Analyzing Jim Cramer – Booyah! or Boo!

So is Jim Cramer the man from Mad Money mad? Should we give him a Booyah or just simply a big Boo? We analyzed Jim Cramer’s bullish recommendations since July 20, 2005 and the results are a big Boo! The average return for Jim Cramer’s bullish stock market tips during this time period is a dismally negative -3.1%*, and Cramer’s performance is even worse when compared to the performance of the S&P500 (the S&P500 exhibited a negative return of -0.3% over the same time period). A sample of the results is shown below:

What if instead of simply following Jim Cramer’s recommendations, we executed a covered call investment strategy for his recommendations? For this analysis, we will assume an in-the-money covered call investment strategy and we will assume making an average return on the initial covered call options position of 2%. We will assume Jim Cramer’s stock tips having a positive return over the time period will also make an average return of 2% per month, as a new covered call options position will be entered each month. For Jim Cramer stock tips becoming negative, we assume making the initial 2% return plus a 1% return for subsequent months minus the loss of the position due to price depreciation.

For example, suppose Jim Cramer recommended ABC in July of 2005, and over the next 12 months the price of ABC either increased or remained relatively flat, we expect to make on average 12*2% over the time period or 24% for ABC. Suppose Jim Cramer recommended XYZ in July of 2005 and over the next 12 months the price of XYZ decreased -20%, in this case we would expect to make on average the initial 2% plus 11*1% minus -20%, or -7%. A sample of the results of the Jim Cramer covered call investment strategy analysis using these assumptions is shown below:

Using the previously outlined assumptions, the covered call investment strategy performed on Jim Cramer’s recommendations produced a positive +3.8% return verses a negative -3.1% return using Jim Cramer’s plain-Jane stock tips.

For those seeking to execute a covered call investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing covered call options positions.

*Only optionable stocks were considered, the calculated return was -2.8% considering all (optionable and non-optionable) of Jim Cramer’s stock tips.

[tags]stock market tips, covered call investment strategy, covered call options[/tags]