Cashflow Report – Portfolio Income During March 2012

Welcome to the Investing for Cashflow Report – (Belated) March 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report”.  Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports 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


Overview of March 2012

Time got away from me early this month, so the report took a lot longer to pull together than anticipated.  But we’re here now so let’s get started.  From a market viewpoint, March fooled me.  I thought we had at least one more month of price action similar to January and February.  And until the last week or the month or so, I was on the money.  Guess I should have known better.

Lessons Learned in March

I hinted at some exciting developments last month, and I had hoped to fill this report with that news.  Instead, I have a valuable lesson learned; with my current risk management levels (in terms of portfolio sizing), selling naked calls is not a viable strategy.

Quite a few of my posts are littered with commentary about selling naked calls as a risk management technique when markets move against my underling positions in ETFs.  By enabling naked calls, I could reduce the risk of capital loss by buying back the underlying position.  The naked call could be left to expire…no buy-back required.

The first hurdle of naked call selling (at least with TradeKing), is depositing the minimum account balance of $100,0oo.  Ok…easier said then done.  But with interest rates around all time lows, moving my emergency fund and a savings account to my trading account would allow me to hit that level.  That doesn’t mean I have all of it in the market…but if it allows me to make more money with my strategy, those profits would more than offset the “loss” in interest.

NEXT!  In order to enable naked calls, TradeKing requires margin on your account.  Margin allows you to get a loan from your broker and increase the amount of money you can use for trading.  Enabling margin would also create other “limits” on my account, enacted by a broker to protect themselves from loss.

The problem? The cumulative affect that margin has on my money management techniques.  Because I chose leveraged instruments (trading calls on 3x ETF’s), adding margin would give me an effective leverage of 6x!  This has a direct impact on my volatility adjusted position sizes.

Otherwise, March saw EDC and ERX hit trading stops, creating an opportunity to buy back my calls and sell my shares.  Hindsight being 20/20 (a luxury when you’re late in creating a profit report), it was the right call.  I could have just held the positions until option expiration and made a little more money, but there was no way to know that ahead of time.

Cashflow Report – Portfolio Income During March 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = $553.68
Dividends = $1.05

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

Premiums = $433.73
Dividends = $0.00

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

Premiums = $357.49
Dividends = $0.00

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

Premiums = $833.81
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

Realized Cashflow = $2,178.71
Capital Gain = ($50.49)
Profit = $2,128.22


Goal Not Achieved

Profit from Covered Calls - March 2012

GOAL: Execute a covered call trading strategy that creates cashflow profit greater than $3,600 USD per month and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

I was looking good until EDC and ERX rained on my parade at the end of the month.  A day earlier, I was on track for 3,700 in March.  On the plus side, I’m still in the black for the year.  Adjusting for changing position sizes each month, my strategy has yielded almost 23% ROIC (return on invested capital) so far this year.  By invested capital, I mean the return on the money that I’ve actually had in the markets (rather than an account balance, which I would consider Return on Assets).

With the first half of the month over, we already know about the correction in the US stock markets.  I’ve been watching EDC and ERX, but I’ll leave any thoughts on where their headed for my mid-month technical analysis.  DRN seems to be holding up well, and FAS is like an ATM.

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About T. Knight
Blogging about my journey to financial independence via investing for cashflow.

11 Responses to Cashflow Report – Portfolio Income During March 2012

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  2. Pingback: Cashflow Report – Portfolio Income During April 2012 « Investing for Cashflow

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  4. Pingback: Cashflow Report – Portfolio Income During May 2012 « Investing for Cashflow

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