How To Use This Site
Investment Enhancing Systems, Inc. (IES) is celebrating its twelfth anniversary. Our mission is to "Provide the individual investor with investing concepts and investment tools that are easy to use, inexpensive and produce professional results".
What this site is intended to do for our subscribers:
Find the right stocks and calls
The primary purpose of this site is to educate our subscribers in the use of covered call strategies. Some think all options are risky and should be avoided by conservative investors. Covered calls are conservative (they can be traded in IRA accounts) and profitable. Covered calls are not a get rich quick strategy. We want our subscribers to learn and then earn. This strategy takes patience and sticking to the rules, but as you can see from our results, patience and sticking to the rules pays off. Option commissions play a big part in the returns realized. They tend to be higher than commissions on the stock trade. Subscribers usually look for low cost online brokers to handle their covered call portfolios.
How do we find our "Stocks-to-Consider" and populate our portfolios? Stocks from the NYSE, NASDAQ and AMEX are considered by the Analyzer, resulting in thousands of calculations. We run the Covered Call Analyzer using our default parameters to find our picks. The Analyzer uses proprietary algorithms that find equity call options and Exchange Traded Funds (ETFs) that have been run up by professional traders and analysts. These professionals generally know something that is going to drive a stock price up, and they buy call options rather than buy the stock. Our subscribers can run the Analyzer at any time, using their own parameters, to generate their own portfolios.
IES runs the Analyzer only on expiration weekend (the Saturday after the third Friday of the month). We use the closing prices from the Friday before expiration to update our lists and portfolios. We only consider the next highest strike price, out-of-the-money calls, one or two months out. Our subscribers can then take the weekend to analyze these lists and portfolios and run the Analyzer themselves if they want to consider different parameters. They then make their trades on Monday morning. The prices will have changed after the opening on Monday morning, but since stock price and option price move in tandem, the expected return probably won't change much. However, prices when the trades are actually made should be checked to confirm that there hasn't been significant changes in the stock or call price.
We update our lists and portfolios each month on expiration weekend with the intent of showing our subscribers what we did with those stocks and covered calls that were the basis of our lists and portfolios last month. The comments in our results pages show whether:
1) the stock got called
2) we exercised the get-out price after buying back the calls at a lower price
3) the stock didn't get called and we sold more calls for the next month
4) the stock is being "held", waiting for better call premiums.
5) what return was realized
We have found that the best premiums are usually realized about thirty days before the next expiration. We also don't want our stock positions to be tied up for long periods of time with far-out call contracts. With options, time is a wasting asset and as you get closer to expiration, the premiums for out-of-the-money calls tend to diminish.
Data is uploaded to the site about one hour after the close on each trading day. This allows our subscribers to run the Analyzer any evening and select the trades they may want to make the next day.
Our objective is to get the stock called at a higher strike price on the next month expiration date. Most of our subscribers don't check their investments daily. We don't want our subscribers worrying about price fluxuations during the month. Generally they wait until the next expiration weekend and see what happened - what got called and what didn't. They then spend a few hours on that expiration weekend determining what to do with the cash generated by the called stock and if they should sell new calls on the stock that didn't get called. Many subscribers follow our lists or portfolios and make their trade accordingly and follow up with our comments on what happened the next month. The only thing they have to worry about between expiration weekends is the get-out price (see below)
many of our subscribers start by using "play money". That means they make assumed stock purchases and covered call sales on paper, but don't actually make the trades. They review our "Stocks-to-Consider" postings and our various portfolios, or run the Analyzer with their own parameters, and pick stocks that they might be comfortable with. Then, instead of calling their broker or going on line to an online broker, they go online to a financial service like Yahoo.Finance on Monday morning to get actual prices for the selected stock and the premiums for the calls and write these down to keep track of how they do. After several months, if they are comfortable with the strategy, they will begin making real trades and start making real money.
In order to be successful, you need diversity. This means that the portfolio should have enough different individual stocks in it to offset a major downturn in any single stock. Our $10,000 Aggressive Portfolio tries to make money with only five stocks with value of about $2,000 each. If only one goes below our get-out price (-15%), it's hard to dig out of the hole it creates. It's better to have five stocks ($2,000 each) in a $10,000 portfolio that two stocks ($5,000 each).
If the money available is too low to purchase an individual stock, you may not be able to buy the minimum 100 shares for a single call contract, or the call commissions may swamp out the return. There has to be a balance between the number of individual stocks (diversity) in the portfolio and the dollars available to purchase each stock.
Our Conservative and Aggressive lists now have twenty (20) stocks with value of about $5,000 each. Our $100,000 Retirement Portfolio has ten (10) stocks with value of about $10,000 each. If we have to exercise the get-out price on one or two stocks, it's not as hard to dig out. A $30,000 portfolio might consist of 6 - 8 different stocks with value of about $4,000 to $5,000 each. The individual investor needs to analyze how to get the best diversity vs. how the commission effects returns for lower individual stock values.
A get-out price should be established and stuck to. We have set our default get-out at a 15% drop from the purchase price. It is sometimes hard for an investor to sell a stock when it drops. It is important that our subscribers establish a get-out price and stick to it. To be successful you have to do this. Many of our subscribers use an online service like Yahoo.Finance, MarketWatch or MSN Investing to set up monitored portfolios that will alert them when one of their stocks is getting close to the get-out price. This means that they don't have to monitor their portfolio prices daily. If the get-out price is reached, they have to buy back the calls first (at a lower price) and then sell the stock. Usually investors that think the dropping stock will come back end up taking bigger losses. Sometimes there is a stock that "tanks" so fast on bad news that it is impossible to get out at the get-out price. This happens rarely, but when it does, we hold the stock for a short time (usually about a week) and look for a bounce of a few percent and then get out. If the Analyzer finds a stock that is anticipating "news", such as a biotech or drug company awaiting approval from the FDA, we may identify it as "RISKY" in our lists and portfolios. This usually occurs in our aggressive list and portfolios and investors should be prepared for a big reward or a big loss.
Once you are comfortable with the strategy and the rules of diversity and get-out, you may want to start your own portfolio. We have two lists and three portfolios that we follow. The portfolios start at the the beginning of the calendar year. You may want to start you portfolio mid-year and may not be able to follow the portfolios that we have already started. Our lists and portfolios can be reviewed periodically for educational purposes. Your number of stocks and portfolio size will probably be quite different from our lists and portfolios. You also need to decide what kind of portfolio it should be for your own objectives - conservative, aggressive, retirement. We offer our Subscribers a MS Excel spreadsheet that can be used to keep track of their own personal covered call portfolios
Good Luck and Profitable Investing!!!
Investment Enhancing Systems, Inc.
8514 Hollywood Drive
Orland Park, IL 60462
708-403-2629
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