First let me say that I believe that picking good stocks is an "Art" and not a "science". In other words I have always felt that there is no way to quantify in numbers what makes a good investment so I have been reluctant to write a trading plan. However I do find myself using certain consistant criteria and methods in choosing my stocks for covered calls and naked puts. I guess you can say this is a "trading plan" however I will not be limited strictly to this criteria. By definition this makes me a fundamentalist and not a technical analysis person.
OBJECTIVE: To create a separte trading account for actively writing naked puts and covered calls to MAXIMIZE current monthly income.
ENTRY METHOD: All positions will first be entered by selling a Naked Put. The sale will be for between one-quarter and one-half of the total anticipated position in the portfolio. (i.e. if we want a total of 400 shares we will initially enter a NP for 100 to 200 shares or 1 to 2 contracts). All positions will be entered in either the near month or 1 month out.
MAINTENANCE: Naked Puts will continue to be written until a position is "put" to the account. At that time a covered call will be written on that new stock position at the strike price that it was put to the account in order to maximize monthly income. In the same month a new naked put will be written on the position at a 5 to 10% discount to the strike price of the original put. For example if stock ABC was put to us at $30, we would then write a covered call for $30 on that stock AND enter a new Naked Put for between $27 - $28.50 thus effectively collecting income on both ends of the stock and averaging down the position cost. THIS WILL BE DONE ONLY if the stock is still considered fundamentally sound and no material changes have occurred since initial investment.
ROLLING and BUY BACKS: Rolling positions will rarely be utilized since we are tyring to maximize current month income. If an option falls below 10 cents then we may buy back the option IF we see places to better utilize capital otherwise we will wait until expiration.
Stock Selection Criteria:
1) Management must have a reputation for Honesty and Integrity. I want to be able to listen to the quarterly conference calls and know what they are saying is true.
2) I read all the recent news articles about the company for the last 3 months. You can do this at any news service like quote.yahoo.com
3) I look for minimum 5 years of consistant or increasing dividends. I REALLy prefer 10 years or more of increasing dividends. I Don't like stock buy backs because this puts the money in the company's hands and generally they simply give back out this stock as bonuses. I want the money in MY hands and a company that recognizes that.
4) I go to seekingalpha.com and read the transcript from the most recent earnings conference call. This is probably the SINGLE MOST VALUABLE source of information for a company in my opinion.
5) I look for good debt control. No exact numbers here but "Cash is King" and "Debt is Bad".....Very Very Bad,
6) Must have Positive Earnings (before extraordinary items) for the past 4 quarters.
7) Focus all my research on "Safety and Downside Protection". Growth here is not important to me because I can make money in a Covered Call Position if the market goes up, sideways or even slightly negative. Stock price crash is a covered call writers worst enemy!
8) Only write Covered Calls on current month or 1 month out.
9) My minimum premium I will take is 2.5% Any less than that and I feel like the downside risk is not worth the return.
