Recession Proof Covered Call Investment Strategy

So you’re tired of the roller coaster ride of the stock market, in some years it’s up like gangbusters, and in other years it’s way down under like Australia. We researched all of the current stock symbols listed on the Nasdaq, NYSE, and American stock exchanges for those with “recession proof” characteristics.

We analyzed all of the stock symbols to determine the ones with a perfect past history of weathering a recession or even a softness in the economy. We also screened for companies that perform well in an expansive economy. Basically, we looked for the stock symbols of companies performing well regardless of the macroeconomics. The resulting list of “recession proof” stocks is show below (optionable stock symbols are shown as links):

ACET ERTS JW.A NABI SYK WFC
ACO FELE KDE NWLIA SYMC WFSL
ARKR FHN LSBX NWN TPP WGR
BANF FRX LUK ONB TRP  
BF.A GSBC MAFB ORI TSRI  
BF.B HMA MCRS PFDC UBSI  
CGNX HRZB MGA POT UDR  
CHD IFCJ MI PVSA UMBF  
CUZ IGT MKC SBCF UNH  
EMCI IVC MTSC SPLS WERN  

We took the analysis one step further and back tested a covered call investment strategy for these stocks for June of 2006 and July of 2006.

We performed a screen using the “recession proof” list of stocks for covered call investing on May 22, 2006 using PowerOptions new SmartHistoryXL Back Testing tool, and determined two potentially viable positions for the June analysis:

“Top 2 of 2 results for Covered Call search on May 22, 2006 ordered by Downside Protection “
Company Name Stock
Symbol
Price & Chg Option
Symbol
Expire/Strike
& Days To Exp
Opt
Symbol
%Dnsd.
Prot
% If Unch. % If Asgnd
UnitedHealth Group Inc. UNH 43.52 (-0.90) UHBFI 06 JUN 45.0 (26) 1.2 2.8 2.8 6.3
Forest Labs. FRX 37.69 (-0.40) FHAFH 06 JUN 40.0 (26) 1.0 2.7 2.7 9.0

The results of the back test are shown below:

“Results for Covered Call search on May 22, 2006 using “”User Defined”" search settings”
Name Stock End Date Stock Price % In Money Net Value % Return
UnitedHealth Group Inc. UNH 6/16/2006 44.3 -1.6 44.3 4.7
Forest Labs. FRX 6/16/2006 37.7 -6.0 37.7 2.9

# Successful positions: 2 out of 2 (100%)

Avg. % Return: 3.8%

QQQQ % Return: -1.6% (5/22/2006 to 6/16/2006)

SPX % Return: -0.8% (5/22/2006 to 6/16/2006)

The July back test search analysis using the “recession proof” list of stocks is shown below:

“Top 6 of 6 results for Covered Call search on June 19, 2006 ordered by Downside Protection”
Company Name Stock
Symbol
Price & Chg Option
Symbol
Expire/Strike
& Days To Exp
Opt
Symbol
%Dnsd. Prot % If Unch. % If Asgnd.
Forest Labs. FRX 37.53 (-0.21) FHAGH 06 JUL 40.0 (33) 1.6 4.3 4.5 11.3
Stryker Corp. SYK 44.82 (-0.24) SYKGI 06 JUL 45.0 (33) 1.3 2.9 3.0 3.4
UnitedHealth Group Inc. UNH 43.50 (-0.79) UHBGI 06 JUL 45.0 (33) 1.1 2.4 2.5 6.0
Western Gas Resources Inc. WGR 40.66 (-1.50) WGRGI 06 JUL 45.0 (33) 0.9 2.2 2.3 13.2
Staples Inc. SPLS 24.44 (-0.30) PLQGE 06 JUL 25.0 (33) 0.5 2.0 2.1 4.4
Marshall & Ilsey Corp. MI 44.71 (-0.48) MIGI 06 JUL 45.0 (33) 0.9 2.0 2.1 2.7

The results of the back test are shown below:

Name Stock End Date Stock Price % In Money Net Value % Return
Western Gas Resources Inc. WGR 7/21/2006 60.3 15.7 25.4 13.2
Forest Labs. FRX 7/21/2006 42.8 2.9 6.5 11.3
UnitedHealth Group Inc. UNH 7/21/2006 50.0 5.0 10.0 6.0
Marshall & Ilsey Corp. MI 7/21/2006 46.7 1.8 3.7 2.7
Stryker Corp. SYK 7/21/2006 44.1 0.0 -2.0 1.4
Staples Inc. SPLS 7/21/2006 21.9 0.0 -13.9 -8.4

# Successful positions: 5 out of 6 (83%)

Avg. % Return: 4.4%

QQQQ % Return: -6.5% (6/19/2006 to 7/21/2006)

SPX % Return: 0.0% (6/19/2006 to 7/21/2006)

Analysis
For both months, June and July, the “recession proof” investment strategy performed very well, with average returns of 3.8% (26 days) and 4.4% (33 days) and success rates of 100% and 83%, respectively. The only loss from covered call investing observed was a July position, Staples, resulting in a loss on the position of -8.4%, however, holding Staples without the covered call options position would have resulted in a -13.9% loss. Besides Staples, the only other stock declining in price was SYK, and the premium generated from writing the covered call options positions on SYK covered the depreciation in the price of SYK to realize a gain of 1.4%. Additionally, four of the July positions (WGR, FRX, UNH & MI) finished in-the-money and the subsequent call positions were assigned or “called away”. Of note, for one July position (WGR), the return would have been greater if the covered call investment strategy had not been implemented for that position, but even though an outright position in WGR would have resulted in a large gain, the gain realized with the covered call options position on WGR was still significant (13.2%).

The results of this analysis suggest why the covered call investment strategy is considered to be a conservative strategy, (see “Aggressive Strategy for the Conservative Investor” for more information). If the market trends higher, the covered call options positions tend to be assigned or called away, realizing a maximum profit for a covered call. Additionally, the premiums generated from the option on the covered call options position help alleviate losses in a market that trends lower, and aid in generating a profit when the market is stagnant.

PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. 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.

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