Some long investors may still be licking their wounds from the pounding they received in May of 2006; the Nasdaq 100 was down over -7% and the S&P 500 was down over -3%. But May of 2006 didn’t have to be a bummer month.
Using PowerOptions new SmartHistoryXL Back Testing tool, we found at least one covered call search methodology generating positive returns for May of 2006. The results of this search are shown below:
| Results for Covered Call search on April 27, 2006, with option expiration on May 19, 2006 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Co. Name | Stock Sym. |
Stock Price 27-Apr-06 |
Strike Month |
Opt Bid | % Dnsd Prot. |
% If Assgnd. |
Stock Price 19-May-06 |
% Return | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| USEC Inc. | USU | 12.53 | 06 MAY 12.5 | 0.55 | 4.4 | 4.3 | 12.49 | 4.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PetroChina Co. Ltd. | PTR | 109.64 | 06 MAY 110 | 3.10 | 2.8 | 3.2 | 112.50 | 3.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pohang Iron & Steel Co. Ltd | PKX | 69.20 | 06 MAY 70 | 2.05 | 3.0 | 4.2 | 69.26 | 3.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sinopec Corp. | SNP | 63.50 | 06 MAY 65 | 1.40 | 2.2 | 4.7 | 62.15 | 0.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
# Successful positions: 4 out of 4 (100%)
Avg. % Return: 2.7%
QQQQ % Return: -7.4% (4/27/2006 to 5/19/2006)
SPX % Return: -3.4% (4/27/2006 to 5/19/2006)
Analysis:
Even though the general market was down significantly in May of 2006, this particular covered call search methodology returned +2.7% with a 100% success rate (all positions profitable) although one position, Sinopec Corp., was just barely profitable (0.1%).
The pundits reading this might say, “it worked well in May, but what about in other months� The results using this particular covered call search screen for June, July and August was +0.9%, +3.7% and +4.5%, respectively. The search methodology returned positive results in June, July and August, although June was just barely positive, but +0.9% on a monthly basis represents +10.8% on a cumulative basis, not too bad.
The search criteria used for this methodology is:
| Search Parameter | Greater Than | Less Than | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Price/Earnings | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % of 52 Week Range | 30 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % Dividend Yield | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Price/Sales | 0 | 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| % If Unchanged | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 100 day simple moving average greater than 200 day simple moving average | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings date – “not between now and expiration†| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sort Results Table by – “% If Unchanged†| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Option Expiration Time Frame – “May†| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Remove Sector/Industry – “Biotechnology†| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.
If you already own stock, the covered calls investment strategy enables you to earn extra cash income from those holdings. In many cases the covered call income can exceed the dividend income you may be collecting. There is a tool on the PowerOptions site that will help you measure how much “money you are leaving on the table” by not using covered calls. You will be surprised how much money you can earn with this simple strategy.
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.
[tags]covered calls, option income, stock options[/tags]