Covered Calls and Cash Secured Puts (Part 34)

Before I continue the discussion of dollar cost averaging (DCA) as a position management technique, I want to expound on a statement I made that gets at the core of CC/CSP trading.

Recall from my last post:

> DCA lowers the cost basis… over 28%, which leaves
> $6.48 less to recoup for position profitability. This
> can save months!

The goal of these positions is to have the short call be assigned (CC) or to have the short put expire (CSP). Once this occurs then the margin requirement is released and a new position may be initiated in its place.

Annualized return is about dividing total return by the number of years in trade. The shorter a position lasts, the smaller the denominator and the greater the annualized return.

Lowering the CB, which DCA allows us to do, decreases how much cash we need for breakeven or for position profitablity. Once profitable, I always want to keep an eye out for position exit via option expiration (CSP) or option assignment (CC). This effectively locks in my gain and allows me to move on.

The sooner I can end a position, the greater the annualized return. A core mantra of the CC/CSP approach is “back to cash, back to cash, back to cash!” In general, positions that take a few months or less can post juicy annualized returns (18-30%+) while positions that drag on for years score annualized returns in the single digits.

If single-digit annualized returns is the worst-case scenario then we’re looking at a trading approach with tremendous potential! Realize too that this will tend to occur when stock price tanks resulting in vast outperformance by the CC/CSP.

Unfortunately, I suspect the worst-case scenario is more likely to involve corporate bankruptcy, a relentless stock decline, or a sudden stock crash. If I only see this on 1 out of 1000 positions then I can comfortable absorb that loss. If I see this on 1 out of every 10 positions, however, then my optimism would suffer a substantial blow.