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Covered Call Boot Camp
No System Is Perfect, Right?
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It is inevitable that sooner or later we’ll be caught in a bad market, and so, there is some chance of losing money for a period of time. But in writing covered calls in the manner we do, we’re usually holding stocks for an average of around 2 months. That gives us a chance to reevaluate our positions frequently if the market gets too dangerous. Moreover, we already have substantial downside protection from the outset. We sometimes have more than 20% protection before we risk being in the red. The overall average since the inception of our service has been 9.9%. That's plenty of protection for a two month holding period.

"Our target return includes being out of the market for at least part of the time in most years."

We also lessen our risk by staying less than fully invested at times when the market risk seems too high. In fact, that’s why I say we’re shooting for a 12% to 20% annual return instead of the 26% we made in 2007. Our target return includes being out of the market for at least part of the time in most years. 

It is also important to note that although the stock market does reasonably well in most years, sometimes it doesn't. The vast majority of people buying stocks have no downside protection whatsoever in those years. If there's a terrorist attack, or some other market-crashing event, losses can be rapid and substantial. Even in the worst market crashes, our portfolio is protected from much of the risk.

Historically, 88% of our positions have closed profitably, but even when one of our positions closes below our cost basis, we are able to write more options on the stock, and make up some or all of the deficit. Moreover, other stocks in the portfolio help take up the slack as well. That's why the overall portfolio has remained highly profitable, despite the occasional clinker.

"In an up or sideways market, you can make lots of money -- 25% a year is not unreasonable."

Of course, past results can never guarantee future performance, but I think you can see why I feel so sure the risk-to-reward ratio here is better than any in other area of investing. With a conservatively managed portfolio of this sort, even in a down market, the premium collected on your options can more than offset any decline in stock price between the time the option is written and the time the option expires. In an up or sideways market, you can make lots of money -- 25% a year is not unreasonable.

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