Preservation of Capital
CYA InvestingMarch 13, 2003
The past three years have been difficult for any investor who carried bullish positions. Today, the outlook remains uncertain.
On the one hand, there is hope that after the USA - Iraq conflict - in whatever form it eventually takes - is resolved, all will be well and the market will soar.
On the other hand, the economic data is anything but bullish and it may not matter whether there is war or peace. Any euphoria resulting from the avoidance of war, or the end of a short war, may be short-lived. It is possible that our looming defecits and increasing unemployment rate may lead to a continued market downturn.
What is an investor to do?
The answer is neither obvious nor simple. Each investor must decide how to allocate his assets. Our recommendtion is:
- For the portion allocated to owning long stocks
- Consider writing covered calls against some of those assets.
IF YOU CHOOSE TO INVEST IN THE STOCK MARKET
It is clear to all investors that markets do not always rise. The portion of your money invested in stocks is at risk. By using options, specifically by adopting the Covered Call Writing strategy, you can:
- Preserve your capital by protecting your investments
- The amount of protection is limited
- Protection equals the option premium received
- Make money more often
- Selling the call reduces your break-even price
- Reduce the volatility of your stock portfolio
If the market does surge, if euphoria is long-lived, then you will still have profiatable investments. If the market declines further, or if it is stagnant, then you will be very pleased with your decision to write covered calls.
This strategy helps you make money (or reduce losses) when times are not good for investors, and to participate and earn profits when markets rise. It is a sound, conservative strategy for those who want to own stocks.
To learn about our book, click here .
Feedback appreciated: Comments or questions:Previous Articles