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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Herm who wrote (8024)	8/2/1998 11:17:00 PM
From: bill mccarthy	Read Replies (3) \| Respond to of 14162

Herm: This may or may not interest you, but but it relates to your study: About 5 years ago, I started investing, based on the following: 1. Select a portfolio of solid blue chip stocks. 2. On a 140 day chart, plot the z-line(line of least squares). Then draw 2 parallel lines, one at the "top", indicating the normal highs for the period, and one at the "bottom", denoting the normal lows. This open-ended parallelogram indicates both the current trend of the stock price and entry and exit points, relative to the "average" stock price at that time. 3. If a buy is indicated, check fundamentals, assuring that the current price is not from bad news, etc. Then buying, selling after the price approaches the "top" parallel line. This worked so well in actual practice that I formed a small fund with my friends and associates and easily beat the S&P 500 four years in a row.What prevents this from generating profits of 100% or more a year is occasionally, I would purchase a stock that would suffer bad news in the "holding" stage and I would either suffer a substantial loss, or have money tied up longer than I desired, waiting for a comeback.As I terminated the fund at the end of each year and reformed(for legal reasons) I wasn't of a mind to hold too long, tying up capital. I also traded on margin to compound the use of the funds. If your system would either filter my purchases, or reduce the loss suffered, it could be a real "fit" to me. On the other hand, if it produces better profits than what I am doing, great. I've sold covered calls many years ago, but I would think the problem would be the same-major price downtrends while you are "holding", due to bad developments. How do you avoid this? Any technical analysis has to be based on current information, not historical or even current data.Or to put it simply, if a stock is bought at 20 and goes to 12, selling covered calls will only return your money if the calls aren't exercised.How do you avoid this "trap"?