Pay Day is Coming Up!

The next part of my system involves selling covered call options. Not only do I dollar cost average ETF's in my system, I further lower my risk by selling covered calls against my positions. I like to collect somewhere between 1% and 2% per month by selling calls. In most cases I can sell calls above my average cost per share and still collect 1% to 2% per month.

Which calls to sell do you ask? I always look to sell front month out of the money calls. I can collect enough premium and have theta work in my favor. Most front month calls expire out of the money. This means that most times I will be able to collect the premium and not be required to sell. If I do have to sell, two good things have happened: 1) the ETF has gone up in value and 2) I am forced to bank some profits. There is no such thing as taking a bad profit.

This is where the discipline comes in. The temptation will be there to buy back those options you sold if the ETF takes off in price. DON'T DO IT!! You are not smarter than the market. I am not smarter than the market. If the market tells you it is time to bank some profits, take them. No judgement calls. Stick to the system. You never know the future of the market.

Monday will be payday for me. Options will expire on the positions I own Friday and I will be able to collect more premium for July expiration. Of course the market has been a mess over the last couple weeks. No problems here. I just keep collecting the cash.

I Love When the Market Goes Down!

This may seem counter-intuitive (most of your success in the market will be) but it is a key principle in my system. When the market goes lower, I get pretty excited. I only invest from the long side, but the market going down makes me happy. Here's why:

As you know from my previous post, I use ETF's in my investment strategy. How do I buy them? I dollar cost average. This basically means that I purchase a specific amount on a set schedule no matter what the price is. This allows me to slowly accumulate a position over time. I don't have to worry about timing my purchases correctly. I know that over time, I will buy some higher-priced shares and some lower priced shares. The average price is all I worry about.

To give a very basic example of how this works. Say I want to buy $200 worth of shares every week. The first week I buy the ETF it is trading at $20 per share in week one. This means I purchase 10 shares. Week two rolls around and the price has dropped to $17.50. This allows me to buy 11 shares with my $200 and have a little cash left over. Week three, the price has dropped again. This time they are trading at $15 per share. Now I can buy 13 more shares with the cash and have a little left over. What does all this mean? Here's the math:

Week 1 10 shares @ $20 = $200
Week 2 11 shares @ $17.50 = $192.50
Week 3 13 shares @ $15 = $195

Total shares: 34
Total Cost: $587.50
Average Cost per share: $17.28

Had I bought everything on week 1, I'd be sitting on a pretty large paper loss if it falls to $15 and it has to get back to $20 just for me to get back to even. This way my average cost is lower. If it goes back to $20 I am sitting on a profit.

I didn't have to time anything. I didn't need some fancy technical analysis. I knew that no matter what, I am buying more next week. More importantly, I didn't need to make "judgement calls". It allows me to stay disciplined and follow my system no matter what the market is doing. If the ETF recovers back to the level it was a couple weeks ago, I am making money. I also add money to my account every week. Fresh capital gives me a buffer and allows me to continue to buy shares if it goes down for an extended time. Remember, I use ETF's so I can be pretty sure it's not going to zero.

And another thing. Do the math. The numbers work if the price goes up too. Using the same three week example and ($20 week 1) ($22.50 week 2) and ($25 week 3). You'd own a total of 26 shares and your average cost is $22.31. I'll take a 10+% gain in three weeks.

I use some other strategies to make my overall costs lower but we will cover that in another post.