Monday, January 20, 2014

ICC Q4 Results: It Was the Best of Times, It Was the Worst of Times

The Index Covered Call Trading Plan  (aka: ICC) is CCI's approach for managing a position of index ETFs and related covered calls.  The most recent trade against this plan is described below.  A reader can find details about the rational and management of the trades at the ICC trading plan tab on CCI's home page.   

Once again CCI's accounting department (i.e. me) has been busy putting together spreadsheets of q4 results for the index covered call positions that were discussed in  most of this quarter's blog posts.  After running these results past our staff auditors (me again), the technical staff (yes, me again) has posted results for the ICC results, Buy & Hold results and some comparisons below.

                                                      ICC                B&H                 YTD
                                                Q4       YTD          YTD               Variance         % of B&H Returned
SPY                                         5.9%    19.5%       32.0%           - 12.5%                 61%
IWM                                         4.4%    19.4%      38.4%            -19.0%                  51%
EEM                                        5.2%     0.8%       - 3.8%            + 4.6%                  Loss to gain
TLT(20 yr Bond)                        -1.5%    -9.6%     -13.3%            + 3.7%                   Loss cut by 28%
Some Observations

  • As often stated in this blog this covered call approach is expected to under perform the market in good times, and out perform in bad times.  Overall, the intent is to create a less volatile ride that compares favorable with a somewhat traditional asset allocation of 60% stocks and 40% bonds.  
  • As per the title of this post, the US stock market had just about the best times imaginable in 2013. With the stock market having the best of times, this past year could represent almost the worst time for performance of ICC relative to the market. This is illustrated by ICC for US markets only returning 50-60% of the stock market performance.  If the underlying performance was closer to average returns, I suspect the returns for the covered call portfolio would be much more aligned, and have the potential to outperform the market. I'm not much into market forecasting.  However,  for 2014,  I will go out on a limb and suggest that the US market performance in 2014 has a very, very high probability of  its performance being less than the performance achieved in 2013.   Such a high probability that I'm willing not just to continue this approach, but increase the amount of overall assets I have allocated to these US covered call positions in 2014 as a hedge against poor stock market performance.
  • On the other side of the "bit-coin" (lol), the Emerging Market index had a bad year and the covered call strategy turned a loss into a gain. Long term US treasury bonds had the worst of times. The covered calls lessened the blow of this draw down.
  • Seemingly a more important comparison is that between a "normal" asset allocation vs. a covered call portfolio.  Comparison can be made to several different allocations, but below is an example that illustrates the idea of covered calls being a alternative way to achieve the returns of a traditional asset allocation. 
    • A "normal" allocation of 40% spy, 10% iwm, 10%eem, 40% tlt would have returned 10.9%
    • An allocation of 100% to covered call position in stocks of 60% spy, 20% iwm, 20% eem would have returned 15.7%
  • Lastly, an etf offering a covered call strategy for the S&P 500(PBP) returned 12.6% in 2013.  CCI's S&P500 covered call portfolio was up 19.5%.  Same underlying index, both focused on monthly covered calls, but managed differently. That is over 50% better performance, and CCI outperformed in all four quarters of the year.  My conclusion from this data could be I'm a genius (lol).  However, more realistically I think covered calls are naturally sensitive to time and price. If a person is planning to write covered calls, the person can not passively let the calls go until expiration as done in an index/passive etf.  TO make this strategy effective a person should commit the time to actively adjust covered call positions when the time and price dictate a change in position.
  • Lastly a few caveats
    • As they say. Past Performance is no guarantee of future results. This is especially true with option positions which are not only impacted by the absolute gain/loss of the underlying but the path (i.e. volatility) to reaching that end result.
    • This data was prepared via some manual data entry and spreadsheets. While, I think I got it right there is always the chance for error, and these results are un-audited. 

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