Hey, all.  Happy Friday!  I wanted to give you a quick talk on one of my most powerful options strategies, one that forms the bulk of my trades in the Dr. Stoxx Options Letter.  This system works so well, I've banked over $15,000 just since Christmas!  All those presents we bought our kids?  More than paid for!

The strategy I'm talking about is what I call the "Put-Write -- Covered-Call Cycle (PW-CC)"  Market conditions are absolutely perfect for this cycle right now, and the fact that we are in earnings season gives it an extra boost.  

Here is how this powerful strategy works:

1. Find a key set of stocks that you like for both fundamental and technical reasons.  These should be stocks you would like to own for the longer-term.  Some of my favorites for this strategy are: AAPL, GOOGL, BABA, BIDU, CELG, JAZZ, among others.  ETF's also work well.

2. Sell weekly puts 1 to 2 weeks out just under key support levels.

3. Hold to expiration.  If worthless, bank the profit and repeat step 1.

4. If assigned shares, write calls on the first strike, 2 to 3 weeks out, that would make the position profitable. 

5. Hold covered calls to expiration.  If not called away, go back to step 4 and repeat.  

6. If exercised, go back to step 1 and repeat.

The most important step in this cycle, of course, is step 1.  This cycle can be a portfolio killer if you don't first select the right stocks.  Here strong analysis skills are a must.  You must know the critical valuation points of the company, both retail and sell-side sentiment toward the company, and any important catalysts over the near-term.  

Step 2 requires technical analysis skills.  This is sometimes more difficult that it would seem.  Pinpointing key support over the near-term is often more than just eye-balling the most recent pivot low.  There is trend analysis, regression analysis, and mean-reversion analysis which must all be factored in.

If done right, 80% to 90% of your trades will not go any farther than step 3.  This is the ideal, because if you find yourself in steps 4 and 5, you will slow down the whole process.  This tends to reduce your overall returns.  But if only 1 in 10 trades go into the covered call leg of the cycle, you can potentially be looking at some very strong returns indeed.  See our results below.

A quick note on risk management: you won't need it!  You might be tempted to load up on put-writes since often the premium sold is only around $200 or less per contract.  But because cash must be set aside in case your are assigned shares, your position sizing is automatically limited to the size of your capital.  There is no real way to get overly leveraged with this system.  Your broker will cut off your buying power before then.

How about some results?  The Dr. Stoxx Options Letter  is closing in on a 10% gain so far in January.  Nice!  That's a bit better than average, but still represents the kind of gains that are possible with the PW-CC Cycle.  Here are our closed trades so far in 2015, and below that are our overall results since we launched.  Hope you can join us!