We have just completed the fourth month of this model portfolio. A summary of the income we have received to date in shown in the table below (click to enlarge).

Income Tracker as at 31 July 2012 – Click on image to enlarge

In July, three of the put options that we sold earlier expired ITM so the put contracts were exercised and we bought the contracted amount of RIO, NCM and ILU shares. We immediately put our NCM shares up for sale at $24 by selling covered calls over them. We also made future commitments to buy more ILU shares at $8 by selling put option contracts. We received a total of $2,334 in premiums for the option contracts that we sold this month.

We received $1080 of dividends from our NAB shares in July. As these dividends are fully franked, we are entitled to another $462.86 of franking credits which I also added to our earnings for July.

We had to use $70,300 of our cash to buy RIO, NCM and ILU shares. The interest rate of our Cash Investment account remained at 4.00% in July. At the end of the month, we would have received interest of $234.28 for our remaining $71,260 of cash, giving us a total income of $4111.14 or a 2.05% return this month on our capital of $200,000.

Our target return for this model portfolio is 15% per year in income received (see Model Portfolio Set Up). So far, our return is 6.48% in the last 4 months. We have not factored in brokerage and fees in our income tracker and after deducting the expenses, we are still on track to achieving our target return of 15% per year.

As the market value of some of our shares is below what we bought them for, we have some unrealised capital loss in our share portfolio. As at 31 July, our unrealised loss is $11,287 or 5.64% of our total capital of $200,000. Although the market value of our TLS and NAB shares is a lot higher that what in shown in the Share Tracker below, we have sold covered calls on these shares which caps the capital gains for these shares to the strike price of the calls we sold. Having unrealised losses in a share portfolio is normal especially after a big correction like the one we had in May. Anyone who owned mining stocks would have suffered losses. By having a diversified portfolio of both growth and defensive stocks, we can keep the losses manageable.

Open Stock Positions as at 31 July 2012 – Click on image to enlarge

If you have bought good quality stocks, there is nothing too much to worry about especially if you can continue to generate income from them by selling covered calls. I purposely track capital and income separately as I like to treat my stocks like I do property. Last year your investment property would have fallen in value by 5-10% but you would also have collected 4-5% in rental income. When you invest in property, you generally do not worry too much about the value of our property on a daily basis, but rather focus on making sure you have good tenants to rent the property. Shares are assets just like property. Unlike property, we can a minute-by-minute valuation on our shares which makes any short-term falls in value more visible in shares compared to property.

I will be providing weekly and monthly updates on this model portfolio on this blog. If you are intrigued by our income strategy but have trouble following the discussions in this post, you will need to first download and read our e-book in order to understand the strategy and do some basic options education (found on our Resources page) to familiarise yourself with option terminology.

Stay tuned!

Disclaimer: This post is for educational purposes only and should not be treated as investment advice. This strategy would not be suitable for stock investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek investment advice if required.

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