Monthly Returns - April 2009

Thursday, April 30, 2009

Returns -- Through April 2009

Since beginning this Covered Calls Investment Portfolio (CCIP), many important covered call investing tips have been learned, and mistakes have been made. As it has been noted in other covered call investors blogs, it is very important to choose which option to sell based on the current outlook for the stock market. If you sell calls too deep-in-the-money you risk missing out on substantial gains such as those weve seen over the past 2 months. On the other hand, if you sell options to far out-of-the-money, you risk still losing a substantial portion of your original investment if the market tanks as it did previous to March 9.

Since beginning this experiment of Covered Call Investing, the portfolio (CCIP) has outperformed the S&P 500 by about 10% (this is calculated using the SPY etf, which tracks the S&P 500). The chart below presents the monthly performance of the CCIP for April, as well as the performance of the portfolio since inception.



It is important here to reflect on what could have been done differently over the past month, as well as what was done well:

-- March 2009 --

This was the month of inception for the Covered Calls Investing Portfolio (CCIP). This was as much of a trial and error activity as it was an investing activity, as this was the first real covered call investing for this investor. As such, a full strategy had not yet been established for what types of calls to establish, what types of stocks to buy-write, and what if any exit criteria there should be for a position. It was also an interesting month to begin this portfolio, as the market ended up rebounding substantially in the latter half of the month, testing the commonly stated drawback to covered calls, namely, limited upside.

Due to the use of various financial instruments however, and the purchase of stocks with extremely high volatility. The portfolio was able to perform admirably. There are essentially two possible ways to play a covered call strategy. Either choose very volatile stocks, and sell in the money calls, or buy slow-moderate growing stocks and sell out of the money calls. Either option can allow for good covered call performance in a bull market. The portfolio was also buoyed by its relatively large stake in financials. This month also provided extremely high options premiums even out as far as August.

-- April 2009 --

This month has provided plenty of new learning opportunities for this Covered Call investor. Although performance has managed to trounce that of the S&P 500 over the past month, recent performance has been relatively disappointing in the sense that it has relatively tracked the S&P 500 since April 17, 2009. This is most likely due to this investors decision to stick to the plan of selling in-the-money calls, due to the extreme run up of stock prices in the past 2 months. Unfortunately, the tendency for covered calls to cap portfolio growth reared its ugly head in this situation. However, it is important not to fall back into the normal human psyche of feeling that your missing out, and changing your strategy mid-stride due to a short-term outlook. Another key reason covered calls are a good part of any portfolio is because they force you to take profits. Many times we hold onto stocks too long, because we think they will just keep going up, and then they start to drop, and we say "no, itll go back up, ill wait it out," but when it doesnt then youve both lost all your gains, and maybe even added some losses.

Portfolio Results

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through April 30, 2009) = 36.89%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through April 30, 2009) = 25.03%

The CCIP has outperformed the S&P 500 benchmark by a total of 11.86%

May 2009 Next Steps

The current strategy for establishing calls in May for June expiration is still yet to be seen. The next couple weeks will be very interesting to watch especially with the recent news of Chrysler bankruptcy as well as the bank stress tests coming out next week, it isnt yet known how the market may react. We could be in for a bit of a pullback maybe to the 750 area in the S&P 500 to do a retest of the november lows. Although I consider this to be quite unlikely, anything is possible these days.

The strategy for establishing covered calls positions will be as follows, based on the closing price of the S&P 500 on May expiration, May 15, 2009:

If S&P 500 is between 750 and 800 establish calls 2.5-5% out of the money

If S&P 500 is between 800 and 850 establish calls slightly out of the money (0-2.5%)

If S&P 500 is between 850 and 900, we are most likely in a phase of sideways movement, and should establish at the money calls if we want our stocks to be called away, or slightly out of the money if we are simply looking for income.

If S&P 500 is above 900, we have likely not yet had a pullback, and should consider selling slightly in the money calls