Cashflow Report – Portfolio Income During April 2012

Welcome to the Investing for Cashflow Report – April 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

Enjoy!

Overview of April 2012

For most of the month, the markets were in a correction, so I avoided new positions in ERX and EDC.  TMF was beginning to rebound.  And oddly enough, DRN continued higher.  Towards the end of the month, the markets confirmed a new uptrend.  It was the not the strongest start, but enough to send FAS and DRN above my strike prices.

I bought back into DRN and FAS, as they had held up well in April, regardless of the correction.  I decided to keep my powder dry with regard to ERX, EDC, and TMF, because I wasn’t convinced the rally had legs.

**UPDATE: May 4th brought about the end of the April 25th rally attempt.  This could be good news for TMF, but I’m glad I stayed away from ERX, and EDC.  Hopefully, DRN and FAS continue to hold up well, but I’ll let me trading program do the talking.

Lessons Learned in April

One the strategy front, I’ve decided to take advantage of the weekly options on FAS to refine my trading techniques.  With 4-5 expirations per month, I can get feedback on performance much more quickly, and the time my money is at risk is considerably lower.

Historically speaking, I sell in/out of the money calls based on market conditions. In the money calls were the order of the day when markets were in a correction.  This gave me some downside protection if the ETF fell, in the form of higher premiums.  If the ETF rose, I still received a decent cashflow, even though I was selling at a slight capital loss.  In April, I decided to sell only out of the money calls, even though the market was in a correction.  I want to see if this rule modification could improve my ability to capture capital gains.  Unfortunately, most of my gains in April were wiped out when FAS rebounded in price towards the end of the month.

Cashflow Report – Portfolio Income During April 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = $394.36
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 = $1,200.17
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

Realized Cashflow = $1,594.53
Capital Gain = ($1,464.29)
Profit = $130.24

Goal Not Achieved

Bar Graph of Portfolio Income from Covered Calls - April 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

TMF could make some headway now that the markets are back in a correction, that is where I’ll be focusing my attention (in terms of new positions).  As for DRN and FAS, I’ll be watching my stop-loss triggers closely.  More than likely, I’ll be saddled with some capital losses next month (May) because I bought FAS and DRN shares when the market was rallying.

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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

Enjoy!

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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Cashflow Report – Portfolio Income during February 2012

Welcome to the Investing for Cashflow Report – February 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

Enjoy!

Overview of February 2012

February was much like January; the general markets continued higher despite a general expectation of a pullback from most experts. DRN, EDC, ERX, and FAS continued to breakthrough long-term resistance levels, and I continued to ride the uptrend.

Lessons Learned in February

The increased focus on capturing capital gains decreased the return gained from option premiums (as expected). The premiums are lower when selling out-of-the-money calls compared with near-the-money calls. The goal was to avoid the capital losses that wrecked my returns in 2011, so in that light, the increased focus as worked. However, there is a cost, in terms of my return on investment.

My measurement system needs another round of improvements. Actual gains rely on option assignment, which may or may not occur each month. All of my positions were assigned at some point in February, so I can calculate actual capital gains and compare them with my January estimate. Logically, the next step would be to revise my profit number from January.

For example, In January, I estimated my capital gains at $2,426.41, based on my account balance at the end of the month. As you will see below, that actual capital gains that I captured were $2,213.26 (approximately 10% lower). This means that my realized profit for January was $3,498.79, which is below my goal of $3,600.

But my longest stretch between buying a position to open and selling on assignment has been 6 months, which makes meeting monthly goals difficult.

I’ll see what I can come up with this month. In the meantime, I’ll revise January’s method a little, and go from there.

Cashflow Report – Portfolio Income During February 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = $533.05
Dividends = $0.00

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

Premiums = $454.36
Dividends = $0.00

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

Premiums = $229.36
Dividends = $0.00

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

Premiums = $488.45
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

Realized Cashflow = $1799.58
Estimated Capital Gain = $335.05
Estimated Profit = $2,134.63

Realized Capital Gains

DRN = $563.98
EDC = $1,096.25
ERX = $285.10
FAS = $267.93
TMF = $0.00

Total = $2,213.26
Actual vs. Estimated = 91.2%

Goal Not Achieved

Bar Graph of Profits from Covered Call Trading

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 realized ~90% of the capital gains from January, which was great. The potential still exists for some nice capital gains in March, but I won’t know until the 16th. I’ve been working on some other aspects of this strategy for the past few months, and I’m hoping to wrap it up in March, so stay tuned.

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Cashflow Report – Portfolio Income during January 2012

Welcome to my Investing for Cashflow Report – January 2012 Edition!

Every month, I create a “cashflow report” to review the portfolio income (i.e. 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 – hopefully!)
  4. Get your feedback on ways to improve

Enjoy!

January 2012 Overview

The stock marketing continued to move higher despite the “weakness” associated with the start of the rally, Greek debt, etc. With DRN, EDC, ERX, and FAS testing or breaking through longer-term resistance levels, I decided not to fight the trend, sit on my hands, and try to capture some capital gains before locking into any covered call positions. I also decided to sell out of my TMF position because it broke long term support.

Lessons Learned in January

I’m still experimenting with the best way to report cashflow AND capital gains. Options include balancing my books based on an ETFs closing price at the end of the month, the strike price of the covered call, or avoiding reporting an capital gains until they are booked.

Right now, I’m leaning towards dealing with capital gains the way that a corporation does, since I can’t really “book” gains until I sell a stock. Any time I have money in the market, I’ll have a negative capital gain based on purchase price. For a company, cash and stocks are seen as assets with a value on the balance sheet at a specific point in time. As far as cashflow goes, the positive amount shows up in “cash” and a corresponding liability added because I “owe” someone an ETF at the strike price per the covered call.

My account statements calculate a the total account value, which includes the value of investments at the end of the month, similar to a corporate balance sheet. I also have the value of my outstanding options shown as a negative value. The caveat with the options negative value is that it is overstated; the negative value will slowly dwindle away as we head towards expiration due to the time value of the option.

I’ve also tried to make these reports a little less time intensive by showing capital gains and cashflows net of commissions and fees rather than having a separate line item. This will remove some of the calculation steps I go through at the end of the month and hopefully avoid one of the issues I discovered at the end of last year.

Cashflow Report – Paper Income During January 2012 – Breakdown:

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

Realized Capital Gains = $70.00
Premiums = $194.36
Dividends = $0.00

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

Realized Capital Gains = ($734.70)
Premiums = $324.36
Dividends = $0.00

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

Realized Capital Gains = $3.11
Premiums = $423.72
Dividends = $0.00

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

Realized Capital Gains = $836.94
Premiums = $380.46
Dividends = $0.00

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

Realized Capital Gains = ($1,180.03)
Premiums = $0.00
Dividends = $0.00

Cashflow = $1,323.36
Realized Capital Gain = ($1,004.68)
Unrealized Capital Gain = $4,716.62
Estimated Profit = $3711.94

Goal Achieved!

Bar Graph of Profits from Covered Call Trading

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’m sitting on some nice paper profits right now, but until the calls are executed I can’t actually “spend” the money. The good news is that 2012 is off to a good start!

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

Cashflow Report Updates – June and October

Over the holidays, I lost some files from my hard drive. I’m still in the process of figuring out what is missing, but the most important set of documents lost was the folder containing all my charts/graphs/spreadsheets for option trading.

Needless to say, I was a little less than happy. The silver lining is that being forced to recreate trading logs made a 2011 year-end review very easy.

As I pulled things together, I noticed that there was an error in two of my previous cashflow reports. I’ve updated the posts, and am in the process of creating a graph that reflects these changes for my December cashflow report and the 2011 Year In Review.

The first error occurred in June; shareholders of EDC received a dividend (paid in June) and a short-term capital gain (paid in July). At the time, I assumed that both were paid on the same date (in June). Unfortunately, the change means that I came up short of the June cashflow goal by $44. Considering I surpassed my July cashflow goal by $400+, I decided that I can still call June a success.

The second error occurred in October; I sold two calls against ERX, but just didn’t add the premiums together properly. The cashflow was $914 instead of $1,014.

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