Common Cents Investing

Rolle EEM Covered Calls

2014-03-18T07:08:00.000-05:00

TRANSACTION TYPE: Emerging market stocks have slumped recently, and CCI used the opportunity to harvest some premium and rolled the covered call position out and down as described below.

TRANSACTION DATE: Mon. 03/17/14

Action: Buy to Close

Exp. Date: Mar. 22, 2014

Strike: $40.50

Price: $.33

Action: Sell to Open

Exp. Date: Apr, 4 2014 (rolled out two weeks)

Strike: $40.00

Price: $.30

Rolled Emerging Market Covered Call Up and Out

2014-03-02T21:11:00.001-06:00

TRANSACTION TYPE: Emerging market stocks went sideways this past week, and CCI used the opportunity to harvest some premium and roll the covered call position up and out and described below.

TRANSACTION DATE: Fri. 02/28/14

Action: Buy to Close

Exp. Date: Mar. 7, 2014

Strike: $40.5

Price: $.11

Action: Sell to Open

Exp. Date: Mar, 22 2014 (rolled out two weeks)

Strike: $40.50

Price: $.33

Rolled IWM Covered Calls

2014-02-28T15:12:00.000-06:00

DESCRIPTION: iShares Russell 2000

TRANSACTION TYPE: Roll Out and Up

Small Cap stocks continued to rise and CCI rolled the covered call position as described below.

TRANSACTION DATE: Feb. 28

Action: Buy to close

Exp. Date: Feb. 28, 2014

Strike: $116

Price: $2.32

Action: Sell to Open

Exp. Date: Mar. 14, 2014 (out two weeks)

Strike: $118

Price: $1.58

Rolled Small Cap Covered Call

2014-02-23T10:42:00.000-06:00

DESCRIPTION: iShares Russell 2000

TRANSACTION TYPE: Roll Out and Up

Small Cap stocks have snapped back recently and CCI was forced to roll the covered call position as described below.

TRANSACTION DATE: Feb. 21

Action: Buy to close

Exp. Date: Feb. 22, 2014

Strike: $112

Price: $3.82

Action: Sell to Open

Exp. Date: Feb. 28, 2014 (out one week)

Strike: $116

Price: $0.87

Rolled EEM Covered Call Out and Up..Twice

2014-02-18T17:15:00.001-06:00

TRANSACTION TYPE: Emerging market stocks have bounced back somewhat from their lows. CCI adjusted the covered call position as follows.

TRANSACTION DATE: Fri. 02/14/14

Action: Buy to Close

Exp. Date: Feb. 14, 2014

Strike: $.39

Price: $.65

Action: Sell to Open

Exp. Date: Feb. 22, 2014 (rolled out one week)

Strike: $40

Price: $.23

Action: Buy to Close

Exp. Date: Feb. 22, 2014

Strike: $.40

Price: $.13

Action: Sell to Open

Exp. Date: Mar. 7, 2014 (rolled out two weeks)

Strike: $40.50

Price: $.24

Rolled SPY Covered Call Out and Down

2014-02-07T10:38:00.000-06:00

TRANSACTION DATE: Thurs. 02/06/14

Action: Buy to Close

Exp. Date: Feb. 22, 2014

Strike: $183

Price: $.18

Action: Sell to Open

Exp. Date: Feb. 22 2014 (rolled out until next month)

Strike: $182

Price: $ 1.12

Re-established EEM Covered Call

2014-02-04T12:55:00.001-06:00

TRANSACTION TYPE: Emerging market stocks continued to fall making the prior covered call position obsolete quickly. CCI let the last covered call position expired, and re-established the covered call position. Details below.

TRANSACTION DATE: Tues. 02/04/14

Action: Buy to Close

Exp. Date: Jan. 31, 2014

Strike: $41.50

Price: $.00 (expired)

Action: Sell to Open

Exp. Date: Feb. 14, 2014 (rolled out nearly two weeks)

Strike: $39

Price: $.24

Continuing to Roll C Covered Call

2014-02-02T14:00:00.001-06:00

Financial stocks (Specifically both XLF and C which are held in this paired option position) continued at the end of the week. Hence CCI harvested the option premium gained in the C Covered call and rolled the position as described below.

Bought back the Feb 28, $52.50 call in C at $.24 (capturing a modest $.18/contract profit)
Sold the Mar 7 (out an additional week), $51 call in C for a $.51/contract credit.

This position was initiated on Jan 8, 2013. The performance of various potential holdings as of the time of this trade are shown below:

The XLF etf has been up with the rest of the market. Just buying and holding the XLF over this period would have returned a very nice 22.8 %.
The leverage obtained by instead simply holding the Jan 15 $10 call would have generated an unrealized, leveraged, capital gain of 58.4%.
The leveraged, long/short strategy defined in this thread is up 54.3%. An outstanding gain with somewhat less risk/leverage than holding a naked LEAP.

Adjusted Covered Call Position in SPY

2014-01-31T19:16:00.000-06:00

TRANSACTION DATE: Fri. 01/31/14

Action: Buy to Close

Exp. Date: Feb. 22, 2014

Strike: $185

Price: $.25

Action: Sell to Open

Exp. Date: Feb. 22 2014 (rolled out nearly three weeks)

Strike: $183

Price: $.56

Boeing: Hitting Crusing Altitude

2014-01-28T15:25:00.000-06:00

It has been a long time since CCI discussed its position in Boeing.

As discuss in this three year old article ( http://seekingalpha.com/article/249485-boeing-early-boarding-for-investors-seeking-good-mid-term-prospects) CCI suggested Boeing seemed to be starting the beginning of a cycle of new aircraft production and related products. The article suggested $70 was a good entry price, with $100 to $120 seeming like a "target" price.

One of the benefits of blogging is it requires an investor to document their rationale for owning a position. With the start of a new year, and Boeing trading around $140 it was time to re-examine the position. The following article http://seekingalpha.com/author/common-cents/instablog documents my current thoughts about Boeing.

From a portfolio position, taking profits from this position that is up 100% is certainly an option. However, while Boeing's upward run may be over, it seems to me that their backlog of orders makes it highly likely Boeing won't crash and burn. IMO, It seems like there is a decent probability that Boeing stock may cruise along at this altitude for awhile. Based on that forecast CCI is going to treat the Boeing position as a good candidate to write covered calls against. Specifically, with Boeing trading around $137 and earnings later this week, CCI sold the Feb $145 call against a portion of the portfolio's holding for $1.00. If the stock surges on earnings news, CCI will likely let the position be trimmed with the assignment of the calls. If the stock goes sideways or falls from its current levels, the call premium will add a modest .7% return to the existing gains. CCI would then likely re-establish the covered call further out in the future.

Rolled Small Cap (IWM) Covered Call Out and Down

2014-01-27T14:41:00.000-06:00

DESCRIPTION: iShares Russell 2000

TRANSACTION TYPE: Roll Out and Down

Small Cap stocks continued to take a pounding recently. CCI used the opportunity to roll/reposition the covered call position to take some of the hedging profits and realign the call to a more practical position.

TRANSACTION DATE: Jan. 27

Action: Buy to close

Exp. Date: Feb. 7, 2014

Strike: $117

Price: $0.16

Action: Sell to Open

Exp. Date: Feb. 14, 2014 (out one week)

Strike: $115

Price: $0.70

Rolled Covered Call in C to Refresh the XLF Hedge

2014-01-24T15:31:00.002-06:00

Earlier in the week C reported earnings and disappointed the market. Further, the market and financial stocks (Specifically both XLF and C which are held in this paired option position) fell today. This drop in price exhausted most of the hedge the short call was providing to this position. Hence CCI harvested the option premium and rolled the position as described below.

Bought back the Feb 22, $55 call in C at $.11 (capturing a $.93/contract profit)
Sold the Feb 28 (out an additional week), $52.50 call in C for a $.42/contract credit.

This position was initiated on Jan 8, 2013. The performance of various potential holdings as of the time of this trade are shown below:

The XLF etf has been up with the rest of the market. Just buying and holding the XLF over this period would have returned a very nice 25 %. Down about 4% since the last post.
The leverage obtained by instead simply holding the Jan 15 $10 call would have generated an unrealized, leveraged, capital gain of 56.6%. This is down over 10% since the last post
The leveraged, long/short strategy defined in this thread is up 52.4%. An outstanding gain with somewhat less risk/leverage than holding a naked LEAP. Only down 3.9% since the last post.

Lucky with Leverage in Apple

2014-01-23T15:18:00.001-06:00

CCI set out to re-establish a long/short option position in Apple as done with this and other stocks in the past. CCI planned to buy a deep ITM call leap position in Apple (APPL) before next weeks earnings, and to somewhat hedge that position by selling short term calls against that long position.

This morning CCI

Bought Jan 15 $400 Call for $150
Sold Jan 31, 14 $580 call for $4

The intent was to hold this position through next weeks earnings, and some of the noise created by Carl Ichan's activism in Apple. As it turns out, CCI "brilliantly" (aka: luckily) caught the bottom of today's Apple trading range. By late in the afternoon, Apple had reversed and traded up by 1.5% from the time of purchase. CCI just took quick profits by the following transaction

Sold Jan 15 $400 call for $156.50
Bought Jan 31, 14 call for $5

That is a gain of $5.50 per contract or a nice 3+% gain in a few hours.

CCI may look to re-establish the original position in the near future, especially if Apple sells off going into their earnings announcement. .

Rolled IWM Covered Call Up and Out

2014-01-23T14:58:00.002-06:00

DESCRIPTION: iShares Russell 2000

TRANSACTION TYPE: Roll Out and Up

Small Cap stocks finally took a small step back today and CCI used the opportunity to roll/reposition the covered call position. The Jan. 24 option was closed for a small profit, but the new position gained more time and upside.

TRANSACTION DATE: Jan. 23

Action: Buy to close

Exp. Date: Jan. 24, 2014

Strike: $116

Price: $0.47

Action: Sell to Open

Exp. Date: Feb. 7, 2014 (out two weeks)

Strike: $117

Price: $0.85

ICC Q4 Results: It Was the Best of Times, It Was the Worst of Times

2014-01-20T18:57:00.000-06:00

The Index Covered Call Trading Plan (aka: ICC) is CCI's approach for managing a position of index ETFs and related covered calls. The most recent trade against this plan is described below. A reader can find details about the rational and management of the trades at the ICC trading plan tab on CCI's home page.

Once again CCI's accounting department (i.e. me) has been busy putting together spreadsheets of q4 results for the index covered call positions that were discussed in most of this quarter's blog posts. After running these results past our staff auditors (me again), the technical staff (yes, me again) has posted results for the ICC results, Buy & Hold results and some comparisons below.

ICC B&H YTD
  Q4     YTD   YTD Variance         % of B&H Returned
SPY 5.9% 19.5% 32.0% - 12.5% 61%
IWM 4.4% 19.4% 38.4% -19.0% 51%
EEM 5.2% 0.8% - 3.8% + 4.6% Loss to gain
TLT(20 yr Bond) -1.5% -9.6% -13.3% + 3.7% Loss cut by 28%

Some Observations

As often stated in this blog this covered call approach is expected to under perform the market in good times, and out perform in bad times. Overall, the intent is to create a less volatile ride that compares favorable with a somewhat traditional asset allocation of 60% stocks and 40% bonds.
As per the title of this post, the US stock market had just about the best times imaginable in 2013. With the stock market having the best of times, this past year could represent almost the worst time for performance of ICC relative to the market. This is illustrated by ICC for US markets only returning 50-60% of the stock market performance. If the underlying performance was closer to average returns, I suspect the returns for the covered call portfolio would be much more aligned, and have the potential to outperform the market. I'm not much into market forecasting. However, for 2014, I will go out on a limb and suggest that the US market performance in 2014 has a very, very high probability of its performance being less than the performance achieved in 2013. Such a high probability that I'm willing not just to continue this approach, but increase the amount of overall assets I have allocated to these US covered call positions in 2014 as a hedge against poor stock market performance.
On the other side of the "bit-coin" (lol), the Emerging Market index had a bad year and the covered call strategy turned a loss into a gain. Long term US treasury bonds had the worst of times. The covered calls lessened the blow of this draw down.
Seemingly a more important comparison is that between a "normal" asset allocation vs. a covered call portfolio. Comparison can be made to several different allocations, but below is an example that illustrates the idea of covered calls being a alternative way to achieve the returns of a traditional asset allocation.

A "normal" allocation of 40% spy, 10% iwm, 10%eem, 40% tlt would have returned 10.9%
An allocation of 100% to covered call position in stocks of 60% spy, 20% iwm, 20% eem would have returned 15.7%

Lastly, an etf offering a covered call strategy for the S&P 500(PBP) returned 12.6% in 2013. CCI's S&P500 covered call portfolio was up 19.5%. Same underlying index, both focused on monthly covered calls, but managed differently. That is over 50% better performance, and CCI outperformed in all four quarters of the year. My conclusion from this data could be I'm a genius (lol). However, more realistically I think covered calls are naturally sensitive to time and price. If a person is planning to write covered calls, the person can not passively let the calls go until expiration as done in an index/passive etf. TO make this strategy effective a person should commit the time to actively adjust covered call positions when the time and price dictate a change in position.
Lastly a few caveats

As they say. Past Performance is no guarantee of future results. This is especially true with option positions which are not only impacted by the absolute gain/loss of the underlying but the path (i.e. volatility) to reaching that end result.
This data was prepared via some manual data entry and spreadsheets. While, I think I got it right there is always the chance for error, and these results are un-audited.

It Only Took Two Years..but Booked a Profit in the Short Position in Lulu

2014-01-18T09:05:00.000-06:00

As discussed here, back in Jan. of 2012, CCI felt unreasonably high valuations for Lululemon (lulu )made this a good candidate a portion of the overall portfolio allocated to short positions.

It took awhile (OK..it took a long time), and some mental toughness (as the say the market can be irrational for longer than you can stay patient) but this week Lulu announced some disappointing sales. The stock finally came down enough for CCI to take about a 10% profit in this short position. Along the way, CCI actually enhanced that return by a few more percentage points with the sale of puts against this position (aka: the inverse of covered calls.)

A 10+% gain over a period where almost any "normal" long position would have been up 30+% does not sound that exciting. Of course, that is easy to say in hindsight. Who knew two years ago that the market would go straight up. It is nice to be able to get a win from a short position that was acting as a hedge for the long bias of the overall portfolio. A win/win!

Over the past two years, LULU has somewhat grown into its valuation, with its PE down to 25ish. There might be more room for it to fall further, but there are also now many stocks with high valuations. That means there might be other stocks that represent better short opportunities. Hence, CCI took these profits and will be looking for other short opportunities in the near future.

Rolled SPY Covered Call

2014-01-16T18:16:00.000-06:00

The Index Covered Call Trading Plan (aka; ICC) is CCI's approach for managing a position of index ETFs and related covered calls. A reader can find details about the rationale and management of this position here. The latest trade for this position is discussed below.

UNDERLYING ETF: SPY
DESCRIPTION: SPDR S&P 500

TRANSACTION DESCRIPTION: The S&P 500 has mostly continue its upward march. With Only two days left until expiration CCI rolled the covered call position with an aggressive strike price believing there could be a reversion to the mean over the coming month.

ACTION: But to Close
EXP DATE: Jan 21, 2014
STRIKE: $181
PRICE: $3.21

ACTION: Sell to Open
EXP DATE: Feb 22, 2014
STRIKE: $185
PRICE: $2.06

Re-establish Covered Call in EMM

2014-01-14T15:51:00.000-06:00

TRANSACTION TYPE: Emerging market stocks fell rather quickly making the prior covered call position obsolete quickly. CCI let the last covered call position expired, and conservatively re-established the covered call position. Details below.

TRANSACTION DATE: Tues. 01/14/14

Action: Buy to Close

Exp. Date: Jan. 10, 2014

Strike: $41.50

Price: $.00 (expired)

Action: Sell to Open

Exp. Date: Jan. 31, 2014 (rolled out nearly three weeks)

Strike: $41.50

Price: $.16

Deja Vu - Rolled C Covered Call Up and Out

2014-01-13T13:42:00.002-06:00

As discussed here CCI has a long position in the financial sector etf (xlf) via the Jan 15 $10 Call, that has usually been hedged via a shorter duration short call in Citigroup (C).

Just after rolling the C covered call last week, financial stocks (Both XLF and C) fell. As discussed in the last post, CCI had aggressively rolled the covered call in C "hoping for" a short term reversal to the mean. That essentially happened just a few days later. Better lucky than good! So it was time to recapture some option premium lost in the last roll and re-establish a somewhat less aggressive position as described below:

bought back the Jan 24 $54 call in C at $0.97 (sold at $1.63 last week)
sold the Feb 22, $55 call in C at $1.08 (for an $.11 credit)

C still reports earnings this week, so this option position will still require monitoring and perhaps some adjustment. However, baring an earnings blow out, this option position it is now at a place where there is a reasonable probability of getting all the way back to a conservative covered call position.

This position was initiated on Jan 8, 2013, almost exactly a year ago. The performance of various potential holdings as of the time of this trade are shown below:

The XLF etf has been up with the rest of the market. Just buying and holding the XLF over this period would have returned a very nice 29.1 %. That is comprised of 27.2% unrealized cap gain, and 1.9% in dividends. This is down 1.3% since the last post.
The leverage obtained by instead simply holding the Jan 15 $10 call would have generated an eye popping unrealized, leveraged, capital gain of 67.2%. This is down 2.8% since the last post
The leveraged, long/short strategy defined in this thread is up 56.3%. An outstanding gain with somewhat less risk/leverage than holding a naked LEAP. Only down .5% since the last post

Rolled C Short Call Position Up and Out

2014-01-11T09:45:00.000-06:00

As discussed here CCI has a long position in the financial sector etf (xlf) via the Jan 15 $10 Call, that has usually been hedged via a shorter duration short call in Citigroup (C).

Financial stocks have had a nice run recently. This week, CCI rolled the short call in Citigroup as a hedge against the long, leveraged position in XLF held in the portfolio. Specifically, this week CCI

bought back the Jan 10 $53 call in C at $2.08
sold the Jan 24, $54 call in C at $1.63

Unfortunately for this trade, during the most recent period C has materially outperformed the XLF index. That occurrence means the short call in C acted to mute the positive performance over this period. CCI believes/hopes that there is a good probability for C to revert to the mean over the coming period. Hence CCI decide to sell an ITM call this time. This essentially buys more time for this mean reversion to happen. C reports earnings next week so it is highly likely this option position may need to be adjusted fairly quickly. Stay tuned.

This position was initiated on Jan 8, 2013, almost exactly a year ago. The performance of various potential holdings as of the close of trading on Friday Jan 10, 2014 are shown below:

The XLF etf has been up with the rest of the market. Just buying and holding the XLF over this period would have returned a very nice 30.4 %. That is comprised of 28.5% unrealized cap gain, and 1.9% in dividends. (May all my holdings perform like this....lol)
The leverage obtained by instead simply holding the Jan 15 $10 call would have generated an eye popping unrealized, leveraged, capital gain of 70.0%. (leverage is great when it works!!!)
The leveraged, long/short strategy defined in this thread is up 56.8%. An outstanding gain with somewhat less risk/leverage than holding a naked LEAP

Rolled Small Cap (IWM) Covered Call Up and Out

2014-01-10T11:10:00.001-06:00

DESCRIPTION: iShares Russell 2000

TRANSACTION TYPE: Roll Out and Up

CCI harvested some option premium and repositioned the IWM covered call position as described below.

TRANSACTION DATE: Jan. 10

Action: Buy to close

Exp. Date: Jan. 10, 2014

Strike: $115

Price: $0.15

Action: Sell to Open

Exp. Date: Jan. 24, 2014 (out two weeks)

Strike: $116

Price: $0.63

Interesting Chart to Start the New Year

2014-01-01T21:00:00.000-06:00

Best wishes for a happy and healthy new year to all!!!!

The new year often is a time to reflect on past years performance and future investments. During my reading over the holidays, I stumbled across an interesting chart at http://researchpuzzle.com/. I encourage readers to look at the site and specifically the chart at http://rp-pix.com/.

At the end of the year is is natural to look at the past year's performance. The chart referenced above looks at not one year's performance, but the past seven year's performance. Arguably, seven years is a reasonable approximation of a business cycle. The chart shows the seven years total returns on the ten year US bond (TLT), investment grade bonds (lqd), and the S&P 500(SPY). Interestingly, these three very different investments have about the same seven year return. However, they got there via very different paths. Stocks plunged and recovered, the 10 year surged and then pulled back, while investment grade bonds was a more consistent performer.

As with any bit of information, there are a lot of "conclusions" that can be drawn from one chart. Some things that crossed my mind when looking at this data include:

I assume this is somewhat of an anomaly. I did not look at any other seven year periods, but if this is the norm, then there is no point to trying to make asset allocation decisions. More specifically it would seem surprising to me if in this low interest rate environment, bonds could match the performance of equities over the next 7 years. That does not make me a bull on the stock market, but rather a bear on the bond market.
Rebalancing would have worked better. I did not do any math, but just from looking at the chart it is clear that buying the dips, selling the rips would improve performance. Some might call that timing the market, I prefer to think of it as aggressive rebalancing. Perhaps we should all make a new years resolution to more diligently/aggressively rebalance our assets.
and...there is more than one way to get to the same place. Not shown on the graph, but any traditional asset allocation across these different assets would also yield a similar return. It also means that there might be other ways to match/beat the results/risks of a traditional portfolio allocation over a business cycle via the use of other instruments. One of those other instruments is options. In 2014, CCI plans to continue to discuss option based strategies to provide alternative approaches to augment traditional asset allocations

Rolled Emerging Market (EEM) Covered Calls Out and Down

2013-12-23T15:38:00.001-06:00

TRANSACTION TYPE: Emerging market stocks have fallen recently and CCI harvested some option premium and re-establish the covered call position as described below.

TRANSACTION DATE: Mon 12/23/13

Action: Buy to Close

Exp. Date: Jan. 3, 2013

Strike: $42

Price: $.07

Action: Sell to Open

Exp. Date: Jan. 10, 2013 (rolled out one week further)

Strike: $41.50

Price: $.28

Net Credit: $.20 after commissions

SPY Covered Call Rolled Out

2013-12-19T15:48:00.003-06:00

UNDERLYING ETF: SPY

DESCRIPTION: SPDR S&P500

TRANSACTION DESC: With only two days left until expiration, CCI rolled the SPY covered call out until January as described below

Action: Buy to Close

Exp. Date: Dec. 21, 2013

Strike: $181

Price: $.28

Action: Sell to Open

Exp. Date: Jan, 18 2014

Strike: $181

Price: $1.20

Net Credit after commissions: $.92

Rolled C Covered Call

2013-12-18T20:04:00.002-06:00

As discussed here CCI has a long position in the financial sector etf (xlf) via the Jan 15 $10 Call, that has usually been hedged via a shorter duration short call in Citigroup (C).

With only a few days until expiration, CCI rolled the short call in Citigroup as a hedge against the long. leveraged position in XLF held in the portfolio. Specifically, CCI

bought back the Dec 21 $52.50 call at $.08, harvesting $.36 in option premium per contract
sold the Jan 10, $53 call at $.44/contract.

Note: C is scheduled to report earnings on Jan 13. This strike date was selected to avoid the volatility of that event. This position will likely be rolled out to a strike well beyond the earnings date (feb?) if an opportunity to harvest option premium presents itself in the next few weeks

Since inception on Jan 8, 2013 the performance of various potential holdings as of the time of this trade are shown below:

The XLF etf has been relatively flat lately but continues to hold onto its excellent performance since January - up 24.7%! That is comprised of 23.4% unrealized cap gain, and 1.3% in dividends.
The leverage obtained by instead simply holding the Jan 15 $10 call has generated and unrealized, leveraged, capital gain of 58.0%. (leverage is great when it works!!!)
The leveraged, long/short strategy defined in this thread is up 53.8%. That is comprised of 39.5% in unrealized leveraged capital gains, 14.3% in realized option premium.