Systematic Covered Writing

... more than just covered calls!

We begin exploring the strategies of SysCW with a Very Significant Question ...

What is YOUR Investment Objective?

Given the market behavior since the tech bubble popped in 2000 followed by the housing and financial crisis of 2008, what do you think would be a reasonable rate of return from an investment these days? You decide . . . what is your objective?  Pick a percentage that you could reasonably expect to achieve, and one you would be happy with once you had it.

NOW, PLEASE, WRITE IT DOWN! 

If you were realistic with your answer ... you probably wrote down something between 6% and 15% annually. Yes, 2% is realistic, but would you be happy? Likewise, 23% would make you happy, but is it realistic?  If you wrote down something significantly more than 15%, Systematic Covered Writing may not be able to help you, unless you are willing to take more risk than SysCW recommends.

As a point of interest, do you know how long it would take to double your money if you were able to achieve your desired rate of return?   Here is a simple mathematical equation.  It's called the rule of 72.

THE RULE OF 72 - When you divide the number 72 by a proposed annualized rate of return (APR), you end up with the number of years it takes to double your money.

The following table will provide some examples for you.

RULE OF 72       

Interest Rate Years to Double
6.0% 12.00
6.5% 11.08
7.0% 10.29
7.5% 9.60
8.0% 9.00
8.5% 8.47
9.0% 8.00
9.5% 7.58
10.0% 7.20
10.5% 6.86
11.0% 6.55

Please keep this information in mind as you explore the very conservative investment strategy used within Systematic Covered Writing.  CAUTION - The statements above, as well as the information that follows, are not to be construed as to guarantee that the strategies suggested will produce any given rate of return.  Investing in the stock market has always involved the risk of loss of capital,  and investing in the stock market should only be used as a long-term method of potentially increasing your wealth.

Having said that, it is important to realize that Systematic Covered Writing is a more conservative method of investing than purchasing individual stocks for a portfolio!  You will understand why this is the case shortly. For now, please just believe that the conservative nature of SysCW is a given.  With that assumption, then if SysCW can be used to achieve your desired rate of return, would in not follow that one would be prudent to adopt an investment approach that is more conservative than some other?

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This information is provided for educational purposes only and should not be considered as otherwise.  No example or statement presented should be construed as a recommendation to buy or sell a security, be it a stock or call option.

SYSTEMATIC COVERED WRITING
Copyright © 2005. All rights reserved.
Revised: 04/08/11