THE ONE-THIRD STRATEGY – PART I
By Michael Craig
With everything that happened in the market last year, I have made some adjustments to my personal investment strategy, the One-Third Strategy. I felt that these modifications would be helpful to many of the investors that utilize this strategy, as well as investors that don’t use it.
I am often asked about various investment strategies. Furthermore, some of these requests go on to ask how I personally invest with covered calls. I have always been reluctant to give out information on how I personally invest for fear that people would blindly follow the system because I was using it. Rather, I wanted people to follow it because it was a good system to help them achieve their investment goals. However, I do feel that this investment strategy does contain several rules that might be helpful to all investors.
Below is the system that I personally use to invest in covered calls. It is not necessarily the “best” system or the right system for you. However, I do think that you will find it educational. I am not suggesting that anyone use this system, and there are several other approaches that may yield better results. This is simply an approach that I have had success with, and one that works for my personal investment goals. I call it the One-Third Strategy.
The underlying theory behind the approach is to be aggressively conservative. Meaning, I consider this to be a conservative approach, but on the conservative “scale” it is aggressive. This is in contrast to a conservative aggressive strategy that is used by many other covered call investors, where the underlying strategy is aggressive. In general, I am a conservative investor, and I do not like risk or losing money. Additionally, I have made more money from the compounding effects of covered call writing, than I have from the really high yielding calls.
THE ONE-THIRD STRATEGY RULES
1. Invest calmly, there is NEVER anything too good to pass up.
2. Don’t buy just to buy, wait for a stock you are comfortable owning.
3. Invest over 3 different risk categories, high risk, medium risk, and low risk.
4. Invest equally over the categories with equal dollar amount going to each type of risk.
5. If you can’t invest equally, low risk gets priority, then medium risk, then high risk.
6. If you can find more low risk stocks that you like, buy them, and put less in the other categories.
7. If market conditions turn bad, then utilize the Conservative Strategy.
8. NEVER invest more than 20% of your overall portfolio in one stock.
9. Sell the calls immediately after buying the stock.
10. Don’t try and squeeze out eighths and sixteenths of a point.
11. Watch your stocks carefully after you have purchased them.
12. Sell out on a significant upwards run. Buy your calls back, and sell out for immediate profit.
13. Cut your losses early on a downwards run.
14. Aim for 7% monthly return.
15. Try to avoid holding a stock over earnings.
16. Diversify with different industries and sectors.
Overall, I invest over three different risk categories: low risk, medium risk, and high risk. I tend to invest equally over the three categories. If you are using our service, the low risk is usually the 13/13/Deep in the money category, the medium risk is usually the Over $25/Stock Split category, and the high risk is the Under $25 category.
