Monday, March 19, 2012

A Look At Covered Calls - Cycle 3 Round Up

This is an update of my A Look at Covered Calls - The Naked Truth project. A hypothetical portfolio of systematic covered call writing (AKA synthetic naked put writing) with a non-margin account.


We are starting to get some interesting results from the covered call project as not all of the stocks are continuing to go vertical.

I've slightly changed the format of the spreadsheet and added a chart; Last week my hard disk started splitting atoms and nuked itself, so decided to reconstruct them this way. It should give a better longer term view as we go along.

Goldman Sachs is the one stock from the three continuing to rocket northward so the story here is a repeat of the last two cycles. That is, the covered call is making money, but less than if we just held the stock, the short call losing on intrinsic value.

Last Friday at $122.19 GS was well in the money so to avoid assignment I bought back the call at the ask for $7.16 and wrote the April $125 call for $3.05

We're 18% up, but with 14% cash losses on the short calls we'd be grimacing if we had a non margin account. Yes we've made 6% per month which seems to validate the seminar cretins on the face of it, but deeper analysis reveals a different picture.

When a stock is on a strong uptrend, the covered call effectively halves (give or take) returns and gobbles up spare cash.

From FCX we get a totally different picture this cycle. The stock has retraced much of the gain seen in the first cycle. We made some nice cash from the calls. After rolling the nearly worthless Mar 44 down to the 40 and the forty expiring worthless, we made nearly six and a half percent. But the cash gains over the last two cycles have only paid for the losses on the first cycle and we've lost money on the stock. Overall the covered call strategy is level pegging with buy and hold at just over four percent. I wrote the April $40 call for $1.20.

Still no nett cash in hand profit after three cycles.

The covered call strategy has reduced volatility but still no cash in hand.

NOV has been in the sweet spot for this cycle as far as the covered call strategy is concerned, i.e. write the call, stock goes sideways, call expires worthless, pocket the premium and have a festive dinner with family and friends... seminar cretin nirvana with four percent cash in hand return this cycle. This is the situation the covered call is best for long term holders of stock.

If only you could predict that. But if you could predict that accurately, bugger the covered call, you'd cash up the stock, mortgage the house, the business, sell your first born male child and plonk on as many short strangles as they'd let you have and retire rich

Additionally, if I was trying to flog a bullshit course on covered calls, I would cherry pick this months results as an 'example' of how to get rich with covered calls.

Over the three cycles thus far the picture of course is different, still down eleven odd percent on the cash position and still behind on buy and hold, even though we are up nineteen percent overall.

We will need a few more sideways months to make this look good. I wrote the April $85 call for $1.71.

Overall a pretty good month for the project as readers can see what happens when the stock is not going straight up.

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