The market continued to surge higher off March lows adding 12.1% to its tally to complete the year. It was really a tale of two markets, pre- and post-election. Through October, the market fell 2.6% as fears around election uncertainty and spikes in Covid-19 infections gave way to a rather positive outlook given split government (so the thinking was at the time), benign Federal Reserve policy, solid earnings growth, impending stimulus and a probable infrastructure package. As a result, the market returned 15.2% from October 31st to year end. Volatility, as measured by the VIX® Index, generally tracks in the opposite direction of market movements, and therefore, moved from the mid-20s to trade above 40 as the election approached before settling down to the low 20s throughout December. Given this backdrop, we continued to add to our cyclically exposed positions while maintaining secular growth exposures. For example, in early October we bought a new position in Eaton (ETN) and reestablished weightings in Qualcomm (QCOM) and CSX (CSX) in November and Starbucks (SBUX) and Honeywell International (HON) in December after being called away previously. Eaton is excellently positioned to benefit from possible infrastructure spending and also added a new unit, eMobility, that focuses on electric vehicle power modulation throughout the car and including drive train. The company yields 2.7% (at time of purchase) with solid cash flow generation and balance sheet stability. We exited one name in the quarter, Kimberly-Clark (KMB), due to the continuing head winds from rising input costs and the lack of ability to forecast timing around the return of commercial office revenues given sustained secular shift to work-from-home norms going forward. With volatility (VIX) sustaining in the 20 range, we engaged in positive cash flow premium rolls for the majority of existing contracts, buying back the near-term strikes and rolling out on the calendar and up in strike for a significant part of the portfolio call option positions. Generally speaking, premiums on most positions at 25 to 30 delta are generating 1.25% to 1.6% simple return. For every position, the decision is made to maximize return either by grabbing income through the option writes or by allowing for more upside participation with less option premium. Given the market’s persistent strength, in many cases, we have chosen to write closer to 20 to 25 delta (less income but higher strike price) in order to maximize total return of the position and the portfolio. At quarter end, the portfolio is roughly 54% written, with the intent to raise the coverage to 60% as the market continues to move higher.
Learn more about the Connors Covered Call Strategy including access to materials and commentary...