Wednesday, November 15, 2006

Covered Call Trading Plan

Version 14 - Updated 01/02/14 (see History)

INVESTMENT OBJECTIVES

The primary objective is to generate 1% of income per month on invested capital.

Results will be based on invested capital only and the monthly averages will be used to determine the annual return.

Investments will be made in a diversified portfolio of common stocks in dividend paying companies and a limited number of ETF's.

INVESTMENT STRATEGY

The primary strategy is to establish positions in undervalued companies with solid fundamentals, and a history of increasing dividends (see Stock Selection below). Positions may also be established in a limited number of ETF's.

Cash Secured Put (CSP) options will be sold to establish new positions and Covered Call (CC) options may be sold once the stock is acquired.

The income generated will be reinvested, held in cash, transferred to other accounts or used for other investment strategies, depending on the availability of qualified candidates and/or other investment opportunities.

POSITION SIZING

Initial positions will be established at 100 shares.

Additional shares of a given company may be purchased, usually through the assignment of put options.

All positions will be managed separately, regardless of the company. There may be multiple positions in the same company.

ASSET ALLOCATION

This portfolio will use two asset classes as follows:

  • Individual Stocks.

  • Exchange Traded Funds.

When few opportunities are available, more cash may be held in the account, transferred to another account, or used for other investment strategies.

STOCK SELECTION

The following resources will be used to select potential candidates:

The following is the selection criteria for Dividend Champions:

  • Dividend Champions (25+ years), Contenders (10-24 years), or Challengers (5-9 years).

  • No Master Limited Partnerships (MLP's).

  • Covered by Morningstar and Value Line Daily Options Survey.

  • Morningstar (M*) rating >= 3 stars.

  • Strike Price below M* Fair Value.

  • Return on Investment (ROI) >= 1%

The following is the selection criteria for ETF's:

  • CSP downside protection of 5% or greater.

  • Return on Investment (ROI) >= 1%

ENTRY/MAINTENANCE STRATEGY

Initial positions will be established by selling a CSP below the fair value and current stock price.

If the CSP is assigned, CC's may be sold at/above the purchase price until the stock reaches fair value or is called away.

Stocks may be also held uncovered to take advantage of capital appreciation opportunities.

EXIT STRATEGY

When a company's fundamentals no longer meet the criteria, or if the company becomes overvalued and other qualified candidates are available, all positions for that company will be closed.

OPTION EXPIRATION STRATEGY

At option expiration, Cash Secured Puts (CSP), Covered Calls (CC) and Uncovered Stocks will be handled as follows.

Cash Secured Puts (CSP)

  1. If the company is no longer a qualified candidate, close the position.

  2. If the company is still a qualified candidate then do one of the following:

    • If assigned and the stock is purchased, continue the position by selling a CC at/above the purchase price. Try to avoid selling a call below the purchase price of the stock. The stock may also be held uncovered to take advantage of capital appreciation.

    • If expired and the same strike can be sold, continue the position by selling another put at the same strike.

    • If expired and the same strike can not be sold, close the position.

Covered Calls (CC)

  1. If the company is no longer a qualified candidate, close the position.

  2. If the company is still a qualified candidate then do one of the following:

    • If assigned and the stock is sold, close the position.

    • If expired and the same strike can be sold, continue the position by selling another call at the same strike.

    • If expired and the same strike can not be sold, hold the position uncovered until the same or higher strike can be sold. Try to avoid selling a call below the purchase price of the stock.

Uncovered Stocks

  1. If the company is no longer a qualified candidate, close the position.

  2. If the company is still a qualified candidate then do one of the following:

    • Continue to hold the stock uncovered.

    • Sell a CC at/above the purchase price. Try to avoid selling a call below the purchase price of the stock.