October 2009 Results

The month of October was the second negative month for the CCIP. The overall market was essentially flat for the month, though the benchmark SPY ETF was down slightly. Premiums have stayed low, as the VIX has continued to stay pretty low throughout the month. As I have been implementing my new investing strategy over the past month and a half I have noticed some interesting things in the movement of the account. Although I have not been “beating” the benchmark by very much my volatility has been much lower. The average daily move in the CCIP has been 0.7% in the month of October vs. 1.18% in the SPY (the median was also better, 0.69% vs. 1.08%). As one of my goals in the CCIP is to make it a better investment vehicle for those who don’t like to see huge swings in account value, this is very promising. In terms of individual positions, I continue to try to move out of my positions in UNG, and hopefully that will happen in the next few months. At least in this case, natural gas prices can’t go to 0, so my potential loss is not unlimited.

I have also started to track other metrics recently to judge the performance of the CCIP. One of these metrics is to understand the overall “profit yield” in the portfolio. The “profit yield” normalizes the potential returns of each position on an annualized basis to determine an overall portfolio potential annualized return. My goal is to keep this number above 25%, and it currently stands at 28.65%. I will report this number with each monthly update from now on.

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through October 31, 2009) = 56.77%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through October 31, 2009) = 48.11%

The CCIP has outperformed the S&P 500 benchmark by a total of 8.66%

November 2009 Next Steps

The month of November is bound to be full of surprises, as it seems that the rally is losing steam. Lately, I have also heard a lot of talk about a head and shoulders pattern beginning to form, which could mean a large drop in the market in the near future. As a result of this uncertainty, I have started moving some of my money into more stable companies, which have strong dividends and are less dependent on an improving economy. As I noted above, my current strategy aims for a portfolio annualized return of 25%, however this is adjusted downwards from where it stood at the beginning of the month, which was 35%.

As of right now, my current strategies for the CCIP include:

• Near-month covered calls
• Long-term covered calls
• Ex-dividend Strategy
• Cash-Secured Put Strategy
• Put Spread Strategy

The strategy for establishing covered calls positions after November expiration will depend on what positions close ITM at expiration. I will establish new positions based upon my annualized return asset allocation strategy in order to hit an overall portfolio return of 25%.

As always, please post any thoughts or questions you have regarding the CCIP and the posts on the blog.

August 2009 Results

The month of August was unfortunately the first negative month for the CCIP. The portfolio was dragged down by the horrible performance of UNG which reduced the overall portfolio performance of the CCIP by about 3%. Premiums have continued to decline as the VIX has stayed in a relatively low range which has been helpful to those who wish to cover downside risk by purchasing protective puts, but not for those looking to sell premium. Every once in a while an investment choice does not do what you expect, and this possibility has to always be considered when selecting asset allocation. As I noted in my post on asset allocation within a covered call portfolio it is extremely important not to weight any one of your positions too heavily. Unfortunately, UNG represented about 10% of my overall portfolio, and so its 30% decline substantially impacted overall portfolio performance. The fact that the overall portfolio only dropped slightly was a testament, however, to the successful choices in other parts of the portfolio.

Unfortunately, as well as the under-performance by the CCIP in August, the portfolio has also lost much of the ground it had over the benchmark, S&P 500. Although it is still ahead of the market, its "lead" has been reduced. This brings up an important point regarding a covered call portfolio, as well as the general strategy of the CCIP. It is my intention, not to necessarily consistently beat the market, but instead to provide a constant return of at least 10%. However, this is not to say that I do not want to maximize my possible returns. This is why I have adopted additional strategies to enhance my returns. These include the new ex-dividend date strategy which thus far has been executed 3 times, one of these times being called away successfully at the ex-div date. The second strategy involves purchasing an OTM SPY call in order to participate in additional upside if the market increases substantially over a month.

The portfolio continues to beat the market since its inception (by about 7.5%). The chart below presents the monthly performance of the CCIP for August, as well as the performance of the portfolio since inception.

Portfolio Results

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through August 31, 2009) = 54.06%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through August 31, 2009) = 46.54%

The CCIP has outperformed the S&P 500 benchmark by a total of 7.54%

September 2009 Next Steps

The month of September is going to be a real test for the rally's strength. The summer vacation is over, and reality is beginning to set in. Third quarter earnings will start this month, and will ultimately determine the direction of the market. Companies will now have to show that after substantially cutting costs they can start to increase sales.

The CCIP has made a bit of a change of direction as well over the last two months, as I have added additional strategies such as cash-secured puts, OTM calls, and the ex-dividend date strategy. Additionally, I have adopted a new type of allocation strategy which focuses on reducing risk, and centering strategy around specific annualized return goals.

Unfortunately, I will be going on vacation the week after expiration and will not have access to the internet. This obviously makes option roll-over a bit difficult. As a result I will most likely be closing ITM positions on the Thursday prior to expiration, and then opening new positions on expiration Friday. This may result in losing out on about 0.25% of gains, but it is better than missing a week of market action

The strategy for establishing covered calls positions after September expiration will depend on what positions close ITM at expiration. I will establish new positions based upon my new annualized return asset allocation strategy.

As always, please post any thoughts or questions you have regarding the CCIP and the posts on the blog.

June 2009 Results

The month of June continued to leave investors and traders wondering where the market will be by the end of the year. It was the fourth month that the CCIP has been in existence, and it was a real test of whether the portfolio could make money in a sideways market. As I have mentioned many times before successful stock picking is very important when the market is oscillating around the same value for a long time. After oscillating between 880 and 920 in the month of May, the S&P 500 has shifted its bounds slightly higher to between 890 and 950 in June. A somewhat disturbing fact for the overall market, though possibly a good thing for covered calls investors is that after hitting a low of around 25 on June 29, the VIX (a measure of the volatility in the market) rebounded to 28 by thursday. This pop is most likely related to the worse than expected job numbers which came out for June.

In my opinion, the market over reacted the these job numbers. For one, they included all of the auto workers who have been idled since GM entered bankruptcy. Secondly, the unemployment rate itself was better than expected. Lastly, it is unrealistic to assume that this recovery will be straight up; there are going to be blips along the way. Over the next few weeks the market will be driven very much so by the earnings reports which start next week. If earnings are mixed to better than expected I think the market will be ok, if they are mostly below expectations, we may be looking at a move back towards 800 if not 700. So lets hope for everyone's sake that this does not happen.

The portfolio continues to beat the market since its inception (by about 14.5%). The chart below presents the monthly performance of the CCIP for June, as well as the performance of the portfolio since inception.

Portfolio Results

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through June 30, 2009) = 46.09%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through June 30, 2009) = 31.51%

The CCIP has outperformed the S&P 500 benchmark by a total of 14.58%

July 2009 Next Steps

The month of July is going to be very interesting for both the market and the CCIP portfolio. As earnings season begins, the market is likely to become much more volatile, which could be an advantage for option premium selling, but also cause wild fluctuations in stock prices. In terms of strategy for the CCIP, it is somewhat centered around a current strategy of selling both near month calls as well as 2-month out calls. About half of the current portfolio is in July calls, while half is in August calls. This will make expiration for July much less difficult in terms of finding new positions, but also makes it so that no additional option premiums will be had for many of the positions. This strategy was born mostly out of the fact that quite a few positions in the CCIP had fallen precipitously and so in order to sell a call above the original purchase price, it had to be done for August rather than July.

For those positions in with options expiring in July, much will depend on if the market declines until expiration, because I may face the same issue when it comes to whether to sell August calls or September calls. One thing which will give a boost to the CCIP this month is dividend payments which will tack an additional 1% onto the performance of the CCIP in July.

The strategy for establishing covered calls positions after July expiration will be as follows, and is similar to the rationale for establishing July calls earlier this month, based on the closing price of the S&P 500 on July expiration, July 17, 2009:

If S&P 500 is between 750 and 850, initial earnings reports have most likely been below expectations and the market is moving towards retesting lows. This will likely result in the sale of September calls for positions expiring in July, and possibly the buy back of calls sold for August. As far as new positions go, if there is any cash, I may sell cash-covered puts to buy in at lower prices if the market continues to decline, but still make money if the market rebounds.

If S&P 500 is between 850 and 950, we have most likely survived the first week of earnings without too much of a hitch, and some of the July covered calls should be called away. In this case I will likely establish either covered calls or cash-secured puts depending on which is positioned to yield a greater result.

If S&P 500 is above 950, we have most likely seen better than expected earnings. This would probably result in all the July calls being called away (maybe not Best Buy), and some of the August covered call positions being substantially in the money, which may result in may closing some of the positions, or rolling them up.

May 2009 Results

Sunday, May 31, 2009

Returns -- Through May 2009

The month of May was quite interesting for both the market and the CCIP.  It was the third month that the CCIP has been in existence, and was also the first month that the CCIP lagged its benchmark (SPY), though only by less than 1%.  One would normally assume that during a period of relatively flat movement in the overall market, the CCIP would have performed well, because the general rationale of a covered call portfolio is that it will recieve income even when the market moves sideways.  Unfortunately, due to the relatively late expiration of June calls, as well as the high volatility of the positions in the portfolio, this was not the case.  Based on current market values, if all of the positions in the portfolio end in the money at expiration, the porfolio will increase another 5% in value.

The portfolio continues however to beat the market since its inception (by about 12%). The chart below presents the monthly performance of the CCIP for May, as well as the performance of the portfolio since inception.

Portfolio Results

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through May 31, 2009) = 44.33%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through April 30, 2009) = 32.34%

The CCIP has outperformed the S&P 500 benchmark by a total of 11.99%

June 2009 Next Steps

The current strategy for establishing calls in June for July expiration has yet to be determined.  This is mostly due to the fact that there are still 3 weeks left until June expiration, and a lot can happen in the meantime.  As GM is likely to file for bankruptcty tomorrow, it will be interesting to see how the market reacts, especially considering that in my opinion it has been pretty obvious for the past two months that it was going to happen.  I think that it is most likely already priced into the market.

Earnings season is essentially over at this point, and so there aren't really any unforeseen news events on the horizon besides the normal US data, such as housing, GDP, retail sales etc. Although the North Korea situation could pose an issue to the markets short-term I believe its just the usual posturing, though I wont make this a political blog.

Positions in the CCIP may be rolled up and out depending on what happens in the next three weeks, but this will be noted on the blog.  Additionally, I may add further cash-scured put positions with July expirations in order to maximize potential profit.

The strategy for establishing covered calls positions after June expiration will be as follows, and is similar to the rationale for establishing June calls earlier this month, based on the closing price of the S&P 500 on June expiration, June 19, 2009:

If S&P 500 is between 750 and 850, we have most likely recieved bad news on the economic front and aare moving towards retesting lows, and thus should establish calls 2.5-5% in the money

If S&P 500 is between 850 and 950, we have most likely solidified a new bottom, and should sell at the  money calls between -2.5% and 2.5% away from current price

If S&P 500 is above 950, we have most likely had consistent good news and should sell out of the money calls at least 2.5% out of the money

April 2009 Results

Thursday, April 30, 2009

Returns -- Through April 2009

Since beginning this Covered Calls Investment Portfolio (CCIP), many important covered call investing tips have been learned, and mistakes have been made. As it has been noted in other covered call investors blogs, it is very important to choose which option to sell based on the current outlook for the stock market. If you sell calls too deep-in-the-money you risk missing out on substantial gains such as those weve seen over the past 2 months. On the other hand, if you sell options to far out-of-the-money, you risk still losing a substantial portion of your original investment if the market tanks as it did previous to March 9.

Since beginning this experiment of Covered Call Investing, the portfolio (CCIP) has outperformed the S&P 500 by about 10% (this is calculated using the SPY etf, which tracks the S&P 500). The chart below presents the monthly performance of the CCIP for April, as well as the performance of the portfolio since inception.



It is important here to reflect on what could have been done differently over the past month, as well as what was done well:

-- March 2009 --

This was the month of inception for the Covered Calls Investing Portfolio (CCIP). This was as much of a trial and error activity as it was an investing activity, as this was the first real covered call investing for this investor. As such, a full strategy had not yet been established for what types of calls to establish, what types of stocks to buy-write, and what if any exit criteria there should be for a position. It was also an interesting month to begin this portfolio, as the market ended up rebounding substantially in the latter half of the month, testing the commonly stated drawback to covered calls, namely, limited upside.

Due to the use of various financial instruments however, and the purchase of stocks with extremely high volatility. The portfolio was able to perform admirably. There are essentially two possible ways to play a covered call strategy. Either choose very volatile stocks, and sell in the money calls, or buy slow-moderate growing stocks and sell out of the money calls. Either option can allow for good covered call performance in a bull market. The portfolio was also buoyed by its relatively large stake in financials. This month also provided extremely high options premiums even out as far as August.

-- April 2009 --

This month has provided plenty of new learning opportunities for this Covered Call investor. Although performance has managed to trounce that of the S&P 500 over the past month, recent performance has been relatively disappointing in the sense that it has relatively tracked the S&P 500 since April 17, 2009. This is most likely due to this investors decision to stick to the plan of selling in-the-money calls, due to the extreme run up of stock prices in the past 2 months. Unfortunately, the tendency for covered calls to cap portfolio growth reared its ugly head in this situation. However, it is important not to fall back into the normal human psyche of feeling that your missing out, and changing your strategy mid-stride due to a short-term outlook. Another key reason covered calls are a good part of any portfolio is because they force you to take profits. Many times we hold onto stocks too long, because we think they will just keep going up, and then they start to drop, and we say "no, itll go back up, ill wait it out," but when it doesnt then youve both lost all your gains, and maybe even added some losses.

Portfolio Results

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through April 30, 2009) = 36.89%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through April 30, 2009) = 25.03%

The CCIP has outperformed the S&P 500 benchmark by a total of 11.86%

May 2009 Next Steps

The current strategy for establishing calls in May for June expiration is still yet to be seen. The next couple weeks will be very interesting to watch especially with the recent news of Chrysler bankruptcy as well as the bank stress tests coming out next week, it isnt yet known how the market may react. We could be in for a bit of a pullback maybe to the 750 area in the S&P 500 to do a retest of the november lows. Although I consider this to be quite unlikely, anything is possible these days.

The strategy for establishing covered calls positions will be as follows, based on the closing price of the S&P 500 on May expiration, May 15, 2009:

If S&P 500 is between 750 and 800 establish calls 2.5-5% out of the money

If S&P 500 is between 800 and 850 establish calls slightly out of the money (0-2.5%)

If S&P 500 is between 850 and 900, we are most likely in a phase of sideways movement, and should establish at the money calls if we want our stocks to be called away, or slightly out of the money if we are simply looking for income.

If S&P 500 is above 900, we have likely not yet had a pullback, and should consider selling slightly in the money calls