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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: Uncle Frank who wrote (426)	5/4/2001 11:27:48 AM
From: BDR	Read Replies (1) of 5205

<<But neither of those states are predictable or sustainable, and 95% of the time the market will be up & down with only a mild directional bias. >> Agreed. We can't arrive at investing principles based on just the past eight months experience just as we can't use 1999 as a basis for investing either. Volatility to provide worthwhile premiums and mild directional bias make it much easier for covered call writing. So do you try and time call writing or just keep at it writing new ones as the old expire? I am sure we all have a feeling that there are better times to write calls than others or better times to write far out of the money calls v. in the money calls. Some are better than others at recognizing trends. Some use technical analysis and charts. For example, Herm Matos, who started the "How to Write Covered Calls" thread (http://www.siliconinvestor.com/subject.aspx?subjectid=12574), uses Bollinger Bands and some other technical tools. I have taken the liberty of cutting/pasting a brief summary of his technique below. His method would work best in a choppy market of the sort that you state exists 95% of the time. In the downdraft earlier this year there never seemed to be a good time to sell calls (hitting the upper BB). Quick W.I.N.s. Review 1. Stock starting to move down [W]ithdrawing - The stock appears to be pulling back after a upward cycle. Technical indicators would be an upper BB tag, high RSI, positive Stochastics, peaking OBV. Write CCs at this point to lock in your profits and protect your downside. Use the BB and RSI as you guide. 2. Stock starting to move up [I]ncreasing - The stock appears to have bottomed out and starting to move upwards. Technical indicators would be lower BB tag, low RSI, negative Stochastics, low OBV just starting to turn up. Cover CCs and wait. Perhaps you can buy more stock or long calls as sideshows. Stock moves sideways [N]eutral - Hold your position. Defensive investor [S]ideshows - Buy cheap PUTs on upper BB tags for reversals off tops especially around earnings release dates. Buy cheap long calls after double-bottoms. Average down and leverage your CC premies to lower your net cost basis (NUT).

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