Thursday, July 24, 2008

Today's New Positions

I established 5 new positions today (AXP, BBT, CCL, TGT, & VMC). Although the positions are new, the companies selected were ones I already owned in my covered call portfolio. Usually, when I'm looking for new positions, I filter out companies that I already own. However, sometimes there are new opportunities in these companies, which has a few advantages. 1) These are companies that I've already analyzed and determined that I'd be willing to hold for the long term. 2) If the stock price has declined, the dividend yield has increased, and the volatility, which affects the options price, has probably increased as well. 3) It saves time finding, analyzing, and researching new companies to invest in. Of course, position sizing is still important and I still limit all positions in a company to 5% or less of total capital.

All of the stock prices for the above companies have declined in price since I established the initial position. Usually when that happens I average down to lower my cost basis and sell additional calls based on the new cost basis. However, this time I decided to try a new approach.

Rather than averaging down on the existing positions, I looked at establishing new positions at the current price/strikes, which has a couple of advantages. 1) Since I usually establish ITM positions, if these stocks are called away at expiration, I make a nice profit, which is more than I would have made averaging down into a single position. 2) If the calls expire worthless, then I have additional shares, which lowers my total cost basis, and allows me to sell additional calls and collect additional dividends. So, it's almost like averaging down a single position but a bit more flexible, and hopefully more profitable.

I'm constantly looking at ways to tweak my trading plan to improve not only the process but the returns as well. Hopefully, this change will accomplish that goal.