From Greed & Fear To Grow & Protect, Part 2 by Allen Rehert
The Road To Recovery
In part 1 of this two-part article, you were introduced to rules you could apply in various markets, including markets recovering from a decline. Here in part 2, we’ll see how well the rules work.
Last month, I described how and why I set out to build a buy write strategy using combinations of stocks and call options with the goal of making at least a 10% annualized return. My objective was to find stocks that are unlikely to decline substantially, but if they did, I would use my recovery rules from part 1 to allow my buy write investments to track or improve upon the recovery of the underlying stock. For the strategy, I used a selective screen to tell me what to buy and I developed conditional rules to tell me when to exit. Here, I’ll describe how I tested the strategy.
To test my strategy, I analyzed the expected behavior via simulation. I used the Black-Scholes equation to value options using these parameters: