Ten Rules for Using the SSR Technique

As promised, here are the 10 rules for using the SSR covered call defensive technique as presented by Hooper and Zalewski in their book, Covered Calls and Leaps.

1. The SSR is to be used on a covered call position where an investor has an open TSS for income call.
2. The investor has a profit in the stock position. (The stock is worth more than you paid for it.)
3. The position cannot be closed for a profit as the loss on buyback of the call is greater than the potential profit from selling the stock. Therefore, if the position is closed out, a net loss is created.
4. Use the SSR worksheet to calculate the net loss in closing the transaction. (part of the Covered Call Toolbox provided one month's free at www.compoundstockearnings.com)
5. Input various LEAPs contracts into the SSR worksheet. The SSR usually works better when using the second to last expiration LEAPs rather than the furthest out LEAPs contract. Start one strike price out of the money and move into the money 3 or 4 contracts.
6. Input various near month and 2 month out call contracts into the SSR worksheet. Start 2 strikes out of the money and move into the money 2 contracts.
7. The SSR should be executed if the SSR worksheet presents a transaction that has both an uncalled return and called return of greater than 2%. Preference should be given to the SSR transaction with the highest returns. Preference should also be given to selling the near month call.
8. It is also preferable that the SSR be cash flow positive. Investors with excess capital may still choose to execute the SSR if it is cash flow negative. Optimally, the transaction should generate net cash.
9. If the transactions presented by the SSR worksheet do not meet the return requirement of cash flow requirments in 7 and 8, more aggressive investors may choose to enter shorter-term calls into the SRR worksheet as an alternative to using a LEAPs. Aggressive investors may buy a shorter term call to construct a SSR if the shorter term call provides an SSR that meets rules 7 and 8.

If buying a short term call:

a) Preference must be given to the longest term call that meets rules 7 and 8.

b) An investor must not purchase a call when that call's price consists of more than 15% time value. This limit ensures that the investor is purchasing primarily intrinsic value. (exercisable value) and will not be affected greatly by time decay in the event that the position is not exited quickly.

c) When purchasing a shorter term call, investors must be aware that in the event the stock begins trading down, the call will need to be called out.

10. In the event that the call was shorted and the SSR restructure expires worthless, the position should be managed like a regular LEAPs position with the following exception:

The investor should always give preference to selling a near month call if that call will provide a positive called and uncalled return. Remember, the objective of the SSR is not to manage the position for income, but to exit the unproductive position as soon as possible.