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By Mark Bern

As promised this is the first summary article intended to provide periodic return results for the strategy based upon the first set of options sold. But before I get into the rules and the hypothetical results I also want to mention that I will be addressing the topic of portfolio construction and allocation in the next update article that is due out no later than the Friday of the week following Thanksgiving. The timing will depend upon when I find a good put option on one or more of the stocks for which our puts have already expired.

I will now set forth the rules that I must abide by for the next two years.

1. I will report results for two separate portfolios; one based upon the strategy and the other based upon a similar buy-and-hold investing strategy.

a. The strategy portfolio will consist only of the cash, option positions (premium gains/losses) and stock that are put to us at expiration of the options purchased.

b. The buy-and-hold portfolio will consist only of the stocks that we have sold put options on and the cost basis will be the closing price on the day the option appeared in the article (as of the date of writing/submission).

2. I will only count premium gains and losses on call options where the stock was put to us via exercise. All call premiums mentioned in the articles thus far were for illustration purposes only.

3. Only the closing prices will be used on all transactions (other than options exercising transactions for which the prices are pre-determined). Examples include the selling of options to open positions, the buying of options to close positions, the selling of stock unless through the use of stop orders.

4. Commissions will be estimated on each transaction (readers should be able to obtain lower transaction fees in the real world, but I do so to assume average prices that are easily attained rather than the lowest possible fees to be conservative) as follows:

a. Option transactions to open or close positions (other than through exercise) will bear a cost of $9 per transaction.

b. Stock purchases and/or sales through the exercise of options will bear a cost of $15 per transaction.

c. Stock purchases or sales transacted without the use of options will bear a cost of $10 per transaction.

5. I will report results for the strategy portfolio using three classifications:

a. Closed/expired options gains or losses and realized gains or losses on stock sales during the period since the last summary and since inception.

b. Change in value of open options and stocks held within the portfolio since the last summary and since inception.

c. The combined change in value of the overall portfolios including both open and closed positions since the last summary and since inception.

d. I will assume that each portfolio began with a total cash balance of $150,000. I estimate that this is the approximate amount necessary to build a diversified, equity portfolio buying round lots of stocks from the list from which I will be drawing. This means that I will have some cash left over in the original portfolios (more in the strategy portfolio than in the buy and hold portfolio) that will be a temporary drag on the return, but I should be able to make that up over time. I should also mention at this point that the list of companies that I will be drawing from may vary over time depending upon which companies’ stocks offer the best value (in my opinion) but that all companies being considered will be of similar quality. It will also become apparent as time passes that we should end up with more shares in the strategy portfolio because of the lower prices we intend to pay. We will see how this works out over time.

e. I will vary the strategy somewhat when circumstances dictate and to provide examples of the various ways this strategy can be deployed, but my primary focus will be on the original version provided in the initial article. If you have not read that article, it is probably a good idea to catch up now. Here is a link.

Below are tables which express the results according to the parameters listed above.

Buy-and-Hold Portfolio

Stock Symbol

Date of Purchase

# of Shares

Price Paid

Comm. Paid

Total Cost

Current Price

Gain / Loss Closed Positions

Gain / Loss Open Positions

Total Gain / Loss + Div.

LOW

9/20/2011

100

19.92

$10.00

$ 2,002

22.68

$ -

$ 266

$ 280

INTC

9/23/2011

100

22.16

$10.00

$ 2,226

22.73

$ -

$ 47

$ 68

INTC

10/31/2011

100

24.54

$10.00

$ 2,464

22.73

$ -

$ (191)

$ (170)

TEVA

9/22/2011

100

35.39

$10.00

$ 3,549

36.91

$ -

$ 142

$ 164

CVX

9/26/2011

100

91.49

$10.00

$ 9,159

92.29

$ -

$ 70

$ 151

UTX

11/7/2011

100

71.55

$10.00

$ 7,165

71.04

$ -

$ (61)

$ (13)

UNP

11/10/2011

100

85.22

$10.00

$ 8,532

95.16

$ -

$ 984

$ 984

CL

9/29/2011

100

89.54

$10.00

$ 8,964

86.73

$ -

$ (291)

$ (233)

WAG

9/29/2011

100

32.53

$10.00

$ 3,263

32.47

$ -

$ (16)

$ 7

VFC

9/30/2011

100

121.52

$10.00

$12,162

126.24

$ -

$ 462

$ 462

QCOM

9/30/2011

100

48.63

$10.00

$ 4,873

51.86

$ -

$ 313

$ 335

EMR

9/30/2011

100

41.31

$10.00

$ 4,141

47.11

$ -

$ 570

$ 610

SE

10/3/2011

100

24.13

$10.00

$ 2,423

28.23

$ -

$ 400

$ 400

CMCSA

10/4/2011

100

21.17

$10.00

$ 2,127

21.00

$ -

$ (27)

$ (27)

OXY

10/5/2011

100

75.72

$10.00

$ 7,582

86.69

$ -

$1,087

$1,087

MMM

10/4/2011

100

72.01

$10.00

$ 7,211

76.13

$ -

$ 402

$ 457

BBY

10/5/2011

100

23.16

$10.00

$ 2,326

25.63

$ -

$ 237

$ 237

JCI

10/6/2011

100

28.96

$10.00

$ 2,906

27.59

$ -

$ (147)

$ (147)

T

10/7/2011

100

28.44

$10.00

$ 2,854

27.24

$ -

$ (130)

$ (130)

AMAT

10/10/2011

100

11.01

$10.00

$ 1,111

10.16

$ -

$ (95)

$ (87)

MDT

10/10/2011

100

33.58

$10.00

$ 3,368

33.68

$ -

$ -

$ -

BBL

10/13/2011

100

60.72

$10.00

$ 6,082

53.93

$ -

$ (689)

$ (689)

BLK

10/20/2011

100

152.16

$10.00

$15,226

151.27

$ -

$ (99)

$ (99)

MSFT

10/20/2011

100

27.04

$10.00

$ 2,714

24.30

$ -

$ (284)

$ (264)

NVS

10/20/2011

100

57.98

$10.00

$ 5,808

51.65

$ -

$ (643)

$ (643)

Values

$129,988

$250

$130,238

$132,545

$ -

$2,307

$ 2,739

Beginning Bal

$150,000

Days Since Inception

67

Cash Remaining

$ 19,762

Total Return

1.83%

Annualized Total Return

9.95%

As you can see, the buy-and-hold portfolio has performed fairly well. It has gained $2,307 from unrealized appreciation and earned $432 from dividends. We still have $19,762 in cash available for future purchases and will deploy that as we increase holdings in lower-priced stocks that we currently own to balance out the allocation between sectors for diversification. Our total return thus far has been 1.83 percent over the first 67 days since inception which translates to an annualized return of 9.95 percent. We’ll see shortly how that compares to results from the Enhanced Strategy Portfolio below.

Enhanced Strategy Portfolio

Stock Symbol

Date of Purchase

# of Shares / Contracts

Price / Premium Paid /Rec’d

Comm Paid

Total Cost / Rec'd

Current Price

Gain / Loss on Closed Positions

Gain / Loss on Open Positions

Total Gain / Loss

LOW

9/20/2011

1

$ 54

$ 9

$ 45

$ -

$ 45

$ -

$ 45

INTC

9/23/2011

1

280

$ 9

$ 271

$ -

$ 271

$ -

$ 271

INTC

10/31/2011

2

194

$ 9

$ 185

$ 1.65

$ -

$ (145)

$(145)

TEVA

9/22/2011

1

138

$ 9

$ 129

$ -

$ 129

$ -

$ 129

CVX

9/26/2011

1

335

$ 9

$ 326

$ -

$ 326

$ -

$ 326

UTX

11/7/2011

1

168

$ 9

$ 159

$ -

$ 159

$ -

$ 159

UTX

11/7/2011

1

271

$ 9

$ 262

$ 4.60

$ -

$ (198)

$(198)

UNP

9/29/2011

1

264

$ 9

$ 255

-

$ 255

$ -

$ 255

UNP

11/10/2011

1

300

$ 9

$ 291

$ 5.05

$ -

$ (214)

$(214)

CL

9/29/2011

1

219

$ 9

$ 210

$ -

$ 210

$ -

$ 210

WAG

9/29/2011

1

119

$ 9

$ 110

$ -

$ 110

$ -

$ 110

VFC

9/30/2011

1

510

$ 9

$ 501

$ -

$ 501

$ -

$ 501

QCOM

9/30/2011

1

203

$ 9

$ 194

$ -

$ 194

$ -

$ 194

EMR

9/30/2011

1

180

$ 9

$ 171

$ -

$ 171

$ -

$ 171

SE

10/3/2011

1

85

$ 9

$ 76

$ -

$ 76

$ -

$ 76

CMCSA

10/4/2011

1

89

$ 9

$ 80

$ -

$ 80

$ -

$ 80

OXY

10/5/2011

1

410

$ 9

$ 401

$ -

$ 401

$ -

$ 401

MMM

10/4/2011

1

299

$ 9

$ 290

$ -

$ 290

$ -

$ 290

BBY

10/5/2011

1

104

$ 9

$ 95

$ -

$ 95

$ -

$ 95

JCI

10/6/2011

1

120

$ 9

$ 111

$ -

$ 111

$ -

$ 111

T

10/7/2011

1

80

$ 9

$ 71

$ -

$ 71

$ -

$ 71

AMAT

10/10/2011

1

68

$ 9

$ 59

$ 0.58

$ -

$ 1

$ 1

MDT

10/10/2011

1

145

$ 9

$ 136

$ 0.57

$ -

$ 79

$ 79

BBL

10/13/2011

1

190

$ 9

$ 181

$ 3.70

$ -

$ (189)

$(189)

BLK

10/20/2011

1

310

$ 9

$ 301

$ -

$ 301

$ -

$ 301

MSFT

10/20/2011

1

87

$ 9

$ 78

$ 1.42

$ -

$ (64)

$ (64)

NVS

10/20/2011

1

180

$ 9

$ 171

$ 4.20

$ -

$ (249)

$(249)

$ 5,159

$ 3,796

$ (979)

$2,817

Beginning Bal

$150,000

Days Since Inception

67

Cash Remaining

$144,841

Total Return

1.88%

Annualized Total Return

10.2%

So far, so good! Our total return since inception was 1.88 percent which results in a 10.2 percent annualized return. We haven’t been put a stock yet but I would expect to snag a few during this next iteration. Then we will begin selling calls and collecting dividends in addition to selling puts with the remaining cash. We currently have $144,841 remaining in cash, most of which is pledged against cash secured puts. There is not much more to say at this stage so we will just let the two portfolios wage the battle and see which comes out ahead in the end. Since most of the current and future puts to be sold will not expire until January or February of 2012, the next summary update article will be published sometime after February 17, when there will be more to report. I will try to keep this whole process somewhat fluid in the beginning and then settle into a more regular routine once everything is set up. I wanted to provide the detail in this first summary since there are more columns to add later. I will look at what makes the most sense for future editions.

Source: Enhanced Long-Term Investing, Income Strategy Summary, Nov 2011