Friday, December 2, 2011

Trading Plan - Initial

With a little more experience with the covered call strategy, and after completing the November status report, I decided I was finally ready to prepare a trading plan that will guide investing activities in the Rescue My IRA portfolio.

I used a template developed by one of my colleagues in the Covered Call Community - the basic framework is available from the Yahoo Board "Just Covered Calls."  I see it as a living document - I'm sure my approach will evolve and become more thorough with experience.  But here it is in its entirety, first edition.

“Rescue my IRA” Trading Plan

Objective and Background

The objective of this trading plan is to grow the amount I will have available for retirement.  The trading plan only deals with my IRA at Scottrade; I continue to participate in my employer’s 401(K) in addition to these investment activities.

A few years ago, I consolidated my IRAs – four accounts – into one with a large brokerage house.  I counted on the broker there to help me grow my resources, and since he had a good strategy, I felt confident we could reach a simple, not very specific, goal of “having enough.” 

After a few years and bad economic times, it became clear that my broker’s strategy wasn’t going to achieve my goal.  When I consolidated the accounts their nominal value was about $77K.  After a few years, I had seen values as low as $44K.  My conclusion, simply, was that I could do better than this; I then rolled the account, now valued at just more than $51K, over to Scottrade.

I worked with a buy-and-hold strategy in the past, which probably won’t work in today’s markets.  I found additional information about using covered calls to improve investment yields – and this is the strategy I have chosen. 

My big-ass goal for this money is to generate 12% growth per year in the account, while continuing to save between 10 and 15% of my annual income in a company 401(K).  If I am successful, the value of this account could reach nearly $xxx by the time I am aged xx.


As I noted above, I have chosen a covered call strategy as my primary method of achieving this goal.  I will identify, qualify, and buy stock in quality companies that pay a dividend.  I will then seek to trade in covered call contracts written against these shares as a way to build an income stream that supplements the dividends and capital gains that will be earned by the shares. 

The main risks I face with this strategy are simple:

·         Operational risk of making mistakes in stock choices
·         Process risk, consisting of the typical down side arising from holding stocks

Covered calls provide some downside protection in the amount of the premium received for the contract, so the process risk is partially managed.  I describe the stock picking method below; it is meant to manage the operational risk.



  • The Rescue My IRA account is established at Scottrade, Alexandria, VA
  • Account Type: IRA
  • Capital Available: Initial investment was approximately $51K


The focus of this account will be to invest in stocks and option contracts.  From time to time, the account may use alternative instruments, including ETFs, CDs, and mutual funds, but as the account is getting started, these will not be primary.


The overall timeframe of this plan is from November 2011 through December 2023, when I will be aged xx.  For now, let’s consider that a typical retirement age, and therefore a reasonable goal and investment horizon.

Position Sizing

My current plan is to hold no more than 15 positions in this account, with the optimal number being around 12.  After 20% of the value of the account is held in cash reserves, 80% will be invested in stock holdings, which the covered call contracts will be written against.  This means that on average, a holding will represent between 5% and 5.5% of the total account value, if 15 positions are established; or between 6.5% and 7.0% if I am working with 12 positions.

Trade Entry Strategy

Stock picking will be key to success in the Rescue My IRA account.  I will select stocks from US markets that include the following key elements:

·         Nationally known brand and industry leadership
·         Established record of dividend payments ranging from 2-5% annually
·         An S&P STARS rating of 4 or 5 and a Morningstar rating of 4 or 5
·         At the time of purchase, the shares should be trading within the middle 40% of their 52-week range
·         No shares will be purchased that have an anticipated earnings announcement in the next month

From time to time these qualifying details may be revised.

I will make purchases using limit orders that set a price within the middle of the 52-week trading range for each position.  The initial covered call transaction should generate at least $100 in cash flow, and the total trade to establish a position must generate a 12% annualized return on the purchase price of the shares.  The return consists of option premiums, capital gains, and dividends.

Trade Exit Strategy

When the time comes to close a position, I will simply place a limit order for the sale, assuming the stock has not been assigned based on the covered call written against it.  No positions will be closed until all associated options have been closed.

Since I am okay with a buy and hold strategy in this account, and with the covered calls and dividends most positions will continue to generate an income stream even while prices are moving down, I will not exit a position merely because the price is declining.  Exits for beaten-down stocks will be based on their not meeting the trade entry requirements listed above.

On the other hand, if a position is rising, the odds increase that a covered call written against it will be assigned, so that will be one way to close a position with a gain.

I will also evaluate a stock approaching its 52-week high to determine whether to continue holding it or whether to sell and reinvest the proceeds.


Position Management Strategy

The trading cycle for shares in this account will be driven by the options calendar.  Optimally, positions will be evaluated as the options expiration date approaches, and the decision will be based on whether it is feasible and profitable to roll-up, down or out the option contract; to let the contact expire unexercised; or to take profits when the contract is exercised.

Assuming the stock continues to meet the criteria above:

  • If the price is stable, a new contract will be written for the same strike in a future month.
  • If the price is slightly lower, a new contract at the same strike in a future month will be sold.
  • If the price is significantly lower, the new contract may be based on either a lower strike price or a further out month.
  • If the price is slightly higher, the new contract will be at the same or next strike price in a future month.
  • If the price is significantly higher, it may be time to take profits or to continue to roll the contracts.

Tax Strategy

This is an IRA and therefore tax deferred.  A tax strategy is not necessary.

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