Shane Johns is the President and Co-founder of CoveredCalls.com, an options data service for covered call investors. CoveredCalls.com was founded in 1997 as a resource to help Covered Call investors quickly identify high-premium covered call plays.

Shane’s company provides unique high-premium covered call plays as well as focusing on risk management, and protection of investment capital.

It was a pleasure to speak with Shane Johns about how he manages his trading business. This is the second part of that interview.

Optionetics: Are your trading systems geared more toward long-term strategies or short-term strategies?

Shane:  Short-term.  We prefer 30-day expiration periods, but will consider 60-day expirations max.  The shorter term expiration periods are more advantageous to the call option seller, due to time-value erosion.  We''ll let the near-term call option buyers take the big risks.  Risk is always balanced with reward, and we prefer the more conservative side.

Optionetics: What are some of the key rules or factors that you consider before selecting any potential trading opportunity?

Shane:  Safety.  Any investment strategy can be risky.  And the wise investor will look for, and understand, the potential position risks up front, and learn how to mitigate or avoid them.

For example, one of our new offerings at CoveredCalls.com is our unique "Married Puts" data.

Even if you are totally wrong on your investment selection, Married Puts *guarantee* that downside loss is LESS than 5%!  In other words, the stock can drop to 0 (zero) and your loss is less than 5%!  This is insurance for your stock.  This may sound too good to be true, but let me give an example:

In February 2008, Yahoo (YHOO) stock was trading at $27.78/share.

If an investor were to buy 100 shares of stock, and at the same time buy a put option (this is why these "puts" are "Married Puts", because you buy the put option at the same time you buy the stock) at the 30-strike expiration (in-the-money) and two expiration periods away, this is what it looked like:

So for two expiration periods of downside protection, we are risking 3.2%.  And the idea is to, as the stock goes up within these two months of protection (before the put expiration), write covered calls for two cycles.  And if we were totally, completely wrong with our technical and/or fundamental analysis, and our stock selection, our max risk exposure is only 3.2%.

But combine this protection strategy with good fundamental and technical research, and you have a successful AND protected game-plan.

To summarize our "Married Puts" play:

1. Buy the stock
2. Buy an ITM (in-the-money) put option
    a. One strike ITM
    b. Two expiration periods away

This is a great technique for managing the downside risk that is inherent with non-protected covered call positions.

Optionetics: What are your favorite markets that you like to trade and track with your analysis tools?

Shane: Our tools scan and cover the entire market, but we prefer avoiding the single-stock risk completely, and staying with ETs for our underlying investment vehicles (for the CC positions).  But we do provide the high-premium single-stock plays that some our clients want (for the much higher premiums).  We like CCs on the QQQQ, or more recently (since these new "Ultra" ETFs from ProShares are relatively new...only a couple years), we like CC''s on the QLD or on the QID (the short side).  These "Ultra" ETFs from ProShares track to either 2x the QQQQ, or 2x the short of QQQQ.

Optionetics: What is your most memorable trade?

Shane:  It''s always the losers.  It''s the losses that make you not sleep well at night, and this is one reason we now provide the tools to mitigate the downside loss risk...that is a valid criticism of covered call investing.

Optionetics: With all the different technical as well as fundamental analysis tools out there how does a new trader avoid information overload or "analysis paralysis"?

Shane: Easy...we only focus on two technical indicators: Bollinger Bands and RSI.

There are people a lot smarter than us, and a lot more expert than us, with technical indicators, and we''ve all seen the technical charting screens where there are about 6 overlaid indicators, and 10 other tracking indicators below the stock chart.  That is information overload and "analysis paralysis."  Plus, no system is 100% accurate.  And if the "system" is too confusing, people just won''t use it at all.

What we''ve found is that a simple Bollinger Bands overlay paired with a simple 14-day RSI gives us good readings overall.  This way we have a "trend" indicator (BB) paired with a "momentum" indicator (RSI), and our simple guidelines are:

• Stock thru upper BB and RSI > 70: downturn coming (sell stock and/or buy puts)
• Stock thru lower BB and RSI < 30: upturn coming (buy stock and/or sell OTM covered calls)

Optionetics: Thanks, Shane, for sharing your trading approach with our Optionetics reading audience.

To read previous installments of this interview, please click here.

Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
Visit Jeff’s Forum
Listen to Jeff at www.ProfitStrategiesRadio.com

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