About a year ago I decided to put some money towards an investment idea I had been thinking about for years. I was going to buy stocks for the sole purpose of selling covered calls on them. My thought process was simple enough:
- Buy equities that were near option call levels
- Sell a covered call at a price that was predetermined to be an acceptable gain for me
- Use premium to buy different equities
If the stock got called then I received my premium plus the gain that I already accepted as my maximum profit. If the stock didn’t get called away then I would just do it again (and again and again) with the same equity position. During that time I also bet against my first stock using a put strategy.
As far as the covered call strategy I still believe in it 1000%, but I think I implemented it incorrectly. My focus was to,
find companies with a market cap of at least $200 Million, a positive P/E, a stock price of below $5.00 per share and are traded on the options exchange. From the remaining companies I will research them one by one to determine whether to move on any of the options available. The covered calls will be out of the money options that will expire within 0 to 6 months of purchase. The strike price will be an amount that I am very okay profit-wise
Not once do I discuss the underlying business because it didn’t matter to me…and that was/is a mistake. The reason the stock price had to be low was because I needed enough cash to buy the underlying stocks to sell the calls against. At this point I would call this speculation at best, and at worst, gambling.
When I finally roll out of the outstanding contracts I will provide an accountability report as I always do. My plan is that once the contracts come due I will sell the underlying stock at market value and look into picking up passive index investing.
Why passive index? Because I have active funds in my hated 401(k) and a non-qualified dividend portfolio (my favorite asset), so I feel like just taking this account off the table for a very long time.
Again, I want to revisit this investment strategy one day, but when I do I will do it correctly.
The more I abandon active trading approaches, the better I do.
I can’t do it fully…but this one aspect just wasn’t worth it