Search This Blog

Wednesday, March 30, 2016

Some Favorite Investing Blogs

When it comes to investing, I'm an avid, selective, careful, critical, and thoughtful (i.e. ASCCT) reader.  For the past three years, I have used a reading aggregator called Netvibes to continually gather articles as they are posted from the approximately 80 investing-related website blogs that I track.  I strongly recommend using a reading aggregator and there are several excellent ones you can test to determine which one best serves your own needs.

A few favorite blogs are listed below by category.  Perhaps you will consider including these as you develop your own reading aggregator?
  1. Financial News -- Marketwatch, Yahoo Finance                                                    
  2. Investing -- Abnormal Returns, The Pragmatic Capitalist, The Big Picture
  3. Value Investing --ValueWalk, Validea's Guru Investor Blog
  4. Economics -- Advisor Perspectives, Calculated Risk
  5. Covered Calls -- Covered Calls Advisor (of course!), The Blue Collar Investor
Although I carefully read in excess of 100 investing-related articles each week, there are probably six times that many articles in the 80 blogs.  So I survey the article titles (and sometimes their initial paragraphs) to select those articles that I believe will be most interesting, insightful, and worthwhile.

I hope this article is helpful to you.

Best wishes,
Jeff   

Tuesday, March 29, 2016

Thoughts on Two Volatility Indicators

When the usual monthly results were posted ten days ago for the Mar2016 options expiration, it was noted that the Covered Calls Advisor was only 10% invested in next-month (Apr2016) positions and was 90% in cash.  Usually by this time each month (i.e. 10 days after options expiration), the opposite is true and new positions for the following expiration month have been established so that about 90% is invested and only about 10% is in cash.

Some readers have asked: Why haven't new positions been established yet for the Apr2016 option expiration?

First, the Covered Calls Advisor's 'Overall Market Meter' is Slightly Bearish.  But that indicator has been 'Slightly Bearish' since last November and I have continued to establish conservative in-the-money covered calls each month since then.  So being Slightly Bearish by itself is not a sufficient reason to delay establishing new positions with the available cash.  But the two charts below provide the additional rationale for being extra cautious now.

The first chart shows the S&P 500 Volatility Index (known as VIX) for the past 6 months.  VIX is sometimes termed the 'fear index' because it normally increases coincident with stock market declines.  Conversely, when investors are confident (perhaps complacent is a more appropriate term), VIX normally declines to around the 15 neighborhood, which is about where it is now.

As Covered Calls investors, we are options sellers, not buyers.  We sell Call options when we establish Covered Calls positions (as well as for their synthetically equivalent positions of selling 100% Cash-Secured Puts).  When VIX is low, options prices (premiums) are also low and thus provide a lower potential annualized return-on-investment.  But, this is true not only for the S&P 500; it is also true for most of the 500 individual companies that comprise it.  Just as VIX measures volatility for the S&P 500, 'implied volatility' (IV) measures volatility for an individual stock (at any specific time, expiration date, and strike price).




















At the current level of 15, VIX is near the low end of its recent normal range of 15 to 25.  The second chart below shows the ratio of VIX to VXV.  Think of VXV as the markets' expected future value of VIX 3 months in the future.  As shown on the chart, VIX:VXV is also near its low for the past 6 months, so there is an expectation that VIX will be significantly higher 3 months from now (which implies a corresponding stock market decline from current levels during that time period).

In short, both VIX and VIX:VXV tend to fluctuate up and down between their high and low levels (i.e. they revert-to-the-mean).  With both charts currently near their lows, a stock market correction in the near-term future seems likely.





















As you know, the Covered Calls Advisor is primarily a fundamental, value-oriented investor, so technical analysis like what is described in this article is not the norm.  When a market correction occurs (coincident with increasing implied volatility), you can expect that several new positions will be established and the Covered Calls Advisor will then return to the more normal fully-invested portfolio.  As a starting point for future reference, SPY opened at $206.30 today. As always, I will post the transactions for all new positions on this blog site on the same day they occur.


Best Wishes and Godspeed,
Jeff (the Covered Calls Advisor) 

    

Friday, March 25, 2016

Results From a PutWrite Study

Here is a new study that, yet again, confirms prior academic research showing that the PutWrite strategy slightly outperforms the Buy-and-Hold strategy (and with less portfolio risk) over the past 30 years.  It is especially interesting since this paper extends prior studies that have focused primarily on monthly options by also considering weekly options:
An Analysis of Index Option Writing with Monthly and Weekly Rollover


Saturday, March 19, 2016

March 2016 Options Expiration Results

The Covered Calls Advisor Portfolio contained fifteen positions with March 18th, 2016 expirations.  All fifteen positions were in-the-money at expiration so the positions were closed out and the maximum potential return-on-investment (ROI) was achieved for all positions. The overall average annualized ROI for these fifteen positions was +22.8%.  The result for each position was:
  • Alibaba Group Holding Ltd. = -4.7% absolute return (-20.2% annualized return over 85 days)
  • Apple Inc. = +1.0% absolute return (+19.3% annualized return over 19 days)
  • Bank of America Corp. = +3.0% absolute return (+44.3% annualized return over 25 days)
  • Delta Air Lines Inc. = +0.9% absolute return (+19.8% annualized return over 17 days)
  • Enterprise Products Partners LP = +2.2% absolute return (+32.8% annualized return over 24 days)
  • General Motors Co. = -1.5% absolute return (-6.9% annualized return over 81 days)
  • iShares China Large-Cap ETF (Position 1) = +1.6% absolute return (+30.0% annualized return over 19 days)
  • iShares China Large-Cap ETF (Position 2) = +8.8% absolute return (+57.6% annualized return over 56 days)
  • iShares MSCI Emerging Markets ETF = +1.1% absolute return (+16.2% annualized return over 24 days)
  • iShares MSCI South Korea ETF = +6.0% absolute return (+37.0% annualized return over 59 days)
  • iShares Nasdaq Biotechnology ETF = +2.6% absolute return (+39.2% annualized return over 24 days)
  • JPMorgan Chase & Co. = +0.9% absolute return (+4.6% annualized return over 74 days)
  • MetLife Inc. = +0.7% absolute return (+4.0% annualized return over 59 days)
  • Nationstar Mortgage Holdings Inc. = +5.4% absolute return (+19.5% annualized return over 110 days)
  • Tesoro Corporation = +3.5% absolute return (+44.3% annualized return over 29 days) 
Two examples of how these ROIs were calculated are detailed below.  Bank of America was a Covered Calls position and Apple Inc. was a 100% Cash-Secured Puts position.

1. Bank of America Corporation (BAC) -- Covered Calls Position Closed at Expiration
The transactions were:
02/23/2016 Bought 700 Bank of America Corporation shares @ $12.21
02/23/2016 Sold 7 BAC Mar2016 $12.00 Call options @ $.55
Note: a simultaneous buy/write transaction was executed.
03/02/2016 Ex-dividend of $.05 per share
03/18/2016 7 BAC Mar2016 Calls expired in-the-money and the 700 BAC shares were sold at the $12.00 strike price.
Note: the price of BAC was $13.79 upon the Mar2016 options expiration.

The overall performance result (including commissions) for this Bank of America covered calls position was as follows:
Stock Purchase Cost: $8,554.95
= ($12.21*700+$7.95 commission)

Net Profit:
(a) Options Income: +$379.75
= ($.55*700 shares) - $5.25 commission
(b) Dividend Income: +$35.00
= ($.05 dividend per share x 700 shares)
(c) Capital Appreciation (BAC assigned at $12.00 at Mar2016 expiration): -$154.95
+($12.00-$12.21)*700 - $7.95 commissions

Total Net Profit (BAC stock called away at $12.00 at Mar2016 expiration): +259.80
= (+$379.95 +$35.00 -$154.95)

Absolute Return: +3.0%
= +$259.80/$8,554.95
Annualized Return: +44.3%
= (+$259.80/$8,554.95)*(365/25 days)


2. Apple Inc. (AAPL) -- 100% Cash-Secured Puts Position Closed at Expiration
The transactions were as follows:
02/29//2016  Sold 2 AAPL 100% cash-secured $94.00 Put options @ $.95
Note: The price of AAPL was $97.47 when this transaction was executed.
03/18/2016 2 AAPL Put options expired.  The price of AAPL stock was $105.92 upon Mar2016 options expiration.

The overall performance result (including commissions) was as follows:
100% Cash-Secured Cost Basis: $18,807.95
= $94.00*200 + $7.95

Net Profit:
(a) Options Income: +$188.50
= ($.95*200 shares) - $1.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (AAPL was above $94.00 strike price at Mar2016 expiration): +$0.00
= ($94.00-$94.00)*200 shares

Total Net Profit (If Apple is above $94.00 strike price at Mar2016 options expiration): +$188.50
= (+$188.50 +$0.00 +$0.00)

Absolute Return (AAPL was above $94.00 strike price at Mar2016 options expiration): +1.0%
= +$188.50/$18,807.95
Annualized Return (AAPL was above $94.00 strike price at expiration): +19.3%
= (+$188.50/$18,807.95)*(365/19 days)

The cash now available from the closing of these positions will be retained in the Covered Calls Advisor Portfolio until new Covered Calls and/or 100% Cash-Secured Puts positions are established.  With the expiration of the fifteen positions yesterday, the Portfolio is now about 90% cash and about 10% invested in the four Apr2016 (expiring April 15th, 2016) positions listed in the right sidebar.  In the days ahead, the transactions associated with any new positions established with the available cash will be posted on this blog on the same day they occur.

Friday, March 18, 2016

Worthwhile Reading

Below are the articles read during the past week the Covered Calls Advisor found to be most interesting and insightful to us investors.  To be successful investors, avid reading is of paramount importance, so I've recently developed these weekly 'Worthwhile Reading' posts to share with you.  Here is my Covered Calls Advisor blog post from over 8 years ago that explains my approach to investment-related reading: On Being ASCCT Readers 
  1.  Avoiding 'Growth Traps' and 'Value Traps': One of my favorite stock screeners is what I call VQG (Value, Quality, and Growth).  But in identifying stocks that offer both good value and good growth, it is important to also filter out those stocks that are 'value traps' How to Avoid the Value Trap and/or 'growth traps' Out Over Your Skis: How to Avoid a Growth Trap  

  2. Understand the difference between GAAP earnings, Non-GAAP earnings, and Cash Flow: Link

  3. Some Wisdom of Warren Buffett: Warren Buffett on Investing and
    What Buffett Saw in Baseball's Greatest Hitter

  4. Investing for the Long Run: Surviving the Short Term and Stocks for the Long Run

  5. Some food for thought: Hard Truths for Investors to Wrap Their Heads Around

  6. Two questions to ponder from the ‘A Wealth of Common Sense’ blog:  (a) Why do investors always ask if it’s time to sell stocks after they’ve fallen and then ask if it’s time to buy after they’ve risen? … and  (b) Why do companies get blamed for “missing expectations” when they release quarterly earnings numbers and not the analysts who create those expectations? Why don’t they ever say: “analysts’ expectations missed the actual results again”? 

Hope you enjoy these articles and find them useful.

Best wishes and Godspeed,
Jeff (the Covered Calls Advisor)

Thursday, March 17, 2016

Established Two New Put Options Positions in Celgene Corp. and Delta Air Lines Inc.

The Covered Calls Advisor Portfolio established two new positions in Celgene Corp. (ticker symbol CELG), and Delta Air Lines Inc. (DAL). In both cases, 100% cash-secured Put options were sold with Apr2016 options expirations. Conservative out-of-the-money Puts were sold with substantial downside protection to the strike price.

The Covered Calls Advisor does not use margin, so the detailed information on these positions and some potential results shown below reflect the fact that both positions were established using 100% cash securitization for the Put options sold.

As detailed below, the potential returns are:
1. Celgene Corp.: +1.8% absolute return in 30 days (equivalent to a +22.2% annualized return-on-investment)
2. Delta Air Lines Inc.: +1.4% absolute return in 30 days (equivalent to a +17.1% annualized return-on-investment)
Note: the Implied Volatility (IV) of the options at the time they were sold was 34 for Celgene Corp. and 35 for Delta Air Lines, so both options 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.  Celgene Corp. (CELG) -- New Position
The transaction was as follows:
Image result for celgene logo03/17/2016  Sold 2 CELG 100% cash-secured $90.00 Put options @ $1.65
Note: The price of CELG was $95.00 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $18,007.95
= $90.00*200 + $7.95

Net Profit:
(a) Options Income: +$328.50
= ($1.65*200 shares) - $1.50 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If CELG is above $90.00 strike price at Apr2016 expiration): +$0.00
= ($90.00-$90.00)*200 shares

Total Net Profit (If Celgene is above $90.00 strike price at Apr2016 options expiration): +$328.50
= (+$328.50 +$0.00 +$0.00)

Absolute Return (If CELG is above $90.00 strike price at Apr2016 options expiration): +1.8%
= +$328.50/$18,007.95
Annualized Return (If CELG is above $90.00 at expiration): +22.2%
= (+$328.50/$18,007.95)*(365/30 days)

The downside 'breakeven price' at expiration is at $88.35 ($90.00 - $1.65), which is 7.0% below the current market price of $95.00.
The 'crossover price' at expiration is $96.65 ($95.00 + $1.65).  This is the price above which it would have been more profitable to simply buy-and-hold Celgene Corp. stock until April 15th (the Apr2016 options expiration date) rather than selling these Put options.


2.  Delta Air Lines Inc. (DAL) -- New Position
The transaction was as follows:
03/17/2016  Sold 4 DAL 100% cash-secured $45.00 Put options @ $.64
Note: The price of DAL was $48.42 when this transaction was executed.

A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $18,007.95
= $45.00*400 + $7.95

Net Profit:
(a) Options Income: +$253.00
= ($.64*400 shares) - $3.00 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DAL is above $45.00 strike price at Apr2016 expiration): +$0.00
= ($45.00 -$45.00)*400 shares

Total Net Profit (If DAL is above $45.00 strike price at Apr2016 options expiration): +$253.00
= (+$253.00 +$0.00 +$0.00)

Absolute Return (If DAL is above $45.00 strike price at Apr2016 options expiration): +1.4%
= +$253.00/$18,007.95
Annualized Return (If DAL is above $45.00 at expiration): +17.1%
= (+$253.00/$18,007.95)*(365/30 days)

The downside 'breakeven price' at expiration is at $44.36 ($45.00 - $.64), which is 8.4% below the current market price of $48.42.
The 'crossover price' at expiration is $49.06 ($48.42 + $.64).  This is the price above which it would have been more profitable to simply buy-and-hold Delta Air Lines shares until April 15th (the Apr2016 options expiration date) rather than selling these Put options.

Tuesday, March 15, 2016

Established Covered Calls in Bristol-Myers Squibb Co.

Today, a covered calls position was established in Bristol-Myers Squibb Co. (ticker symbol BMY) with an Apr2016 expiration.  This Bristol-Myers covered calls position includes consideration of an upcoming $.38 quarterly dividend with an ex-div date of Mar 30th.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, an in-the-money covered call position was established with the strike price of $62.50 below the stock purchase price of $63.63.

As detailed below, two potential return-on-investment results for this position are:
If Early Assignment: +1.5% absolute return (equivalent to +36.9% annualized return for the next 15 days) if the stock is assigned early (business day prior to Mar 30th ex-date); OR
If Dividend Capture: +2.1% absolute return (equivalent to +24.1% annualized return over the next 32 days) if the stock is assigned at the Apr2016 expiration on April 15th.

1. Bristol-Myers Squibb Co. (BMY) -- New Covered Calls Position
The $.38 dividend of Mar 30th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.20 [$2.13 option premium - ($63.63 stock price - $62.50 strike price)] remaining in the short call option decays well below the upcoming $.38 dividend payment by March 29th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Bristol-Myers shares away to capture the dividend.

The transactions were:
03/15/2016 Bought 300 BMY shares @ $63.63
03/15/2016 Sold 3 BMY Apr2016 $62.50 Call options @ $2.13
Note: a simultaneous buy/write transaction was executed.
03/30/2016 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this Bristol-Myers covered calls position are as follows:
Stock Purchase Cost: $19,096.95
= ($63.63*300+$7.95 commission)

Net Profit:
(a) Options Income: +$636.75
= ($2.13*300 shares) - $2.25 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 30th ex-div date): +$0.00; or
(b) Dividend Income (If BMY assigned at Apr2016 expiration): +$114.00
= ($.38 dividend per share x 300 shares)
(c) Capital Appreciation (If BMY assigned early on Mar 29th): -$346.95
+($62.50-$63.63)*300 - $7.95 commissions; or
(c) Capital Appreciation (If BMY assigned at $62.50 at Apr2016 expiration): -$346.95
+($62.50-$63.63)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Mar 30th ex-dividend date): +$289.80
= (+$636.75 +$0.00 -$346.95); or
Total Net Profit (If BMY assigned at $62.50 at Apr2016 expiration): +$403.80
= (+$636.75 +$114.00 -$346.95)

1. Absolute Return [If option exercised on Mar 29th (business day prior to ex-dividend date)]: +1.5%
= +$289.80/$19,096.95
Annualized Return (If option exercised early): +36.9%
= (+$289.80/$19,096.95)*(365/15 days); OR

2. Absolute Return (If BMY assigned at $62.50 at Apr2016 expiration): +2.1%
= +$403.80/$19,096.95
Annualized Return: +24.1%
= (+$403.80/$19,096.95)*(365/32 days)

In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a good return-on-investment result, especially when considering the historically relatively low volatility for Bristol-Myers stock.  These returns will be achieved as long as the stock is above the $62.50 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $61.12 ($63.63 -$.38 -$2.13) provides 3.9% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this Bristol-Myers position, all eleven criteria were achieved.

Monday, March 14, 2016

Established Covered Calls in Western Digital Corporation

Today, a covered calls position was established in Western Digital Corporation (ticker symbol WDC) with an Apr2016 expiration.  This is the first position established with an April 2016 options expiration in the current Covered Calls Advisor Portfolio.  All other positions have a Mar2016 expiration (this Friday).  This WDC covered calls position includes consideration of an upcoming $.50 quarterly dividend with an ex-div date of Mar 30th.  Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established with the strike price of $45.00 below the stock purchase price of $48.23.

As detailed below, two potential return-on-investment results for this position are:
If Early Assignment: +2.4% absolute return (equivalent to +55.1% annualized return for the next 16 days) if the stock is assigned early (business day prior to Mar 30th ex-date); OR
If Dividend Capture: +3.5% absolute return (equivalent to +38.2% annualized return over the next 33 days) if the stock is assigned at the Apr2016 expiration on April 15th.

1. Western Digital Corporation (WDC) -- New Covered Calls Position
The $.50 dividend of Mar 30th is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $1.20 [$4.43 option premium - ($48.23 stock price - $45.00 strike price)] remaining in the short call option decays well below the upcoming $.50 dividend payment by March 29th (the business day prior to the ex-div date), then it is possible that the call options owner would exercise early and call the Western Digital shares away to capture the dividend.

The transactions were:
03/14/2016 Bought 300 WDC shares @ $48.23
03/02/2016 Sold 3 WDC Apr2016 $45.00 Call options @ $4.43
Note: a simultaneous buy/write transaction was executed.
03/30/2016 Upcoming ex-dividend of $.50 per share

Two possible overall performance results (including commissions) for this Western Digital covered calls position are as follows:
Stock Purchase Cost: $14,476.95
= ($48.23*300+$7.95 commission)

Net Profit:
(a) Options Income: +$1,326.75
= ($4.43*300 shares) - $2.25 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 30th ex-div date): +$0.00; or
(b) Dividend Income (If WDC assigned at Apr2016 expiration): +$150.00
= ($.50 dividend per share x 300 shares)
(c) Capital Appreciation (If WDC assigned early on Mar 29th): -$976.95
+($45.00-$48.23)*300 - $7.95 commissions; or
(c) Capital Appreciation (If WDC assigned at $45.00 at Apr2016 expiration): -$976.95
+($45.00-$48.23)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Mar 30th ex-dividend date): +$349.80
= (+$1,326.75 +$0.00 -$976.95); or
Total Net Profit (If WDC assigned at $45.00 at Apr2016 expiration): +$499.80
= (+$1,326.75 +$150.00 -$976.95)

1. Absolute Return [If option exercised on Mar 29th (business day prior to ex-dividend date)]: +2.4%
= +$349.80/$14,476.95
Annualized Return (If option exercised early): +55.1%
= (+$349.80/$14,476.95)*(365/16 days); OR

2. Absolute Return (If WDC assigned at $45.00 at Apr2016 expiration): +3.5%
= +$499.80/$14,476.95
Annualized Return: +38.2%
= (+$499.80/$14,476.95)*(365/33 days)

In this instance, early assignment provides a higher annualized return, so early assignment is preferable; but either outcome would provide a very attractive return-on-investment result for this investment.  These returns will be achieved as long as the stock is above the $45.00 strike price at assignment.  If the stock declines below the strike price at expiration, the breakeven price of $43.30 ($48.23 -$.50 -$4.43) provides 10.2% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls investments using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved.  As detailed below, for this Western Digital Corporation position, all eleven criteria were achieved.

Thursday, March 10, 2016

Worthwhile Reading

Below are the articles read during the past week the Covered Calls Advisor found to be most interesting and insightful to us investors.
  1. Be an avid reader.  Read carefully and critically, but be selective and read only from high-quality sources: The Anti-Reading List 

  2. This is an outstanding article: Overcoming Investor Indecision 

  3. Is the Bull Market About Over?: Thoughts on the 7-Year Anniversary of the Current Bull Market

  4. Why Stocks Outperform Bonds: Link

  5. Schwab Market Commentary: Reasons for Recent Rebound in Global Stock Markets 

  6. In behavioral investing, there has been substantial research on cognitive biases.  A foremost problem for investors is termed 'loss aversion'.  Simply stated, we like to win but we hate to lose; and we feel the pain from losses about twice as much as we receive pleasure from gains: Counteracting 'Loss Aversion'                                 
  7. Can We Profit from 'Loss Aversion'?
    Because many investors suffer from the cognitive bias of 'loss aversion', they frequently buy out-of-the-money Put options to establish loss limits in their long stock positions. These Put buying pressures can artificially inflate the price of these Put options above their expected realized value, thereby creating an opportunity for us option sellers (think selling out-of-the-money 100% cash-secured Put options) to profit from these investors' fears (i.e. their 'loss aversion' cognitive bias behavior).

Hope you enjoy the articles I've selected and find them useful.

Best wishes and Godspeed,
Jeff (the Covered Calls Advisor)

Wednesday, March 9, 2016

Early Assignment of General Motors Corp. Covered Calls

The Covered Calls Advisor has two General Motors Mar2016 covered calls positions (one at the $29 strike price and one at $30).  Early this morning, I received an email notification from my broker that the $29 position was exercised early, so the stock was assigned (i.e. sold) at the $29 strike price.  The $30 position was not exercised, so the $30 covered calls position remains in the Covered Calls Advisor Portfolio.

Details for the $29 covered calls position are provided below.  The General Motors shares had risen from $29.96 when purchased to $30.30 at yesterday's market close and the time value remaining in the call option had declined to $.37 (based on the midpoint of the bid/ask spread at the market close yesterday).  Given that the stock price declines at market open today by the $.38 ex-div amount, I was somewhat surprised that the owner of the Call options exercised his/her option early since they immediately forfeited the remaining $.37 time value to purchase the shares (and capture the dividend).  In this advisor's experience, early assignment normally occurs only in those uncommon deep-in-the-money positions when there is less than $.10 time value remaining near the end of trading on the day prior to the ex-div date.  But as covered calls investors, we are grateful to receive the immediate gift ($.37 per share in this instance) when it does occur. 

As detailed below, the actual return-on-investment result for this closed position was a +0.6% absolute return (equivalent to +30.6% annualized return for the 7 days holding period).

The transactions were:
03/02/2016 Bought 300 GM shares @ $29.96
03/02/2016 Sold 3 GM Mar2016 $29.00 Call options @ $1.17
Note: a simultaneous buy/write transaction was executed.
03/09/2016 Upcoming ex-dividend of $.38 per share
03/09/2016 3 GM Call options assigned and associated 300 GM shares sold at $29.00 strike price.  Note: the price of GM stock was $30.30 at yesterday's market close.

The overall performance result (including commissions) for this GM covered calls position was as follows:
Stock Purchase Cost: $8,995.95
= ($29.96*300+$7.95 commission)

Net Profit:
(a) Options Income: +$348.75
= ($1.17*300 shares) - $2.25 commissions
(b) Dividend Income (Call options exercised early on business day prior to Mar 9th ex-div date): +$0.00
(c) Capital Appreciation (Early assignment on Mar 8th): -$295.95
+($29.00-$29.96)*300 - $7.95 commissions

Total Net Profit (Call options exercised on day prior to Mar 9th ex-dividend date): +$52.80
= (+$348.75 +$0.00 -$295.95)

Absolute Return: +0.6%
= +$52.80/$8,995.95
Annualized Return (If option exercised early): +30.6%
= (+$52.80/$8,995.95)*(365/7 days)

Sunday, March 6, 2016

Overall Market Meter Remains "Slightly Bearish"

Today, the Covered Calls Advisor recalculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The result is that the Covered Calls Advisor's current market viewpoint remains at Slightly Bearish.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.    

The seven factors used can be categorized as:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).
Note: The rating for each of these factors is not subjective.  Each factor is calculated using objective, quantifiable measures.

The current Market Meter average of 2.57 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 2.25 to 2.99).  This overall value of 2.57 is identical to the 2.57 from last month. 

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bearish sentiment is to "on-average sell 1% in-the-money covered calls for the next options expiration month".

Your comments or questions regarding this post (or the details related to any of the seven factors used in this model) are welcomed. Please email me at the address shown in the upper-right sidebar.

Regards and Godspeed,
Jeff

Thursday, March 3, 2016

Worthwhile Reading

Each week, the Covered Calls Advisor carefully reads over 100 articles (in the categories of finance news, economics, investing, value investing, stocks, and covered calls) from high-quality sources.  Here are the articles selected from the past week that provided the greatest interest and insights:

The three-legged stool below is symbolic of a solid foundation.  One of my favorite stock screeners includes factors related to Value, Quality, and Momentum (VQM).

                      
These two links are articles from Alpha Architect, who share my enthusiasm for a VQM approach to stock selection:

Buy Value and High-Quality Stocks

Combining Value and Momentum Investing




What is your guess:  Who is the world's greatest living investor and what is his greatest strength?
The answers are here: The Greatest Investor and His Greatest Strength

S&P 500 companies are using Non-GAAP accounting to camouflage the decline in GAAP earnings: Mind the GAAPs

The Covered Calls Advisor's Country Value Rankings (see 'Top 5 Countries' listed in the right sidebar) is loaded with Emerging Market countries.
Larry Swedroe agrees: It's Time to Buy the Emerging Markets 

And finally, an article describing how covered calls investors can supplement their income from dividend-paying stocks with income from selling Call options : Link


Enjoy the reading!
Jeff

Wednesday, March 2, 2016

Established Positions in Delta Air Lines Inc. and General Motors Corporation

Today, positions were established in Delta Air Lines Inc.(ticker symbol DAL) and General Motors Corp.(ticker GM).  For Delta, three March 2016 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).  General Motors is a covered calls position with a Mar2016 expiration at the $29.00 strike price that explicitly considers the potential for capturing the upcoming quarterly ex-dividend of $.38 on March 9th.  As shown in the right sidebar under the list of Covered Calls Advisor Portfolio positions, this is the second GM covered calls position established.  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. Delta Air Lines Inc.: +0.9% absolute return in 17 days (equivalent to a +19.8% annualized return-on-investment)
2. General Motors Inc.: +1.8% absolute return in 17 days (equivalent to a +37.9% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 37 for Delta and 24 for GM, 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. Delta Air Lines Inc. (DAL) -- New 100% Cash-Secured Puts Position 

The transaction was as follows:
03/02/2016  Sold 3 DAL Mar2016 $45.00 100% cash-secured Put options @ $.45
Note: the price of DAL was $47.83 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: $13,500.00
= $45.00*300
Note: the price of DAL was $47.83 when these options were sold

Net Profit:
(a) Options Income: +$124.80
= ($.45*300 shares) - $10.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DAL is above $45.00 strike price at Mar2016 expiration): +$0.00
= ($45.00-$45.00)*300 shares

Total Net Profit (If DAL is above $45.00 strike price at Mar2016 options expiration): +$124.80
= (+$124.80 options income +$0.00 dividend income +$0.00 capital appreciation)

Absolute Return (If DAL is above $45.00 strike price at Mar2016 options expiration): +0.9%
= +$124.80/$13,500.00
Annualized Return: +19.8%
= (+$124.80/$13,500.00)*(365/17 days)

The downside 'breakeven price' at expiration is at $44.55 ($45.00 - $.45), which is 6.9% below the current market price of $47.83.

Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing Calculator, the probability of making a profit (if held until the Mar 18th, 2016 options expiration) for this DAL short Puts position is 79%. This compares with a probability of profit of 50.3% for a buy-and-hold of DAL shares over the same time period. Using this probability of profit of 79%, the expected value annualized return-on-investment (if held until expiration) is +15.6% (+19.8% * 79%), an attractive risk/reward profile for this conservative investment.  

The 'crossover price' at expiration is $48.28 ($47.83 + $.45).  This is the price above which it would have been more profitable to simply buy-and-hold DAL until the Mar2016 options expiration date rather than selling these Put options.


2. General Motors Corporation (GM) -- New Covered Calls Position

An ex-dividend occurs on March 9th of $.38.  Although somewhat unlikely, if the current time value (i.e. extrinsic value) of $.21 [$1.17 option premium - ($29.96 stock price - $29.00 strike price)] remaining in the short call options decay further by March 8th (the business day prior to the ex-dividend date), there is a possibility that the Call options owner would exercise early and therefore call the 300 GM shares away to capture the dividend payment.

As shown below, two potential return-on-investment results for this position are:
If Early Assignment: +0.5% absolute return (equivalent to +26.0% annualized return for the next 7 days) if the stock is assigned early (business day prior to Mar 9th ex date); OR
If Dividend Capture: +1.8% absolute return (equivalent to +37.9% annualized return over the next 17 days) if the stock is assigned at the Mar2016 expiration on March 18th.

The transactions were:
03/02/2016 Bought 300 GM shares @ $29.96
03/02/2016 Sold 3 GM Mar2016 $29.00 Call options @ $1.17
Note: a simultaneous buy/write transaction was executed.
03/09/2016 Upcoming ex-dividend of $.38 per share

Two possible overall performance results (including commissions) for this GM covered calls position are as follows:
Stock Purchase Cost: $8,995.95
= ($29.96*300+$7.95 commission)

Net Profit:
(a) Options Income: +$340.80
= ($1.17*300 shares) - $10.20 commissions
(b) Dividend Income (If option exercised early on business day prior to Mar 9th ex-div date): +$0.00; or
(b) Dividend Income (If GM assigned at Mar2016 expiration): +$114.00
= ($.38 dividend per share x 300 shares)
(c) Capital Appreciation (If GM assigned early on Mar 8th): -$295.95
+($29.00-$29.96)*300 - $7.95 commissions; or
(c) Capital Appreciation (If GM assigned at $29.00 at Mar2016 expiration): -$295.95
+($29.00-$29.96)*300 - $7.95 commissions

Total Net Profit (If option exercised on day prior to Mar 9th ex-dividend date): +$44.85
= (+$340.80 +$0.00 -$295.95); or
Total Net Profit (If GM assigned at $29.00 at Mar2016 expiration): +$158.85
= (+$340.80 +$114.00 -$295.95)

1. Absolute Return [If option exercised on Mar 8th (business day prior to ex-dividend date)]: +0.5%
= +$44.85/$8,995.95
Annualized Return (If option exercised early): +26.0%
= (+$44.85/$8,995.95)*(365/7 days); OR

2. Absolute Return (If GM assigned at $29.00 at Mar2016 expiration): +1.8%
= +$158.85/$8,995.95
Annualized Return: +37.9%
= (+$158.85/$8,995.95)*(365/17 days)

In this instance, early assignment provides a lower annualized return, so capturing the dividend and being assigned at Mar2016 expiration is preferable; 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 $29.00 strike price at assignment.  If the stock declines below the strike price, the breakeven price of $28.79 ($29.96 -$1.17) provides 3.9% downside protection below today's purchase price.

The Covered Calls Advisor has established a set of eleven criteria to evaluate potential covered calls using a dividend capture strategy.  The minimum threshold to establish a position is that at least nine of these eleven criteria must be achieved, which for this GM position was the case (as shown in the table below).