Cashflow Report – Portfolio Income During August 2012

Welcome to the Investing for Cashflow Report – August 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” (hat tip to Pat Flynn over at Smart Passive Income). 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 August 2012

August saw TMF move against my covered call position, wiping out the rest of my profit for the year.  And I am now into my 5th month of sub-par returns.  Considering the Buy/write index (Powershares ETF – Ticker PBP)  is only up 4% this year, I’m not doing too badly…but that doesn’t mean I’m happy with my performance either.

The general markets (DJIA, NASD, SP500) were pretty quiet last month.  Trading volume remained lower than average and prices rose in small increments.

Lessons Learned in August

My 2012 experiment of using my trading program to capture capital gains  is not working.

As I’ve mentioned before, leveraged ETFs inherently have a lot of price volatility.  That volatility is the reason I can generate large percentage returns selling calls each month.   However, the capital losses that can result from holding these ETFs for a month is usually larger than the potential cashflow.

A pattern has emerged, and it follows a sequence:

I buy a leveraged ETF and sell a call.   In order to maximize cashflow, I could sell the first in the money call.  In order to maximize capital gain, I could sell the first out of the money call (assuming my first priority is still cashflow).  The ETF falls in price.  The price drop is large enough to absorb all the income from selling a call, resulting in an overall loss on the trade.  The option expires, and I am left with an ETF that is trading at a price well below my purchase price.  I sell another call for the next month, but the 2nd premium is not large enough to offset the first loss.

Before January 2012, I held risk-adjusted positions in all 5 ETFs.  At the beginning of each option cycle, I would sell calls against all 5 positions.  During downtrends in the general markets, in the money calls were used.  During up trends, near the money calls were used.  Usually, the ETFs did not fall at the same time, so the cashflow from selling calls covered most of the capital losses (if any) each month.

The 2012 adjustment attempted to lock in more “capital gains”.  I used risk adjusted positions in the 5 ETFs, but only if the ETFs had generated a buy-signal from using a price channel.  I would also close out a position if a sell signal was generated.  After a review of my results this year, I’ve noticed that using my price channel program has limited capital losses AND gains.  Because of the volatility, leveraged ETFs can recover from large drops in price very quickly (minor uptrends) and offer potentially profitable trades that I do not capture.

By limited the number of ETF’s I own, the diversification offered by holding all 5 ETFs is lost.  When I first started out, I had money in all 5 positions.  Some were up, some were down, but in the end, I was usually coming out ahead.  Now, I am only in 1 or 2 etf’s because I do not have a buy signal.  So when I lose money on one trade, I do not have the premiums/gains from other trades to reduce the losses.

Live and learn.  I need to use different signals – to come up with a new way to determine when a leverage ETF is a “buy” and when it is a “sell”.   At this time, my simple trend lines do a better job than price channels, so I will return that that for the time being while I evaluate other techniques.

I also need to focus less on capital gains, and more on limiting losses.  Capital gains are nice, but “investing for cashflow” was intended to create an asset that could fluctuated in value and still produce cashflow every month.  If I want to make money with capital gains, I should just trade equities and not worry about options.

Another important lesson learned is the number of months that could pass between hitting my cashflow goals.  Right now, I would need at least a 7 month cushion ($25,200) just to cover expenses…and that doesn’t include the losses from trading.

Cashflow Report – Portfolio Income During August 2012 – Breakdown:

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

Premiums = $0.00
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 = $347.72
Dividends = $0.00

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

Premiums = ($36.31)
Dividends = $0.00

Cashflow = $311.14
Capital Gains/Losses = ($5,094.81)


Goal Not Achieved

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

I am kicking off September with nothing on the balance sheet. I’ve been trading weekly FAS options due to their short duration.  I don’t feel comfortable entering longer-term positions. Between the Fed’s upcoming announcement about QE and the uncertainty surrounding ECB/Germany monetary actions, I’m content to sit on my hands see what happens.

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

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