Cashflow Report – Portfolio Income During May 2012

Welcome to the Investing for Cashflow Report – May 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 May 2012

May was similar to April; the general markets spent a majority of the month in a correction.  EDC and ERX continued to fall in price.  DRN and FAS were unable to overcome the general selling pressure and rolled over.  TMF had a much better month, and is back in play after some stellar price action.

Lessons Learned in May

May was less about lessons learned and more about confirming previous “rules”…further proof that sell rules saved me from substantial losses.

Toward the end of February, I was writing about EDC trading in the 120’s and ERX reaching into the mid-60’s.  The end of March brought sell signals at $108.45 and $46.77  for EDC and ERX, respectively.   Those two ETF’s closed the month of May at $68.19 and $34.85, which means that they lost an additional 37% and 25% % since the sell signals…let along the late February prices.    So following the rules for each covered call (100 shares) saved me more than $4,000 in losses for EDC and $1,200 for ERX.

Based on those facts, one would think that using a mechanical trading system makes following the rules easy.  However, you (me) still have to enter the orders, which gives us both a chance to bend the rules based on our emotions.  Why would we (I) bend the rules you ask?  Because following the rules often means watching your gains get swallowed up while waiting for the next signal.

This is what happened with DRN and FAS.  This year’s focus on creating cashflow and capital gains has worked, but also means that I had capital gains to lose if the markets turned south.  And I made the situation worse by trying to make a quick buck and selling in the money calls, rather than just selling ASAP.  Instead of a little extra profit, I received DRN and FAS price drops below the strike of my ITM options, which just added insult to injury.

Cashflow Report – Portfolio Income During May 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = ($5.02)
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $752.43
Dividends = $0.00

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

Premiums = $663.09
Dividends = $0.00

Realized Cashflow = $1,410.50
Capital Gain = ($4415.33)
Profit = ($3004.83)

Goal Not Achieved

Portfolio Income for May 2012 - Investing for Cashflow

GOAL: Execute a covered call trading strategy that creates 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

April and May have been a bust, with capital losses gobbling up premiums generated by selling calls.  Fortunately, money management and my mechanical trading system have kept my positions to a minimum and limited the damage of falling share prices.   I’m still in the black for the year (~5k).  Not enough to pay the bills, but profit is profit.

I’m not holding my breath for June, in terms of getting back into DRN, EDC, ERC, and FAS.  The specter of a Greek default and exit from the Euro (being called “Grexit”) hangs overhead…not to mention the banking issues in Spain and Italy.  There are no good options across the pond, and the US economy isn’t exactly setting the world on fire either.  I expect the flight to safety to continue, causing further increases to TMF’s share price.

Related Posts


June Option Investing – TMF Covered Calls

My basic technical analysis for May showed TMF breaking through previous resistance levels (not one but two!).  And the last time we saw price action of this nature, two things happened.  TMF produced some great profits, and the general markets tanked.

Looking at the chart for TMF, the mid-70’s are now the nearest level of support, which is great timing for June option plays.  I adjusted my trading money management rules slightly for June because the markets in a correction and the probability of entering into positions other than TMF is low.

ETFs (Bought)

  • TMF – 100 shares @ $75.80
  • TMF – 100 shares @ $74.96

Calls (Sold)

  • TMF – 1 $77 call @ $3.10
  • TMF – 1 $77 call @ $2.80

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

For those of you visiting for the first time, I use basic technical analysis to 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 any commentary from the previous month’s analysis.

Every investor and trader should review their trades on a regular basis, and this effort helps me improve my ability to “read the tape”.


May Market Analysis

Since April’s technical analysis, the market gave us a head-fake rally (right when it was time to sell calls), and then proceeded to dive back into a correction the first week in May.  Needless to say, this meant all my positions were assigned, and then new positions were bought back at price levels that didn’t last very long.  All of which means capital losses unfortunately.

DRN, EDC, ERX, and FAS are all searching for support.  Right now, technical analysis points to the late September  and early October 2011 lows as a likely candidate.  TMF should benefit, and remains the only real covered call candidate for May and June.

May Technical Analysis for DRN

Here were my thoughts on DRN in April:

So far, so good. DRN found support from the December trendline, and seems to have broken the 57-65 range it was stuck in since February.  At the beginning of April, DRN tried and failed (on high trading volume no less!).  Hopefully, it meets with more success this month.

May’s Chart:

Candlestick Chart for DRN - May 2012

Until last week, DRN was resisting the general markets’ downward pull.  As you can see from the chart above, the negative pressure finally gained the upper hand last week.  The surprise was just how quickly DRN succumbed.  On Wednesday, DRN opened at $71.oo per share.  Friday’s close of $59.72 created a loss of ~16% over 3 days of trading.  This loss highlights the volatility associated with leveraged ETF’s.

May Technical Analysis for EDC

April’s commentary:

I was right on one count; EDC was the stock to watch last month.  Unfortunately, I got to watch it fall.  My opinion that EDC had breached the May-August downtrend was not only premature, it was wrong.  Since reaching that level (around 120) EDC has steadily retreated.  The silver lining here is that there is no real support level above the low 60’s.  So the next support level will either be at 60 (making EDC range bound between 60 and 120!), or establish a new uptrend that can run back up to 120 before seeing any selling pressure (which is about 20% from this weekends price).

May’s Chart:

Candlestick Chart for EDC - May 2012The potential uptrend I mentioned failed to gain traction.  After breaching the potential uptrend, EDC plummeted in price.  The next level of potential support is right around $65-$66, set back on Sept. 30th and Nov. 25th of 2011.  If EDC can’t find footing there, the next level of support is $37.50, which was last seen during the week of Feb 27, 2009.  EDC started the month of May at $99.76, which means the ETF has lost ~33% over the past 14 trading days.  Covered calls just aren’t going to cover that kind of price drop.

May Technical Analysis for ERX

April’s Commentary

The $60 price target was a much harder stop than I thought, and my call for a quiet month of sideways price action was wrong.  Instead, ERX tested and broke its new uptrend and is now searching for support.

May’s Chart:

Candlestick Chart for ERX - May 2012

ERX is still searching for support.  $25-$30 appears to be the next stop, meaning another 20% drop is likely.

May Technical Analysis for FAS

April’s Commentary

Easy come, easy go.  FAS filled in the March gap up pretty quickly.  The good news is that the November-March uptrend held fast.  The sideways price action was short-lived, but now FAS is sitting just above the November-March trendline.  Hopefully that means I’ll be reporting we found support and not another broken trendline next month.

May’s Chart:

Candlestick Chart for FAS - May 2012Just goes to show you that you CANNOT trade/invest based on hope.  I had hoped we would see a confirmation of the Nov-Mar uptrend. Instead, FAS broke it (right around $100 per share) and then fell…hard.  Since breaking the uptrend, FAS’s price has dropped ~25%.  The only good news is that the ability to trade weekly options allowed me to cover some of the losses I incurred waiting for my system’s sell signal to pop up.

May Technical Analysis for TMF

April’s Commentary

TMF found support in the low 50’s and rebounded into the mid 60’s.  It appears that TMF is now range bound between the low 50’s (an upper limit stretching back to August 2010), and the mid 70’s.  As we move forward into May, TMF should be able to find support along the April-August trendline (low to mid 50’s).

May’s Chart:

Candlestick Chart for TMF - May 2012

TMF did find support in the mid-50’s, and the proceeded to break not one, but TWO potential resistance levels.  When TMF moves to the upside, it really moves!  The last time we saw this time of action was back in August and September of last year.  On the up side, we could match that price action and see some solid gains in TMF.  On the down side, that price action will also mean weakness in the general markets.

Stop Loss Alert for DRN

DRN appeared to be weathering the storm, but even the strong can only handle so much.

Yesterday’s price action dropped DRN triggered a trading stop, which means it is time to buy back the outstanding calls and liquidate the underlying position.  It is a difficult thing to do, as today is option expiration, and I had planned to let my DRN calls expire and then sell them outright on Monday.

Maybe the markets will open strong, and I’ll be able to sell some in-the-money calls and generate a little cashflow on my way out.


Stop Loss Alert for FAS

When the markets enter a correction, I carefully watch all my existing positions for signs of weakness.  In the past that meant selling in the money calls.  These days, I am more cautious and just opt to sell out of my position and wait for things to recover.

Today’s price action dropped FAS below my program’s trading stop, which will cause me to buy back the outstanding calls tomorrow and liquidate the underlying position.  Without the ability to sell naked calls, this is the safest option for me right now.

On the bright side, option expiration is this week.  So my $97 calls are trading for $0.05 and I would have bought them back anyway.  I’ll watch the market open tomorrow.  An up day might allow me to save a percent or two.

May Option Investing – TMF Covered Calls

Yesterday, TMF came back into play for my covered call strategy.  Although being stuck in a fairly wide range, I received a buy signal yesterday from my trading program, which means it is time to go back to work using covered calls.  The buy signal corresponds to a new uptrend, so out-of-the-money calls were the tool of choice.  Good thing too…market weakness towards the end of the day pushed TMF just shy of my strike price.  If we can make it to the end of the week, that is a ~3% ROI for 4 days of trading.  A great “quick win” to offset some of my FAS losses this month.

ETFs (Bought)

  • TMF – $71.18

Calls (Sold)

  • TMF- $72.50 call @ $0.90

May Option Investing – FAS Covered Calls Part 2

FAS appears to be another victim of the latest market correction.  It hasn’t triggered a sell signal, but I think that buying back my $101 option is a pretty safe bet (currently trading at 0.05/share).  I contemplated whether or not to make a quick $50 or so this afternoon by selling an out of the money call.  Ultimately, I decided to try to leverage this weekend’s time value by buying back my $101 option (expired this afternoon) and selling a $97 call that expires next Friday (5/19).

Hopefully, FAS doesn’t fall too much more…it is taking a lot of my 2012 profit down with it!

ETFs (Bought)

  • FAS – $103.46 (Purchased on 4/30)

Calls (Sold)

  • FAS – $101.00 call @ $1.18 (Sold)
  • FAS – $101.00 call @$0.05 (Bought)
  • FAS – $97.00 call @ $1.55 (Sold)
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