Cashflow Report – Paper Income during October 2011
November 6, 2011 2 Comments
Welcome to my Investing for Cashflow Report – October 2011 Edition!
Every month, I create a “cashflow report” to review the paper income I’ve created from trading covered calls. Analyzing trades is something every investor/trader should do on a regular basis, and I use these reports to do the following:
- Help me track my progress towards financial independence
- Maintain my focus on increasing paper income and meeting my goals each month
- Provide an example of creating an income from investing/trading (actually making money)
- Get your feedback on ways to improve
Enjoy!
October 2011 Overview
Coming into the month, the markets confirmed the beginning of an uptrend (October 4th), although all signs pointed to a pretty weak (i.e. short lived) rally. I was worried this would be another month of no cashflow, because the previous rally attempts had ended a few days after beginning. Instead of trading, I deposited my first month’s worth of expenses into an online checking account.
By mid-month, with the uptrend still going, I took the plunge with some October calls, reasoning that this would put my money at risk for a short period of time (~2 weeks). Technical analysis had revealed we were approaching some key resistance levels, but that there was some upside and therefore room for further covered call trades. I also added the ETF ERX to my portfolio.
Heading into November, the markets encountered selling pressure, as the key resistance levels began to show themselves.
What I learned in October
In September, I did not make any trades because I feared the market was headed south. Without the ability to sell naked calls, I felt the risk of loss from my underlying positions was higher than the potential gain from option premiums. So let’s see how that worked out for me.
Assumptions
- Purchase price of shares = Closing price for each ETF on September 19th
- Option premium for each call = Closing price for a call option just in-the-money (i.e. strike price just below ETF’s closing price on September 19th)
- Positions sizes carried over from August (least accurate assumption from a trading system perspective)
Trades
Purchase 300 shares of DRN @ 51.20
Sell 3 $51 calls @ 5.00
= $1,500 in cashflow less commissions
Purchase 300 shares of EDC @ 19.11
Sell 3 $18.58 calls @ 2.50
= $750 is cashflow less commissions
Purchase 400 Shares of TMF 61.84
Sell 4 $61 calls @ 5.5
= $2200 in cashflow less commissions
Purchase 200 shares of FAS @ 13.06
Sell 2 $13 calls @ 2.00 ($2.00 is an estimate – I could not find a price)
= $400 in cashflow less commissions
Potential Cashflow = ~$4,850
These trades would have generated a cashflow of ~$4,850 less commissions and fees. So in theory, I would have met my cashflow goal. However, all my option positions were exercised in August, so per my money management rules, I would have (hopefully) recalculated my positions sizes. The volatility in price for these ETF’s would have resulted in smaller positions in DRN, EDC, and TMF.
Adjusted Trades:
Purchase 100 shares of DRN @ 51.20
Sell 1 $51 call @ 5.00
= $500 in cashflow less commissions
Purchase 200 shares of EDC 19.11
Sell 2 $18.58 calls @ 2.50
= $500 in cashflow less commissions
Purchase 100 Shares of TMF 61.84
Sell 1 $61 call @ 5.5
= $550 in cashflow less commissions
Purchase 200 shares of FAS @ 13.06
Sell 2 $13 calls @ 2.00
= $400 in cashflow less commissions
Adjusted Potential Cashflow = ~$1,950
The adjusted position sizes would have generated a cashflow of ~$1,950 less commissions and fees. In this case, I would not have met my cashflow goal. I did remove $3,600 from my account to pay the bills, so I wonder what the overall impact would be to the purchasing power of my portfolio.
Overall Impact
On October 21st (expiration day for October Options):
- DRN closed at $47.53, so the $51 call expired and my theoretical DRN position would have been down $3.67 per share ($367)
- EDC closed at $17.18, so the $18.58 calls expired and my theoretical EDC position would have been down $1.93 per share ($386)
- TMF closed at $59.21, so the $61 call expired and my theoretical TMF position would have been down $2.63 per share ($263)
- FAS closed at $13.62, so the $13 calls would have been exercised and my theoretical FAS position would have been down $0.06 per share ($12)
$1,950 + ($1,028) = $922 profit + ($3,600) = ($2,678)
The $922 profit would have reduced the “catch-up” cashflow I now need to generate, but is less substantial than I had originally thought.
For Grins
Had I thrown caution to the wind, my cashflow of ~$4,850 would have been reduced by $2,477 for a net profit of $2,373.
Cashflow Report – Paper Income During October 2011 – Breakdown:
DRN-Direxion Daily Real Estate Bull 3X (ETF)
Premiums = $852.00
Dividends = $0.00
Commissions/Fees = ($6.35)
EDC-Direxion Daily Emerging Markets Bull 3X (ETF)
Premiums = $435.00
Dividends = $0.00
Commissions/Fees = ($22.56)
TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)
Premiums = $667.00
Dividends = $0.00
Commissions/Fees = ($11.26)
FAS-Direxion Daily Financial Bull 3X Shares(ETF)
Premiums = $370.00
Dividends = $0.00
Commissions/Fees = ($18.26)
ERX-Direxion Daily Energy Bull 3X Shares(ETF)
Premiums = $1014.00
Dividends = $0.00
Commissions/Fees = ($11.28)
Net Cashflow – October 2011 = $3268.28
Goal Not Achieved
GOAL: Execute a covered call trading strategy that creates cashflow greater than $3,600 USD per month, and deposit $3,600 USD per month into an expense account, for 3 months straight.
The Road Ahead
My hindsight calculations provided yet another indication that a balance high enough to trade naked calls is necessary to protect my investing capital and create a robust cashflow for financial independence.
Related Posts
- Cashflow Report: Paper Income during September 2011
- Cashflow Report: Paper Income during August 2011
- Cashflow Report: Paper Income during July 2011
- Cashflow Report: Paper Income during June 2011
- Cashflow Report: Paper Income during May 2011
- Cashflow Report: Paper Income during April 2011
- Cashflow Report: Paper Income during March 2011
- Cashflow Report: Paper Income during February 2011
- Cashflow Report: Paper Income during January 2011
You got a really useful blog. I have been here reading for about an hour. I am a newbie and your success is very much an inspiration for me.
Thanks!