Everyone wants to know about the next great stock, but not remotely enough people want to know about the old tactic that far too few traders and investors use to prepare for sharp selloffs.
Let’s change that now…
In my own portfolio (which was down like everyone else’s over the past few weeks), I generated huge chunks of cash to the tune of 3.4% of my portfolio’s value.
Since the S&P 500 was down 8.0% or so, this means I cut my losses by 40% (assuming my stocks bounce back, the predicate of this kind of tactic), compared to those folks not selling calls.
I get many emails about this, which is appropriate given I run something called the Covered Call Blueprint service and two coaching services that have a lot to do with calls. Sadly, too many of those emails hit my mailbox after the worst part of a selloff was behind us.
Too late… sort of like Tom Brady giving up more of his salary to pay for better offensive linemen.
The key to the cash generation from my own portfolio was embedding a call selling strategy into a stock ownership strategy; they are not separate.
I sell calls as soon as I buy a stock. When the market goes down and pulls the stock down, or if the stock goes down on its own, I buy back that first call and sell another one. And another, and so on.
One stock, the country’s best independent refiner, Tesoro (NYSE:TSO), has huge premiums on calls and puts, so I bought the shares by selling a put and being assigned. Then I sold calls. In January, I must have rolled down my calls at least three, maybe four times (bought it back and sold another at a lower strike price for the same date).
It gets blurry sometimes when that much cash is flying into your account.
The market has stabilized. Some of the calls I wrote are now in the money and I will roll them forward, meaning I will buy them back and sell one with a higher strike price for a later date. I lose some of the appreciation; not much, but I end up far better off than before the selloff began.
This kind of selloff will happen again and again, as long as the Chinese are amateurs, Putin uses military aggressiveness as political Viagra, and the Fed does this and that. Be prepared.
Cut your losses, boost your cash, and you may end up like me, wishing the selloff lasted just a tad longer.