Covered Calls and Cash Secured Puts (Part 32)
Posted by Mark on February 24, 2014 at 05:08 | Last modified: February 13, 2014 16:21Today 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.
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