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Saturday, September 8, 2007

4 Steps for Establishing a Great Covered Calls Portfolio

Step 1. The Big Picture - It's important to have a personal outlook for the overall stock market. Are you bullish, bearish, or neutral for the near-term future of the market? This outlook must not be obtained quickly or emotionally. Rather, our outlook should result from: (1)avid reading of high-quality financial resources; and (2) from applying a disciplined ratings process that includes several macroeconomic, momentum, value, and growth factors. My current outlook will always be shown as the top information element in the right column of this blog --
For now, "The Covered Calls Advisor Says: The Current Overall Stock Market Outlook is : SLIGHTLY BULLISH. The Corresponding Investing Strategy is: SELL SLIGHTLY OUT-OF-THE-MONEY COVERED CALLS."
Generally speaking, covered call positions should be established that are consistent with your overall market perspective, namely:
Bullish -- Plan to sell primarily Out-of-the-Money(OTM) Calls
Neutral -- Plan to sell primarily At-the-Money(ATM) Calls
Bearish -- Plan to sell primarily In-the-Money(ITM) Calls

Step 2. Stock Selection - Stock Selection is Job #1 for the stock market investor, and it's also the most important decision for us covered call investors. Consequently, there will be a lot of information provided in future posts describing how this Advisor analyzes and selects stocks for inclusion in a covered call portfolio.

Step 3. Analyzing the Covered Call Investment - Once good stock investment candidates are identified, it is essential to perform additional analysis to determine which covered call option positions available will provide the best combination of both attractive return-on-investment potential as well as sufficient downside protection.

Step 4. Portfolio Diversification - Last, but certainly not least, is to ensure that the total portfolio of covered call positions is adequately diversified. The three components of diversification are: (1) Asset Allocation, (2) Sector Diversification, and (3) Individual Position Concentration.

There will be many future posts that will explore detailed aspects of each of these 4 steps with the intention of assisting you in refining and improving your own covered call investing decisions.