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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Grantcw who wrote (40178)	11/19/2010 5:01:57 PM
From: E_K_S	Respond to of 78469

Hi cwillyg - My first step when considering possible trade is that the stock must be a value buy or at least a speculative value find. I also check the candidates of stocks to see if they trade options, if they have a large open interest and just how liquid the options trade (are there large bid/ask spreads?). Typically, I will begin to just accumulate shares (usually a tracking position) in the stock as I research the news, pending projects, management and financials (are there proposed secondary offerings around the corner?). Once the position begins to move in my favor, I might explore a covered call strategy depending on (1) the annual dividend rate & ex dividend date(s), (2) earnings outlook and expected growth and (3) what I expect the position should contribute in gains to the overall portfolio. If I plan to hold 2-3 years and the dividend yield is under 5%, I will explore a possible covered call strategy on a portion of the position. Never have I before been involved with E&P companies where there has been so much volatility. These are pretty much high risk high return positions. Since the portfolio must generate some return on each position, longer term holds that pays no dividend become candidate for me writing covered calls. Because of the huge price changes in GMXR the Black & Scholes volatility factor is large (around 87%) vs the volatility factor for GST (recently around 67%). The higher the volatility factor the larger the call premium. That said, it does not always work out as planned. I accumulated a lot of shares of MHR in the high $3's but was too quick selling some May $5.00 calls. I generated enough income to guarantee the portfolio a 25% return on my capital invested (if the stock is called away). Unfortunately the calls I sold have doubled in price since I sold them. I was too early but achieved my goal of generating enough income to justify holding the uncovered shares too. My total MHR position is much higher in value AND I was able to guarantee a income stream to the portfolio through MAY 2011. Therefore, my call option strategy is more structured for a buy and long term hold of an undervalued position. Daily and weekly movements really do not matter once I have established my core holding. As for setting the Buy/Write position at the time I do the Buy... I don't. If I do my Buy correctly, it is after a sell off, on bad news or just in a down market day. These are all bad events for maximizing the call sale price. I try to sell the calls when there is a break out in the stock, the stock is selling at or above it's 50d MA or an unusually one or two day rally (over 20%) that allows me to lock in the guaranteed income stream (or at least 50% of what I need) I need for my core position to return the minimum income to the portfolio. It sounds somewhat complected but it really is not. It's just a strategy I have come to use that forces me to peel off gains from potential winners. Hope this helps. EKS