Cashflow Report – Paper Income during October 2011

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:

1. Help me track my progress towards financial independence
2. Maintain my focus on increasing paper income and meeting my goals each month
3. Provide an example of creating an income from investing/trading (actually making money)
4. 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

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