The markets being closed today, provided a good opportunity to pull together performance for the Index Covered Call Portfolio. (ICC). A summary of the activities performed to achieving these results is included at the bottom of this post and the conceptual trading plan for this portfolio is shown
here .
As shown below from initiation of the approach on Feb. 24, 2013 to Dec. 31, 2013 the covered call portfolio outperformed the underlying index! At the same time the results are also less volatile. Better results with less volatility means a better risk-adjusted rate of return.
Description SPY SPY- CC IWM IWM-CC
Cap Gain Return 4.1% 4.1% 1.9% 1.9%
Dividend Return 2.3% 2.3% 2.0% 2.0%
Option Return 0% 1.3% 0% 2.4%
TOTAL RETURN 6.4% 7.7% 3.9% 6.4%
Monthly Std. Dev. 2.9% 2.0% 3.6% 1.9%
Worst Month -6.0% -4.1% -6.6% -2.1%
Please note that all results are unaudited. Additionally, past performance
is no guarantee of future results. That is certainly true for these
results as different returns and volatility in the underlying indexes
will generate different results. However, the case study does seem to
support most of the premises for using
covered calls such as
An investor using covered calls
must remember that writing the covered call is just the first step
and would be well served to have a plan/system to manage those
calls. This portfolio suggests one approach that seemed to work in
this case.
Performance for covered calls as
compared to just holding the underlying index will likely be
Covered calls do dampen
volatility. To the degree that is positive characteristic of a lower
risk portfolio this strategy can be beneficial to an overall
portfolio.
* * * * * * * Summary of Approach * * * * * * *
The stock market had moved up
handsomely in the first months of 2012. At that time, I decided to
to select and follow an approach to managing covered calls. This
article describes the actual results of writing monthly covered calls
against the S&P 500 ETF (
SPY) and the Russell 2000 ETF (
IWM) for
the last ten months of 2012. The following describes the process
used and corresponding results.
For SPY;
The option was held until
When those conditions were met,
the option was rolled to
Using these guidelines the process
was redone every month. It triggered twelve rolls of the option over
the next ten months. Not surprisingly,
That ratio of 4 of 12 times
is what would have been expected with option having a delta of 33%
The maximum monthly draw down of
the covered call portfolio was 4.1% compared to 6.0% for just holding the ETF. Lastly, while the data covers
only 3 ½ quarters the covered call approach never had a loosing
quarter while holding the S&P had two loosing quarters.
For IWM;
This situation also triggered
twelve rolls of the option over the next ten months. Those twelve
option rolls generated a net credit of $201.45 or 2.43%.
This return was in addition to the
1.91% capital appreciation of the etf and 2.04% in dividends paid.
Overall that means the returns for
In this case the covered
calls turned a very modest return into something much better.
