Tuesday, November 1, 2011

Qualifying Stocks/Waiting on the Transfer

Scottrade tells me that Ameriprise does all their transfers in a batch, and that is done weekly on Tuesdays.  So hopefully, later today, I will know that the transfer is done; there may be a few days of waiting for the funds to make their way into my Scottrade account.  During all this, I have been keeping busy doing research about what stocks to keep as core holdings to implement the covered call strategy around.

The folks over on Yahoo's "Just Covered Calls" board have been very helpful on this front - it seems that optimally, the investor/trader using this strategy needs to have a routine, and a second pointer was to only pursue stocks you wouldn't mind owning, in case you end up holding when they are not assigned.  I've still got some work to do on developing the routine, but in the meantime, I've developed some ground rules for choosing the initial stocks.

First, I put together a candidate list from some Motley Fool information - they have a lot of material on high-yielding stocks, for example.  Second, I took some cues off of what the other covered call group members are using.  And third, I filled out a list of 30 potentials using a "dogs of the Dow" screen: which of the 30 DJIA stocks are performing worst year to date.

With this list of thirty, I put together a spreadsheet that would further screen them using some basic rules:

  • A four or five star rating from both Morningstar and S&P (surprisingly, this eliminated IP, which I currently hold, and disqualified my ACM, the company I currently work for, where I hold shares!);
  • There must be a dividend, and I am looking for >1%, but optimally 2%-5%;
  • The price at the time of the purchase should be near the midpoint of the 52-week high and low; and
  • The companies must be a significant brand name to ensure longevity and company quality.
Now, I may revise these a bit with experience.  For example, the first rule could be subject to revision once I have more practice reading fundamentals for myself.  The third rule could be revised as well, using a "fair value" calculation (one of the Yahoo board posters has a "fair value" calculation that he uses to set a target price of 80% of fair value) - I used the 52-week midpoint as a surrogate for this to ensure that there was price upside and adequate volatility to ensure a good premium on the calls.

This screen gave me a short list of 8 candidates, as follows:
  • AA
  • COP
  • CSX
  • DIS
  • GE
  • GLW
  • MRK
  • MSFT
Next post I will write about the position rules for my shares.

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