The following adjustment was made today on CLHB:
21-May-07 - Continued Trade - STO 1 Jun07 50.00 Call @ 0.19 -
Current Position Summary:
Stock Investment: $5,350.00
Income Generated: $585.00
Percent Income Generated: 10.93%
Net Profit If Called: $235.00
Percent Return If Called: 4.39%
Annualized Return If Called: 14.06%
Days to Expiration: 114 days
Trade History:
21-Feb-07 - Initial Stock Position - BTO 100 CLHB @ 53.50 -
21-Feb-07 - Initial Call Option - STO 1 Apr07 50.00 Call @ 5.32 - Expired
23-Apr-07 - Continued Trade - STO 1 May07 50.00 Call @ 0.34 - Expired
21-May-07 - Continued Trade - STO 1 Jun07 50.00 Call @ 0.19 -
Monday, May 21, 2007
Measuring Returns
As you may have noticed in the May 2007 results I reported 2 different measures for my returns over the past 2 years, cost basis and liquidation value.
Here's an example of the two measures.
Let's say the starting amount is $100,000, fully invested, with a period of 1 year.
Cost Basis Method - Assumes that the stocks will be sold at or above their cost basis, including income generated. In other words, no losses. This is a fairly reasonable assumption since I usually manage each position until it can be closed at a profit and have yet to close a position at a loss over the past 2 years. Now, this doesn't mean I'll never close a position at a loss, just that I haven't had to do so yet.
Cost of stock purchased = $100,000
Amount of income generated = $23,860
Total portfolio amount = $123,860
Annualized Return = 23.86%
Liquidation Method - Assumes that all positions were liquidated at the time of the calculation (i.e. buy back the short calls and sell the long stock). This is not very likely since I have no intention of liquidating these positions.
Cost of stock purchased = $100,000
Current liquidation value = $94,380
Amount of income generated = $23,860
Total portfolio amount = $118,240
Annualized Return = 18.24%
Notice that the income generated for both measures is the same. The only difference is the liquidation value.
I track the liquidation value, but since I never intend to liquidate my account, I don't pay much attention to it, but I know people will ask so I track it ;-)
The Average Monthly Returns on Invested Capital is calculated using the Cost Basis method. In otherwords, I take the amount of income generated and divide it by the amount of invested capital at the beginning of the option expiration month. It does not factor in the liquidation value of the portfolio. The reason for this is that I'm more interested in the amount of income I can generate than on the liquidation value.
It's important to track one or both of these measures to see how well my portfolio is performing against a benchmark. If I'm beating the benchmark, as I appear to be doing, regardless of which measure you look at, then it justifies continuing to trade according to my plan. If I'm not beating the benchmark, then I either need to change my plan or just invest in the benchmark index or find another investment vehicle. The first benchmark to beat of course is the risk free rate of return, as measured by T-Bills. If you can't beat that, then you're better off just buying T-Bills.
Another method that I use to compare against a benchmark is Standard Deviation of returns and Sharpe Ratio.
The standard deviation of the returns measures the volatility of the portfolio.
The Sharpe Ratio measures the risk-adjusted performance. It's calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
The goal here is to have a higher average return and lower standard deviation than the benchmark (i.e. low risk/high reward = higher Sharpe Ratio).
Here's an example of the two measures.
Let's say the starting amount is $100,000, fully invested, with a period of 1 year.
Cost Basis Method - Assumes that the stocks will be sold at or above their cost basis, including income generated. In other words, no losses. This is a fairly reasonable assumption since I usually manage each position until it can be closed at a profit and have yet to close a position at a loss over the past 2 years. Now, this doesn't mean I'll never close a position at a loss, just that I haven't had to do so yet.
Cost of stock purchased = $100,000
Amount of income generated = $23,860
Total portfolio amount = $123,860
Annualized Return = 23.86%
Liquidation Method - Assumes that all positions were liquidated at the time of the calculation (i.e. buy back the short calls and sell the long stock). This is not very likely since I have no intention of liquidating these positions.
Cost of stock purchased = $100,000
Current liquidation value = $94,380
Amount of income generated = $23,860
Total portfolio amount = $118,240
Annualized Return = 18.24%
Notice that the income generated for both measures is the same. The only difference is the liquidation value.
I track the liquidation value, but since I never intend to liquidate my account, I don't pay much attention to it, but I know people will ask so I track it ;-)
The Average Monthly Returns on Invested Capital is calculated using the Cost Basis method. In otherwords, I take the amount of income generated and divide it by the amount of invested capital at the beginning of the option expiration month. It does not factor in the liquidation value of the portfolio. The reason for this is that I'm more interested in the amount of income I can generate than on the liquidation value.
It's important to track one or both of these measures to see how well my portfolio is performing against a benchmark. If I'm beating the benchmark, as I appear to be doing, regardless of which measure you look at, then it justifies continuing to trade according to my plan. If I'm not beating the benchmark, then I either need to change my plan or just invest in the benchmark index or find another investment vehicle. The first benchmark to beat of course is the risk free rate of return, as measured by T-Bills. If you can't beat that, then you're better off just buying T-Bills.
Another method that I use to compare against a benchmark is Standard Deviation of returns and Sharpe Ratio.
The standard deviation of the returns measures the volatility of the portfolio.
The Sharpe Ratio measures the risk-adjusted performance. It's calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
The goal here is to have a higher average return and lower standard deviation than the benchmark (i.e. low risk/high reward = higher Sharpe Ratio).
Sunday, May 20, 2007
CHS - Closed Position
The CHS May07 20.00 Call was exercised and the stock was called away for a profit. The following is the trade history and returns, including IB commissions.
Covered Call Results
Stock Investment: $2,091.00
Income Generated: $239.00
Net Profit: $148.00
Percent Return: 7.08%
Annualized Return: 22.86%
Duration of Trade: 113 days
Buy & Hold Comparison
Opening Price: $20.91
Closing Price: $24.89
P/L per Share: $3.98
Shares: 100
Dividends: $0.00
Net Profit: $398.00
Percent Return: 19.03%
Annualized Return: 61.48%
Duration of Trade: 113 days
Trade History:
25-Jan-07 - Initial Stock Position - BTO 100 CHS @ 20.91 -
25-Jan-07 - Initial Call Option - STO 1 May07 20.00 Call @ 2.39 - Exercised
18-May-07 - Option Exercised - EX 1 May07 20.00 Call @ 20.00 -
Covered Call Results
Stock Investment: $2,091.00
Income Generated: $239.00
Net Profit: $148.00
Percent Return: 7.08%
Annualized Return: 22.86%
Duration of Trade: 113 days
Buy & Hold Comparison
Opening Price: $20.91
Closing Price: $24.89
P/L per Share: $3.98
Shares: 100
Dividends: $0.00
Net Profit: $398.00
Percent Return: 19.03%
Annualized Return: 61.48%
Duration of Trade: 113 days
Trade History:
25-Jan-07 - Initial Stock Position - BTO 100 CHS @ 20.91 -
25-Jan-07 - Initial Call Option - STO 1 May07 20.00 Call @ 2.39 - Exercised
18-May-07 - Option Exercised - EX 1 May07 20.00 Call @ 20.00 -
Wednesday, May 9, 2007
JBHT - Closed Position
The JBHT May07 25.00 Call was exercised early on 5/08/07, the day before Ex-Dividend date, and the stock was called away for a profit. The following is the trade history and returns, including IB commissions.
Covered Call Results
Stock Investment: $7,358.00
Income Generated: $1,061.00
Net Profit: $1,203.00
Percent Return: 16.35%
Annualized Return: 13.53%
Duration of Trade: 441 days
Buy & Hold Comparison
Opening Price: $24.53
Closing Price: $28.96
P/L per Share: $4.43
Shares: 300
Dividends: $99.00
Net Profit: $1,428.00
Percent Return: 19.40%
Annualized Return: 16.02%
Duration of Trade: 441 days
Trade History:
21-Feb-06 - Initial Stock Position - BTO 300 JBHT @ 24.53 -
21-Feb-06 - Initial Call Option - STO 3 Mar06 25.00 Call @ 0.59 - Expired
20-Mar-06 - Continued Trade - STO 3 Aug06 25.00 Call @ 1.19 -
15-May-06 - Dividend Received - DIV 300 Dividend @ 0.08 -
25-Jul-06 - Buy Back & Roll Out - BTC 3 Aug06 25.00 Call @ -0.06 - Closed
25-Jul-06 - Continued Trade - STO 3 Jan07 25.00 Call @ 0.99 - Closed
18-Aug-06 - Dividend Received - DIV 300 Dividend @ 0.08 -
28-Nov-06 - Dividend Received - DIV 300 Dividend @ 0.08 -
19-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 25.00 Call @ -0.11 -
19-Dec-06 - Continued Trade - STO 3 May07 25.00 Call @ 0.59 - Exercised
21-Feb-07 - Dividend Received - DIV 300 Dividend @ 0.09 -
09-May-07 - Option Exercised - EX 3 May07 25.00 Call @ 25.00 -
Covered Call Results
Stock Investment: $7,358.00
Income Generated: $1,061.00
Net Profit: $1,203.00
Percent Return: 16.35%
Annualized Return: 13.53%
Duration of Trade: 441 days
Buy & Hold Comparison
Opening Price: $24.53
Closing Price: $28.96
P/L per Share: $4.43
Shares: 300
Dividends: $99.00
Net Profit: $1,428.00
Percent Return: 19.40%
Annualized Return: 16.02%
Duration of Trade: 441 days
Trade History:
21-Feb-06 - Initial Stock Position - BTO 300 JBHT @ 24.53 -
21-Feb-06 - Initial Call Option - STO 3 Mar06 25.00 Call @ 0.59 - Expired
20-Mar-06 - Continued Trade - STO 3 Aug06 25.00 Call @ 1.19 -
15-May-06 - Dividend Received - DIV 300 Dividend @ 0.08 -
25-Jul-06 - Buy Back & Roll Out - BTC 3 Aug06 25.00 Call @ -0.06 - Closed
25-Jul-06 - Continued Trade - STO 3 Jan07 25.00 Call @ 0.99 - Closed
18-Aug-06 - Dividend Received - DIV 300 Dividend @ 0.08 -
28-Nov-06 - Dividend Received - DIV 300 Dividend @ 0.08 -
19-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 25.00 Call @ -0.11 -
19-Dec-06 - Continued Trade - STO 3 May07 25.00 Call @ 0.59 - Exercised
21-Feb-07 - Dividend Received - DIV 300 Dividend @ 0.09 -
09-May-07 - Option Exercised - EX 3 May07 25.00 Call @ 25.00 -
Tuesday, May 1, 2007
OIC Introduces Newest Podcasts on Covered Calls
The Options Industry Council’s educational seminar, Covered Calls and Income Producing Strategies, is now available on video and audio podcasts. Starting today, you can download these podcasts to your iPod, Mp3, PDA, smartphone, or PC. As with all OIC live seminars and on-demand webcasts, these podcasts are available for FREE!
Now available:
Podcast #1: Review of Options Basics & Terminology
Podcast #2: The Covered Call Strategy: A Conceptual Overview
In these podcasts, OIC instructor Steve Meizinger of the International Securities Exchange presents a review of the basics in Podcast #1 and then, in Podcast #2, introduces the Covered Call and why an investor who is neutral to bullish on an underlying stock should consider using this popular options strategy.
Go to OIC Podcasts to download these first two podcasts.
Starting next week, a new podcast will be available for each of the next six weeks. You will receive an e-mail before the release of each podcast.
Week 2: Podcast #3: Covered Calls: Return Calculations
Week 3: Podcast #4: Common Misconceptions
Week 4: Podcast #5: Writing Short-Term Calls Against LEAPS
Week 5: Podcast #6: Selling Puts
Week 6: Podcast #7: Selling Puts: Return Calculations
Week 7: Podcast #8: Covered Combinations
Now available:
Podcast #1: Review of Options Basics & Terminology
Podcast #2: The Covered Call Strategy: A Conceptual Overview
In these podcasts, OIC instructor Steve Meizinger of the International Securities Exchange presents a review of the basics in Podcast #1 and then, in Podcast #2, introduces the Covered Call and why an investor who is neutral to bullish on an underlying stock should consider using this popular options strategy.
Go to OIC Podcasts to download these first two podcasts.
Starting next week, a new podcast will be available for each of the next six weeks. You will receive an e-mail before the release of each podcast.
Week 2: Podcast #3: Covered Calls: Return Calculations
Week 3: Podcast #4: Common Misconceptions
Week 4: Podcast #5: Writing Short-Term Calls Against LEAPS
Week 5: Podcast #6: Selling Puts
Week 6: Podcast #7: Selling Puts: Return Calculations
Week 7: Podcast #8: Covered Combinations
Friday, April 27, 2007
SNDK - Adjustment
The following adjustment was made today on SNDK:
27-Apr-07 - Interim Trade - STO 2 May07 45/00 Call @ 0.84 -
I could have made this adjustment on Monday and gotten about $1.10-$1.15 on the call option but I decided to until after SNDK announced earnings on Thursday. You never know how a stock is going to react to an earnings announcement so, IMHO, it's better to wait until after the announce before establishing or adjusting a covered call position.
Note that this position will be almost a year old by May expiration. In that time I generated about 23% in option premium. Also note that this is an Interim trade. This usually means the call option is below the cost basis, which would result in a loss if called. In this case though, the call option is above the cost basis and will result in a small gain. I really don't want to let this stock get called away and give back most of the option premium I generated, so I flagged this as an Interim trade and will roll it out and up to avoid assignment if the call option goes ITM.
Current Position Summary:
Stock Investment: $10,854.00
Income Generated: $2,543.00
Percent Income Generated: 23.43%
Net Profit If Called: $689.00
Percent Return If Called: 6.35%
Annualized Return If Called: 5.96%
Days to Expiration: 361 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 SNDK @ 59.56 -
24-Apr-06 - Initial Call Option - STO 1 Jul06 57.50 Call @ 7.09 - Closed
06-Jul-06 - Buy Back & Roll Out/Down - BTC 1 Jul06 57.50 Call @ -0.16 -
06-Jul-06 - Dollar Cost Averaging - BTO 100 SNDK @ 48.98 -
06-Jul-06 - Combined Cost Basis - $10,854.00 200 @ 54.27 -
06-Jul-06 - Continued Trade - STO 2 Oct06 55.00 Call @ 3.39 - Expired
23-Oct-06 - Continued Trade - STO 2 Jan07 55.00 Call @ 2.14 - Closed
19-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 55.00 Call @ -0.16 -
19-Dec-06 - Continued Trade - STO 2 Feb07 50.00 Call @ 1.69 - Closed
06-Feb-07 - Buy Back & Roll Out/Down - BTC 2 Feb07 50.00 Call @ -0.06 -
06-Feb-07 - Interim Trade - STO 2 Apr07 45.00 Call @ 1.39 - Expired
27-Apr-07 - Interim Trade - STO 2 May07 45/00 Call @ 0.84 -
27-Apr-07 - Interim Trade - STO 2 May07 45/00 Call @ 0.84 -
I could have made this adjustment on Monday and gotten about $1.10-$1.15 on the call option but I decided to until after SNDK announced earnings on Thursday. You never know how a stock is going to react to an earnings announcement so, IMHO, it's better to wait until after the announce before establishing or adjusting a covered call position.
Note that this position will be almost a year old by May expiration. In that time I generated about 23% in option premium. Also note that this is an Interim trade. This usually means the call option is below the cost basis, which would result in a loss if called. In this case though, the call option is above the cost basis and will result in a small gain. I really don't want to let this stock get called away and give back most of the option premium I generated, so I flagged this as an Interim trade and will roll it out and up to avoid assignment if the call option goes ITM.
Current Position Summary:
Stock Investment: $10,854.00
Income Generated: $2,543.00
Percent Income Generated: 23.43%
Net Profit If Called: $689.00
Percent Return If Called: 6.35%
Annualized Return If Called: 5.96%
Days to Expiration: 361 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 SNDK @ 59.56 -
24-Apr-06 - Initial Call Option - STO 1 Jul06 57.50 Call @ 7.09 - Closed
06-Jul-06 - Buy Back & Roll Out/Down - BTC 1 Jul06 57.50 Call @ -0.16 -
06-Jul-06 - Dollar Cost Averaging - BTO 100 SNDK @ 48.98 -
06-Jul-06 - Combined Cost Basis - $10,854.00 200 @ 54.27 -
06-Jul-06 - Continued Trade - STO 2 Oct06 55.00 Call @ 3.39 - Expired
23-Oct-06 - Continued Trade - STO 2 Jan07 55.00 Call @ 2.14 - Closed
19-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 55.00 Call @ -0.16 -
19-Dec-06 - Continued Trade - STO 2 Feb07 50.00 Call @ 1.69 - Closed
06-Feb-07 - Buy Back & Roll Out/Down - BTC 2 Feb07 50.00 Call @ -0.06 -
06-Feb-07 - Interim Trade - STO 2 Apr07 45.00 Call @ 1.39 - Expired
27-Apr-07 - Interim Trade - STO 2 May07 45/00 Call @ 0.84 -
Thursday, April 26, 2007
UPS - New VICC Position
A new VICC position was established today on UPS. The following is the trade information, including IB commissions:
26-Apr-07 - Initial Stock Position - BTO 100 UPS @ 71.93
26-Apr-07 - Initial Call Option - STO 1 May07 75.00 Call @ 0.10
Stock Investment: $7,193.00
Income Generated: $10.00
Percent Income Generated: 0.14%
Net Profit If Called: $317.00
Percent Return If Called: 4.41%
Annualized Return If Called: 73.12%
Days to Expiration: 22 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
26-Apr-07 - Initial Stock Position - BTO 100 UPS @ 71.93
26-Apr-07 - Initial Call Option - STO 1 May07 75.00 Call @ 0.10
Stock Investment: $7,193.00
Income Generated: $10.00
Percent Income Generated: 0.14%
Net Profit If Called: $317.00
Percent Return If Called: 4.41%
Annualized Return If Called: 73.12%
Days to Expiration: 22 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
Monday, April 23, 2007
WMT - New VICC Position
A new VICC position was established today on WMT. The following is the trade information, including IB commissions:
23-Apr-07 - Initial Stock Position - BTO 100 WMT @ 49.26
23-Apr-07 - Initial Call Option - STO 1 May07 52.50 Call @ 0.10
Stock Investment: $4,926.00
Income Generated: $10.00
Percent Income Generated: 0.20%
Net Profit If Called: $334.00
Percent Return If Called: 6.78%
Annualized Return If Called: 98.99%
Days to Expiration: 25 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
23-Apr-07 - Initial Stock Position - BTO 100 WMT @ 49.26
23-Apr-07 - Initial Call Option - STO 1 May07 52.50 Call @ 0.10
Stock Investment: $4,926.00
Income Generated: $10.00
Percent Income Generated: 0.20%
Net Profit If Called: $334.00
Percent Return If Called: 6.78%
Annualized Return If Called: 98.99%
Days to Expiration: 25 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
WFMI - New VICC Position
A new VICC position was established today on WFMI. The following is the trade information, including IB commissions:
23-Apr-07 - Initial Stock Position - BTO 100 WFMI @ 47.19
23-Apr-07 - Initial Call Option - STO 1 May07 50.00 Call @ 0.83
Stock Investment: $4,719.00
Income Generated: $83.00
Percent Income Generated: 1.76%
Net Profit If Called: $364.00
Percent Return If Called: 7.71%
Annualized Return If Called: 112.62%
Days to Expiration: 25 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
23-Apr-07 - Initial Stock Position - BTO 100 WFMI @ 47.19
23-Apr-07 - Initial Call Option - STO 1 May07 50.00 Call @ 0.83
Stock Investment: $4,719.00
Income Generated: $83.00
Percent Income Generated: 1.76%
Net Profit If Called: $364.00
Percent Return If Called: 7.71%
Annualized Return If Called: 112.62%
Days to Expiration: 25 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
MDT - New VICC Position
A new VICC position was established today on MDT. The following is the trade information, including IB commissions:
23-Apr-07 - Initial Stock Position - BTO 100 MDT @ 52.72
23-Apr-07 - Initial Call Option - STO 1 May07 55.00 Call @ 0.19
Stock Investment: $5,272.00
Income Generated: $19.00
Percent Income Generated: 0.36%
Net Profit If Called: $247.00
Percent Return If Called: 4.69%
Annualized Return If Called: 68.40%
Days to Expiration: 25 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
23-Apr-07 - Initial Stock Position - BTO 100 MDT @ 52.72
23-Apr-07 - Initial Call Option - STO 1 May07 55.00 Call @ 0.19
Stock Investment: $5,272.00
Income Generated: $19.00
Percent Income Generated: 0.36%
Net Profit If Called: $247.00
Percent Return If Called: 4.69%
Annualized Return If Called: 68.40%
Days to Expiration: 25 days
Note that as a VICC position the primary objective is capital appreciation. The stock will be held long term until it reaches or surpasses it's fair value. Front month OTM call options are sold to bring in a small amount of income while waiting for the stock to appreciate. The calls are sold far enough OTM to avoid assignment and the need to make any mid-month adjustments.
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