STOCK SELECTION
WHO SHOULD YOU BELIEVE?
Stock selection is the first step in establishing a Systematic Covered Writing position. Not only is it the beginning, it is also the single most important step in the entire process. Recalling Method Two in the section on Making Money (see page 7), "An investor purchases a stock that he or she would not mind owning in a given portfolio”, leads to a question: How does the covered writer decide which stock to purchase for a portfolio? The premium for a call option should never be the key reason for purchasing any stock. If the covered writer does not like aspects of a particular stock, then it really doesn't matter what the premium for a call might be. This is very important because if the stock loses value after it is purchased, the stock may be held in the portfolio for some time. As a covered writer, make sure the stock is desired.
Given the importance of stock selection, a few words need to be written about other Internet based sources and covered calls. Specifically, comments from Web sites that suggest 'they' can help the viewer make ‘lots of money’ using covered calls if only the viewer will follow their system. It is suggested that you apply the Critical Thinking Evaluation process as presented below to Systematic Covered Writing just as it should be applied to any Web site that hypes phenomenal returns. Always remember, it is your money. You may care what it owns, but your money doesn’t.
There are many Web sites that tout significant returns if you follow recommendations for entering covered call positions. In fact, a search on the Internet for ‘covered call strategies’ will provide the searcher with hundreds of thousands of Web sites from which to choose. Many of them will provide examples showing exceptional returns based on their 'system'. These should all be evaluated using the Critical System Evaluation approach. (Click each evaluation to access information.)
· Can the trade in the example be repeated?
· What happens if the call being suggested is not exercised?
· Are they showing a complete history of activity for a given stock covering a number of years?
· Are they suggesting what to do next?
· What is the charge for the 'proprietary' selection system?
By clicking any of the questions listed above you
will be taken to a brief discussion as to why you may want to consider asking
the specific question in the first place. As with previous sections, it is
suggested that you take the time to read each of the links above before you
continue. Now, let's get to the process of Stock
Selection. Please click 
.
SYSTEMATIC COVERED WRITING
Copyright © 2005. All rights reserved.
Revised: 03/04/07