BEAT THE MARKET: COVERED CALL WRITING

A CONSERVATIVE OPTION STRATEGY

COVERED CALL WRITING is a strategy designed to modify an investor's profile. It is not a magic strategy. 
·         It a strategy for investors with a bullish bias. 
·         It is not suitable for the very bullish investor because profits are limited.
·         It is appropriate for investors who want to slightly outperform the stock market over an extended time -- and to achieve that result with a less volatile portfolio (i.e., the value of the portfolio experiences smaller losses when markets decline and smaller profits when markets surge.) 
When you own individual stocks, exchange traded funds (ETF), or mutual funds, the value of your portfolio (obviously) moves up and down with the general movement of the stock market. As an investor, you may not have thought about the truth of the following statements, but in the back of your mind you surely understand that they are true.
·         Owning an ETF -- especially an ETF on one of the broad based indexes -- is an attempt to match the general performance of the stock market. The investor is not searching for ways to beat the market -- merely to match its performance. Such ETFs include: SPY (based on the S&P 500 Index), IWM (based on the Russell 2000 Index) , and QQQ (Based on the NASDQ 100 Index).
·         Investors who buy mutual funds are looking for out-performance, trusting the professional portfolio managers to choose investments that do outperform. In general, this is a poor investment plan because most fund managers fail to to beat their benchmark indexes. On top of that, they change an annual management fee for their failure. If you prefer to allow others to manage your money and make investment decisions for you, then you will probably do better with index funds and index ETFs, rather than traditional mutual funds. Sure, some mutual funds produce outstanding gains, but how are you supposed to find those funds in advance? You cannot.
COVERED CALL WRITING
When writing covered calls, the most important part of the strategy is choosing which stock to own. It is true that you can add to your profits by skillfully trading the options, but that pales in comparison with how your overall results depend on whether the stock rises or falls. The objective with covered call writing is to find stocks that do not lose significant value. There is no need to find stocks whose prices skyrocket.

HOW SHOULD ENTER AN OPTION ORDER?

When beginning to trade (stocks, options, commodities, etc.) you want to avoid the costly mistake of entering orders incorrectly. I know that this seems trivial, but the overly anxious beginner can get it wrong. 
One expensive way to avoid mistakes is to telephone your broker and place the order. There is no reason to do that because it is more efficient, and less expensive, to enter orders via the Internet.
There are two separate considerations when placing an order. 
1. Buy or Sell exactly the options that you want to trade.
Most of the time it is a very simple process to use your broker's online trading software because they make every effort to make it bulletproof. However, first-time traders may have difficulty understanding some of the terminology. NOTE: If you take the time to understand options and how they work before placing your order, then this will not apply to you. However, many traders are so anxious to get started that they take shortcuts.
 Solution: If you have any questions, or if any part of the order-entering process is confusing, then call customer service and ask for a detailed explanation of anything that is not 100% clear.
If you are entering a spread order, be aware that some brokers use the term "buy" while others use the term "sell" for the identical trade. There is no way that a new trader can overcome such a problem - especially when that you are not aware that this problem exists.
Solution: Take the time to look at the specific options being bought and sold and be certain that this trade gives you the position that you want to own.
For example, when it comes to trading iron condors, some brokers "buy the iron condor" while other brokers "sell the iron condor" - and the difficult-to-understand truth is that these two trades result in the trader owning exactly the same position. But the brand new trader cannot be expected to know that -- and can easily make a mistake when deciding whether he/she wants to buy or sell the spread.

IMPORTANT TRADE DECISIONS

"BUY DLF 120 CALL @ 2 TGT 2.75/3.90 SL 1.20"

TRADING REQUIRES FREQUENT DECISION MAKING
The generally accepted difference between investors and traders is that investors have a much longer-term time horizon.
Traders seek stock-market profits by selling as soon as a profit target is met. They never get married to a position. Nor do they have loyalty to the company whose stock they own. They often ignore the nature of the company itself, relying on charts (technical analysis) to make buy/sell decisions. Some traders own positions for as little as a few seconds, while others may wait as long as two months for a position to work. 
Investors tend to hold positions for years, decades, or even an entire lifetime. As a consequence, they make (too) few investment decisions. Investor portfolios should be examined on a regular basis (at least yearly) with the goal of unloading stocks that no longer deserve a spot in the portfolio. Alas, that seldom happens and many buy and hold investors believe in holding forever. 
Traders make a ton of decisions.
These include more than just "when to buy" and "when to sell." Most of the time the decision is to take no action and continue to own the position. It is very important to recognize that "doing nothing" requires a real decision. ["You've got to know when to hold 'em; know when to fold 'em."] It should not represent your inability to decide whether to initiate a new trade or exit a current position. For example, when you own a stock position, intending to exit very quickly with a target profit of five-cents per share, it is essential to recognize whether the stock price is behaving as expected.
If the price does not follow the predicted trajectory, then the trader must decide whether what he/she sees is still acceptable, or whether the original premise for making the trade has been violated. That is an active decision-making process. It is a very poor practice to tell yourself that "the profit is not yet five-cents per share, so I must continue to hold." There has to be a sound reason for holding.

TRADING TENETS ; MY PHILOSOPHY OF TRADING

There is no guarantee that you will earn money as a trader. Knowing that simplistic rule represents the first step towards finding success in the trading world. Why? Because those who appreciate the truth of the statement know that much hard work is ahead of them. They also understand that becoming a consistently profitable trader is a task that is difficult to accomplish. But it is far from impossible. 
When you, as a trader, have a winning mindset and understand reality, then your chances of coming out as a winner in the trading game is significantly higher than if you just take tips from other people or follow advice from a newsletter.
I began trading options for my own account in 1975 (and as a professional, beginning in 1977). I have leaned many lessons. Based on that experience, today's post contains nuggets of information that I want to share because I believe that every trader can benefit from being aware of these ideas -- even those of you who may not agree with all.
I offer them with the hope that they will help you make more money over the longer term -- and more importantly -- save you from self-destruction during the beginning phases of your career.
1.       ALWAYS KNOW HOW MUCH OF YOUR MONEY IS AT RISK FOR EVERY POSITION IN YOUR PORTFOLIO. Consider the the worst possible scenario and be certain that your exposure to loss is never more than you can afford to lose. This is especially true for anyone who sells options (naked) or buys and holds individual stocks, ETFs, or mutual funds.
2.      HOPE IS NOT A STRATEGY. Prayer will not help. Protecting your assets comes from careful risk management. 
3.      COMPARE THE POTENTIAL REWARD AND LOSS FOR EACH TRADE. Be certain that seeking that reward is worth the risk. For each trade, establish a profit target AND know the maximum sum that you are willing to lose. Remember that it is possible to lose more money than you plan because there are times when there is nothing you can do to hedge risk -- for example when the markets are poised to gap higher or lower. Thus, know your financial liability if the worst possible scenario occurs and have the discipline to get out of the position when your profit or loss target is met.
4.      WHEN YOU ARE SHORT AN OPTION, or when you sold an option spread, allow someone else to collect the last few pennies of profit by covering the short position -- before expiration -- at a low price.
5.      DEFINE YOUR COMFORT ZONE. Do not blindly accept the risk tolerance of another trader. A trade may be suitable for someone else, but that does not mean that it is suitable for you. Trade within your comfort zone -- especially as a new trader. Later, you will probably (slowly) expand that zone.
6.      Greed is not good.
7.      CONFIDENCE IS NECESSARY FOR SUCCESS. Fully understanding what you are doing leads to confidence. However, overconfidence may result in blowing up your account.
8.     ALWAYS KNOW HOW MUCH MONEY IS AT RISK. (Worth repeating). This applies to when you initiate the trade as well as to every day that you continue to hold the position.
9.      UNLIKELY EVENTS DO OCCUR. Do not seek tiny rewards, despite the high probability of success, unless the worst case scenario results is a small loss. Translation: Do not sell far-out-of-the-money options @ $0.05 to $0.15 with the belief that they will always expire worthless. If you ignore this piece of advice, every once in awhile, something bad will happen. That is how careless traders go broke.
10.  EXAMINE POSITIONS EVERY DAY AND DECIDE WHETHER THEY ARE WORTH OWNING AT CURRENT MARKET VALUE. This has nothing to do with whether the position is currently underwater or profitable. The trade should pass the simple test: Do you want to own this position today?