GUIDELINES
With any investment strategy, or collection of strategies, there should be a basic set of guidelines, principals, and or assumptions which are adopted. You could call these the rules of engagement if you will. With this thought in mind, please consider the following.
- Regardless of the strategy or investment concept, the bulk of funds allocated for investing in the stock market, need to be available for potentially long-term investments. SysCW does not provide an exception to this universal investment rule. You must commit to being a long-term investor. What's a long-term? In general, at least 3-5 years should suffice for the bulk of the positions. If you need the funds you are planning on investing sooner than 5 years from today, then you really should think twice above any investment! Be it a house, a horse, or a covered call position, if you are going to need the money for 'whatever' reason in a relatively short period of time ... then do not invest it in the first place!
- Don't chase premiums. The size of the premium for any given option is not the key to success. It is more important to be able to generate premiums over and over again. The key is to 'like' the underlying stock first ... then decide if the call premium justifies the investment. Options expire and become worthless, hopefully your underlying stock position doesn't become worthless! There is generally a good reason for high premium options. Unfortunately, we may not always understand why a particular stock has higher than normal option values.
- Downside protection is more conservative. SysCW is a very conservative investment approach. It is somewhat common knowledge that a covered call position is more conservative than owning the stock itself. You will see this GUIDELINE used with the Initial Position strategy.
- Diversification of the portfolio is critical. Do not invest more than 5% of your assets in any one position. The only exception to this rule would be for smaller portfolios where the commitment of future funding is present, or where the initial funding is such that the number of positions is limited.
- It's okay to take a profit. Positions are established that will provide a given, expected and acceptable rate of return. Positions are established which will provide a given, expected and acceptable rate of return if the call option is exercised. Investors should be willing to sell a stock in order to achieve this return and not worry about ‘what could have been’.
- Cash generation is the key. No strategy can control the value of any individual stock. SysCW is designed to generate cash, in spite of the value of the stock.
- Each position, trade, or transaction must have a purpose. Know the purpose and the strategy will present itself! Once the position is established, don't lose sight of the purpose.
- Strategy Rules. Each strategy has is own set of 'rules'. The guidelines listed here are the foundation, the "rules" are the specifics. The rules for each Strategy will be presented in the Strategy discussions.
- Short-TERM Positions. There are pros and cons to one to two month positions. The advantage ends up being a higher annualized return if the position 'works'. On the other hand ... because the duration is shorter, the extrinsic value of the option contract is reduced. This means one would end up with less downside protection than with a 'normal' SysCW Position. At this point, we limit the number of Short-TERM positions to about 10% of a given portfolio.
Remember . . .
"Systematic Covered Writing is a series of strategies for long-term investors that believe nobody really knows which stock is going to appreciate at any particular point in time.
They also believe there are a limited number of possible overall changes in an individual stock's value during a specified period, and that someday the value of a given stock will be higher than when originally purchased.
Lastly, they understand that their wealth is not emotionally connected to any individual stock held within the portfolio.
