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Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: Uncle Frank who wrote (864)	6/2/2001 1:09:38 PM
From: adairm	Read Replies (1) \| Respond to of 5205

Dear dUF, May I discuss the strategy of covered call writing with you? I have a nice long term portfolio of gorillas and kings, (and a few shiny pebbles!) and I'm now considering commiting new money into a CC portfolio, with the goal of creating income. I have dabbled with CC writing for a couple of years, and also had great success with writing naked puts last summer. (Didn't work too well last fall! <g>) But now, I'm ready to supplement my income with a strategy of buy/writes. The primary problem, as I see it, is the possibility of another devastating bear market, such as what we have just experienced. My portfolio of CSCO, MSFT, CREE, PMCS, EMC, etc. has fallen drastically from it's highs. (In the spring 2000, I thought I was a "Master of the Universe" to borrow a phrase from Tom Wolfe.) Now, I know that a CC strategy will not prevent a loss of capital, but it can help soften the losses. Here's what I would like to do: Write near strike OTM CC's for near term expiration. My goal would be to try to get 2% premium. If the Call expires, write again for the next month. If called out, add the gain to the capital invested. Under this scenerio, I would want to be called out. The 'windfall' profit of the rise of the share price of the underlying stock would not be viewed as 'income', but rather as a buffer to offset those stocks that go down in price. Under the assumption that stock prices rise about 12% per year over time, and CC writing might cause me to lose 1/2 of that appreciation, my portfolio should rise at about a 6% rate (annually) in capital while producing monthly income in the form of Call premiums. Is this a reasonable approach? I know you are selling CC's off LTB&H stocks that you really don't want called out, and are just looking for a little income on the side. I'm trying to put your nephew Voltaire's stress-free strategy to work, but with less risky stock. Any comments would be appreciated. Thanks, Adairm