Saturday, January 3, 2009

Summary Workbook and terminology

Originally, I had created a ledger for all positions, but I was finding that hard to get a good overview of everything. Instead, I split each position up into its own worksheet and created a summary worksheet that looks like this:

Equity aXIRR aROI OptionRV StockRV
ED 33.7% 29.1% 31.3% 0.0%
EFA 98.4% 67.1% 100.0% 5.7%
IWM 182.7% 105.5% -2.6% 0.4%
MMM -31.7% -46.9% 91.7% 7.6%
PFE 57.0% 45.0% 155.3% 4.4%
SPY 129.5% 83.9% 63.0% 3.3%
USO 398.5% 177.0% 3.8% 1.8%

For easy navigation, each ticker symbol is a link directly to the worksheet for that equity and each equity worksheet has a direct link back to the summary sheet.

The aXIRR and aROI numbers give me an overview of the total returns on each position. OptionRV tells me the relative value of the option, current price to transaction price. StockRV tells me the relative value of the stock, current price to outstanding option strike price.

So, based on the above, I'd probably take a look at rolling EFA, MMM, and PFE.

aXIRR is the annual internal rate of return, as computed by the XIRR() function in EXCEL.

aROI is the annual rate of return on an income stream basis. Basically:

aROI = (stock gain + net option premiums + dividends) / (initial cost) * (365 / # of days of position)
 
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3 comments:

  1. JEFF PARTLOW: THE COVERED CALLS ADVISORJanuary 4, 2009 at 4:03 AM

    Great start to your blog! However, given your awesome analytical ability, I'm convinced you are being much too humble with your blog title. We all make mistakes, but I'm confident you will do a lot more right than wrong!

    Best wishes,
    Jeff

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  2. jokingmeJanuary 6, 2009 at 2:09 PM

    One comment on your aROI. Shouldn't your initial CC option premium be subtracted from your 'initial cost' rather than be added as 'net option premiums'? Subsequent options should be as you show. I.E. If you buy a stock for $55.50 and immediately sell a CC for $1.50 your investment basis for your aROI is $54 not $55.50. It may not be worth the trouble , but it does impact the aROI computation.

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  3. RandyJanuary 6, 2009 at 7:23 PM

    Jokingme -- I used to do it that way, but am convinced it is not correct. For two reasons:

    1. It means the first purchase of a covered call is treated differently than all others. It would also mean you would treat a starting position differently if you did NOT sell the call at exactly the same time you purchased the stock. For example, my PFE call was sold days later. Would I calculate its aROI differently?

    2. If the stock price were to drop to zero, it would cause a loss of 100%. However, since I have the premium in my pocket, a loss of 100% is not possible. I have an advantage over someone who bought the stock and didn't sell the call.

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