Monthly Returns - June 2009

The month of June continued to leave investors and traders wondering where the market will be by the end of the year. It was the fourth month that the CCIP has been in existence, and it was a real test of whether the portfolio could make money in a sideways market. As I have mentioned many times before successful stock picking is very important when the market is oscillating around the same value for a long time. After oscillating between 880 and 920 in the month of May, the S&P 500 has shifted its bounds slightly higher to between 890 and 950 in June. A somewhat disturbing fact for the overall market, though possibly a good thing for covered calls investors is that after hitting a low of around 25 on June 29, the VIX (a measure of the volatility in the market) rebounded to 28 by thursday. This pop is most likely related to the worse than expected job numbers which came out for June.

In my opinion, the market over reacted the these job numbers. For one, they included all of the auto workers who have been idled since GM entered bankruptcy. Secondly, the unemployment rate itself was better than expected. Lastly, it is unrealistic to assume that this recovery will be straight up; there are going to be blips along the way. Over the next few weeks the market will be driven very much so by the earnings reports which start next week. If earnings are mixed to better than expected I think the market will be ok, if they are mostly below expectations, we may be looking at a move back towards 800 if not 700. So lets hope for everyone's sake that this does not happen.

The portfolio continues to beat the market since its inception (by about 14.5%). The chart below presents the monthly performance of the CCIP for June, as well as the performance of the portfolio since inception.

Portfolio Results

The 2009 Since Inception results are as follows:

1. Since Inception Results

CCIP Absolute Return (March 7 through June 30, 2009) = 46.09%

Benchmark S&P 500 (SPY) Absolute Return (March 7 through June 30, 2009) = 31.51%

The CCIP has outperformed the S&P 500 benchmark by a total of 14.58%

July 2009 Next Steps

The month of July is going to be very interesting for both the market and the CCIP portfolio. As earnings season begins, the market is likely to become much more volatile, which could be an advantage for option premium selling, but also cause wild fluctuations in stock prices. In terms of strategy for the CCIP, it is somewhat centered around a current strategy of selling both near month calls as well as 2-month out calls. About half of the current portfolio is in July calls, while half is in August calls. This will make expiration for July much less difficult in terms of finding new positions, but also makes it so that no additional option premiums will be had for many of the positions. This strategy was born mostly out of the fact that quite a few positions in the CCIP had fallen precipitously and so in order to sell a call above the original purchase price, it had to be done for August rather than July.

For those positions in with options expiring in July, much will depend on if the market declines until expiration, because I may face the same issue when it comes to whether to sell August calls or September calls. One thing which will give a boost to the CCIP this month is dividend payments which will tack an additional 1% onto the performance of the CCIP in July.

The strategy for establishing covered calls positions after July expiration will be as follows, and is similar to the rationale for establishing July calls earlier this month, based on the closing price of the S&P 500 on July expiration, July 17, 2009:

If S&P 500 is between 750 and 850, initial earnings reports have most likely been below expectations and the market is moving towards retesting lows. This will likely result in the sale of September calls for positions expiring in July, and possibly the buy back of calls sold for August. As far as new positions go, if there is any cash, I may sell cash-covered puts to buy in at lower prices if the market continues to decline, but still make money if the market rebounds.

If S&P 500 is between 850 and 950, we have most likely survived the first week of earnings without too much of a hitch, and some of the July covered calls should be called away. In this case I will likely establish either covered calls or cash-secured puts depending on which is positioned to yield a greater result.

If S&P 500 is above 950, we have most likely seen better than expected earnings. This would probably result in all the July calls being called away (maybe not Best Buy), and some of the August covered call positions being substantially in the money, which may result in may closing some of the positions, or rolling them up.