Covered Calls and Cash Secured Puts (Part 32)

Today I will analyze a Rich MacDuff example of the Combo BB & RO & Up position management strategy.

One thing I like to do is evaluate the CC/CSP performance against the stock.  This position was held for 508 days and made 20.54%.  The stock increased 32.30%.  Since he bought more shares he would not have participated in the full gain.  Half the shares would have made 32.30% and the other half 17.87% for an average of 25.09%.

While this is one occasion where I may not walk away with the warm fuzzy feeling of outperformance, consider some other things.  First, the position made money at an annualized rate of 14.76%.  I would be happy if my total portfolio returned that!  Second, this would be one position among many during the course of a year.  Some will return less and others will be supercharged.  Ultimately, what I really want to know is how poorly the losers fare.

This position is interesting because it is not an instance I would have expected the Combo BB & RO & Up adjustment to be applied.  The position was never losing money.  Sans adjustment, the second option would have been assigned on 4/16/2010 for a gain of 17.83% vs. +14.99% for the stock.  Why not simply take assignment and move onto the next position?  If he wanted to stay with this stock then he could have initiated a new position at the higher stock price.

How valuable was the roll adjustment?  Factoring in a $2/contract commission, I will calculate the annualized return of the roll:

(284 days – 4 days) / (365 days / 1 year) = 0.767 years.

The adjustment return is:

($1.75 – $0.34) / $17.148 = 8.16%

The annualized return is:

8.32% / 0.767 years = 10.64%

This is not great but acceptable–especially for a position he might be fighting to make/keep profitable.  This one was profitable and handsomely so. The calculation helps me to better understand why the annualized return of the whole position was [marginally] subpar when the uptrending stock really posed little challenge at all.

My preference will be to reserve dollar cost averaging ($CA) for cases where I am forced to avoid a loss. 

In the next post, I will talk more about the $CA adjustment.