Systematic Covered Writing

... more than just covered calls!

The belief system behind any investment strategy or philosophy should be understood and adopted prior to assets being invested.  The following principles are the foundation to the belief system behind Systematic Covered Writing (SysCW).  The five principles listed are not only the starting point for this document, they are the heart and soul of the decision process and as such they will be referred to often.

 

PRINCIPLE ONE

When considering any individual stock, it is fundamental to recognize that when it comes to a stock’s value, Nobody Knows whether the stock will go up in value, go down or stay the same. Typically, one analyst feels a stock is going to go this way and yet the stock winds up going that way.  Yet another feels the market will go that way and it winds up going this way.  Confusing?  Yes it is, and so is the market.  Don't kid yourself.  There is no magic formula, no exact set of features and no technologically advanced computer that can consistently predict the price movement of every stock.  Otherwise, someone would already have all the chips!

In accepting the idea there is no 'needle in the haystack', the investor can stop looking for that 'needle' and be confident when it comes right down to it ... Nobody Knows.  Ponder this: whatever stock someone is buying, someone else is selling and whatever stock someone is selling, someone else is out there buying it.    For every buyer there is a seller and visa versa.  Understand, both the buyer and the seller believe they are right!

Below is an example of nobody knowing.  The data shows a 'change in opinion' of two well-known financial-brokerage firms.  The professional analysts, working for these firms, changed their recommendation on Apple Computer (AAPL) on January 13, 2005.  Beneath their ‘upgrade’ revisions are some random price quotes for AAPL over the twelve month period indicated. 

Today is January 13, 2005
Company	Symbol	Brokerage Firm	Upgrade from:	Upgrade to:
Apple Computer	AAPL	(Large well known)	Neutral	Overweight
Apple Computer	AAPL	(Large well known)	Neutral	Buy
Change in Value
Date		Price
1/2/2004		$21.28
7/15/2004		$32.93
1/3/2005		$63.29
1/13/2005		$71.18

You will notice the 'names' of the brokerage firms have been removed from the table above. Which analyst was correct is not the point.  In the greater scheme of 'professional advice', brokerage firm recommendations are published in reports to clients. In order to 'look good' it would be wise for them to be suggesting to 'Buy or Overweight' a stock that has TRIPLED IN THE LAST 12 MONTHS, which is exactly why these two firms changed their rating. 

The point is if these experts ‘knew’ anything, they would have suggested buying APPL when the stock was trading in the twenties! Note the change in value of Apple Computer did not just sneak up on the analyst, but rather, had been increasing throughout 2004.  Out of 23 analysts that followed Apple Computer, more than half of these experts had just a 'hold' rating on January 13, 2005. A hold rating is not the same as: "Maybe you might want to consider buying this stock".  This information was collected on January 13, 2005. (Please note that this information is readily available on many 'free' Web sites.)

Given the analysts are the professionals; they are paid to research, ‘to know’ and to provide an opinion about the investment merits of any given company they follow.  When it comes right down to it ... Systematic Covered Writing suggests the reader adopt the philosophy and understanding that . . .

NOBODY KNOWS!  NOT EVEN THE PROFESSIONALS.

Principle One states: Nobody Knows.

   

SYSTEMATIC COVERED WRITING
Copyright © 2005. All rights reserved.
Revised: 03/04/07