1. The North Forty (Longer Term Crops) Written calls with 5-7 months expiration dates and strike price written at or near the current stock price with a 12-15% actual premiums with a 30% per annum target..
Also, includes longer calls like LEAPS where the actual premium is 20-30% with a 20% per annum target. Provides greater amount of downside protection vs the shorter calls.
2. The Back Forty (Shorter Term Crops): Written calls with 1-3 months expiration dates and strike prices written at or near the stocks current price. You will need to pick solid stocks that have a high probability of performing during the short life of your calls as you have a lower level of premium downside protection. Actual premiums in the 2-5 % range with per annum % high because of the short holding period. (Typical Strategy for many call writers).
If you grow these kind of crops it is critical you stay close to your investments because if the stock
significantly falls and you don't take some type of action you can lose money quickly because of the low premiums with a short recovery time vs. the longer call strategy with larger premiums and more time to recover from the down drafts. Regardless of approach, still no guarantee you will not lose money at some point unless you are a wizard and never pick a losing stock. The Micro Trend Farm is an evolution of this approach. More to come.
3. The Orchard: Contains crops that provide 3-6% dividends and covered call premiums with a target of 12-15% annual return. Examples might be Verizon or some utilities with calls. Recognize that higher dividends can drive down call premiums so you need to consider the overall return.
More conservative (Note: many thought solid paying dividend stocks were always dependable but as we saw from the last few years you never know what might happen to a company's dividend in challenging economical times like we face now.)
4. The Unpaired Crop: These are stocks that do not have a paired covered call. This can happen because you closed the call and locked in a profit and are waiting for a new call write. Or, it may be a stock that you already owned and you want to retain but it doesn't have high call premiums. Or, It's a new purchase of a stock that you really like and want to own it and covered calls again do not have the justified premiums. I own some of these but it is important that you keep this crop to less then say 5% of your total assets. There is nothing wrong in having different crops on a covered calls farm. But be careful it doesn't become your main crop unless you have decided to abandon the strategy.
5. Green House: A green house is where new seedlings are grown as well as sensitive plants that need to be protected from the cold and other weather conditions. There are a number of companies that I like to own that do not meet my call premium requirements. These are stocks that I feel have a lot of long term potential. So, I buy very small share number, e.g., 50 shares, and hold them longer term. I periodically review each holding and add positions if I still feel the same about the company. I might even write covered calls at some point if their premiums increase. Examples of stocks in my crop include: IBM, Priceline, Disney, Jack in the Box, and several others (these are not recommendations but examples of the kinds of stocks). I limit the holding to no more then 1-2% of my total assets.
6. The Barn: Good old hard cash. Unfortunately, in today's interest rate environment it is probably earning less then 1% unless you locked it in for 30 years (hope not). I believe all portfolio's need to have
some cash. It let's you sleep at night. I like to keep around 5% of total assets in cash. Or, around
1 year of living expenses so if the market does take a hit I don't have to close positions in a panic..
While CCS does provide some downside protection it is still limited and without protective crop action losses can still occur once downside is breached.
The Covered Calls Farm
Planting and Harvesting Covered Calls for Fun and Profit using a Farming Strategy
Please Note: This site does not recommend any specific investments. Please consult with a certified financial planner or brokerage to discuss specific investments. This is not a site for profit but an educational site for a specific call option strategy that is well documented but doesn't seem to be fully understood.
Updated: March 16, 2011
The North Forty: Longer Term Crops
The Back Forty (Shorter Term Crops)
The Barn (Cash and Fixed Assets)_
Unpaired: Stock without a covered call: