Adjusting Our Portfolio Mix to Achieve Diversification and Cash Allocation – March 15, 2021
To decrease portfolio risk for our covered call writing and put-selling portfolios we must be well-diversified and allocate a similar amount of cash per position. The allotment of cash per-position will rarely be precise but it is a goal we must incorporate into our methodology. In this article, I will describe the process for covered call writing using the Premium Blue Chip Report (top-performing Dow 30 stocks) for the September 2020 contracts using a $250,00.00 cash balance. The process can be adjusted up or down depending on the cash available.
Blue Chip Report for September 2020 Contracts
Structuring our strategy requirements for a $250,000.00 portfolio
- Diversify with 7 elite-performing Dow 30 stocks
- Allocate $36k per position ($250k/7)
- Divide the price-per-share into $36k and round to the nearest 100
- Are adjustments needed?
- Must leave a 2% – 4% case reserve for potential exit strategy opportunities
Portfolio initial setup based on initial strategy guidelines
Covered Call Writing Portfolio Setup
Following the initial guidelines, the cost is $15,724.00 greater than the cash available plus there is no reserve for exit strategy. We need to make an adjustment of about $20,000.00. In this case, I decided to reduce my potential CRM holding from 200 shares to 100 shares.
Portfolio final setup after the adjustment
We are now diversified with 7 different Dow 30 top-performers and have a reasonable, although not perfect, cash allocation per-position. There is also a cash reserve of $5956.00 for potential exit strategy executions.
Next steps
Once we have our portfolio selections, we turn to the option-chains to select strikes that meet our system criteria and immediately enter our 20%/10% guidelines.
Discussion
Portfolio risk will be mitigated by diversifying the securities in our portfolios and allocating a like amount of cash per-position. We must also factor in the need for a cash balance to execute potential exit strategy opportunities.
Author: Alan Ellman