Sunday, April 27, 2008

Yield Analysis

Since the primary goal of my covered call portfolio is current income, I developed another spreadsheet to track the Annualized Yield on Cost of each position, consisting of option premiums plus dividends, if any. Some of my older positions don't pay dividends so the yield would come exclusively from option premiums.

My minimum yield goal is 12% annualized, based on the purchase price of the stock. For example, if I bought a stock for $50 and it paid $1.50/share in annual dividends, my Annualized Dividend Yield on Cost would be 3% ($1.50/$50). To meet my goal of 12% Annualized Yield on Cost I'd need a total of $6/share of annual income ($50*12%). So I would need an additional $4.50/share ($6.00-$1.50) in annual option premiums, or 9% Annualized Option Yield on Cost. This comes to about 0.38/share ($4.50/12) of option premium per month.

By analyzing the Annualized Yield on Cost of each position, I'll be able to tell which positions are meeting the minimum requirement of 12% and which positions are not. Used in conjunction with the spreadsheet I developed to identify a fundamental breakdown in the company, I'll be able to make more objective decisions on which positions to keep and which ones to close.