January Technical Analysis – DRN, EDC, TMF, FAS, and ERX

For those of you visiting for the first time, I use technical analysis to help make trading decisions related to a covered call strategy. Each month, after options expire, I review price and market action since the previous option expiration date, as well as my commentary from the previous month’s analysis.

As I say in my monthly cashflow report, every investor and trader should review their trades on a regular basis, and this effort helps me improve my ability to “read the tape”.

Enjoy!

January Market Analysis


DRN, EDC, FAS, and ERX all broke through long-term resistance, but at still in neutral. the good news is that they are testing their resistance levels as we speak, and could establish new uptrends shortly. TMF appears to be headed in the opposite direction, breaking a long-term uptrend and beginning its search for support from buyers.

Keep an eye on Europe. People in the know say that it is really bad, but our markets seem to shrug it off. Is the wool being pulled over our eyes, or have we really turned a corner?

January Technical Analysis for DRN


Here were my thoughts on DRN in December:

DRN spent…November looking for a low, and the first half of December testing the newly established downtrend.  Currently, DRN seems to be content to ride the underside of the trend.  On the plus side, a sustained positive move would break the downtrend started back in July.  With each of the last two, near-term lows higher than the previous low, there is some upward momentum.  If DRN decides to move higher, the next test of resistance would be in the mid-50’s.

January’s Chart:

DRN Price Chart for January 2012

DRN broke the downtrend started in July 2011, and moved steadily higher to close out 2011.  The past few days have seen more upward price movement, bringing DRN to it’s next level of resistance (mid 50’s).  This level has been tested several times since last August without success.  The recent upward momentum, coupled with a new sideways trend should be good news for option traders, with the next level of resistance is in the mid-60’s.

January Technical Analysis for EDC


December’s commentary:

EDC did its best to test the October lows, but stopped just short and established a new, short-term uptrend.  Unfortunately, the longer-term downtrend also stayed intact.  As of Friday, we reached a decision point…either we’re going to break the longer-term downtrend, or find support for a side-ways or shallow uptrend.

January’s Chart:

EDC Price Chart for January 2012

EDC decided to head north to start off 2012, breaking the July downtrend and gaining 35% since my last review.  Too bad I wasn’t focused on capital gains!  The remaining trends are still negative, so I’ll be watching EDC to see if it can pass the next test (Sept-Nov downtrend).  If so, there is another downtrend to contend with, but not before some impressive gains or another 4 months of sideways price movement.

January Technical Analysis for TMF


December’s Commentary

TMF continued higher, finding support near the 50-day moving average.  As long as economic turmoil is front and center, TMF will continue to move higher.

January’s Chart:

TMF Price Chart for January 2012

Economic turmoil remain front and center, but TMF did not continue higher like I said it would.  Instead, it broke the long-term uptrend and is now looking for support in the low 60’s.

January Technical Analysis for FAS


December’s Commentary

FAS found price support near the $50 mark, and then turned higher to retest the July downtrend.  With the price sitting just below $60, the longer-term downtrend waits to be broken or confirmed.

January’s Chart:

FAS Price Chart for January 2012

FAS broke the July downtrend, and is poised to take out the both the low-80’s resistance level AND the uber-long downtrend dating back to the spring of 2011.  Past those levels, FAS could see 110 before running into any problems.

January Technical Analysis for ERX


December’s Commentary

ERX did retest the $40 support level, then briefly broke the longer-term downtrend that was confirmed in Oct-Nov.  Much like EDC, ERX is at a decision point, and should either confirm or break that downtrend.

January’s Chart:

ERX Price Chart for January 2012

ERX broke the downtrend, but wasn’t able to make as much progress as the other ETFs (excluding TMF).  The mid-50’s are a key test, but ERX appears to have a solid, short-term uptrend powering it higher.

The Root of All Evil?

The Safe Investing Blog

Red Eyes Black BackgroundMoney! Money is the root of all evil. Right?

Wrong.

Maybe it’s a pet peeve of mine. But this phrase just irritates me to no end. It’s one thing to misquote someone…happens to everyone. But before using any statement as a basis for any argument, check the facts. Especially if you’re representing the Occupy Wall Street movement on a national broadcast…just sayin’.

This quote comes from the Bible; specifically passage 1 Timothy 6:10.

For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows. – King James Bible (Cambridge Ed.)

So…the root of all evil is? The LOVE OF money. It is how YOU think and act towards money that is good or evil. Money is just an object – something we use to exchange goods and services.

I often wonder how…

View original post 22 more words

Year End Cashflow Report – Paper Income during 2011

Welcome to the Investing for Cashflow Report – 2011 Edition!

Last month, this blog passed the one year mark, so it was only fitting that we have a cashflow report for 2011. If you have your own 2011 year-in-review, please post a link in my comments section so that we can all learn about your successes and failures. As you’ll see below, there is always room for improvement.

As always, I will use this report to:

  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!

2011 Overview

2011 Price Performance of NYSE

2011 NYSE Price Chart with 50 day EMA

As an overall gauge of the US equity markets, I follow the NYSE (NYA). It the broadest of the indexes, and all the ETFs I use for covered calls follow components of this market (more or less). Therefore, it is a great baseline for investing performance and provides a good backdrop for my goals and any trading successes/failures encountered through the year.

The NYSE kicked off 2011 at 8,044 on Jan. 03 and hit a high of 8,671 on May 02 (+7.8%). From there, it proceeded to drop to a low of 6,574 on Oct 03 (-24.2% from the high). We ended the year at 7,477 on Dec. 30 (up 13.7% from the low, down 13.8% from the high, and -7.0% from where we started).

For comparison, over the same period of time, the the Dow Jones Industrial Average (DJIA) was up 4.6%, the SP500 (SPX) was unchanged, and the NASDAQ Composite (COMP) was down 3.2%.

2011 Goal Review

Overall, my goal at the start of last year was to make $36,000 by December. As I’ve learned, goals with long time frames (more than a month) need to be broken down into manageable, shorter-term steps so I don’t lose focus. That is how I arrived at a goal of $3,000 per month.

In March, I reached the $3,000 per month target for the first time. By May, I had hit three months in a row, which gave me the green light to raise my goal. For the year, I broke the $3,000 level 8 times.

In June, I increased my goal (per month) to $3,600 and subsequently hit that target 3 months in a row. For the year, I met this target 5 times.

After a disastrous August, I added another condition to my goal of $3,600 per month in cashflow; the withdrawal of $3,600 each month. I met the cashflow goal in 2 of the past 3 months, while depositing $3,600 into an expense account for 3 months straight to close out the year. As an end result of my trading in 2011, I generated $37,755.68 from selling call options.

Even though my definition of success looks different today than it did a year ago, I see that as a sign of personal growth and adaptation. I achieved my trading goals for 2011, and became a smarter investor and trader in the process. All in all, I have to conclude that last year was a success.

Investing for Cashflow - Performance in 2011

2011 Investing for Cashflow – Cashflow from Premiums

*ROI = Cashflow/Capital Invested

Premiums ROI
Jan $2,279 8.8%
Feb $2,879 5.8%
Mar $3,154 6.5%
Apr $3,488 5.7%
May $3,037 4.7%
Jun $3,556 6.4%
Jul $4,025 6.6%
Aug $4,452 18.1%
Sept $0 0.0%
Oct $3,168 11.7%
Nov $3,934 9.6%
Dec $3,784 9.8%

GOAL ACHIEVED: Create cashflow greater than or equal to $3,000 USD per month for 3 months straight
GOAL ACHIEVED: Create cashflow greater than or equal to $3,600 USD per month for 3 months straight.
GOAL ACHIEVED: Execute a covered call trading strategy to create $36,000 USD in paper income
GOAL ACHIEVED*: Create cashflow greater than $3,600 USD per month AND deposit $3,600 USD per month into an expense account, for 3 months straight.
*2 out of 3 isn’t bad!

Lessons Learned in 2011

Searching through a bookWe all know that there is a big difference between paper trading and live trading. Emotions can get the better of us, and that is why the mechanical trading system exists. This year I saw that the difference between paper trading and live trading is actually fairly small…when compared to the ginormous difference between live trading and trading for a living.

Some say that you must practice money management in order to become a successful trader. I think that statement doesn’t go far enough; you must practice trading money management in order to trade successfully. But it is not only applied on a per trade or portfolio level. In order to trade for a living, you must also practice personal money management within your trading account! There is the short term impact of reducing the money you have to trade the following month. But the major issue is long term. Removing money every month is very similar to having a loan; each month, you have a guaranteed loss.

In October, I started removing money from my account each month and by December the impact of capital gains exploded in my face. Basically, I had a capital loss of $10,800 in three months before I even started trading!

Lesson Learned: Covering monthly expenses will need to be included in my cashflow analysis

My system for measuring performance is flawed needs to be improved (another personal goal is using positive language).  My singular focus on paper income (premiums from covered calls) left me blind to capital gains and losses. Before I started withdrawing money from my account each month, capital gains were not as important as monthly cashflow levels. I thought that by focusing on the premiums, the income would eventually allow me to stop trading with “my money”. In reality, the income from premiums offset losses the ETF’s incurred, and my overall balance provided a false sense of security.

Then came the weekly FAS option experiment. Not only did it prove my theory on capital gains and losses, it also generated other helpful insights.

Let’s revisit my December cashflow post and the FAS trades:

Dec 05 = $3.40 premium for a Dec. 9 $67.00 Call
Dec 12 = $3.10 premium for a Dec. 17 $62.00 Call
Dec 19 = $2.10 premium for a Dec. 23 $59.00 Call
Dec 27 = $1.32 premium for a Dec. 30 $68.00 Call

The 4 FAS trades for the created a total premium of $9.92 for the month of December. On Dec. 05, a $67 call expiring on Dec. 30 sold for ~8.50. So selling weekly options on FAS did increase cashflow over selling a one month option on FAS. The 4 FAS trades for the created a total premium of $9.92 for the month of December.

But…
I started December’s cashflow trades with FAS shares at $67.53…these shares were not sold until my $59 calls were exercised on Dec. 23rd. ($59.00 – $67.53 = A loss of $8.53 per share = ouch!). I purchased more shares on Dec. 27 for $67.38. Selling those shares at the $68.00 strike price would have created a capital gain of $0.62 ($68.00-$67.38), and an overall capital loss for this set of FAS trades comes to -$7.91.

So…
The total premiums from my 4 FAS in December was $9.92. The total capital loss from my 4 FAS in December was ($7.91). The total net income from FAS in December (properly adjusted for commissions and fees) was $2.01. As mentioned earlier, on Dec. 05, a $67 FAS call expiring Dec. 30 sold for ~$8.50. Had I sold that Dec. 30th call option, I would have generated $8.50 in cashflow and lost $0.53 on the shares I purchased on Dec. 05 ($67.00 – $67.53).

Now, there was no way to know that FAS would end the year around $67. But I don’t need to add commissions and fees to see that trading COVERED CALLS each week created substantially less profit. But the exercise did find an error in tracking commissions. My formulas did not include commissions from buying and selling ETFs. I’m guessing that this is another artifact of my focus on cashflow and not capital gains.

Lesson Learned: Capital gains/losses from trading ETFs will need to be included in the cashflow analysis, including commissions and fees.

– and –

Lesson Learned: The higher premiums achieved from selling weekly COVERED CALL options are offset by capital losses due to price fluctuations in the underlying ETFs.

Why is covered calls in CAPS? Because of something in my August Cashflow report:

…having the ability to trade naked options is extremely important for capital preservation and loss avoidance (mentioned here).

And this post from August:

…in order to generate cashflow with a covered call strategy, I have to be in the market. I don’t have over 100,000 in my trading account, so I can’t trade naked options (brokerage rules). When I reach a 100,000 account balance, my strategy, money management and position sizing rules will be updated to take advantage of the new capabilities. If the market tanks, I can sell naked calls and just sit on the cash (effectively a covered call, just without owning an underlying position). In early August, I would have sold my shares, and sat on the options until they expired.

Lesson Learned: My current strategy and tactics involving covered calls cannot product sufficient income during medium to long term downtrends.

– and –

Lesson Learned: Creating income from investments requires different strategies at different times, and I will need to rely on more than covered calls to meet my goals.

Cashflow Report Revisited – Total Income During 2011 – Breakdown:

I updated my measurement system to account for capital gains and commissions properly, as well as any deposits or withdrawals from my account, and here is where I ended up for 2011. I also thought it would be valuable to revisit the ROI table.

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $17,592.51
Dividends = $398.88
Capital Gains/Losses = ($16,462.69)
Net Gain/Loss = $1,528.70

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $11,440.57
Dividends = $455.98
Capital Gains/Losses = ($11,927.28)
Net Gain/Loss = ($30.73)

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $2,130.82
Dividends = $49.90
Capital Gains/Losses = $62.65
Net Gain/Loss = $2,243.37

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $3,386.23
Dividends = $0.00
Capital Gains/Losses = ($5,506.34)
Net Gain/Loss = ($2,120.11)

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $2,300.79
Dividends = $0.00
Capital Gains/Losses = ($1,896.97)
Net Gain/Loss = $403.82

CZM-Direxion Daily China Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00
Capital Gains/Losses = ($26.24)
Net Gain/Loss = ($26.24)

Net Gain – 2011 = $1998.81

2011 Investing for Cashflow – Net Gains

*Adjusted ROI = (Cashflow+Captial Gains)/Capital Invested

Premiums Capital Gains Adj. ROI
Jan $2,279 ($830.30) 5.6%
Feb $2,879 $275.52 6.4%
Mar $3,154 ($2,791.86) 0.8%
Apr $3,488 $1,215.15 7.6%
May $3,037 ($866.70) 3.4%
Jun $3,556 ($4,390.80) -1.5%
Jul $4,025 ($2,736.18) 2.1%
Aug $4,452 ($16,796.41) -50.3%
Sept $0 $311.01 0.0%
Oct $3,168 ($2,048.09) 4.1%
Nov $3,934 ($5,442.53) -3.7%
Dec $3,774 ($1,655.68) 5.5%

2012 – The Year Ahead

I won’t know the federal/state tax impact until later this spring, but using a conservative estimate of 35% puts me at ~3% return last year. Better than a majority of the indexes, but no where close to my expectations 5-6% PER MONTH!

I think my monthly goals are still ok. The $3,600 income level is high enough for now, and removing $3,600 will force my hand in terms of capital gains awareness. That said, I need to alter my strategy and tactics to account for market trends (up, down, and sideways).

At the end of 2012, I would like to see more than 90% of my cashflow converted into useable dollars, rather than 90% going to towards offsetting capital losses. With my current strategy, selling covered calls into uptrends was the most robust tactic (i.e. created capital gains AND positive paper income). So I need better asset allocation in combination with some sort of trendfollowing indicator. I’m not sure if that means only invest in uptrending ETFs at this point, but without the ability to sell naked calls, my choices are limited.

And finally, my money management rules (personal and trading) need some work. Even though I wasn’t fully invested in August, losing 50% of the money I had in the market absolutely destroyed my profitability in 2011.

2011 Cashflow Reports

Cashflow Report – Paper Income during December 2011

Welcome to my Investing for Cashflow Report – December 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!

December 2011 Overview

Heading into December, my group of leveraged ETFs were mounting another assault on the July downtrend and TMF was searching for support. By all appearances, mid-month brought the previously mentioned “Santa Clause” rally to DRN prices. ERX was also able to break its downtrend, but without the conviction of DRN. For EDC and FAS, I still need more convincing price action to declare the downtrends officially over. TMF continues to be range-bound between 60 and 80, while making continually higher lows.

Lessons Learned in December

Back-up your data. ’nuff said.

For a second month, I attempted to use FAS calls to increase cashflow. This month, there were no splits or other events to obscure my test. Instead, the last two trading weeks (Dec. 19 and Dec. 27) were shortened due to the holidays, creating lower premiums.

Dec 05 = $3.40 premium for a Dec. 09 $67.00 Call
Dec 12 = $3.10 premium for a Dec. 17 $62.00 Call
Dec 19 = $2.10 premium for a Dec. 23 $59.00 Call
Dec 27 = $1.32 premium for a Dec. 30 $68.00 Call

The 4 FAS trades for the created a total premium of $9.92 for the month of December. On Dec. 05, a $67 call expiring on Dec. 30 sold for ~$8.50. So selling weekly options on FAS did increase cashflow over selling a one month option on FAS, even with the lower holiday premiums.

Cashflow Report – Paper Income During December 2011 – Breakdown:

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $330.00
Dividends = $398.88
Commissions/Fees = ($5.63)

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $1,080.00
Dividends = $9.21
Commissions/Fees = ($11.28)

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $400.00
Dividends = $49.90
Commissions/Fees = ($5.63)

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $1,202.00
Dividends = $0.00
Commissions/Fees = ($28.16)

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $370.00
Dividends = $0.00
Commissions/Fees = ($5.63)

Net Cashflow – December 2011 = $3,783.66

Goal Achieved

Paper Income from Covered Calls

Investing for Cashflow – Performance – 2011-12

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

Hopefully, January will bring some established uptrends in DRN, EDC, FAS, and ERX. I think that 2012 will bring some changes in the way that I execute trades, but more on that in the 2011 year in review. Happy New Year!

2011 Cashflow Reports

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