Monday, April 16, 2007

A New Strategy

I decided to experiment with a new strategy for trading covered calls on what I call "pure" value stocks. These are stocks in solid companies selling at a discount to their fair value.

For this strategy I developed a new trading plan, which I call the Value Investing Covered Call (VICC) Trading Plan (see next post).

The main objective of this plan will be capital appreciation with a secondary objective of current income. I'll allocate about 10% of my current covered call portfolio to VICC positions.

In my regular covered call trading plan, I look for covered calls that provide 10-12% downside protection and a 20-24% annualized return if called. That plan has a primary objective of income.

VICC positions will have different requirements. Since I'll be buying stocks, with a margin of safety below their fair value, to hold for the long-term, I'm not looking for any downside protection. I'm also not looking for too much income either, since the objective is capital appreciation.

This is basically a buy & hold strategy except I'll be selling OTM call options to bring in a small premium, like a monthly dividend, while waiting for the stocks to appreciate. Speaking of dividends, all of the stocks selected will be dividend paying stocks where I'll try to double the dividend yield by selling call options. So, again, I shouldn't need much in the way of monthly option premium to achieve that (i.e. any premium above .10/month).

After option expiration this Friday, I'll see how much cash I have available and select 1 or more VICC positions, in addition to any new covered calls positions. As always, all trades will be posted here.