of downside protection.

2) The stock you are looking at needs to have option trading associated with it. Otherwise you will not be able to sell a call on it. Oftentimes smaller cap stocks will not have options, due to the fact that they are simply not followed that well. Additionally, if companies which tend to have low trading volumes do have options, they will often have large bid/ask spreads, which result in some level of uncertainty of your potential return. (bid/ask spreads) will be explained in further posts.

3) Once a stock has met this standard, then I check to see if its current volatility is higher than its corresponding index. Normally for a covered call strategy it is better to find stocks with higher volatility because they tend to have higher time premiums, which essentially means you get a better price for the call option that you sell. However, the reason why stocks tend to have volatility is often because it is unclear whether they will go up or down, which obviously increases risk, however you decrease this risk by selling the call option.

4) Sometimes it is important to consider when a companies earnings release may be, because if it is bad, it could cause the stock to drop by 10 or more percent. However, under current market conditions, stock prices are so depressed, that this metric is not necessarily as important. In times of economic prosperity, this metric would be more important, as a bad earnings report in good economic times, could signal a company is losing its edge.

5) Another key metric to look for is dividend yield, and if the stock will pay a dividend before the next options expiration date. If it does, then you get the added return of the dividend, which both enhances returns, and provides additional downside coverage in case the stock reaches expiration date, and is below the strike price.

Look for further posts to cover how to select a specific stock, at what strike price to sell the option, and for what expiration date once it has met these standards

Opening Bell.....

Welcome Readers!

This Covered Calls Investor blog is intended to show one investors attempt to increase investing returns while decreasing overall risk. My hope is that this blog will both educate investors who seek a similar goal, as well as provide some possible investing ideas. Covered calls can provide income to an investor while waiting for a market rebound, as well as lock in gains if a stock begins to decrease in value, rather than having to purchase a put option for insurance.

Although, the purpose of this strategy is to provide both a diversified portfolio as well as using a covered call strategy, at first the focus will be on current pieces of the portfolio. The current covered call portfolio will be posted shortly, and transactions will be updated within a few days of their occurrence.

I hope those of you who read this blog will see that covered call investing is not just for conservative investors, but can also provide a consistent quality return, with much less risk than a normal equity portfolio.