Covered Call Analyzer from Investment Enhancing Systems, Inc.

This page provides some guidelines and strategies for running the Analyzer and making money with covered calls. Your objective in using this site should be to identify those stock/call combinations (buy/writes) that will yield the best returns. We assume that call premiums are run up by "people in the know", who have done their own analysis and determined that a stock is going to rise. The Analyzer finds these combinations. We use the Analyzer to identify opportunities for our various Aggressive and Conservative monitored portfolios published each month on expiration weekend for our subscribers. Subscribers can run the Analyzer at any time to develop their own portfolios.

The developers of the Covered Call Analyzer have spent over thirty (30) years developing a basic strategy for maximizing the use of covered call options. This strategy has allowed the development of wealth in various kinds of accounts including IRA accounts. Several people have used the strategy to retire early and to provide ongoing retirement income.

The strategy is relatively simple, requiring no graphs, charts or Greek letter formulae. Instead it uses time tested trial, error and results to produce a set of rules to enhance portfolio value. We have been publishing our results since 1999 and have modified our strategy as we have identified new ways to use the Analyzer. We have probably experienced every covered call possibility over the years and our "Result" pages show you what we did in every transaction in the "Comments" field for each but/write traded.

This is an ideal strategy for a self-directed IRA account, but will work well in any account. If you are young and building your portfolio for retirement, retain everything in your account - growth in stock share price and all premiums from the sale of calls. If you are retired, use the call premiums for income and retain the stock and the appreciation of the stock as it moves up to the strike prices in the portfolio. When a stock is called or sold, keep this money in the account and use it to buy another covered call stock opportunity identified by the Analyzer. Consider selling next month calls on stocks that were not called if they are favorable. If not, consider selling or holding the stock, depending on its fundamentals.

Review your portfolio and run the Analyzer on the weekend of (or the Monday morning following) the third Friday of each month. Calls expire on Saturday of this weekend and a new cycle for the selling of calls starts on the following Monday. On this Monday, there will be a market for calls for the next two months on all optionable stocks. You can run the program on the weekend following the third Friday, but there may not be options listed for some stocks for the second month out, depending on which cycle they are in. There will be prices for call options for all optionable stocks for the next expiration date on this expiration weekend. Starting prices for all two month out options should be generated during Monday's trades.

Don’t put all your eggs in one basket. Divide you investing money among several different stocks, in different industries, and in different price ranges. Because commission effects can be large on smaller transactions, you might be tempted to put everything into one stock that has a high return. Don’t! The Analyzer will tell you how many shares to purchase with the money you have, after the commission effect. Use this feature. A rule of thumb would be:

Total Money in Portfolio	How many stocks to by	Put in "Money Available" Field
$10,000	5-6	$2,000
$20,000	6-7	$3,000
$25,000	8-10	$3,000
$50,000	12-12	$5,000
$100,000	10-12	$10,000

and so on.Diversification is good; the more stocks you can have in your portfolio the better, but you must have at least 100 shares of a stock in order to sell a call contract. As your portfolio grows, raise the amount you put into each stock and the number of stocks you buy. Be patient.

Use the Parameters to select your stock. Establish your own parameters for the stock’s P/E Ratio, 52-week price range, spread between share price and strike price. The Analyzer performs calculations on all the stock/call combinations traded that day that meet your parameters, tells you what and how many shares to buy, what the cost will be after commissions, what covered calls and how many to sell, the income realized from the sale of the call contracts, and projects actual returns if the stock is called.

Don’t go for low priced stocks. Many stocks priced in the $5 to $15 range have spectacular option premiums. Volatility is a measure of how fast and how much a stock’s share price goes up and down. High volatility means the price fluctuates widely and quickly. Stocks with high volatility usually have higher call premiums and may predict some spectacular returns. You should not buy stocks just to sell covered calls that will have big annualized returns. You may buy a stock, sell some calls and realize a big net income from those sales, only to see the stock share price drop sharply during the term of the option because some anticipated event didn’t occur. Select stocks on their merit and not on their volatility. The parameters section of the Analyzer allows you to establish conservative criteria when selecting stocks.

The strategy doesn’t rely on charts, graphs or formulae using Greek letters. The strategy does assume that the market establishes good market value (premiums) for good stocks or stocks that are predicted to do well in the next few months. Professionals who study the many companies that have call options and insiders, set the premium for calls by offering to buy them. The algorithms, used by the Analyzer, finds these stock/call combinations. This strategy helps you select stocks that should do well based on the premiums established by professionals in the market.

Consider only the sale of “close in” calls - those for next month. Time is a “wasting” asset and options with expiration dates about 30 days out generally tend to have good premiums. Also, you don’t want to be sitting around for months (or years) with your primary assets (stocks) tied up in an options contract. The Analyzer sets the default month to the next month. Although the Analyzer can be run at any time to select stock/call combinations, it is recommended that the Analyzer be run on expiration weekend or the Monday following expiration weekend.

Don’t roll up your calls. If the stock goes above the strike price, you may be tempted to buy back the call (at a much higher premium) and sell the next higher strike price covered calls. This may be tempting because you can keep the stock and keep riding it up. This usually doesn’t work. If the stock goes above the strike price let it get called. Take your profit and run. If you still like the stock, and running the Analyzer indicates it is still a good covered call opportunity, buy some more of the same stock and sell more calls.

Don’t roll down your calls. You should have a "get-out" price for the stocks that you buy, generally about 15% below the purchase price. If the share price drops to this level, get out. Don’t hope that it is coming back.Take your loss and move on to something else. Remember that you must buy back the calls (at a lower price) before selling the stock. If the share price drops, don’t hold and sell new covered calls the next month at a lower strike price. This only locks in a loss. Set your lower limit and get out if you reach it. Many online services(like Yahoo.Finance, MarketWatch or MSN Investing ) offer a monitoring service that will alert you if a stock drops to a certain price. Use one of these services so you don't have to monitor and worry about your underlying stocks every day.

Investment Enhancing Systems, Inc. provides the Analyzer as a calculation tool to help the individual investor identify those stock/call combinations that will yield superior returns. It is up to the individual investor to perform due diligence on any investment strategy before completing any transaction and monitor performance on any investment.