Closing Transaction (NPIP - 5/4/2011) - First Energy (FE)

After reviewing the remaining option premium for this naked put which is part of the NPIP, the decision has been made to close the position. Generally, I will close positions in this portfolio when the annualized return has fallen under 2%. The final profit/loss info is below:

2/22/2011 -- Sold To Open 1 FE July 2011 $34 Put @ 0.6424
5/4/2011 -- Bought To Close 1 FE July 2011 $34 Put @ 0.1077

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: N/A

Final Profit: 1.57%

Original Projected Annualized Profit: 4.82%

Final Annualized Profit: 8.08%

New Position (NPIP) (5/4/2011) - Freeport-McMoRan (FCX)

This is a new position in Freeport-McMoRan (FCX). This position is established in the Naked Put Investing Portfolio (NPIP). The profit/loss info is below:

5/2/2011 -- Sold To Open 1 FCX November $35 Put @ 0.9834


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):


Downside Coverage (from current price of $50.34): 32.4%

Potential Annualized Return At Expiration (11/18/2011): 5.18%

Closing Transaction (NPIP - 5/4/2011) - Abbott Labs (ABT)

After reviewing the remaining option premium for this naked put which is part of the NPIP, the decision has been made to close the position. Generally, I will close positions in this portfolio when the annualized return has fallen under 2%. The final profit/loss info is below:

12/27/2010 -- Sold To Open 1 ABT August 2011 $42.50 Put @ 1.5231
5/4/2011 -- Bought To Close 1 ABT August 2011 $42.50 Put @ 0.2066

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: N/A

Final Profit: 3.10%

Original Projected Annualized Profit: 5.54%

Final Annualized Profit: 8.83%

Closing Transaction (NPIP - 5/3/2011) - Intel (INTC)

After reviewing the remaining option premium for this naked put which is part of the NPIP, the decision has been made to close the position. Generally, I will close positions in this portfolio when the annualized return has fallen under 2%. The final profit/loss info is below:

12/28/2010 -- Sold To Open 1 INTC July 2011 $17.50 Put @ 0.4374
5/3/2011 -- Bought To Close 1 INTC July 2011 $17.50 Put @ 0.0498

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: N/A

Final Profit: 2.28%

Original Projected Annualized Profit: 4.72%

Final Annualized Profit: 6.60%

New Position (NPIP) - Oshkosh (OSK)

This is a new position in Oshkosh (OSK). This position is established in the Naked Put Investing Portfolio (NPIP), to replace some of the positions exited yesterday morning. The new profit/loss info is below:

5/2/2011 -- Sold To Open 1 OSK October $25 Put @ $0.7922


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):


Downside Coverage (from current price of $30.98): 21.9%

Potential Annualized Return At Expiration (10/21/2011): 6.72%

New Position (NPIP) - General Motors (GM)

This is a new position in General Motors (GM). General Motors is an US-Based auto manufacturer with global reach. General Motors emerged from bankruptcy after the financial crisis, a much stronger company as it was able to get rid of many of the problems that dragged it down. The company has very good growth prospects in developing countries, as it is one of the major competitors in China, and is reemerging as a leading US provider as well with innovative new products such as the Chevy Volt. Chrysler also recently reported earnings today, and they had a quarterly profit for the first time since their bankruptcy, and considering how dismal of a company that Chrysler is, if they can do that, GM should be doing great. This position is established in the Naked Put Investing Portfolio (NPIP), to replace some of the positions exited this morning. The new profit/loss info is below:

5/2/2011 -- Sold To Open 1 GM July $27 Put @ $0.34


The important purchase metrics are below for insight into possible profit and loss (these all include commissions):


Downside Coverage (from current price of $32.18): 17.2%

Potential Annualized Return At Expiration (7/15/2011): 5.53%

Closing Transaction (NPIP) - L-3 Communications (LLL)

After reviewing the remaining option premium for this naked put which is part of the NPIP, the decision has been made to close the position. Generally, I will close positions in this portfolio when the annualized return has fallen under 2%. The final profit/loss info is below:

10/22/2010 -- Sold To Open 1 LLL January 2012 $55 Put @ 3.2899
5/2/2011 -- Bought To Close 1 LLL January 2012 $55 Put @ 0.6578

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: N/A

Final Profit: 4.79%

Original Projected Annualized Profit: 4.80%

Final Annualized Profit: 9.10%

Closing Transaction (NPIP) - Intel (INTC)

After reviewing the remaining option premium for this naked put which is part of the NPIP, the decision has been made to close the position. Generally, I will close positions in this portfolio when the annualized return has fallen under 2%. The final profit/loss info is below:

12/28/2010 -- Sold To Open 1 INTC January 2012 $15 Put @ 0.5874
5/2/2011 -- Bought To Close 1 INTC January 2012 $15 Put @ 0.2223

The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: N/A

Final Profit: 2.43%

Original Projected Annualized Profit: 3.68%

Final Annualized Profit: 7.11%

Update To Investing Strategy

Over the past few months I have been "beta-testing" a new investing strategy which combines the original covered call investing strategy along with a new long-term naked put hedge structure. This strategy combines the conservative nature of covered call investing, with what I would best term as conservative long-term hedging. Below I describe the current strategies for both pieces of the revised portfolio strategy:

CCIP (Covered Call Investing Portfolio):

• This portion of the portfolio seeks to utilize a combination of covered calls and cash-secured puts to target an annualized return of approximately 20%
• The portfolio is allocated based on a projected annualized return basis along the following guidelines:

- Projected Annualized Returns of 3-10%: 10% of Portfolio
- Projected Annualized Returns of 10-20%: 27.5% of Portfolio
- Projected Annualized Returns of 20-40%: 35% of Portfolio
- Projected Annualized Returns above 40%: 25% of Portfolio
- Cash Allocation of 2.5%

• In order to keep to these allocations, the portfolio is rebalanced after options expiration on a monthly basis
• If a position is closed between options expiration days, then a new position is established based on the current projected returns of the remaining positions

Naked Put Investing Portfolio (NPIP):

• This portion seeks to use naked put options to act as an income generating hedge for the CCIP
• Naked puts will be sold with an intended exposure of approximately 150% of the existing CCIP
• Target returns for the naked puts will be an average of a 5% annualized return, with downside protection of at least 20%
• The options in this portfolio will generally have lifetimes of at least 3 months, and at the most be 1 year in length

Thus far, the combined portfolio CCIP/NNIP has produced results that have reduced overall volatility, and performed better than the market during downturns. The intent of this portfolio is not and has never been to consistently "beat the market." It is instead intended to provide consistent positive returns on an annual basis. It is this investor's opinion that most investors tend to get hung up in targeting extremely high returns in short period of times, and lose focus of long-term compounding growth.

As usual, I will be interested in hearing others opinions of this strategy. I will now be posting the current NNIP portfolio as well as notating in each post whether a new position is for the CCIP or the NNIP.

Updated Current Positions

I've updated the current holdings in the CCIP as of 4/25/2011.

Frontline (FRO)

This position is in Frontline (FRO), a company which owns and operates large oil tankers. This company is attractive as it pays a hefty 3.9% dividend at the current dividend, which could increase as the economy continues to increase, as it is a variable dividend. The company hit a 52-week high of almost $37 in April, and has been in a steady decline since then, but recently seems to have flattened out around $25. Although it originally was purchased around $29, the stock has been providing good call premium revenue, as well as earning the dividend. The current profit/loss info is below:

Based on the current cost basis, the potential annualized return for this position if called at expiration in January would be 27.03%.

Petrobras (PBR)

This position is in Petrobras, a Brazilian oil & gas conglomerate. This position was originally opened in October after PBR had reached a new 52-week low. Petrobras is one of the most technologically advanced deepwater oil companies in the world, and as such would be primed to participate in the development of future deepwater projects, which are going to be the majority of new oil developments. Based on the current price, however, it is likely that this position will be exited at expiration in January. The profit/loss info is below:

Based on the current cost basis, the potential annualized return for this position if called at expiration in January would be 23.56%.

Encana Corporation (ECA)

This position is in Encana Corporation, a Canadian-based natural gas company. Encana is focused on developing unconventional natural gas formations including shale, tight-gas, and coal-bed methane. The company yields almost 3%, and has generated an average operating margin of about 25% over the past 5 years, with a number of years nearing 50%. The company also has a very intriguing chart which in my opinion demonstrates the perfect type of chart for covered calls investing. The stock has remained rangebound between $26 and $35 for the past year. So essentially, while you receive call premium for holding the stock your also being paid a nice dividend. This has resulted in a potential annualized gain of 20% since the stock was originally purchased in August. The profit/loss info is below:

Based on the current cost basis, the potential annualized return for this position if called at expiration in January would be 20.21%.

Abbott Labs (ABT)

This position is in Abbott Labs, a pharmaceutical company. This position was originally opened in January, as part of the Covered Call Dividend portion of the CCIP. The purpose of this type of position is to utilize ex-dividend dates as potential option call dates in addition to the normal expiration. This idea is based upon the fact that the owner of a call, can purchase the stock at the referenced strike if the stock price is currently above the strike. If the time premium remaining on the option is less than the upcoming dividend, often times the stock will be called away, greatly increasing the annualized return. If it is not called away, then I receive the dividend (which is taxed more favorably) and still keep the stock. The important purchase metrics are below for insight into possible profit and loss (these all include commissions):

Based on the current cost basis, the potential annualized return for this position if called at expiration in February would be 5.43%.