Systematic Covered Writing
... more than just covered calls!
STOCK SELECTION - Long Term
There are certain qualities that a stock should have in order to consider it for any given portfolio. Given the up and down market, it is important to select stocks that a covered writer would not mind owning for several months or even years. Every brokerage firm, every subscription advisory service, every stock analyst and every trading philosophy that exists has their own 'unique' way of selecting the stock. Several of the considerations used are listed below:
P/E Ratio Current Price Longevity Dividend Yield Asset Sector Cash Flow Legal Issues Trading Volume Stability Insider Activity Company 'Story' Appreciation Potential Earnings Management Changes Product Development Long-term Debt Stock Splits Price Trend MACD Volatility ...... and the list continues.
Systematic Covered Writing is not the typical 'buy and hold' approach, but rather a 'buy and cover' strategy. Each position will be maintained until it can be sold at a desired profit. The SysCW approach keeps in mind that, no matter what anybody says or thinks or how sophisticated particular stock selection software may be, Nobody Knows. With most approaches to investing in stock positions, the investor is attempting to generate a profit through capital appreciation of the stock itself. If the stock goes up, the investor can generate a profit, if they sell it.
With Systematic Covered Writing, the emphasis is not on stock appreciation, but rather, on being paid to own the stock. This could be analogous to rental property. If the stock appreciates that’s great. If the value stays the same, that’s just fine. If it loses value, though not so great, it's still okay, as long as the covered writer can continue to be paid to own it. The covered writer accomplishes this through the use of covered calls.
Rule: Do not enter a covered call position unless the stock is desired long-term.
