Thursday, November 4, 2010

The Covered Calls Advisor's Investing Process

Question: What is more important, Investing Process or Results?
Answer: Both, but our investing process is actually more important because a disciplined, well-defined process is critically important in order to achieve exceptional long-term investing results.

The greatest benefit of a well-defined, detailed investing process is that it enables us to be objective in our decision-making and to therefore counteract the negative impact that often occurs if we allow our emotions to influence our decisions. I am convinced that emotionally-driven decisions are the primary culprit that causes investors to often buy high (often accompanied by greed) and sell low (often accompanied by fear), the exact opposite of what they had intended to do.

This article presents the six-step investing process followed by the Covered Calls Advisor. The links embedded within the steps below will provide the interested reader with added detail from prior blog posts on this covered calls investing process.

1. Basic Principles: Remain fully invested in near-month covered calls.

2. Top-Down: Develop an Overall Market Outlook

3. Bottom-Up: Follow a Checklist for Stocks Selection.

4. Screen Selected Stocks further for Good Covered Calls characteristics:
(a) Good call option premiums -- Implied Volatility of stock options at least 20% higher than the VIX; and (b) Good options liquidity with call option open interest above 300 -- to achieve closer bid/ask spreads.

5. Establish covered calls positions at strike prices consistent with the Overall Market Outlook in #2 above.

6. Follow position management rules for timely adjusting of existing covered calls positions.

It is my sincere hope that the information presented here will be helpful with your thought processes as you develop and fine-tune your own covered calls investing process. Your comments or questions regarding any aspect of the investing process described in this article are certainly welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Regards and Godspeed,