DIA Up and the Money tree 11/13/11

Attaching a chart on DIA. This is an ETF on the Dow Jones 30 stock. The signal is up on this since 10/11/11, more than a month ago. Meanwhile my more elaborate system on SPY still shows an exit on long, which holds me back a little. And my 1/month 401K system has had me dipping my foot back into stock funds like Vanguard Explorer Admiral and Artisan Mid-Cap value. I did buy some SPY put options in one of my R/IRA accounts as protection on my 401K long positions and will leave them on till I get a positive up signal on SPY.

Other than that, I have been thinking about a money tree. I went to the local chapter AAII meeting this weekend and picked up a book for reading. It is called “Show me the Money”, Covered Calls & naked Puts for a monthly cash income by Ronald Groenke. The money tree method so to speak. Plant a tree at the back that grows dollar bills that you can keep taking, as long as your underlying stock doesn’t get decimated..

I have rarely practiced using covered calls as I consider them risky with no downside protection. Yet I have met at least a couple of people who have practiced this strategy quite successfully. I think it might be worth considering when combined with tactical asset allocation (market timing) based on slow signals that don’t get you in and out frequently.

The author starts of with an example where he shows a 21.44% return per year over 28 months. Buy the stock and sell the call options and collect premium. This method certainly has downside risk but I will keep my opinions bottled and take a look at what the author has to say. It will take me a little while to digest the strategies he promotes and then I can combine it with some of my own ideas. What is wrong with buying a chunk of high grade stocks like WMT, PFE and KO and selling options on it over and over again as additional income? I think there are nuances I will want to add and do the what if scenarios so that I am prepared with the proper reaction if the stock goes down. But even if one did this in a mindless manner through downturns, would we not come out ahead in the long term? Capital preservation is still important to me so I probably won’t participate when we get major downturns. Still, this might be a good method for sideways and up markets. I like a slow upward moving equity curve on my portfolio and this might add to it. More on this later.