Let's put this information under the topic of making more money. Well, that's a big surprise, I can hear you commenting. Like all the other messages and blogs are about something different. This is a good time of the year, historically and histrionically. It proves out most every year---except 1997, drats.
There is a tendency for the stock market, and several stocks within the market to a higher degree, to move up at the end of the year. How to play this movement? We'll get to that in a moment. First though, just what is a Santa Claus Rally? Well, you think long and hard and realize it must have something to do with Christmas. And for the most part you would be right on. There is no technical definition of this phenomenon, but there are several ideas that bring it to life. Some say it is the last five trading days of the current year and the first two trading days of the new year. That's close enough.
I think it's a bit longer. My Santa Claus is a little chubbier. It starts earlier, say after the December expiration date, or third Friday, and goes deeper into January. If fact it runs into the January Effect.
If you get into a position on Dec. 23rd instead of Dec. 27th, it's usually no big deal. It is a bullish trade, either in stocks or in options. To add to this you can trade positions that have a higher likelihood of moving in this time period. Stocks like the retail stores, online selling services, gift companies. I'll add to this stocks getting ready to participate in the January Effect.
See the next blog called the January Effect. That will add gravitas to this blog.
Here are some potential things you can do:
1) Check the news. How is shopping going? What was Black Friday like (this year it was awesome); Local Saturday (it was also really good; and Cyber Monday---another homerun.
2) How about sales the rest of December? Great so far.
3) What is the market like? It's range bound. Can it be played? It can and it is. Play the DIA options as they near support and resistance levels.
NOTE: Many options now trade weekly. The DIA (ETFs) have an expiration date for Dec. 29th, as well as the regular option expiration date in January. Some have already traded it once.
4) Do short term in-and-out plays, ROSS Stores (ROST) has been good. There is a lot of life left in this stock.
5) Look for stocks with large swings between support and resistance. Check out LULU, NGLS and now ROST. Choose carefully. Probably slightly in-the-money options are the way to go. Don't get greedy. A quick .50 cents on ten contracts is $500.
6) Consider all the news. I think the blog I wrote called Picturesque is one of the most important articles I've ever written.
Look at the whole picture. Give your stock a chance to work.
7) There are so many great covered calls stocks right now. I'll be putting on a January list by Monday.
8) Survey after survey, analysis after analysis, point to the fact that there are bargains everywhere. Stocks are trading at incredible P/E ratios. Also, many stocks are trading at great book values. For example: MSFT could be at $75 and it would seem normal./ Berkshire-Hathaway ($117,600 per share---and a good bell weather stock for all of America) could be at $250,000 per share and it would be still at a good P/E ratio. There are hundreds of others.
NOTE: Again, read the upcoming blog on the January Effect.
One last thing about the Santa Claus Rally. It's usually followed by a very good January, some think it's the best month of the year. I agree, pending other global news.
That's it for now. Let's all get ready for a great and prosperous New Year.
Wade
Tuesday, December 27, 2011
THE JANUARY EFFECT
I have a particular affectation for the January Effect. It is a good time to be alive. Let me share a few ideas of why human spirits soar and this phenomenon is often followed by a soaring of economic activity, including but not limited to the Stock Market. Here goes:
1) The old year is gone. If you had a bad year, you look forward to a better year. If you had a good year, for optimists it can only get better. Many people right now are looking forward to the new year. Hope and Change spring eternal.
2) Many big funds and pensions start to rebalance their portfolios at the end of the year. They go to cash (which started just before Oct. 31st) and start purchasing better stocks.
3) Here's a comical irony. The big guys want to get in the market in advance of the little guys---you and me. Don't we usually think it is the other way around? We, the little guys, are trying to figure out where the big money is going. Point: at the end of December and in January there is a lot of positioning and re-balancing.
4) There is a flood of new money, well . . . flooding the market in January. Some of this is from the aforementioned move from cash to equity positions. Most is from an event which happens every year. It is the new cash that goes into IRAs, 401Ks, pension plans, etc. Think of this. Most corporate plans max out in the previous summer. Now, people have new freed-up donations to their plans and they want to put it to work as soon as they can. This is huge. Consider your own situation. Do you wait for April 14th of 2013 to make your 2012 contribution to your IRA or do you make it on January 2nd of 2012? Get it in early. Why not pick up another year of tax-free growth?
5) January is the month of the ultimate "Earnings Season." It's the year end. If the year has been profitable and the companies are doing well, it should be good. Well, my opinion is that companies have become lean and mean. They have billions of dollars, and in spite of our current government's bias against profits, growth and businsss, many businesses and investments have excelled anyway. One man cannot hold back our free-enterprise system for long.
"IF THERE'S A WAY, TAKE IT; IF NOT, MAKE IT."
6) This year is also different. Companies have investment capital for acquisitions, expansion and organic growth. And their multiples are incredible. Some say, and I agree, this is one of the best times for picking up great companies' stocks that we've seen in over 80 years.
7) And the best January Effect of all is me. I'm here, ready to analyze, figure-out and plan a great month. I hope to hear from you as you "GROW OUT OF YOUR PROBLEMS!"
H A P P Y N E W Y E A R
1) The old year is gone. If you had a bad year, you look forward to a better year. If you had a good year, for optimists it can only get better. Many people right now are looking forward to the new year. Hope and Change spring eternal.
2) Many big funds and pensions start to rebalance their portfolios at the end of the year. They go to cash (which started just before Oct. 31st) and start purchasing better stocks.
3) Here's a comical irony. The big guys want to get in the market in advance of the little guys---you and me. Don't we usually think it is the other way around? We, the little guys, are trying to figure out where the big money is going. Point: at the end of December and in January there is a lot of positioning and re-balancing.
4) There is a flood of new money, well . . . flooding the market in January. Some of this is from the aforementioned move from cash to equity positions. Most is from an event which happens every year. It is the new cash that goes into IRAs, 401Ks, pension plans, etc. Think of this. Most corporate plans max out in the previous summer. Now, people have new freed-up donations to their plans and they want to put it to work as soon as they can. This is huge. Consider your own situation. Do you wait for April 14th of 2013 to make your 2012 contribution to your IRA or do you make it on January 2nd of 2012? Get it in early. Why not pick up another year of tax-free growth?
5) January is the month of the ultimate "Earnings Season." It's the year end. If the year has been profitable and the companies are doing well, it should be good. Well, my opinion is that companies have become lean and mean. They have billions of dollars, and in spite of our current government's bias against profits, growth and businsss, many businesses and investments have excelled anyway. One man cannot hold back our free-enterprise system for long.
"IF THERE'S A WAY, TAKE IT; IF NOT, MAKE IT."
6) This year is also different. Companies have investment capital for acquisitions, expansion and organic growth. And their multiples are incredible. Some say, and I agree, this is one of the best times for picking up great companies' stocks that we've seen in over 80 years.
7) And the best January Effect of all is me. I'm here, ready to analyze, figure-out and plan a great month. I hope to hear from you as you "GROW OUT OF YOUR PROBLEMS!"
H A P P Y N E W Y E A R
Monday, December 19, 2011
Cash Flow in December
CASH FLOW IN DECEMBER
What a great time of year to make a few short, quick turn trades in the market. No money does not grow on Christmas Trees, but almost every year there is a Santa Clause rally. I won't go into all of the reasons here. I've studied it for years and except 1997, there has been a rally or at least an upturn into the end of the year. Many people (including the big institutions) want to get there money in before January, which is historically the best month of the year.
I'm still looking at the Dow, playing the ETF, the DIA. Again, it trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA is at $119 plus pennies. It is a actual stock. This fund (not a mutual fund) owns all of the stocks in the DJIA, or Dow Jones Industrial Average---made up of 30 stocks in blue chip companies.
The stock trades in one dollar increments on the strike prices. So you can do straight option trades, spreads, covered calls, etc. Let's look at a few straight option trades. Options are risky with a great reward if you're right, and losses if you're wrong. Work out your trade-suitability with your own broker.
One more point before I speak of the Actual Trade. Options historically all expired on the third Friday of the month. Some no have expiration dates every other week. Some larger stocks even now have weekly options. I think these all need to be practiced traded with paper-money, before you put real money in harms way. Do they have the same open-interest? How do they perform? I think they are probably like typical options, but we need to learn more.
Look at the DIA $118, $118 and $120 strike price calls for January, the ones which expire on the 21st.
Jan DIA $118 calls: $3.35 x $3.45
Jan DIA $120 calls: $2.18 x $2.20
Now look at the same strike prices which expire on December 30th.
Dec 30th DIA $118 calls: $2.09 x $2.16
Dec 30th DIA $120 calls: $1.04 x $1.07
You can quickly see how much that extra two weeks cost. Also, while January may be a good month, usually, it will be there when these shorter options play out. Each strike price has its advantages and disadvantages. I've spent many blogs explaining this time value, and buying in-the-money options versus out-of-the-money options.
THE TRADE
Once again, several factors are important. One is where the Dow stands in its own range. I think the short term range is 11,800 (11,600 would be really good support) and about 12,200 (12,400 or 12,600 would be a high short term resistance).
Tomorrow AM, and any AM for that matter, you watch CNBC, or any news channel and watch if they have the Dow Futures. If the futures show up or down about 100 points, then it could be a good play. Read my previous blogs where I explained the 100 point move, up or down, might equal a .50 cent profit in the option. If the futures don't show this, then wait. There will be another day.
For example, if the Dec. 30 $119 calls are $1.20, 10 contracts would cost $1,200. Now if one day the Dow moves 100 points, and assuming you got in at a good time, you could make .40 to .50 cents on that move. Your $1,200 could be $1,600 to $1,700 in a day, or even an hour. Yes, there could be news to spoil the move, but right now the option are out two weeks, it has time to work. If you are worried, and want more time, maybe buy the Jan. $120 calls.
One point is to get your sell order in, right when you make the purchase. And a stop loss at about 50% of the option price. $1.20 purchase, would put the protective stop loss on the option at .50 to .60 cents. Cut your losers and let the winners work.
One last point: You could make a lot more money by getting in the day before, but that presents a whole new aspect of figuring out which way the wind will blow. More profits, but more risk.
Wade
What a great time of year to make a few short, quick turn trades in the market. No money does not grow on Christmas Trees, but almost every year there is a Santa Clause rally. I won't go into all of the reasons here. I've studied it for years and except 1997, there has been a rally or at least an upturn into the end of the year. Many people (including the big institutions) want to get there money in before January, which is historically the best month of the year.
I'm still looking at the Dow, playing the ETF, the DIA. Again, it trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA is at $119 plus pennies. It is a actual stock. This fund (not a mutual fund) owns all of the stocks in the DJIA, or Dow Jones Industrial Average---made up of 30 stocks in blue chip companies.
The stock trades in one dollar increments on the strike prices. So you can do straight option trades, spreads, covered calls, etc. Let's look at a few straight option trades. Options are risky with a great reward if you're right, and losses if you're wrong. Work out your trade-suitability with your own broker.
One more point before I speak of the Actual Trade. Options historically all expired on the third Friday of the month. Some no have expiration dates every other week. Some larger stocks even now have weekly options. I think these all need to be practiced traded with paper-money, before you put real money in harms way. Do they have the same open-interest? How do they perform? I think they are probably like typical options, but we need to learn more.
Look at the DIA $118, $118 and $120 strike price calls for January, the ones which expire on the 21st.
Jan DIA $118 calls: $3.35 x $3.45
Jan DIA $120 calls: $2.18 x $2.20
Now look at the same strike prices which expire on December 30th.
Dec 30th DIA $118 calls: $2.09 x $2.16
Dec 30th DIA $120 calls: $1.04 x $1.07
You can quickly see how much that extra two weeks cost. Also, while January may be a good month, usually, it will be there when these shorter options play out. Each strike price has its advantages and disadvantages. I've spent many blogs explaining this time value, and buying in-the-money options versus out-of-the-money options.
THE TRADE
Once again, several factors are important. One is where the Dow stands in its own range. I think the short term range is 11,800 (11,600 would be really good support) and about 12,200 (12,400 or 12,600 would be a high short term resistance).
Tomorrow AM, and any AM for that matter, you watch CNBC, or any news channel and watch if they have the Dow Futures. If the futures show up or down about 100 points, then it could be a good play. Read my previous blogs where I explained the 100 point move, up or down, might equal a .50 cent profit in the option. If the futures don't show this, then wait. There will be another day.
For example, if the Dec. 30 $119 calls are $1.20, 10 contracts would cost $1,200. Now if one day the Dow moves 100 points, and assuming you got in at a good time, you could make .40 to .50 cents on that move. Your $1,200 could be $1,600 to $1,700 in a day, or even an hour. Yes, there could be news to spoil the move, but right now the option are out two weeks, it has time to work. If you are worried, and want more time, maybe buy the Jan. $120 calls.
One point is to get your sell order in, right when you make the purchase. And a stop loss at about 50% of the option price. $1.20 purchase, would put the protective stop loss on the option at .50 to .60 cents. Cut your losers and let the winners work.
One last point: You could make a lot more money by getting in the day before, but that presents a whole new aspect of figuring out which way the wind will blow. More profits, but more risk.
Wade
Monday, December 12, 2011
DIA UPDATE
CASH-FLOW ON STRAIGHT OPTIONS: PLAYING THE WHOLE MARKET
Please allow me to update you on a straight option trade. Options are risky, but the reward is comensurate with the risk.
Lately, I've been studying the option movement---almost intra-day---on the whole market, this time defined as the Dow Jones Industrial Average. It trades as an ETF (Exchange Traded Fund), which is actually a stock and trades like a stock, not a mutual fund. This ETF has $1 incremental strike prices. If the Dow is at 11,980, the ETF will be about $119.80 +/-.
Here's my observation: If the Dow futures are showing up 40 points, I've observed that the Dow will actually go up two to three times that amount. If it is showing down 80 points, as in -80, before the market opens, it will close down about 160 to 240 points. I've observed about 4 to 5 days in the last month when this has now panned out. It's not fool-proof, but it's a good indicator, and it's worthy of more study.
Here's my contention. If you play an option near-the-money (For example if the Dow is at 12,140, you play the $121 or the $122 calls), and you have a few weeks to expiration (this week is expiration, so we have to be careful), then the option will go up about .50 cents for each 100 point move in the Dow. If what I'm observing is true, this is a very important discovery.
Let's look at today for example. Before the market opened the Dow Futures were showing down 120. It was very erratic, bouncing all around, but when the market opened it was right about there. I projected the market would close down about 200 to 240 points. It was there much of the day, and finally closed down about 170 points. If one would have bought the puts (playing the down-side), and purchased the $120 strike price for $1.22 (They opened at $1.60), one could have sold them for $2.04. That's an intra-day trade of about an $800 profit. This is for a few hours. That's $1,220 to $2,040. Now, these are opening and closing prices. If you would have gotten out about 12:30 PM, you would have sold them for $2.30, or $2,300, not $2,040.
One point that is important to consider, and one I've made repeatedly, is to give the trade space to work. For example, if the Dow is showing up or down about 20 points, and the projection is a 40 point move, that may not be enough to even make .50 cents, on my 100 points=.50 cents in the option. See? And the last point, is the regular news. It seems that most of the good and bad news and all the commentary about the news, is already built into the expectation of the opening, or the Futures. The change however may come from news made during the day, and we have plenty of that. So, be careful, there is a lot of risk here. This is a great strategy to paper trade.
Please allow me to update you on a straight option trade. Options are risky, but the reward is comensurate with the risk.
Lately, I've been studying the option movement---almost intra-day---on the whole market, this time defined as the Dow Jones Industrial Average. It trades as an ETF (Exchange Traded Fund), which is actually a stock and trades like a stock, not a mutual fund. This ETF has $1 incremental strike prices. If the Dow is at 11,980, the ETF will be about $119.80 +/-.
Here's my observation: If the Dow futures are showing up 40 points, I've observed that the Dow will actually go up two to three times that amount. If it is showing down 80 points, as in -80, before the market opens, it will close down about 160 to 240 points. I've observed about 4 to 5 days in the last month when this has now panned out. It's not fool-proof, but it's a good indicator, and it's worthy of more study.
Here's my contention. If you play an option near-the-money (For example if the Dow is at 12,140, you play the $121 or the $122 calls), and you have a few weeks to expiration (this week is expiration, so we have to be careful), then the option will go up about .50 cents for each 100 point move in the Dow. If what I'm observing is true, this is a very important discovery.
Let's look at today for example. Before the market opened the Dow Futures were showing down 120. It was very erratic, bouncing all around, but when the market opened it was right about there. I projected the market would close down about 200 to 240 points. It was there much of the day, and finally closed down about 170 points. If one would have bought the puts (playing the down-side), and purchased the $120 strike price for $1.22 (They opened at $1.60), one could have sold them for $2.04. That's an intra-day trade of about an $800 profit. This is for a few hours. That's $1,220 to $2,040. Now, these are opening and closing prices. If you would have gotten out about 12:30 PM, you would have sold them for $2.30, or $2,300, not $2,040.
One point that is important to consider, and one I've made repeatedly, is to give the trade space to work. For example, if the Dow is showing up or down about 20 points, and the projection is a 40 point move, that may not be enough to even make .50 cents, on my 100 points=.50 cents in the option. See? And the last point, is the regular news. It seems that most of the good and bad news and all the commentary about the news, is already built into the expectation of the opening, or the Futures. The change however may come from news made during the day, and we have plenty of that. So, be careful, there is a lot of risk here. This is a great strategy to paper trade.
Thursday, December 8, 2011
STOCK SPLITS AND ROSS STORES
I wanted to update my thoughts on the projected moves of the next week or so. Ross Stores (Ticker Symbol: ROST) is doing their 2:1 stock split next week, Dec. 15th. That may change because not many stock splits are on a Thursday. But Friday is option expiration and maybe they wanted to avoid the same date.
Anyway, I felt that the stock could go to $100. That is still a possibility. However, when I looked at a chart of the past few months, I noticed it had a tough time with $90. Twice it peaked slightly above that price and then backed off.
I encouraged others to buy the $90 calls, and that proved to be a good trade. Ironically, that is still the price that I feel most comfortable with---and the $92.50s. The past few days it's stayed above $90, and punch up over $93. I would have loved to have seen it over $95, and even $100 before now. Yes, it looks like it's in a rolling pattern, but not much of one.
It still has the other great news: a) great earnings; b) the stock split; c) Christmas and the Santa Clause Rally; and d) the Dividend on the 29th. All this is good. However, there is the weak economy as a backdrop and the Euro Crisis looming (there is supposed to be some big announcement [after a multi-country powwow] this Friday), so who knows?
My feelings are that it will move up slightly and then hold or back off slightly. Kind of like a bird taking off into flight, going in stages. So, let me make a projection. It will move to about $94.50 or $95 in the next day or so. Hold, and back off to about the high $93s or low $94s. Then the next up move will be to $96 and then maybe higher following the same hold and back off scenario.
So, I'm changing the option buy and hold to buy and sell quickly. I now think it best to sell the option and then buy back in at the next dip. For example: If the stock moves up to $94 or $95 quickly, then sell the $92.50s, the $95s and/or any other that you hold. Discuss this with your broker. Maybe he/she can set an alert to notify you if it hits those prices. Then if it backs off for a day or so, get back in---depending on the level, let's assume $94, then consider jumping back in.
One thing this type of trading will do, is get some of your money off the table. This takes more time, but it can be worth it. Also, wait and watch next week as we explain Stock Split Strategy 4B, which is the rally into the split. That should be a good time. Look at the charts again, and see what they tell you. It's about ranges and timing.
Wade
Anyway, I felt that the stock could go to $100. That is still a possibility. However, when I looked at a chart of the past few months, I noticed it had a tough time with $90. Twice it peaked slightly above that price and then backed off.
I encouraged others to buy the $90 calls, and that proved to be a good trade. Ironically, that is still the price that I feel most comfortable with---and the $92.50s. The past few days it's stayed above $90, and punch up over $93. I would have loved to have seen it over $95, and even $100 before now. Yes, it looks like it's in a rolling pattern, but not much of one.
It still has the other great news: a) great earnings; b) the stock split; c) Christmas and the Santa Clause Rally; and d) the Dividend on the 29th. All this is good. However, there is the weak economy as a backdrop and the Euro Crisis looming (there is supposed to be some big announcement [after a multi-country powwow] this Friday), so who knows?
My feelings are that it will move up slightly and then hold or back off slightly. Kind of like a bird taking off into flight, going in stages. So, let me make a projection. It will move to about $94.50 or $95 in the next day or so. Hold, and back off to about the high $93s or low $94s. Then the next up move will be to $96 and then maybe higher following the same hold and back off scenario.
So, I'm changing the option buy and hold to buy and sell quickly. I now think it best to sell the option and then buy back in at the next dip. For example: If the stock moves up to $94 or $95 quickly, then sell the $92.50s, the $95s and/or any other that you hold. Discuss this with your broker. Maybe he/she can set an alert to notify you if it hits those prices. Then if it backs off for a day or so, get back in---depending on the level, let's assume $94, then consider jumping back in.
One thing this type of trading will do, is get some of your money off the table. This takes more time, but it can be worth it. Also, wait and watch next week as we explain Stock Split Strategy 4B, which is the rally into the split. That should be a good time. Look at the charts again, and see what they tell you. It's about ranges and timing.
Wade
Tuesday, December 6, 2011
FOLLOW UP - SUCCESSFUL TRADES
I just reread the blog on making successful trades, and I had a few other ideas for you. Some of these will be by the way of market maxims, others observations I've made recently and over the years.
1) There is an old market saying that is as true today as it ever has been. It is this: "Buy on rumors, sell on fact (news). There are many things that drive a stock, the most common being earnings---or better said, the "anticipation of earnings," both good or bad. See #3.
2) One observation is how the stock moves into an earnings announcement. Remember, just before the announcement, the company is in a "quiet period," or what I call the "red-light" period. This simply means no news---at least, no news from the company. Pundits, analysts, and other news reporters, are free to say whatever they want. So I watch and learn, trying to connect the dots, and then I share that info with you.
I can't prove these exact numbers, but it seems to me that about 80% to 90% of the time that a company makes an earnings announcement---whether it was going up, staying flat, or going down, into the announcement, the stock will back off and go down because the news is out. The rumors were true or not. The stock usually goes down. Sometimes not by a lot, but if you're playing options, and the earnings are near an expiration date, it could be disastrous for your option trade---because they are so time sensitive.
Also, much of the time, it's not about the actual numbers, but the commentary about the numbers. This is where the company makes "guidance" remarks about their future earnings, etc. One of the et ceteras is very important, and that is if the company makes other good announcements at the same time---like, a new dividend, or an increase in the dividend; a stock split or a share buyback; or maybe expansion plans, or the resolution of a lawsuit. This is why it is so important to read the whole news article, and seek info from many sources. I like briefing.com. YahooFinance.com is also very good. There are others.
I try to bring you info, but my comments are limited to the stocks that are currently in the basket of student trades.
3) In the stock market, news is everything. Nothing happens without the news. But as I stated in #2, the commentary about the news is also important. News goes into and out of the red-light, green-light period. The timing is set. However, there is one thing you can do: Figure out when the board of directors meets. Nothing happens until they meet. Yes, it could be by phone, but the list I made above are board decisions. You can call the company and ask them. Ask for the share-holder relations department. They will tell you when the next shareholder meeting is, but that's not what you want. You want: "When is the next board of directors meeting?" You still won't know what they will say or do, but know this: Nothing happens until they do.
4) Rick Santelli (The father of the Tea Party Movement) said this is reference to ongoing news: " . . . good news, but not nearly as good news as the headline shock value." There's a lot to this. Think hard on these words.
5) Last, I want to remind you to not get involved in a trade until you are ready. You should paper-trade extensively. Then when you are so excited---meaning the stars are aligned---that you can't wait, then go ahead (under the direction of your broker). Keep in mind the saying from my books: "I'd rather want what I don't have, then have what I don't want."
H A P P Y I N V E S T I N G ! Thought for the day: "If there's a way, take it; if not, make it."
1) There is an old market saying that is as true today as it ever has been. It is this: "Buy on rumors, sell on fact (news). There are many things that drive a stock, the most common being earnings---or better said, the "anticipation of earnings," both good or bad. See #3.
2) One observation is how the stock moves into an earnings announcement. Remember, just before the announcement, the company is in a "quiet period," or what I call the "red-light" period. This simply means no news---at least, no news from the company. Pundits, analysts, and other news reporters, are free to say whatever they want. So I watch and learn, trying to connect the dots, and then I share that info with you.
I can't prove these exact numbers, but it seems to me that about 80% to 90% of the time that a company makes an earnings announcement---whether it was going up, staying flat, or going down, into the announcement, the stock will back off and go down because the news is out. The rumors were true or not. The stock usually goes down. Sometimes not by a lot, but if you're playing options, and the earnings are near an expiration date, it could be disastrous for your option trade---because they are so time sensitive.
Also, much of the time, it's not about the actual numbers, but the commentary about the numbers. This is where the company makes "guidance" remarks about their future earnings, etc. One of the et ceteras is very important, and that is if the company makes other good announcements at the same time---like, a new dividend, or an increase in the dividend; a stock split or a share buyback; or maybe expansion plans, or the resolution of a lawsuit. This is why it is so important to read the whole news article, and seek info from many sources. I like briefing.com. YahooFinance.com is also very good. There are others.
I try to bring you info, but my comments are limited to the stocks that are currently in the basket of student trades.
3) In the stock market, news is everything. Nothing happens without the news. But as I stated in #2, the commentary about the news is also important. News goes into and out of the red-light, green-light period. The timing is set. However, there is one thing you can do: Figure out when the board of directors meets. Nothing happens until they meet. Yes, it could be by phone, but the list I made above are board decisions. You can call the company and ask them. Ask for the share-holder relations department. They will tell you when the next shareholder meeting is, but that's not what you want. You want: "When is the next board of directors meeting?" You still won't know what they will say or do, but know this: Nothing happens until they do.
4) Rick Santelli (The father of the Tea Party Movement) said this is reference to ongoing news: " . . . good news, but not nearly as good news as the headline shock value." There's a lot to this. Think hard on these words.
5) Last, I want to remind you to not get involved in a trade until you are ready. You should paper-trade extensively. Then when you are so excited---meaning the stars are aligned---that you can't wait, then go ahead (under the direction of your broker). Keep in mind the saying from my books: "I'd rather want what I don't have, then have what I don't want."
H A P P Y I N V E S T I N G ! Thought for the day: "If there's a way, take it; if not, make it."
REASONS FOR TRADE SUCCESS
STOCK MARKET CASH FLOW
Straight option plays have a very high rate of risk. Very few people make consistent money at straight option plays---as compared to writing covered calls. Lately though, I've seen a number of students do really well. Some are several trades profitable without hardly a losing trade. I've been trying to analyze this and have come up with a few observations. I will make a list, but that is a strange way to explain this. Let me explain why the explanation is difficult. I think successful option trading is more of an art than a science. Yes, you gather all the information, but much of it comes down to gut feelings. So, even though I'll make the list to keep things organized, please feel free to think outside of the box.
These trades stretch back to last summer. Primarily they have been on the LULU stock split, then on the DIA (trading the movement of the whole market), and now on Ross Stores (ROST). They have been inordinately successful, generating a lot of cash flow. You can read all of these trades in previous blogs.
2) EVENTS: Do you have a specific event you're using to move your stock? Call it a "Compelling Reason," or an "Other Motivating Factor," or a "Forklift"---it is the cause behind the movement. Now check your event against all that I wrote in #1 above and question it thoroughly. Time to work? Strong enough to be real? Clear and workable strike price?
Speaking of the STARs, let me share the system we use to explain a trade. Let it be known that we can't get the info on all of our student trades in time to share all of it before the trade is entered. However there should be enough information to help you make similar trades. We use the STAR as an acronym. Read the summary at the end of this.
S. The Scenario in the market. What's the storyline? What's going on with a particular stock
and what's going on in the sector, the whole market, and even the economy. Why do this
trade now?
T. The Technique to be used. Is it a covered call; A Bull Put Spread; A straight option, a stock
split, or a spin-off?
A. The Actual trade. What we paid for the option or the stock, then what did we take in for
selling the option if it is a covered call trade.
R. The Results. Either the expected results---and this may change as the trade matures---and/or
the actual results achieved---win or lose. And if appropriate the lessons learned---good or bad.
SUMMARY
I suggest that if you use this S.T.A.R. system in your own trades---after watching us use it for educational purposes---that your trades will go better. In fact, by thinking it through---especially the exit point, or expected profits---it will cause you to rethink many trades and not enter trades that will do harm with little upside potential. All of the above is designed to help you think more clearly, taking into account numerous points, and help you connect the dots better.
Let's return to the first part of this article, we've come full-circle. If I could make a 3 or 4 point list and say if you just do these things in order, all well go well, I would do so. But it doesn't exist. If it did, everyone would follow it and get rich. Many people think that some black box exists. A little inside secret or methodology that works everytime. Sorry. It comes down to the art of the deal. "The Art of the Deal" is a book by Donald Trump. I haven't read it but I know exactly what he is talking about. Sad, but most people will never get it. It comes down to using all the science you can gather, then turning it into an art. And you'll never be a great painter or artist or cash flow expert without starting and learning and growing as you go.
"LEARN TO MAKE CORRECTABLE DECISIONS, NOT JUST CORRECT DECISIONS."
Straight option plays have a very high rate of risk. Very few people make consistent money at straight option plays---as compared to writing covered calls. Lately though, I've seen a number of students do really well. Some are several trades profitable without hardly a losing trade. I've been trying to analyze this and have come up with a few observations. I will make a list, but that is a strange way to explain this. Let me explain why the explanation is difficult. I think successful option trading is more of an art than a science. Yes, you gather all the information, but much of it comes down to gut feelings. So, even though I'll make the list to keep things organized, please feel free to think outside of the box.
These trades stretch back to last summer. Primarily they have been on the LULU stock split, then on the DIA (trading the movement of the whole market), and now on Ross Stores (ROST). They have been inordinately successful, generating a lot of cash flow. You can read all of these trades in previous blogs.
Here are the three things that need explaining: (1) KNOW YOUR EXIT; (2) THE FORKLIFT; and (3) USE A SPECIFIC FORMULA. These three are the perfect storm of a cash flow system.
(1) EXIT POINTS: From my earliest days teaching real estate and stock market seminars I've opinionated how important it is to know your exit before you go in the entrance. In fact one should never go in the entrance without knowing the exit. So let me explain this in everyday working knowledge that Molly, Fiona, and Fred have used.
- They used either a set point on the option to exit the trade, or a price of the stock. For example, Molly just traded the Jan $50 calls on a deep dip on LULU. It backed off $6, almost $7 on their earnings announcement. I've taught, "Don't just read the headlines." The news writers always go for the shock treatment. Read the details. Lululemon Athletica sells high-end yoga wear for women. They're now also selling young girls dance wear. The whole article said that their main problem is they can't supply their stores well enough. What a great problem to have. Sales would be up if their stores had more inventory. Molly jumped in on the slam, and bought the Jan $50 calls for $1.28 (ten contracts), for $1,280 and sold them the next day for $3.40, or $3,400, netting $2,120. Do you see the specific reason she got in? Now, by looking at the chart, she realized the stock may go up to $55 or so, which seems to be the resistance level as of late. So, she didn't get greedy and took her profits off the table. The forklift did its job. There will be another trade on another day.
- The same has been happening with trading the Dow---or the ETF, ticker symbol DIA. Look at the charts, and you'll see a definite trading range. In fact, I think the Dow is stuck in a trading range---11,600 on the support (though it did break below that for a day or so), and 12,200 (maybe up to 12,600) on the resistance. Write it down. Buy calls when low, sell them on the rise and buy puts on the downturn. This is an easy strategy to paper-trade, or simulation trade. Learn and Earn.
- Next, don't exceed expectations. Choose the right strike price. I firmly believe you should enter straight option trades with a chance at a triple, or 300%. Rarely do we ever achieve this level of profit, but we enter the trade with that possibility---meaning that the stock/option has a chance to make it and the time to make it to the point you desire. Within this scenario, the time speaks for itself. It's the "chance" that is the hard part. How good is the news? Where does it stand on the chart? What direction is it heading (check the stochastics)? What is the whole market doing?
- Check the Delta, the relationship of the Stock movement to the Option movement. Now, I would like to introduce you to a new topic. I've covered it before but not in these blogs. It's called the Percent to Double. It's often the heading of a column that many brokers have to help them and you make better decisions. It's listed as %Dbl. What this means is the percentage the stock has to move for you to double your money on your options. Example: Let's say you're trading the Dow, as in the DIA. It's at 119 (meaning the Dow is at 11,900) and the $120 calls are going for $2.20. The Dow would have to move up about 3% or about 400 points for your option to double to $4.40. Can it do so? Of course, if the timing is right. What if it's been struggling with 11,900, or 12,000? What if the news about housing, unemployment or the Euro is all bad? Yes it's possible, but improbable. Nevertheless, it doesn't have to move that much for you to be profitable. Point: You don't have to get a double to be profitable. Remember your expectations, your exit point. I still think the Dow movement of 100 points means about a .50 cent move in the options. Is a $500 profit good on $2,200 (ten contracts at $2.20 each) for a day of two, or even an hour or two? I say, "YEP!!!" The Dow has to only move up 100 points.
2) EVENTS: Do you have a specific event you're using to move your stock? Call it a "Compelling Reason," or an "Other Motivating Factor," or a "Forklift"---it is the cause behind the movement. Now check your event against all that I wrote in #1 above and question it thoroughly. Time to work? Strong enough to be real? Clear and workable strike price?
- The event has to be specific. It has to be important---and important to others, not just you. For example: Great earnings. A Dividend increase. Expansion. The ending of a lawsuit. Is the company big enough to be followed by many analysts? If not, is it a falling tree in the forest?
- Is there more than one event to make it move up or hold it up. For example, Ross stores right now has great earnings (14 quarters of profits); a two for one stock split; Christmas and the upcoming Santa Clause rally (almost every year); and a dividend on Dec. 29th. That's a lot to go on. Watch this one. Analyze the trades and rationale here. You'll see a lot of these.
- The longer I live and trade the more convinced I am that the greatest discovery I've ever made has been the "Red-Light, Green-Light" phenomonon. I feel bad someone has taken my RL-GL title and now sell a course by that name. It has nothing to do with me. My strategies are in a book of the same title, and will soon become part of a new Home Study Course. My point here is that everyone knows how important earnings season is to stock movements, but no one relates it to options. And no one ever says: "Hey everyone, we're leaving earnings season. Get your money out of harms way." You need to use this RL-GL knowledge as the back-drop, the canvas of every trade.
- I call it "Passion, Precision, Persistence and Profits"---as in after the first three comes the profits. If you do not have the passion, a strong desire, you'll never stick with it long enough to gain the knowledge of the details---the precision---to be profitable. This is part of the "ART" that I so frequently speak about. Note also, that two people, with similar backgrounds and training can look at the same facts and make completely different trades. Why? It comes down to acting on your feelings, after you gather the facts.
- You need to put market forces to work for you. Time to options is usually the enemy. Sell covered calls. Only do trades with enough time on your side. If you do straight option trades, remember you have a 2 1/2 chance out of 3 of being wrong. It takes a lot of thought to come out on the right side. I studied hundred million dollar option traders who continually got 20% annual returns. I learned some valuable lessons. My attempt is to make 20% a month, so I need to pay close attention to these strategies.
- Always do a trade with a chance to get a 300% return. A triple. You may not get it, but enter it with that opportunity.
- Cut your losses at 50%. If you have $1,200 in the trade, get out when it goes down to $600. Weed the garden better. Let the winners work, cut the losers.
- Do even dollar trades. If you have $10,000 to trade, then do five $2,000 trades, or ten $1,000 trades (or as close as you can).
- Wishful thinking is not an investment strategy. Don't guess, don't hope. Don't make predictions, make projections. Calculate the exit from the entrance and enter when the stars have aligned.
Speaking of the STARs, let me share the system we use to explain a trade. Let it be known that we can't get the info on all of our student trades in time to share all of it before the trade is entered. However there should be enough information to help you make similar trades. We use the STAR as an acronym. Read the summary at the end of this.
S. The Scenario in the market. What's the storyline? What's going on with a particular stock
and what's going on in the sector, the whole market, and even the economy. Why do this
trade now?
T. The Technique to be used. Is it a covered call; A Bull Put Spread; A straight option, a stock
split, or a spin-off?
A. The Actual trade. What we paid for the option or the stock, then what did we take in for
selling the option if it is a covered call trade.
R. The Results. Either the expected results---and this may change as the trade matures---and/or
the actual results achieved---win or lose. And if appropriate the lessons learned---good or bad.
SUMMARY
I suggest that if you use this S.T.A.R. system in your own trades---after watching us use it for educational purposes---that your trades will go better. In fact, by thinking it through---especially the exit point, or expected profits---it will cause you to rethink many trades and not enter trades that will do harm with little upside potential. All of the above is designed to help you think more clearly, taking into account numerous points, and help you connect the dots better.
Let's return to the first part of this article, we've come full-circle. If I could make a 3 or 4 point list and say if you just do these things in order, all well go well, I would do so. But it doesn't exist. If it did, everyone would follow it and get rich. Many people think that some black box exists. A little inside secret or methodology that works everytime. Sorry. It comes down to the art of the deal. "The Art of the Deal" is a book by Donald Trump. I haven't read it but I know exactly what he is talking about. Sad, but most people will never get it. It comes down to using all the science you can gather, then turning it into an art. And you'll never be a great painter or artist or cash flow expert without starting and learning and growing as you go.
"LEARN TO MAKE CORRECTABLE DECISIONS, NOT JUST CORRECT DECISIONS."
Friday, December 2, 2011
Dead Cat Bounce
Well it's been quite a day for Molly and Fiona. They're way up on their Ross Stores trade. Congratulations.
Also, Molly is in the LULU $50 calls for January. The stock was down after earnings. She didn't see any big reason for the $6 to $7 dip, and jumped in. She was up almost a dollar in a few hours.
Kina is way up also, almost $3,500, but she hasn't sold anything yet.
Sometimes a trade like this is called a dead-cat bounce. If you like cats, stop reading. The theory, so it goes, is this: No matter how dead a cat is, if you slam it against the floor, it will bounce up some. That's this play. Okay, gross, I know, but honestly, that's what it is called. Do you want to hear about the dead dog bounce? Okay, I thought not, but it is different.
Watch Estee Lauder (EL). Also, Ross Stores is still in the game. I still think ROST can go to $100. Will it? Who really knows. I believe in forklifts, and am reticent because of worldwide bad news.
But hey, Christmas is coming.
Also, Molly is in the LULU $50 calls for January. The stock was down after earnings. She didn't see any big reason for the $6 to $7 dip, and jumped in. She was up almost a dollar in a few hours.
Kina is way up also, almost $3,500, but she hasn't sold anything yet.
Sometimes a trade like this is called a dead-cat bounce. If you like cats, stop reading. The theory, so it goes, is this: No matter how dead a cat is, if you slam it against the floor, it will bounce up some. That's this play. Okay, gross, I know, but honestly, that's what it is called. Do you want to hear about the dead dog bounce? Okay, I thought not, but it is different.
Watch Estee Lauder (EL). Also, Ross Stores is still in the game. I still think ROST can go to $100. Will it? Who really knows. I believe in forklifts, and am reticent because of worldwide bad news.
But hey, Christmas is coming.
IDEA FOR CASH FLOW - OMF & GGMM
I have a scenario for all of you to think about. It involves doing a riskier trade to make some money and then a more sensible and stable trade to make monthly income. I'm picking this up from Molly's idea.
It starts with doing some quick trades on a stock that has four fork lifts waiting to move it. Right now that is Ross Stores (ROST). For years I've talked of an event, an announcement or some such that would move a stock---up or down---to a new place. In most of my early books I called them OMFs, or Other Motivating Factors. I wrote and spoke of this in regards to analysis. I taught that Fundamental Analysis (my favorite) check on the health of the company---earnings, growth, debt, other factors---like putting a thermometer in the mouth of the company to see if it is healthy.
Technical Analysis on the other hand explored ways to get into the stock or out of the stock at better points. Money Flows, MACDs, Support and Resistance, and the moon in the seven sky, all played into this aspect of looking at and doing trades.
OMFs were the events that moved the stock now---news announcements like a lawsuit starting or ending, dividends, stock splits, managements changes, etc.
In summary or to solidify the point of this I mentioned that Fundamentals tell you WHAT to buy, Technicals tell you WHEN to buy, and OMFs tell you WHY NOW.
Later I called these OMFs compelling reasons. The past few years I've changed it to the Forklift analogy. It's easier to explain. You want this box in the warehouse moved over there, where's the forklift. No forklift, it's not getting moved.
So, back to Ross Stores. Great earnings. A 2:1 stock split. A dividend on Dec 29th. Christmas and hopefully the Santa Clause Rally. Molly picks up on this and wants to make several trades with options. She'll play it into the split, rolling it beforehand.
It could be a great two weeks. Her attempt is to take $5,000 and turn it into $20,000---netting $15,000. That's quite an undertaking. I hope she makes it, though I think it's a little risky for my blood.
That's why I wrote GGMM---Good Golly Miss Molly. We'll see how she does. She's on her way as of this writing.
Let's say she makes it, and even if not consider the following anyway. She takes the $20,000 plus dollars and buy 10,000 shares of BioSante (BPAX) for $2.25. That's $22,500. Molly, make sure you put in a stop loss at, say, $2. Now she can sell the $2 call for .65 cents, taking in $6,500 now. Yes, she would have to give back $2,500 if called out, but with the buy back there is no reason to get called out.
Or she could sell the $2.50 calls for .40 cents, taking in $4,000 now and maybe $2,500 more if called out. Most of my friends could live on around $4,000 a month. That would be a great month if she can make it happen. She's starting with about $5,000 and could end up retired for the rest of her life. GGMM. Go Get'm Miss Molly.
More on this and other exciting developments coming up.
Wade
It starts with doing some quick trades on a stock that has four fork lifts waiting to move it. Right now that is Ross Stores (ROST). For years I've talked of an event, an announcement or some such that would move a stock---up or down---to a new place. In most of my early books I called them OMFs, or Other Motivating Factors. I wrote and spoke of this in regards to analysis. I taught that Fundamental Analysis (my favorite) check on the health of the company---earnings, growth, debt, other factors---like putting a thermometer in the mouth of the company to see if it is healthy.
Technical Analysis on the other hand explored ways to get into the stock or out of the stock at better points. Money Flows, MACDs, Support and Resistance, and the moon in the seven sky, all played into this aspect of looking at and doing trades.
OMFs were the events that moved the stock now---news announcements like a lawsuit starting or ending, dividends, stock splits, managements changes, etc.
In summary or to solidify the point of this I mentioned that Fundamentals tell you WHAT to buy, Technicals tell you WHEN to buy, and OMFs tell you WHY NOW.
Later I called these OMFs compelling reasons. The past few years I've changed it to the Forklift analogy. It's easier to explain. You want this box in the warehouse moved over there, where's the forklift. No forklift, it's not getting moved.
So, back to Ross Stores. Great earnings. A 2:1 stock split. A dividend on Dec 29th. Christmas and hopefully the Santa Clause Rally. Molly picks up on this and wants to make several trades with options. She'll play it into the split, rolling it beforehand.
It could be a great two weeks. Her attempt is to take $5,000 and turn it into $20,000---netting $15,000. That's quite an undertaking. I hope she makes it, though I think it's a little risky for my blood.
That's why I wrote GGMM---Good Golly Miss Molly. We'll see how she does. She's on her way as of this writing.
Let's say she makes it, and even if not consider the following anyway. She takes the $20,000 plus dollars and buy 10,000 shares of BioSante (BPAX) for $2.25. That's $22,500. Molly, make sure you put in a stop loss at, say, $2. Now she can sell the $2 call for .65 cents, taking in $6,500 now. Yes, she would have to give back $2,500 if called out, but with the buy back there is no reason to get called out.
Or she could sell the $2.50 calls for .40 cents, taking in $4,000 now and maybe $2,500 more if called out. Most of my friends could live on around $4,000 a month. That would be a great month if she can make it happen. She's starting with about $5,000 and could end up retired for the rest of her life. GGMM. Go Get'm Miss Molly.
More on this and other exciting developments coming up.
Wade
Tuesday, November 22, 2011
UPCOMING STOCK SPLIT
Ross Stores (ROST) has just announced a 2:1 stock split. This is an exciting one. Last time we played one of these, LuluLemon Athletica (LULU), several times. Some students did very well. This one is with a more established company, a huge company. Ross made this announcement along with their earnings report. They are making a lot of money and the earnings are growing. They've had 14 quarters in a row of profitable operations.
Along with this announcement, they also announced a dividend of .22 cents a share to be paid the end of December. I don't see this as a stand alone play, it's just nice to have it in the background. The stock split will be Dec. 15th. That's the week of option expirations. Some of my students plan on playing this several times---remember, I've isolated five times to play the split. So get a chart, keep it in front of you and let's learn as we go.
One student, Molly, is already in the $87.50 call options for $2.20. I like these December strike prices: $87.50, $90, $92.50, $95, $97.50. Maybe later, the $100, but for .05 more cents right now you can buy the $97.50 and move down $2.50 on the strike price. If you don't know how to get option prices, go to YahooFinance.com and punch in the ticker symbol. Now click on the option button and it will take you to the option chain. You'll have to determine from there what kind of information---read that prices---you want. Always look at the current month and the next month out to get some perspective.
The game is afoot. Past is not present, but look at a three month chart. It's moved up nicely. It's coming up on Christmas. And then the next earnings season, and before that the dividend. It's a perfect storm. Yes, there is always the back-drop of the economy and the craziness in Washington, but it looks good.
The stock could easily stay here, and move around---like a rolling pattern---but, I wouldn't be surprised to see it go to $100 or above. I'll try to keep you posted. This one would be a good one to paper-trade. If so, buy ten contracts of the $95 calls for December. They were going for .40 cents on Friday. That would cost you $400. Shoot for a double, and get out at $800. That would be a good simu-trade.
More on this exciting development later.
Along with this announcement, they also announced a dividend of .22 cents a share to be paid the end of December. I don't see this as a stand alone play, it's just nice to have it in the background. The stock split will be Dec. 15th. That's the week of option expirations. Some of my students plan on playing this several times---remember, I've isolated five times to play the split. So get a chart, keep it in front of you and let's learn as we go.
One student, Molly, is already in the $87.50 call options for $2.20. I like these December strike prices: $87.50, $90, $92.50, $95, $97.50. Maybe later, the $100, but for .05 more cents right now you can buy the $97.50 and move down $2.50 on the strike price. If you don't know how to get option prices, go to YahooFinance.com and punch in the ticker symbol. Now click on the option button and it will take you to the option chain. You'll have to determine from there what kind of information---read that prices---you want. Always look at the current month and the next month out to get some perspective.
The game is afoot. Past is not present, but look at a three month chart. It's moved up nicely. It's coming up on Christmas. And then the next earnings season, and before that the dividend. It's a perfect storm. Yes, there is always the back-drop of the economy and the craziness in Washington, but it looks good.
The stock could easily stay here, and move around---like a rolling pattern---but, I wouldn't be surprised to see it go to $100 or above. I'll try to keep you posted. This one would be a good one to paper-trade. If so, buy ten contracts of the $95 calls for December. They were going for .40 cents on Friday. That would cost you $400. Shoot for a double, and get out at $800. That would be a good simu-trade.
More on this exciting development later.
Sunday, November 13, 2011
KNOWING WHEN TO SELL
I want to weigh in on Molly's trade and her current predicament. If you follow these blogs, you know she still is in the November $122 call options. She bought them for $1.03. She got 10 contracts so that's $1,030. The market went up and she was profitable. She could have sold them for $1.380, netting $350.
But she didn't get out and held on. Then the market tanked and she was underwater. Bravely she jumped in when it was down, and even though I put in some suggestions later, she had already purchased the Nov $120s. That was a bold move. It was a brilliant move. Here's why. Often, when we have a trade that is not working, we get reluctant to do another trade. We let what happened yesterday determine what we do or do not do today. But that was Yesterday and Yesterday's gone. Really, think of all the times I've mentioned: "It's just inventory." So way to go Molly. Then the next day she got out of this $120 strike price with a preset order for $2.25. She had purchased 5 contracts for $1.25. Her profit is $1 X 500, or $500.
Granted, she was still underwater on the $122s. But they came back also. On Friday they were as high as $1.25. Not much, but definitely better than a loss or breakeven. My thoughts were to sell the option and not let 2 to 3 days go away over the weekend. But she did not get out. So it's on to next week. Let's hope there is no bad news this weekend. And remember it's November and that's usually a good month. However, expiration is this coming Friday.
NOW---WHAT TO DO?
The lesson I stated above is very important---consider the trade each day. Is the storyline still strong? What's happening elsewhere? Et Cetera. But there is another lesson to learn. It's about asking the right question. I love great questions---questions that evoke a great answer or solution.
"Should I buy this rental house, or this stock?" That's okay, but a better question would be: "What else could I be doing with my time and money.?" With this $122 call option, currently at near a breakeven point, what should she do? Should she sell?
That is one of the most frequent questions I get at my seminars: "How do I know when to sell?" Here is a better question: "Would I buy the stock here?" This question forces you to think about the stocks' storyline. Has it run its course? Can this price be sustained? And other ponderings. There is no easy answer, especially with options, where you have an expiration date now five days away. So, even though I would have sold on Friday, it's not Friday anymore. So I ask the question now on the weekend: Would I sell this option now?
To help this thought process, I wonder this: If I wanted to play this option once more before Friday's expiration (and I'm not saying that I do), what would I play---which option? And guess what, I come up with the $122s. Funny? I think so. It is the strike price nearest the money. So, the answer is, what? If I were to buy right now, I'd want to buy the very one that I'm thinking of selling. So, Molly, all I have to offer is in the next paragraph.
On Monday morning, before the market opens, I would look at the Futures. If they show the the Dow is going to be up, then I'd stay in for a bit---trying to sell them for $1.50 to $1.80. There would have to be a 100 point move in the Dow to get this higher price. If the market (Futures) show up only minimally or down, I'd get out soon, especially if there has been other bad news. Then I'd start thinking of the December's. All of this is on the horns of a dilemma, and I hope it's the horns of a bullish dilemma.
Look at the chart above. Notice the big sell-off the first part of August (2011). Now look at the rolling pattern for the next several weeks. Then about 3 to 4 weeks ago it took off again. We had a good October. We then had a few ugly days, but it's rolling again. I think the support and resistance is 11,600 (or 11,800) on the current downside and $12,400 (which it hasn't gotten to yet) on the upside. It should move up in December, after a first part of December sell-off. It should allow a lot of plays.
As you can see, the whole market is in a rolling pattern. Everytime the market changes a lot, like the downturn in August, or the upturn in October, go back to paper-trades, or practice trades. I've been looking at these charts for years, and until something happens, like the repeal of Reg FD as part of the Sarbane-Oxley Act, I do not see much chance for the market to get out of this range. Read my last several blogs for the support and resistance levels.
WHILE IT'S ROLLING---LET'S PLAY IT FOR ALL IT'S WORTH.
But she didn't get out and held on. Then the market tanked and she was underwater. Bravely she jumped in when it was down, and even though I put in some suggestions later, she had already purchased the Nov $120s. That was a bold move. It was a brilliant move. Here's why. Often, when we have a trade that is not working, we get reluctant to do another trade. We let what happened yesterday determine what we do or do not do today. But that was Yesterday and Yesterday's gone. Really, think of all the times I've mentioned: "It's just inventory." So way to go Molly. Then the next day she got out of this $120 strike price with a preset order for $2.25. She had purchased 5 contracts for $1.25. Her profit is $1 X 500, or $500.
Granted, she was still underwater on the $122s. But they came back also. On Friday they were as high as $1.25. Not much, but definitely better than a loss or breakeven. My thoughts were to sell the option and not let 2 to 3 days go away over the weekend. But she did not get out. So it's on to next week. Let's hope there is no bad news this weekend. And remember it's November and that's usually a good month. However, expiration is this coming Friday.
NOW---WHAT TO DO?
The lesson I stated above is very important---consider the trade each day. Is the storyline still strong? What's happening elsewhere? Et Cetera. But there is another lesson to learn. It's about asking the right question. I love great questions---questions that evoke a great answer or solution.
"Should I buy this rental house, or this stock?" That's okay, but a better question would be: "What else could I be doing with my time and money.?" With this $122 call option, currently at near a breakeven point, what should she do? Should she sell?
That is one of the most frequent questions I get at my seminars: "How do I know when to sell?" Here is a better question: "Would I buy the stock here?" This question forces you to think about the stocks' storyline. Has it run its course? Can this price be sustained? And other ponderings. There is no easy answer, especially with options, where you have an expiration date now five days away. So, even though I would have sold on Friday, it's not Friday anymore. So I ask the question now on the weekend: Would I sell this option now?
To help this thought process, I wonder this: If I wanted to play this option once more before Friday's expiration (and I'm not saying that I do), what would I play---which option? And guess what, I come up with the $122s. Funny? I think so. It is the strike price nearest the money. So, the answer is, what? If I were to buy right now, I'd want to buy the very one that I'm thinking of selling. So, Molly, all I have to offer is in the next paragraph.
On Monday morning, before the market opens, I would look at the Futures. If they show the the Dow is going to be up, then I'd stay in for a bit---trying to sell them for $1.50 to $1.80. There would have to be a 100 point move in the Dow to get this higher price. If the market (Futures) show up only minimally or down, I'd get out soon, especially if there has been other bad news. Then I'd start thinking of the December's. All of this is on the horns of a dilemma, and I hope it's the horns of a bullish dilemma.
Look at the chart above. Notice the big sell-off the first part of August (2011). Now look at the rolling pattern for the next several weeks. Then about 3 to 4 weeks ago it took off again. We had a good October. We then had a few ugly days, but it's rolling again. I think the support and resistance is 11,600 (or 11,800) on the current downside and $12,400 (which it hasn't gotten to yet) on the upside. It should move up in December, after a first part of December sell-off. It should allow a lot of plays.
As you can see, the whole market is in a rolling pattern. Everytime the market changes a lot, like the downturn in August, or the upturn in October, go back to paper-trades, or practice trades. I've been looking at these charts for years, and until something happens, like the repeal of Reg FD as part of the Sarbane-Oxley Act, I do not see much chance for the market to get out of this range. Read my last several blogs for the support and resistance levels.
WHILE IT'S ROLLING---LET'S PLAY IT FOR ALL IT'S WORTH.
Thursday, November 10, 2011
STOCKS AND OPTIONS: IT'S ALL GREEK TO ME
I give this here as a purely educational response to several trades others have made. It's about the relationship between options and the underlying stock. All I bring to the table is thousands of trades, watching this stock/option relationship and my continuous attempt to connect the dots.
IT'S ALL GREEK TO ME.
Let's first speak of Deltas. The option delta is a way to figure the movement of an option as a percentage of the movement of the stock. Let's say you have a stock at $10. You look at the $10 calls out about a month. They're going for .80 cents. On your screen, if you trade that way, or from your broker, you learn the Delta is 40. This means if the stock goes up $1, the option will go up .40 cents. The stock goes to $11 and the $10 call goes to $1.20.
The Delta is different through time. Every day it's different, showing the deterioration of time, the proximity to the expiration date, as well as the up or down movement of the stock. The Delta is not perfect. It is a rule of thumb, and although close in accuracy it is not penny for penny. Look at the $11 calls. The Delta is 32. Again if the stock goes up $1 the option will go up .32 cents. If the $11 call was .40 cents, it would go to .72 cents. You would have almost a double.
In short, the higher the Delta, the better. If a stock and option have a Delta of 100, it's means a $1 rise in the stock produces a $1 rise in the option. This is not rare, but it is not an everyday occurrence. When the Delta is 100 it is said to be "tick for tick." I used to joke that the only way to get a stock to go tick for tick was to buy the stock. About the only way you will get tick for tick is when the option is deep in the money.
Puts are figured the same, but in reverse. If the stock goes down $1, and the Delta is 40, the put option will go up in value .40 cents.
A FEW POINTS.
1) I like Deltas at 60 or higher. I rarely get them, but I said that I like them. I stand by it.
2) Lately, I've spent extra time trying to explain the Delta on the Dow, or the DIA. I've said that I've noticed that when the Dow (DJIA) goes up 100 points, the Dow option goes up about .50 cents. It has proven out time and time again, though not exactly perfectly. The DIA (Diamonds ETF of the 30 Dow Industrials) trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA stock is going for $119. Now you can relate it to $$$$ as the normal index is points not dollars. So if the $119 call option is going for $2.50 and there is about a month to go to expiration, and the Delta is 40, which Molly tells me it often is, then if the Dow goes up 100 points, the option will go up .40 cents. Your $2, or $2,000 if you purchased 10 contracts, would go up to $2.90, or $2,900. Yes, this can and does often happen in a day.
3) I've said repeatedly that I like to buy slightly out of the money options. If a stock is at $5.80, I'll usually trade the $6 calls, unless it's really close to expiration. However, if the stock is at $5.20, I'll play the $5 calls, either in straight options or in writing covered calls.
4) So, slightly in or slightly out of the money is where I see a bigger bang for the buck is made. For example, Molly recently trades the DIA $122 calls. I was hoping she would have played the $120s. the Dow was at just under 12,000. I do not know what the Delta was of the $122s, I'm going to suggest it was 20, but the Delta on the $120s was 40. The Dow went up nicely for two days---about a hundred points a day, but the options only went up to $1.38, starting at $1.03. She could have gotten out with a $350 profit, but decided to wait another day. The market tanked today, down 380 points, so she's under water. There is still time to be redeemed.
5) Kina on the other hand purchased the $119 calls for $2 and sold them for $2.95, netting $950. This was about the same time as Molly's trade. What's the difference? One, Kina's trade was close to the money---meaning the stock and the strike price were about the same. Molly's trade was out of the money by a lot. So, why the higher strike price? I've done this many times, myself. Simply, they're cheaper. Here's the problem: Stocks climb a wall of worry. Options nearingthe expiration date will lose value fast. Kina's $2 option went up .95 cents. Molly's $1.03 option went up .35 cents. That's still a nice one/two day gain. See #8 below.
6) It's important to check the Delta, and ask yourself this question: Is there enough time for the stock and option to move?
You have to make projections here. Is there a chance that the stock will move up, a lot? Is there time to do so? And how is the whole market doing? You've got to give your options a chance to perform.
7) Use the Delta to find a good stock/option to trade, but don't forget that you can use it later in the trade to help you determine if you should stay in the trade. Say the Delta is 70. That gets you excited. Time goes away. The stock moves up a little, but later the Delta is 20. That means a $1 move in the stock (or any percentage of $1) will get you a very limited move in the option. And time is working against you as you proceed.
8) I see that Molly fit her money to the trade. I hear she had about $1,000 to use. The $120 calls were about $1.80. Because many of us do trades in nice neat 1,000 shares or 10 contract batches, we try to get it at that price---to fit rightly. However, it would have been better to do 6 contracts at $1.80, or $1,080 then 10 contracts on the $122s at $1.03, or $1.030. Don't worry about doing odd numbered trades like this. Brokers receive such trades all the time. See Kina's trade. She got the $119s for $2 and had a nice move. I think these $120 calls would have gone to $2.60, or $1,560 ( 6 X $2.60 = $1,560). That would have been a nice profit of $480. Maybe there's still time for the $122s to work. Let's hope so.
EXIT STRATEGIES.
For years I've taught that one should know the exit before one ever goes in the entrance. Let's explore this with options.
There are four ways to determine an exit point:
1) Set it at a dollar figure, say $2.95. If it hits that or above that (say a gap up) you will sell your position.
2) Set a time. This is where Molly's trade should have ended. It was a one to two day trade. Win, lose or draw, she should have been out Tuesday, even at the very end of the day. There was a forklift for those two days, but who knows about the third day of a nice move? Today, the market corrected big time. Maybe this is the time to get in and make up for the loss on this last trade, but now play the option closer to the stock price---say, the $117s or the $118s.
3) Don't forget to set stop losses on a downward move. Molly could have set a sell order at .50 cents, and been out of the trade with a smaller loss. Also, use alerts to let you know when the option is moving.
4) Set the order to sell the option based on what the stock is going for---this would be an alert, but one in the computer. If the DIA, for example, hit $120.50, then the option would be sold no matter what it's going for. You can project what the movement in the DIA will do, but you can't tell the time left in the option, the implied volatility, and other factors. These factors are all jumbled together.
I surely hopes this helps. It's an ART and a SCIENCE.
Wade
IT'S ALL GREEK TO ME.
Let's first speak of Deltas. The option delta is a way to figure the movement of an option as a percentage of the movement of the stock. Let's say you have a stock at $10. You look at the $10 calls out about a month. They're going for .80 cents. On your screen, if you trade that way, or from your broker, you learn the Delta is 40. This means if the stock goes up $1, the option will go up .40 cents. The stock goes to $11 and the $10 call goes to $1.20.
The Delta is different through time. Every day it's different, showing the deterioration of time, the proximity to the expiration date, as well as the up or down movement of the stock. The Delta is not perfect. It is a rule of thumb, and although close in accuracy it is not penny for penny. Look at the $11 calls. The Delta is 32. Again if the stock goes up $1 the option will go up .32 cents. If the $11 call was .40 cents, it would go to .72 cents. You would have almost a double.
In short, the higher the Delta, the better. If a stock and option have a Delta of 100, it's means a $1 rise in the stock produces a $1 rise in the option. This is not rare, but it is not an everyday occurrence. When the Delta is 100 it is said to be "tick for tick." I used to joke that the only way to get a stock to go tick for tick was to buy the stock. About the only way you will get tick for tick is when the option is deep in the money.
Puts are figured the same, but in reverse. If the stock goes down $1, and the Delta is 40, the put option will go up in value .40 cents.
A FEW POINTS.
1) I like Deltas at 60 or higher. I rarely get them, but I said that I like them. I stand by it.
2) Lately, I've spent extra time trying to explain the Delta on the Dow, or the DIA. I've said that I've noticed that when the Dow (DJIA) goes up 100 points, the Dow option goes up about .50 cents. It has proven out time and time again, though not exactly perfectly. The DIA (Diamonds ETF of the 30 Dow Industrials) trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA stock is going for $119. Now you can relate it to $$$$ as the normal index is points not dollars. So if the $119 call option is going for $2.50 and there is about a month to go to expiration, and the Delta is 40, which Molly tells me it often is, then if the Dow goes up 100 points, the option will go up .40 cents. Your $2, or $2,000 if you purchased 10 contracts, would go up to $2.90, or $2,900. Yes, this can and does often happen in a day.
3) I've said repeatedly that I like to buy slightly out of the money options. If a stock is at $5.80, I'll usually trade the $6 calls, unless it's really close to expiration. However, if the stock is at $5.20, I'll play the $5 calls, either in straight options or in writing covered calls.
4) So, slightly in or slightly out of the money is where I see a bigger bang for the buck is made. For example, Molly recently trades the DIA $122 calls. I was hoping she would have played the $120s. the Dow was at just under 12,000. I do not know what the Delta was of the $122s, I'm going to suggest it was 20, but the Delta on the $120s was 40. The Dow went up nicely for two days---about a hundred points a day, but the options only went up to $1.38, starting at $1.03. She could have gotten out with a $350 profit, but decided to wait another day. The market tanked today, down 380 points, so she's under water. There is still time to be redeemed.
5) Kina on the other hand purchased the $119 calls for $2 and sold them for $2.95, netting $950. This was about the same time as Molly's trade. What's the difference? One, Kina's trade was close to the money---meaning the stock and the strike price were about the same. Molly's trade was out of the money by a lot. So, why the higher strike price? I've done this many times, myself. Simply, they're cheaper. Here's the problem: Stocks climb a wall of worry. Options nearingthe expiration date will lose value fast. Kina's $2 option went up .95 cents. Molly's $1.03 option went up .35 cents. That's still a nice one/two day gain. See #8 below.
6) It's important to check the Delta, and ask yourself this question: Is there enough time for the stock and option to move?
You have to make projections here. Is there a chance that the stock will move up, a lot? Is there time to do so? And how is the whole market doing? You've got to give your options a chance to perform.
7) Use the Delta to find a good stock/option to trade, but don't forget that you can use it later in the trade to help you determine if you should stay in the trade. Say the Delta is 70. That gets you excited. Time goes away. The stock moves up a little, but later the Delta is 20. That means a $1 move in the stock (or any percentage of $1) will get you a very limited move in the option. And time is working against you as you proceed.
8) I see that Molly fit her money to the trade. I hear she had about $1,000 to use. The $120 calls were about $1.80. Because many of us do trades in nice neat 1,000 shares or 10 contract batches, we try to get it at that price---to fit rightly. However, it would have been better to do 6 contracts at $1.80, or $1,080 then 10 contracts on the $122s at $1.03, or $1.030. Don't worry about doing odd numbered trades like this. Brokers receive such trades all the time. See Kina's trade. She got the $119s for $2 and had a nice move. I think these $120 calls would have gone to $2.60, or $1,560 ( 6 X $2.60 = $1,560). That would have been a nice profit of $480. Maybe there's still time for the $122s to work. Let's hope so.
EXIT STRATEGIES.
For years I've taught that one should know the exit before one ever goes in the entrance. Let's explore this with options.
There are four ways to determine an exit point:
1) Set it at a dollar figure, say $2.95. If it hits that or above that (say a gap up) you will sell your position.
2) Set a time. This is where Molly's trade should have ended. It was a one to two day trade. Win, lose or draw, she should have been out Tuesday, even at the very end of the day. There was a forklift for those two days, but who knows about the third day of a nice move? Today, the market corrected big time. Maybe this is the time to get in and make up for the loss on this last trade, but now play the option closer to the stock price---say, the $117s or the $118s.
3) Don't forget to set stop losses on a downward move. Molly could have set a sell order at .50 cents, and been out of the trade with a smaller loss. Also, use alerts to let you know when the option is moving.
4) Set the order to sell the option based on what the stock is going for---this would be an alert, but one in the computer. If the DIA, for example, hit $120.50, then the option would be sold no matter what it's going for. You can project what the movement in the DIA will do, but you can't tell the time left in the option, the implied volatility, and other factors. These factors are all jumbled together.
I surely hopes this helps. It's an ART and a SCIENCE.
Wade
Saturday, November 5, 2011
Fiona's Trade
Another day, another good trade. I'm very impressed with Fiona Farley from Ft. Lauderdale, Florida. She played a put on the DIA almost perfectly. She bought a put when the market hit 11,900 or so. She thought it would back off. I did too. But the next day it shot up about 300 points. You make money on a put when the stock goes down. You have the right to put the stock to someone at a certain price, the strike price.
In this case she was playing the whole Dow Jones Industrial Average, not the index, but a ETF trust that is a stock and trades under the ticker DIA. It trades at 1/100 of the Dow. So if the Dow is at 11,900, the DIA will be going for $119. She bought the $117 puts for $2.70. She got 10 contracts, or spent $2,700. Then lo and behold the Dow went up, losing value in the puts. She did not panic, like most people. She knew she had time to expiration, and with the backdrop of the Euro crisis---the Greek Tragedy---that the market would go down. It did. This was designed to be a one or two day trade, but it took a week. Tuesday (11/1) she got out at $3.30. Doesn't sound like much, but 10 contracts at 100 shares each cost $2,700 and she sold them for $3,300. That's $600 profit before commissions.
Way to go Fiona. I wonder why Molly missed this trade. Maybe because of her fear of puts. I also have had an aversion to puts, because they get you thinking negatively. I still agree. I'm trying to change my thinking, because the market usually goes down a lot faster than it goes up. Over the years, my students who played puts made more money faster than pure call trades. Live and learn.
One point: I think the market is range-bound. This means it's trading between a support level and a resistance level. I think it has fair to good support at 11,600 and weak resistance at 12,200 and solid resistance at 12,600. Anything above or below these two levels I think is an aberration. A higher or lower move might be justified but it provides some ammo for projections. Look at a chart of the past ten years and you'll see what I mean.
Next. I also hear Molly is back into some DIA calls, thinking that after the past two days that the market will go up. I hope she can post her actual numbers.
Speaking of that; I love your questions. So please comment on the blogs I wrote on "Two-Stepping."
Thanks.
NEWS COMMENT: Andre J. Bakhar said, "This is a headline driven market." It usually is.
In this case she was playing the whole Dow Jones Industrial Average, not the index, but a ETF trust that is a stock and trades under the ticker DIA. It trades at 1/100 of the Dow. So if the Dow is at 11,900, the DIA will be going for $119. She bought the $117 puts for $2.70. She got 10 contracts, or spent $2,700. Then lo and behold the Dow went up, losing value in the puts. She did not panic, like most people. She knew she had time to expiration, and with the backdrop of the Euro crisis---the Greek Tragedy---that the market would go down. It did. This was designed to be a one or two day trade, but it took a week. Tuesday (11/1) she got out at $3.30. Doesn't sound like much, but 10 contracts at 100 shares each cost $2,700 and she sold them for $3,300. That's $600 profit before commissions.
Way to go Fiona. I wonder why Molly missed this trade. Maybe because of her fear of puts. I also have had an aversion to puts, because they get you thinking negatively. I still agree. I'm trying to change my thinking, because the market usually goes down a lot faster than it goes up. Over the years, my students who played puts made more money faster than pure call trades. Live and learn.
One point: I think the market is range-bound. This means it's trading between a support level and a resistance level. I think it has fair to good support at 11,600 and weak resistance at 12,200 and solid resistance at 12,600. Anything above or below these two levels I think is an aberration. A higher or lower move might be justified but it provides some ammo for projections. Look at a chart of the past ten years and you'll see what I mean.
Next. I also hear Molly is back into some DIA calls, thinking that after the past two days that the market will go up. I hope she can post her actual numbers.
Speaking of that; I love your questions. So please comment on the blogs I wrote on "Two-Stepping."
Thanks.
NEWS COMMENT: Andre J. Bakhar said, "This is a headline driven market." It usually is.
TWO-STEPPING Part 4
TWO-STEPPING AND DOUBLE-DIPPING
I'll bet all of the people who have read my books or been to my seminars are wondering why in all of these blogs I haven't mentioned my cabdriver experiences. After all I've told the story repeatedly, emphasing that I learned the most important financial lesson of my life driving a taxi. Well, there is no reason to wait any longer. The lesson I've learned and shared is this: "The money is in the meter drop." Simply put, without telling the whole story, is that I made more money taking all of the short runs in my cab driving days rather than waiting for the big run to Sea-Tac Airport. Every time someone got in the cab, I'd drop the meter and it cost them $1.50 to start. I made a lot more than most of the cabdrivers by going for more short runs.
In real estate I employed this strategy by rapidly buying, fixing and selling houses. In the stock market, it is the same. I don't buy a stock at $6 and hope it goes to $60 or $600. I'm trying to make short, smaller profits on a repeatable basis. We live in a monthly cash flow (pay the bills) society. I was often introduced as Wade 'Cash-Flow' Cook.
SELLING THE UPSIDE
I love writing covered calls. It is a cash flow system, using an asset to make monthly income. In Part 5 I'll answer most of the who, what, when, where, why, and how questions. Let me show you here how to make extra income. Double dipping is a procedure that is learnable and repeatable. It is easy to understand and easier to implement.
When we write a covered call, we buy a stock and then sell a call option (usually one month out) and generate immediate cash into our account. We buy a fixed price asset and sell a fluffy option. We can pretty easily get 10% cash returns each month. I'll show you several actual examples at the end of this section.
One drawback when we write covered calls is that we give up the upside of the stock. It is funny. When many people hear about covered call writing, I guess because they can't believe so much money can be made and therefore have to try to find fault with it, ask, "What if the stock goes down?" I answered that in Part 3 of this series. The question they should be asking is: "What if the stock goes up?" There's a lot of pessimism out and about. No one seems to expect stocks to go up anymore.
Here's what I mean. USU (an actual stock) was at $2.10. The $2 call option was 35 cents. If you own the stock and give someone the right to buy the stock at $2, you do not participate in anything above $2. You got paid $350 (assuming you own 1,000 shares of the stock, $2,100). If the stock goes to $3, well, you have limited your sale price to $2. In fact, you would have to give back 10 cents, or $100 of the $350 option premium, netting only $250 for one month. I say that tongue in cheek because right here we have a 10% cash return for one month. If you really think a stock is going to fly don't write a covered call against it. When we first found this stock (about 12 days ago) the stock was at $2.04 and the $2 call was going for .57 cents, Time value disappears. I mention this to teach a lesson: Sell time value.
THE ALL IMPORTANT QUESTION
There is a question that you should use all of the time when writing covered calls. It is this: "DO I WANT TO SELL THE STOCK?" Let me show you how important this is. Let's use the above example to explain this process. Keep in mind, that I'm really big into quality questions. You will need to make some decisions, like this: Should I sell the $2 calls or the $2.50s? Should I wait to sell the option, hoping the stock will go up in the meantime, or just sell it now---selling the extra time? Should I sell the option for this month or for next month? There are a few others.
Later when you to buy-back the option, you will use the same question in making that decision, and then on the same phone call with your broker, you will use the question again to make more decisions. Yes, it's all about cash flow, therefore the question and answer for Jim will be different than that for Sally. They each have needs, they each have skills, they each have more or less time to devote to the process.
If you really want to sell the stock, then sell the lower strike price. If you want to keep the stock sell the higher strike price, and/or be prepared to buy back the option on the next dip. It depends on you and how much you want to make.
DOUBLE DIPPING
If you want to learn more about the basics, I wrote a whole book about this: STOCK MARKET MONEY MACHINE.This is a single topic book about writing covered calls. Double Dipping is a big part of this process if you want to make a lot more money. Like any other methodology there are good, better, best ways of proceeding. Over the years I've worked hard on these enhanced formulas.
It starts with a desire to make money: PASSION, PRECISION, PERSISTENCE, then the PROFITS. You will never get to the profits without the other three. In fact, unless you have a passion for something you will never gain the precision, the exact details, you need to succeed.
Here is how to double dip. You have sold the option. You called your broker and said, "I want to put in an order to sell ten contracts of the November $2 call option for .35 cents. The order goes through at .35 cents. You take in $350. It hits your account the next day. Options trade in one day, stocks in three. You now place an order to buy back the same option. If the stock dips or time expires the option will reduce in price.
When you sold the option you were considered in a short position. On your activity statement for your account it will read Short (-) 10 contracts Nov $2 call. Sometimes it will say short, sometimes there will be a (-) sign. You have opened a position on your stock. It is like a lien on real estate. You are covered because if you are called out, you own the stock and can deliver it. If that is done, almost always on the expiration date, you will see it taken out of your account on Monday. Your account will say, "Account Assigned." The stock will be electronically taken out of your account. The money for selling the stock will be in your account on Thursday. I call this being called out, or selling the stock.
What if you don't want to get called out, even though the stock is above $2? You don't have to be. You can end the open position by closing it. You sold ten contracts, now you buy ten contracts. That will be a plus (+) to the computer, and the short position will end. It's a wash. You have bought back the call position. You have no more obligation to deliver the stock. You're free and clear and good to go. You have recaptured the upside of the stock. You can sell the stock; wait for it to go up; sell another covered call, say the next lower strike price; immediately sell the call for next month---selling more time and pocketing more cash. The choices are yours. Remember it starts over again with the question: Do I Want To Sell The Stock?
This means you have time to think about the trade You can watch this time value and get out of the position, if you choose to. Let's look at what might happen if the stock is at $2.20 and the option is .15 X .20 cents. No time value in the premium so you might get called out. Will you get called out for sure? Yep. If the stock is above $2 you will get called out.
ASK THE QUESTION
Let's use the above example to determine what to do. If we can wrestle with the choices here on paper, you will be able to make better decisions. Should you leave the position alone and get called out, or buy back the option and keep the stock to fight another day? Start by asking the all-important question: Do I want to get called out? How can you make the right choice? There is no right or wrong choice, only ways to make more money---with this same stock or another one.
Here's how simple it is. If it's expiration week, this month's time value is pretty much gone, so inquire about the next month's options. The stock is up from $2.10 to $2.15. You sold this months option for .35 cents. Next months $2 call option can be sold for .45 cents. That would represent $450. You like that number. Now, here's what you do. You buy back the current month option for 15 cents, or $150. Hold it, you ask, "that's 150 smackaroos." Yes, but on the same phone call you take in $450, netting a new $300. So, calculate it out. Income $350, outgo $150, more income $450. You're up $650, and you repeat this month in and month out.
Do you realize you could have figured all this out before you made the decision? The numbers talk to you. And think again, this is all based on $2,100, or $1,050 on margin. I like percentages sometimes, but I like to count the cash much more. A few positions like this and you can quit your job.
ROLLING COVERED CALLS
I have taught this strategy for about 20 years, doing thousands of trades myself, or corporately. As I traveled a new situation arose. My students were doing this two and three times a month. They called it rolling covered calls. Let me explain. Using this same example, they would sell the call for 35 cents, then a few days later, buy the option back on a dip in price of the stock. Then after the weekend, on the next rise in the stock price, they would sell the same option again, or maybe even sell the next lower strike price. More cash now. Then they would buy back the option again by the end of the next week, and sell it again a few days later. They were double-dipping, even triple-dipping. This requires a stock that is moving up and down.
I got tired of hearing of their successes. Again, tongue in cheek, because as an educator, I loved my students out-performing me. I've always been a better coach than player. But my competitive nature drove me to try harder. I set out to do it myself three times, and one month I did it five times on Qualcom (QCOM). I bought the stock at $24 and did covered calls all the way up to where the stock hit $38. This is the month I tried to triple-dip. I did it five times. Yes, that's FIVE. I sold the $40 call, then bought it back, then again and again. It was awesome. I made about $7,000 in one month. I also did it five times one August on Netflix (NFLX). I have tried several more times, but have only been able to do it two and three times a month. It's a lot of work. Oh, the reward? It's worth it, and the fun of doing so makes it like DoubleMint gum.
In all of covered call writing I look for a stock that moves up and down 50 cents to $1 every few days on cheaper stocks, and $1 to $2 every few days on more expensive stocks. Keep checking our site, we find them all of the time. This is working smarter, not harder.
MORE DEALS
I've decided to extend this blog topic. There is so much more good information to share. Useful knowledge, or what I call power strategies, let you zoom through the learning curve and help you make more money. But before I go, I promised that I'd share more deals. These were as of two weeks ago, before the October expiration date. I'll include October and November prices so you can ask the all- important question: Do I want to sell the stock?
We sell at the first number, or the bid, unless you want to place a limit order for more money. Note that you may not get it and might have to come back in later and take whatever you can get.
Micron Technology (MU). $4.91. The Oct. $5 call is .43 X .45. The Nov. $5 calls are .63 X .65. You would take in $430 on 1,000 shares of stock for October. Also, you'd make another .09 cents, or $90 if called out. If the stock stays here, that nice premium will disappear. You would take in more by selling the November's's, but the rule of thumb is this: Take what's on the table now. Nov. will be there after the Oct. expiration date.
FAS, an ETF. $11.50. The October $11 calls are .65 X .75. The $12s are .90 X .93. The November $11s are $2.21 X $2.26. The November $12s are $1.60 X $1.70. These are all great, and this stock is volatile enough to double- and triple-dip.
There are too many more to list here. You've heard "knowledge is power." Well, not so fast, at first knowledge is just potential. It becomes powerful with its wise application. Now on to Part 5. There we'll ask and answer more fully the question: Why do we buy back the option?
Copyright 2011 Epicenter, Inc. All Rights Reserved. wadecook.blogspot.com. Visit us soon.
I'll bet all of the people who have read my books or been to my seminars are wondering why in all of these blogs I haven't mentioned my cabdriver experiences. After all I've told the story repeatedly, emphasing that I learned the most important financial lesson of my life driving a taxi. Well, there is no reason to wait any longer. The lesson I've learned and shared is this: "The money is in the meter drop." Simply put, without telling the whole story, is that I made more money taking all of the short runs in my cab driving days rather than waiting for the big run to Sea-Tac Airport. Every time someone got in the cab, I'd drop the meter and it cost them $1.50 to start. I made a lot more than most of the cabdrivers by going for more short runs.
In real estate I employed this strategy by rapidly buying, fixing and selling houses. In the stock market, it is the same. I don't buy a stock at $6 and hope it goes to $60 or $600. I'm trying to make short, smaller profits on a repeatable basis. We live in a monthly cash flow (pay the bills) society. I was often introduced as Wade 'Cash-Flow' Cook.
SELLING THE UPSIDE
I love writing covered calls. It is a cash flow system, using an asset to make monthly income. In Part 5 I'll answer most of the who, what, when, where, why, and how questions. Let me show you here how to make extra income. Double dipping is a procedure that is learnable and repeatable. It is easy to understand and easier to implement.
When we write a covered call, we buy a stock and then sell a call option (usually one month out) and generate immediate cash into our account. We buy a fixed price asset and sell a fluffy option. We can pretty easily get 10% cash returns each month. I'll show you several actual examples at the end of this section.
One drawback when we write covered calls is that we give up the upside of the stock. It is funny. When many people hear about covered call writing, I guess because they can't believe so much money can be made and therefore have to try to find fault with it, ask, "What if the stock goes down?" I answered that in Part 3 of this series. The question they should be asking is: "What if the stock goes up?" There's a lot of pessimism out and about. No one seems to expect stocks to go up anymore.
Here's what I mean. USU (an actual stock) was at $2.10. The $2 call option was 35 cents. If you own the stock and give someone the right to buy the stock at $2, you do not participate in anything above $2. You got paid $350 (assuming you own 1,000 shares of the stock, $2,100). If the stock goes to $3, well, you have limited your sale price to $2. In fact, you would have to give back 10 cents, or $100 of the $350 option premium, netting only $250 for one month. I say that tongue in cheek because right here we have a 10% cash return for one month. If you really think a stock is going to fly don't write a covered call against it. When we first found this stock (about 12 days ago) the stock was at $2.04 and the $2 call was going for .57 cents, Time value disappears. I mention this to teach a lesson: Sell time value.
THE ALL IMPORTANT QUESTION
There is a question that you should use all of the time when writing covered calls. It is this: "DO I WANT TO SELL THE STOCK?" Let me show you how important this is. Let's use the above example to explain this process. Keep in mind, that I'm really big into quality questions. You will need to make some decisions, like this: Should I sell the $2 calls or the $2.50s? Should I wait to sell the option, hoping the stock will go up in the meantime, or just sell it now---selling the extra time? Should I sell the option for this month or for next month? There are a few others.
Later when you to buy-back the option, you will use the same question in making that decision, and then on the same phone call with your broker, you will use the question again to make more decisions. Yes, it's all about cash flow, therefore the question and answer for Jim will be different than that for Sally. They each have needs, they each have skills, they each have more or less time to devote to the process.
If you really want to sell the stock, then sell the lower strike price. If you want to keep the stock sell the higher strike price, and/or be prepared to buy back the option on the next dip. It depends on you and how much you want to make.
DOUBLE DIPPING
If you want to learn more about the basics, I wrote a whole book about this: STOCK MARKET MONEY MACHINE.This is a single topic book about writing covered calls. Double Dipping is a big part of this process if you want to make a lot more money. Like any other methodology there are good, better, best ways of proceeding. Over the years I've worked hard on these enhanced formulas.
It starts with a desire to make money: PASSION, PRECISION, PERSISTENCE, then the PROFITS. You will never get to the profits without the other three. In fact, unless you have a passion for something you will never gain the precision, the exact details, you need to succeed.
Here is how to double dip. You have sold the option. You called your broker and said, "I want to put in an order to sell ten contracts of the November $2 call option for .35 cents. The order goes through at .35 cents. You take in $350. It hits your account the next day. Options trade in one day, stocks in three. You now place an order to buy back the same option. If the stock dips or time expires the option will reduce in price.
When you sold the option you were considered in a short position. On your activity statement for your account it will read Short (-) 10 contracts Nov $2 call. Sometimes it will say short, sometimes there will be a (-) sign. You have opened a position on your stock. It is like a lien on real estate. You are covered because if you are called out, you own the stock and can deliver it. If that is done, almost always on the expiration date, you will see it taken out of your account on Monday. Your account will say, "Account Assigned." The stock will be electronically taken out of your account. The money for selling the stock will be in your account on Thursday. I call this being called out, or selling the stock.
What if you don't want to get called out, even though the stock is above $2? You don't have to be. You can end the open position by closing it. You sold ten contracts, now you buy ten contracts. That will be a plus (+) to the computer, and the short position will end. It's a wash. You have bought back the call position. You have no more obligation to deliver the stock. You're free and clear and good to go. You have recaptured the upside of the stock. You can sell the stock; wait for it to go up; sell another covered call, say the next lower strike price; immediately sell the call for next month---selling more time and pocketing more cash. The choices are yours. Remember it starts over again with the question: Do I Want To Sell The Stock?
This means you have time to think about the trade You can watch this time value and get out of the position, if you choose to. Let's look at what might happen if the stock is at $2.20 and the option is .15 X .20 cents. No time value in the premium so you might get called out. Will you get called out for sure? Yep. If the stock is above $2 you will get called out.
ASK THE QUESTION
Let's use the above example to determine what to do. If we can wrestle with the choices here on paper, you will be able to make better decisions. Should you leave the position alone and get called out, or buy back the option and keep the stock to fight another day? Start by asking the all-important question: Do I want to get called out? How can you make the right choice? There is no right or wrong choice, only ways to make more money---with this same stock or another one.
Here's how simple it is. If it's expiration week, this month's time value is pretty much gone, so inquire about the next month's options. The stock is up from $2.10 to $2.15. You sold this months option for .35 cents. Next months $2 call option can be sold for .45 cents. That would represent $450. You like that number. Now, here's what you do. You buy back the current month option for 15 cents, or $150. Hold it, you ask, "that's 150 smackaroos." Yes, but on the same phone call you take in $450, netting a new $300. So, calculate it out. Income $350, outgo $150, more income $450. You're up $650, and you repeat this month in and month out.
Do you realize you could have figured all this out before you made the decision? The numbers talk to you. And think again, this is all based on $2,100, or $1,050 on margin. I like percentages sometimes, but I like to count the cash much more. A few positions like this and you can quit your job.
ROLLING COVERED CALLS
I have taught this strategy for about 20 years, doing thousands of trades myself, or corporately. As I traveled a new situation arose. My students were doing this two and three times a month. They called it rolling covered calls. Let me explain. Using this same example, they would sell the call for 35 cents, then a few days later, buy the option back on a dip in price of the stock. Then after the weekend, on the next rise in the stock price, they would sell the same option again, or maybe even sell the next lower strike price. More cash now. Then they would buy back the option again by the end of the next week, and sell it again a few days later. They were double-dipping, even triple-dipping. This requires a stock that is moving up and down.
I got tired of hearing of their successes. Again, tongue in cheek, because as an educator, I loved my students out-performing me. I've always been a better coach than player. But my competitive nature drove me to try harder. I set out to do it myself three times, and one month I did it five times on Qualcom (QCOM). I bought the stock at $24 and did covered calls all the way up to where the stock hit $38. This is the month I tried to triple-dip. I did it five times. Yes, that's FIVE. I sold the $40 call, then bought it back, then again and again. It was awesome. I made about $7,000 in one month. I also did it five times one August on Netflix (NFLX). I have tried several more times, but have only been able to do it two and three times a month. It's a lot of work. Oh, the reward? It's worth it, and the fun of doing so makes it like DoubleMint gum.
In all of covered call writing I look for a stock that moves up and down 50 cents to $1 every few days on cheaper stocks, and $1 to $2 every few days on more expensive stocks. Keep checking our site, we find them all of the time. This is working smarter, not harder.
MORE DEALS
I've decided to extend this blog topic. There is so much more good information to share. Useful knowledge, or what I call power strategies, let you zoom through the learning curve and help you make more money. But before I go, I promised that I'd share more deals. These were as of two weeks ago, before the October expiration date. I'll include October and November prices so you can ask the all- important question: Do I want to sell the stock?
We sell at the first number, or the bid, unless you want to place a limit order for more money. Note that you may not get it and might have to come back in later and take whatever you can get.
Micron Technology (MU). $4.91. The Oct. $5 call is .43 X .45. The Nov. $5 calls are .63 X .65. You would take in $430 on 1,000 shares of stock for October. Also, you'd make another .09 cents, or $90 if called out. If the stock stays here, that nice premium will disappear. You would take in more by selling the November's's, but the rule of thumb is this: Take what's on the table now. Nov. will be there after the Oct. expiration date.
FAS, an ETF. $11.50. The October $11 calls are .65 X .75. The $12s are .90 X .93. The November $11s are $2.21 X $2.26. The November $12s are $1.60 X $1.70. These are all great, and this stock is volatile enough to double- and triple-dip.
There are too many more to list here. You've heard "knowledge is power." Well, not so fast, at first knowledge is just potential. It becomes powerful with its wise application. Now on to Part 5. There we'll ask and answer more fully the question: Why do we buy back the option?
Copyright 2011 Epicenter, Inc. All Rights Reserved. wadecook.blogspot.com. Visit us soon.
Tuesday, October 25, 2011
TWO-STEPPING Part 3
WHAT HAPPENS WHEN YOUR COVERED CALL STOCK GOES DOWN IN VALUE?
This report is about protecting yourself from the downside price movement of a stock, especially in stocks used for covered call writing. I have four strategies to share with you, but before I do, it needs to be understood that writing covered calls has a set of rules, that once understood and used, will help you avoid problems and make more money. The first thing you need to understand is that this is a cash flow strategy. We are not buying a stock at $6 hoping it will go to $60. If it does so, great, but that is not why we do this. Think monthly income, even income several times a month (See TWO-STEPPING, Part 4, coming soon).
You must know the why and the how of doing covered calls. "The person who knows how will always have a job; the person who knows why will always be the boss." (Diane Ravitch) Once you understand the why, then you'll realize that you can make just as much money on your $6 stock if the stock goes to $4. But I'm getting ahead of myself.
FOUR PROTECTIVE STRATEGIES
1) The first strategy to protect yourself from a downdraft in a stock price is this: "An ounce of prevention is better than a pound of cure." I know it's cliche, but it's true. People get a little angry when I say this: "If you think a stock is going to go down, or back off, then don't buy it." I too get angry.
Do your homework. Is the company making money? Does it have a P/E and/or are the earnings growing? This demonstrates a solid picture. The options say a lot about the stock. They should be about 6% to 10% of the stock price. An $8 stock should have an $8 call for a month out around 8%, mas o menos.
The best way I've found to find a good stock is to check the support level. You do this simply by looking at a chart. I like 6 month charts, but you may want to look at one going back a year. Say the stock trades between $8 and $10. It's been doing so for about nine months. Once in awhile it goes below $8, but every time it hits $7.60 it bounces off that number. I call this hard support. You can look at soft support, say a comfortable range, but I like hard support or a price the stock does not go below.
You can use any charting service. Most are free. Check out yahoofinance.com; bigcharts.com; or stockcharts.com. Your brokerage firm probably has a free charting service. Charts are like a map. Use them as such. Sure, the stock can break down more. EPILOGUE DOES NOT MEAN PROLOGUE. If you can, go back and check the news when a stock changed price---up or down---by a 10% to 20% move. There is always a reason for movement. Check the market at hand, especially red-light periods (no-news) or green-light periods (news, as in quarterly news times).
Looking at charts will reveal a lot about your personality. Are you an optimist? Then your thoughts will go in that direction. Sometimes it pays to be a pessimist, or at least a skeptic when looking at charts and trying to project movements. I heard an old expression once: "I'd rather want what I don't have than have what I don't want."
2) The second protective strategy is to practice trade, or what I call paper-trade or simu-trade, as in simulation trade. Practice with pretend money first. On paper, buy the stock, then sell the option or put in an order to sell the option at a certain price (Limit order). Many online accounts have a practice trade section, some with real time, streaming quotes.
Can you imagine a rookie baseball player making it to the majors the first day out? A few do, but not many. They work their way up through the minor leagues, working on their skills. Day in and day out they grind it out, sometimes for years. One of my favorite admonitions (because I received it from a wise person and have had to be reminded of it many times) is this: "Everything you have learned to do and do well, you were hand-trained by someone else." You don't learn to drive a car by reading a driver's ed manual. You don't learn how to ski by watching a video. You need to get in the game, but practice first.
This is one reason why I like blogging. It's lets me teach and share my knowledge. You can learn from my experiences which have cost me dearly. "Perfect practice makes perfect." Paper trade each strategy at least ten times, of which six in a row must be profitable, before you ever use real money. This will help you avoid mistakes. Oh, and keep paper trading even when you've invested all your money. You may be waiting for the next deal, or for money to come in, but whatever, paper-trading helps you stay alert, in-the-know, and on-the-go. When the money comes in, you're ready to take action.
3) This third strategy will save you from losing a lot of money most of the time if your stock goes down. It's called a "stop-loss." You place a stop-loss order when you are afraid the stock will go down past the point you don't want it to go to. It costs nothing to place the order and you can change it anytime.
Back to our $6 stock. It looks solid here, but you fear it may go down some more. You place an order to sell the stock if it hits $5.50. If it moves down to that price the computer will trigger a sale. You're out of the stock and in three days the money will be back into your account. There may be a problem with stop-loss orders in writing covered calls. Remember the word covered means you own the stock. Well now, if you sell your stock, you don't own it anymore. In most accounts, the brokerage firm will buy back the option for you. They will not let you stay in an uncovered position, unless you have secured the right to do so. I won't comment much more on this part of this topic, suffice it to say, you should ask and get the right to write uncovered calls. Now, I didn't say to write uncovered calls, where you don't own the stock. To do so, creates a new batch of risks and concerns. Some people only write uncovered calls. Good for them, but for the average investor, it's not worth it. It is a very bearish strategy. Why do it then? You could stay in an uncovered position for a day or two, just before expiration, let's say.. Now the stock hits the $5.50, and you're out of the stock. There's little chance you'll get called out at $6. Why spend 5 or 10 cents, $50 or $100 to buy back the option on Thursday, the day before expiration? Use this right sparingly.
Also, today, with the speed of computers, you can place a hard order to sell a stock at a certain price, and you can set alerts at a different price, or have your broker do so. You place a hard order to sell the stock at $5.50, but you have an alert at $5.60, so you can look at the whole picture, before your order goes off. This way you can make a better decisions. I really like alerts. They help a lot.
Another problem with stop-loss orders is this: you can get picked off in a second. The stock takes a brief dip, and your order goes off. You're out of the stock and the stock goes back up to $5.90 before the next commercial. You see, these market makers see all orders. They can drop down and pick you off before you know what happened. So set your order low enough to avoid this.
How do you choose the right price for your stop-loss order? I have found three ways. I disagree with the first way, but it's what everyone else teaches and writes about. I am also not fond of the second way.
A) Use a percentage you're happy with. Some say 10% of the stock price. Sorry, I don't like it.
This is an easy way to think of it, but it just doesn't make much sense.
B) Use a dollar amount. Some use the amount they made off the option, so they'll break even.
If they buy the stock for $6.00 and take in 60 cent for selling the option, they will subtract
the 60 cents for the $6, setting the stop-loss at $5.40. I'm okay with this, as I think it shows
some thinking and strategizing, but I think there is a better way.
C) Look at the charts. Find the support level, again what I call hard support. Now place the stop-
loss order just below that. Yes, just below that. Say the chart speaks to you. The hard support
looks like $5.20. It's only hit there twice in the last year. Now set the order at $5.10 or $5.00.
This works best for me.
One more point on this topic. If you have a stock you like, and you feel it's weak, sell the in-the-money call. I.e.., you stock has gone from $6 to $5.20. You're not sure of the direction, but the whole market feels weak, so sell the $5 call, not the $6 call. When you do so, you're selling everything above $5. It's more cash into your account.
AUTHOR'S NOTE:
There is one other aspect to this. Some say it's a good strategy. I've never been able to see the need for it. I've never seen it work the way people think it will. They say to take some of the option premium you've made from selling the option and using it to buy a lower strike price put. A put goes up in value if the stock goes down. Okay, I get it. But like a call, everything has to happen in a quick and timely manner, or you will lose. Example: Sell the $6 call for 75 cents, or $750. Now use $150 of that to buy the $4 put, protecting the downside. I ask: Why spend the $150 as it will probably be wasted money. If you were to sell the $5 or the $6 put, it might be better, but it would more than likely cost you all of the $650 you took in. I don't get it. I suggest the other strategies.
4) The fourth way is to quit being so pessimistic and look for an opportunity to make more money. I'll say it simply: You can make just as much money on a monthly basis with the stock at $6 as you did when the stock was at $8. I agree that no one wants to see their investment go down. In fact, many people bail out. That might be the right strategy if you've checked the news and other factors and think the stock may go down further.
Here's an example involving two of my friends. They participated in one of my tele-seminars and loved buying stocks and doing covered calls. They had purchased 1,000 shares of ELN for around $11 each, or $11,000 plus. Over the next year they made about $11,600 cash profits, or about 10% a month. Then the stock dropped to around $9. At first they were devastated. This down movement paralyzed them. They were stymied and did nothing for a few months, waiting for the stock to recover. I joined in their discussion and asked a question: "Why did you buy the stock? Was it to wait and hope it would go up to $20 or $100 a share, or was it to use as the asset, the base for covered call writing?" They answered that it was for generating monthly income. Back then I called it R.I.G. That stands for Repetitive Income Generator.
I had them look at the $8 calls and the $9 calls. The premiums were quite large. Oftentimes when a stock tanks the implied volatility goes up, fluffing up the options. They were still able to make $700 to $1,000 a month. To make the larger amount they had to double dip---work a little harder and make more.
I've said for years that one of the keys to wealth is to "grow out of your problems." As long as there are call options available, there is money to be made. So don't belly-ache, grow, increase---create your own stimulus package. And a quick note to all of you who have had stocks go down in price, and you're still holding them, FIGHT BACK. I call this a stock repair kit. It may take years to wait for you stock to recover lost ground. You don't have to be a victim of this downturn. You can develop the skills and pound cash back into your account. R.I.G. to the rescue!
Also, one other consideration. Say you have a $10 stock that is now sitting at $6. Maybe selling it and finding a better covered call stock is the way to go. It's all just inventory. Re-deploy your money where it will do the most good. Think like a cash flow millionaire.
______________________________________________________________________
Copyright 2011 Epicenter, Inc. wadecook.blogspot.com. All Rights Reserved. Watch for news announcements.
This report is about protecting yourself from the downside price movement of a stock, especially in stocks used for covered call writing. I have four strategies to share with you, but before I do, it needs to be understood that writing covered calls has a set of rules, that once understood and used, will help you avoid problems and make more money. The first thing you need to understand is that this is a cash flow strategy. We are not buying a stock at $6 hoping it will go to $60. If it does so, great, but that is not why we do this. Think monthly income, even income several times a month (See TWO-STEPPING, Part 4, coming soon).
You must know the why and the how of doing covered calls. "The person who knows how will always have a job; the person who knows why will always be the boss." (Diane Ravitch) Once you understand the why, then you'll realize that you can make just as much money on your $6 stock if the stock goes to $4. But I'm getting ahead of myself.
FOUR PROTECTIVE STRATEGIES
1) The first strategy to protect yourself from a downdraft in a stock price is this: "An ounce of prevention is better than a pound of cure." I know it's cliche, but it's true. People get a little angry when I say this: "If you think a stock is going to go down, or back off, then don't buy it." I too get angry.
Do your homework. Is the company making money? Does it have a P/E and/or are the earnings growing? This demonstrates a solid picture. The options say a lot about the stock. They should be about 6% to 10% of the stock price. An $8 stock should have an $8 call for a month out around 8%, mas o menos.
The best way I've found to find a good stock is to check the support level. You do this simply by looking at a chart. I like 6 month charts, but you may want to look at one going back a year. Say the stock trades between $8 and $10. It's been doing so for about nine months. Once in awhile it goes below $8, but every time it hits $7.60 it bounces off that number. I call this hard support. You can look at soft support, say a comfortable range, but I like hard support or a price the stock does not go below.
You can use any charting service. Most are free. Check out yahoofinance.com; bigcharts.com; or stockcharts.com. Your brokerage firm probably has a free charting service. Charts are like a map. Use them as such. Sure, the stock can break down more. EPILOGUE DOES NOT MEAN PROLOGUE. If you can, go back and check the news when a stock changed price---up or down---by a 10% to 20% move. There is always a reason for movement. Check the market at hand, especially red-light periods (no-news) or green-light periods (news, as in quarterly news times).
Looking at charts will reveal a lot about your personality. Are you an optimist? Then your thoughts will go in that direction. Sometimes it pays to be a pessimist, or at least a skeptic when looking at charts and trying to project movements. I heard an old expression once: "I'd rather want what I don't have than have what I don't want."
2) The second protective strategy is to practice trade, or what I call paper-trade or simu-trade, as in simulation trade. Practice with pretend money first. On paper, buy the stock, then sell the option or put in an order to sell the option at a certain price (Limit order). Many online accounts have a practice trade section, some with real time, streaming quotes.
Can you imagine a rookie baseball player making it to the majors the first day out? A few do, but not many. They work their way up through the minor leagues, working on their skills. Day in and day out they grind it out, sometimes for years. One of my favorite admonitions (because I received it from a wise person and have had to be reminded of it many times) is this: "Everything you have learned to do and do well, you were hand-trained by someone else." You don't learn to drive a car by reading a driver's ed manual. You don't learn how to ski by watching a video. You need to get in the game, but practice first.
This is one reason why I like blogging. It's lets me teach and share my knowledge. You can learn from my experiences which have cost me dearly. "Perfect practice makes perfect." Paper trade each strategy at least ten times, of which six in a row must be profitable, before you ever use real money. This will help you avoid mistakes. Oh, and keep paper trading even when you've invested all your money. You may be waiting for the next deal, or for money to come in, but whatever, paper-trading helps you stay alert, in-the-know, and on-the-go. When the money comes in, you're ready to take action.
3) This third strategy will save you from losing a lot of money most of the time if your stock goes down. It's called a "stop-loss." You place a stop-loss order when you are afraid the stock will go down past the point you don't want it to go to. It costs nothing to place the order and you can change it anytime.
Back to our $6 stock. It looks solid here, but you fear it may go down some more. You place an order to sell the stock if it hits $5.50. If it moves down to that price the computer will trigger a sale. You're out of the stock and in three days the money will be back into your account. There may be a problem with stop-loss orders in writing covered calls. Remember the word covered means you own the stock. Well now, if you sell your stock, you don't own it anymore. In most accounts, the brokerage firm will buy back the option for you. They will not let you stay in an uncovered position, unless you have secured the right to do so. I won't comment much more on this part of this topic, suffice it to say, you should ask and get the right to write uncovered calls. Now, I didn't say to write uncovered calls, where you don't own the stock. To do so, creates a new batch of risks and concerns. Some people only write uncovered calls. Good for them, but for the average investor, it's not worth it. It is a very bearish strategy. Why do it then? You could stay in an uncovered position for a day or two, just before expiration, let's say.. Now the stock hits the $5.50, and you're out of the stock. There's little chance you'll get called out at $6. Why spend 5 or 10 cents, $50 or $100 to buy back the option on Thursday, the day before expiration? Use this right sparingly.
Also, today, with the speed of computers, you can place a hard order to sell a stock at a certain price, and you can set alerts at a different price, or have your broker do so. You place a hard order to sell the stock at $5.50, but you have an alert at $5.60, so you can look at the whole picture, before your order goes off. This way you can make a better decisions. I really like alerts. They help a lot.
Another problem with stop-loss orders is this: you can get picked off in a second. The stock takes a brief dip, and your order goes off. You're out of the stock and the stock goes back up to $5.90 before the next commercial. You see, these market makers see all orders. They can drop down and pick you off before you know what happened. So set your order low enough to avoid this.
How do you choose the right price for your stop-loss order? I have found three ways. I disagree with the first way, but it's what everyone else teaches and writes about. I am also not fond of the second way.
A) Use a percentage you're happy with. Some say 10% of the stock price. Sorry, I don't like it.
This is an easy way to think of it, but it just doesn't make much sense.
B) Use a dollar amount. Some use the amount they made off the option, so they'll break even.
If they buy the stock for $6.00 and take in 60 cent for selling the option, they will subtract
the 60 cents for the $6, setting the stop-loss at $5.40. I'm okay with this, as I think it shows
some thinking and strategizing, but I think there is a better way.
C) Look at the charts. Find the support level, again what I call hard support. Now place the stop-
loss order just below that. Yes, just below that. Say the chart speaks to you. The hard support
looks like $5.20. It's only hit there twice in the last year. Now set the order at $5.10 or $5.00.
This works best for me.
One more point on this topic. If you have a stock you like, and you feel it's weak, sell the in-the-money call. I.e.., you stock has gone from $6 to $5.20. You're not sure of the direction, but the whole market feels weak, so sell the $5 call, not the $6 call. When you do so, you're selling everything above $5. It's more cash into your account.
AUTHOR'S NOTE:
There is one other aspect to this. Some say it's a good strategy. I've never been able to see the need for it. I've never seen it work the way people think it will. They say to take some of the option premium you've made from selling the option and using it to buy a lower strike price put. A put goes up in value if the stock goes down. Okay, I get it. But like a call, everything has to happen in a quick and timely manner, or you will lose. Example: Sell the $6 call for 75 cents, or $750. Now use $150 of that to buy the $4 put, protecting the downside. I ask: Why spend the $150 as it will probably be wasted money. If you were to sell the $5 or the $6 put, it might be better, but it would more than likely cost you all of the $650 you took in. I don't get it. I suggest the other strategies.
4) The fourth way is to quit being so pessimistic and look for an opportunity to make more money. I'll say it simply: You can make just as much money on a monthly basis with the stock at $6 as you did when the stock was at $8. I agree that no one wants to see their investment go down. In fact, many people bail out. That might be the right strategy if you've checked the news and other factors and think the stock may go down further.
Here's an example involving two of my friends. They participated in one of my tele-seminars and loved buying stocks and doing covered calls. They had purchased 1,000 shares of ELN for around $11 each, or $11,000 plus. Over the next year they made about $11,600 cash profits, or about 10% a month. Then the stock dropped to around $9. At first they were devastated. This down movement paralyzed them. They were stymied and did nothing for a few months, waiting for the stock to recover. I joined in their discussion and asked a question: "Why did you buy the stock? Was it to wait and hope it would go up to $20 or $100 a share, or was it to use as the asset, the base for covered call writing?" They answered that it was for generating monthly income. Back then I called it R.I.G. That stands for Repetitive Income Generator.
I had them look at the $8 calls and the $9 calls. The premiums were quite large. Oftentimes when a stock tanks the implied volatility goes up, fluffing up the options. They were still able to make $700 to $1,000 a month. To make the larger amount they had to double dip---work a little harder and make more.
I've said for years that one of the keys to wealth is to "grow out of your problems." As long as there are call options available, there is money to be made. So don't belly-ache, grow, increase---create your own stimulus package. And a quick note to all of you who have had stocks go down in price, and you're still holding them, FIGHT BACK. I call this a stock repair kit. It may take years to wait for you stock to recover lost ground. You don't have to be a victim of this downturn. You can develop the skills and pound cash back into your account. R.I.G. to the rescue!
Also, one other consideration. Say you have a $10 stock that is now sitting at $6. Maybe selling it and finding a better covered call stock is the way to go. It's all just inventory. Re-deploy your money where it will do the most good. Think like a cash flow millionaire.
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Copyright 2011 Epicenter, Inc. wadecook.blogspot.com. All Rights Reserved. Watch for news announcements.
Sunday, October 23, 2011
STOCK MARKET AND THE CLOUD
I read and watch the news, especially as it has to do with politics and investments. With every new technology or application of that technology, disparate effects arise. My thought is simple: "Could does not equal should." (See 1 Cor 10:23) Just because there is a new way to transfer news, and/or manipulate that news, does not mean you should give it equal weight.
Lately Twitter is the format for sparking interest in stocks. This is mainly garbage, and you should be careful. You have no idea what the proponents of a certain stock propagate, and what they're pushing.
Tweeting was for keeping in touch with your friends, and for a few movie stars. Even jocks would tweet from the end zone after scoring a touchdown. It has moved way beyond that. I've always said, "Consider the source. Watch out to whom you are listening." Now, tweets are everywhere, commenting on everything. Be careful where you get your advice. First, find out what everyone gets out of the deal. Second, always have a healthy level of skepticism. Challenge all facts and numbers.
Mike Hogan writing in Barron's said, these tweets create a "misdirection for the misguided." Later he called it just noise and "pointless babble." These words are meant for the mindless comments made by unknowledgeable people. However, keep in mind, it's not just about the people, it's about muddy thinking, possibly by agenda driven propagandists.
If I could get a tweet from Warren Buffet (definitely not about his taxing comments) or from Peter Lynch, or from that renowned author of "Wall Street Money Machine," I'd be very happy. Consider the source. Is the message important, well founded and timely?
I wonder how I'm viewed. I comment on what I think are good ways to create income. I don't look at the market to find the next hot stock. I want to find and share the next hot strategy, or use and explain how to apply these strategies for making extra income.
What do you think? How am I doing? Watch for an upcoming blog on my comments the first part of August 2011. You'll then see how I thought and vicariously played the market at hand.
Abundantly yours, Wade
Lately Twitter is the format for sparking interest in stocks. This is mainly garbage, and you should be careful. You have no idea what the proponents of a certain stock propagate, and what they're pushing.
Tweeting was for keeping in touch with your friends, and for a few movie stars. Even jocks would tweet from the end zone after scoring a touchdown. It has moved way beyond that. I've always said, "Consider the source. Watch out to whom you are listening." Now, tweets are everywhere, commenting on everything. Be careful where you get your advice. First, find out what everyone gets out of the deal. Second, always have a healthy level of skepticism. Challenge all facts and numbers.
Mike Hogan writing in Barron's said, these tweets create a "misdirection for the misguided." Later he called it just noise and "pointless babble." These words are meant for the mindless comments made by unknowledgeable people. However, keep in mind, it's not just about the people, it's about muddy thinking, possibly by agenda driven propagandists.
If I could get a tweet from Warren Buffet (definitely not about his taxing comments) or from Peter Lynch, or from that renowned author of "Wall Street Money Machine," I'd be very happy. Consider the source. Is the message important, well founded and timely?
I wonder how I'm viewed. I comment on what I think are good ways to create income. I don't look at the market to find the next hot stock. I want to find and share the next hot strategy, or use and explain how to apply these strategies for making extra income.
What do you think? How am I doing? Watch for an upcoming blog on my comments the first part of August 2011. You'll then see how I thought and vicariously played the market at hand.
Abundantly yours, Wade
Tuesday, October 18, 2011
TWO-STEPPING, Part 2
The blog I wrote yesterday has caused quite a stir. Thank you for your comments and questions. I honestly have enough to write 5 or 6 more blogs, and maybe this will be the start of a new book or study course. Your questions mean a lot to me, and they lead me along.
In the next few days I'll write about 1) the downside of a stock we choose to use for writing a covered call. More specifically, what we can do if the stock goes down in value; 2) Finding the right kind of stock; 3) Double-Dipping and extra monthly cash flow; 4) and other enhanced techniques for safety and generating even more income. It will be fun. Just because I listed all of this, please feel free to keep sending your questions.
I'm going to give several examples of stocks we looked at today. We'll buy some of these stocks and then sell out to the November expiration date call options, creating a covered call situation. These prices were as of about 12:30 PM, October 17th 2011. Later, as we move through these blogs, I'll bundle a group of stocks and use $20,000 as our cash invested. If you only have $2,000 then you start there. Even $300 extra per month can make a big difference.
Here we go: Bank of America (BAC, the ticker symbol) was $6.05 to buy. The Nov. $6 calls were going for 58 X 59 cents. Stop. We say that as 58 by 59 cents. The first number is the bid and the second number is the ask. Together, they are the bid and ask. If you wanted to buy the stock option at the asking or market price you would buy it for 59 cents.
ANOTHER DAY
I have to jump in here to tell you what just happened. Everything above was written yesterday. It's now the next day, Tuesday, Oct. 18th. We just had a class and divided the students up into 5 groups of 2 each. Each group started with $20,000 of "paper" money. I wanted them to go for the gusto. Me gusta le gusto! (A little Espanol and French awkwardly mixed together). Take the $20,000 on margin, making it $40,000 in buying-power and see how much they can make selling November options against these stock positions.
Here are the prices, as of the close today.
BAC $6.64 $6 c = .88 X .92
S (Sprint) $2.88 $3 c = ..26 X .27
RENN $5.65 $6 c = .45 X .50
EK (Eastman Kodak) $1.31 $1.50 c = .26 X .30
MU (Micron Technology) $5.77 $6 c = .42 X .44
FAS $12.83 $13 c = $1.46 X $1.50 (WOW)
YHOO $15.47 $16 c = $1.10 X $1.15
Okay, here's how it works. I'll give you an example and then challenge you to do some deals on paper. That's one of the great things about writing covered calls, you can paper trade, and you can measure you cash returns before you ever use real money. "Perfect Practice Makes Perfect."
Let's say you buy 2,000 shares of EK. 2,000 times $1.31 is $2,620. Now you sell 20 option contracts of the November $1.50 calls, giving someone the right to buy 2,000 shares of your stock at $1.50. Each contract represents 100 shares. They're going for 26 cents. 2,000 times .26 is $520. This is money you get into your account in one day. That's a nice cash income based on your $2,620, or $1,310 on margin.
The formula is simple: #1 Buy stock, as many shares as you like. Try to always buy in 100 share lots as the options are 100 shares for one contract. #2 Sell Option. Choose a strike price you like. With this one you could have sold the $1 calls for .46, and taken in $920 (.46 X 2,000=$920). But then you would have to give back the .31 cents if you got called out at $1. That would be $610 from the $920. This is okay, but I like selling slightly out-of-the money options. This means the strike price above the stock price.
Now you do one. Pick a stock. Multiply by the number of shares. Divide by two, for the margin amount. Yes, margin is risky, but this was a group of wild and crazy guys, young and daring, so why not be a little risky and risque. Now sell the options and the cash will be in your account tomorrow. Do you like it?
Here's what they came up with. One group used the whole $40,000 and made $4,450 and a little more if they got called out.
The next group made $4,750, but $4,450 if called out of one of the stocks they used. Two other groups were about the same. The last group, a couple of guys from Hawaii made $7,277. Hint: they bought 15,200 shares of EK and sold 152 contracts of the $1.50 calls for .26 each. They bought 3,500 shares of RENN and sold the $5 call, taking in a lot of money, but might have the need to give some back if called out. They're counting on doing a buy-back as time goes on. More on the buy-back in a future blog. Do the math yourself. You will soon have one of those AHAAA moments. These numbers and the buy-back create an awesome power strategy.
Look once more at their results. I'll ask the question again: Does this pique your interest? Does making over $4,000 a month on $20,000 get your attention? What if you only have $4,000 to invest, how does $800 a month extra sound?
These are real numbers. Check them out yourself. Can this strategy lift you out of the doldrums?
In the next few days I'll write about 1) the downside of a stock we choose to use for writing a covered call. More specifically, what we can do if the stock goes down in value; 2) Finding the right kind of stock; 3) Double-Dipping and extra monthly cash flow; 4) and other enhanced techniques for safety and generating even more income. It will be fun. Just because I listed all of this, please feel free to keep sending your questions.
I'm going to give several examples of stocks we looked at today. We'll buy some of these stocks and then sell out to the November expiration date call options, creating a covered call situation. These prices were as of about 12:30 PM, October 17th 2011. Later, as we move through these blogs, I'll bundle a group of stocks and use $20,000 as our cash invested. If you only have $2,000 then you start there. Even $300 extra per month can make a big difference.
Here we go: Bank of America (BAC, the ticker symbol) was $6.05 to buy. The Nov. $6 calls were going for 58 X 59 cents. Stop. We say that as 58 by 59 cents. The first number is the bid and the second number is the ask. Together, they are the bid and ask. If you wanted to buy the stock option at the asking or market price you would buy it for 59 cents.
ANOTHER DAY
I have to jump in here to tell you what just happened. Everything above was written yesterday. It's now the next day, Tuesday, Oct. 18th. We just had a class and divided the students up into 5 groups of 2 each. Each group started with $20,000 of "paper" money. I wanted them to go for the gusto. Me gusta le gusto! (A little Espanol and French awkwardly mixed together). Take the $20,000 on margin, making it $40,000 in buying-power and see how much they can make selling November options against these stock positions.
Here are the prices, as of the close today.
BAC $6.64 $6 c = .88 X .92
S (Sprint) $2.88 $3 c = ..26 X .27
RENN $5.65 $6 c = .45 X .50
EK (Eastman Kodak) $1.31 $1.50 c = .26 X .30
MU (Micron Technology) $5.77 $6 c = .42 X .44
FAS $12.83 $13 c = $1.46 X $1.50 (WOW)
YHOO $15.47 $16 c = $1.10 X $1.15
Okay, here's how it works. I'll give you an example and then challenge you to do some deals on paper. That's one of the great things about writing covered calls, you can paper trade, and you can measure you cash returns before you ever use real money. "Perfect Practice Makes Perfect."
Let's say you buy 2,000 shares of EK. 2,000 times $1.31 is $2,620. Now you sell 20 option contracts of the November $1.50 calls, giving someone the right to buy 2,000 shares of your stock at $1.50. Each contract represents 100 shares. They're going for 26 cents. 2,000 times .26 is $520. This is money you get into your account in one day. That's a nice cash income based on your $2,620, or $1,310 on margin.
The formula is simple: #1 Buy stock, as many shares as you like. Try to always buy in 100 share lots as the options are 100 shares for one contract. #2 Sell Option. Choose a strike price you like. With this one you could have sold the $1 calls for .46, and taken in $920 (.46 X 2,000=$920). But then you would have to give back the .31 cents if you got called out at $1. That would be $610 from the $920. This is okay, but I like selling slightly out-of-the money options. This means the strike price above the stock price.
Now you do one. Pick a stock. Multiply by the number of shares. Divide by two, for the margin amount. Yes, margin is risky, but this was a group of wild and crazy guys, young and daring, so why not be a little risky and risque. Now sell the options and the cash will be in your account tomorrow. Do you like it?
Here's what they came up with. One group used the whole $40,000 and made $4,450 and a little more if they got called out.
The next group made $4,750, but $4,450 if called out of one of the stocks they used. Two other groups were about the same. The last group, a couple of guys from Hawaii made $7,277. Hint: they bought 15,200 shares of EK and sold 152 contracts of the $1.50 calls for .26 each. They bought 3,500 shares of RENN and sold the $5 call, taking in a lot of money, but might have the need to give some back if called out. They're counting on doing a buy-back as time goes on. More on the buy-back in a future blog. Do the math yourself. You will soon have one of those AHAAA moments. These numbers and the buy-back create an awesome power strategy.
Look once more at their results. I'll ask the question again: Does this pique your interest? Does making over $4,000 a month on $20,000 get your attention? What if you only have $4,000 to invest, how does $800 a month extra sound?
These are real numbers. Check them out yourself. Can this strategy lift you out of the doldrums?
MOLLY AND THE LIMIT ORDER
Let me take a moment and explain the difference between a limit order and a market order. I will give you the punch line first. If you are new to trading you should avoid market orders, especially in a fast moving market. And even more so, if you need to watch every penny. There are times for market orders, but very few.
A market order tells your broker or online service to go buy a stock or option no matter the current price. You will get the "next best fill."
A limit order is just what it says. You limit the price. You place your order for the stock or option at a set price, to buy or sell. If the security does not hit that price, you will not get filled.
Your broker has a fiduciary responsibility, and his computer will act this way, to get you the best possible price, even if it is a little different than your limit price, but it always has to be different in your favor. Say you're trying to buy a stock for $6.60. It's currently at $7. It would take a 40 cent down draft to get hit. Now, in a fast moving market, it moves quickly to $6.40. If you did not get filled at $6.50 which is normally the case, as computers are so fast today, you will get filled at $6.40---the next best fill. It is assumed that if you want the stock at $6.60, you'll love it at $6.40. If you had in a market order, you probably would have gotten filled at around $7. If the stock is moving slow it probably doesn't matter the type of order. You can watch and jump in at a price you like.
This is the same with buying options and/or selling options, as in covered call writing. I was writing to one student and she chased an option with limit orders. The Dow was moving fast and she wanted the $114 calls, she tried to get them at $1.30, it moved. Then she tried to get them at $1.50, and it moved through that price and she missed it again. She really wanted them. There is the exception to the above rule. If you really, really want them, change it to a market order. Make sure you're on the same page as your broker. "Get them!!!" Means a market order. You don't care if you pay $1.30 or $1.50---you just want them. Why? In that fast moving period, the option went up $1.00 or so, and she could have gotten out already with near a double.
Oh well, live and learn. There will be more trades tomorrow. Hang in there Molly. We all love you.
Wade
A market order tells your broker or online service to go buy a stock or option no matter the current price. You will get the "next best fill."
A limit order is just what it says. You limit the price. You place your order for the stock or option at a set price, to buy or sell. If the security does not hit that price, you will not get filled.
Your broker has a fiduciary responsibility, and his computer will act this way, to get you the best possible price, even if it is a little different than your limit price, but it always has to be different in your favor. Say you're trying to buy a stock for $6.60. It's currently at $7. It would take a 40 cent down draft to get hit. Now, in a fast moving market, it moves quickly to $6.40. If you did not get filled at $6.50 which is normally the case, as computers are so fast today, you will get filled at $6.40---the next best fill. It is assumed that if you want the stock at $6.60, you'll love it at $6.40. If you had in a market order, you probably would have gotten filled at around $7. If the stock is moving slow it probably doesn't matter the type of order. You can watch and jump in at a price you like.
This is the same with buying options and/or selling options, as in covered call writing. I was writing to one student and she chased an option with limit orders. The Dow was moving fast and she wanted the $114 calls, she tried to get them at $1.30, it moved. Then she tried to get them at $1.50, and it moved through that price and she missed it again. She really wanted them. There is the exception to the above rule. If you really, really want them, change it to a market order. Make sure you're on the same page as your broker. "Get them!!!" Means a market order. You don't care if you pay $1.30 or $1.50---you just want them. Why? In that fast moving period, the option went up $1.00 or so, and she could have gotten out already with near a double.
Oh well, live and learn. There will be more trades tomorrow. Hang in there Molly. We all love you.
Wade
Sunday, October 16, 2011
CASH FLOW and TWO-STEPPING YOUR MONEY
I want to share an idea with you about a different way of thinking about wealth---from enhancing your assets, generating excess income, all the way down to paying bills. Maybe you've heard this before---two-stepping your wealth. This means using money, cash, assets, or whatever, to solve your financial needs, but in a two step process. Here's a scenario:
Gloria has trememdous needs for money. She's behind on everything, and some of the creditors are getting forceful. But help is around the corner. She is getting a gift from Aunt Emily of $10,000. That's enough to make a big dent in her obligations, and definitely will keep the wolf away from the door. However, it's not quite enough to pay off everything. She thinks and thinks. It's better to pay some now, even though she can't pay it all. That's the way most people think. Soon the money will be all gone, and that's it. It's gone. She will feel good for a few weeks.
Let me share another way of thinking: using assets, and the cash it can produce to get out of this problem. It's what I call "cash-to-asset-to-cash." I like it because it lets you grow out of your problems. And on the other side of the next couple of weeks, Gloria won't be left with receipts and still a lot of problems. Grow. Do More. Be More. In short, put your money to work for you.
I love writing covered calls. It gets assets producing income. You can make cash dollars of about 10% to 20% per month. Yes, per month, and maybe more as you get more skilled. I won't explain the whole process here, as I've written much elsewhere, especially in my book, STOCK MARKET MONEY MACHINE. Plus I load up these blogs with real deals that Gloria can copy. With $10,000 you can buy $20,000 worth of stock. It's called margin investing. The broker puts up the other half and uses the stock as collateral. Gloria doesn't like margin, so she'll use it sparingly.
She buys 1,000 shares of FAS (An Exchange Traded Fund in the financial sector). The options are nice. She pays out the whole $10,000 as the stock is $9.80 now. That's $9,800, plus she'll have commissions. Now she sells the November $10 call options, giving someone the right to buy her stock at $10, or $10,000. Those options were $1.85 to sell. She has 1,000 shares so she can sell 1,000 options, taking in $1,850. These are real numbers, though a few days old as of this writing. She now takes out the $1,850---all of it or part of it---and pays the urgent bills. This transaction took about 3 or 4 minutes---and it all happened on the day she received the $10,000 and put it into her account. The option money---that great amount of $1,850---hit her account the next day. She can pick up a check, have it wired to her account, whatever. It's her money to spend.
The other bills? Well the $1,850 went along way to paying the emergencies. In fact she has enough to take her husband and the kids to a nice night out. My advice: Don't spend the principal, spend the profits. She has 20% of her bills paid and she has an asset, this time FAS, still in to account, ready to go to work next month. We do this with several stocks of which many are household names.
Now what happens? Without explaining the buy-back and all the other great "covered call" strategies, suffice it to say, she waits until the third Friday of November. She either sells the stock at $10 (gets called out) or not. Either way she gets to keep the $1,850 and she has the stock in her account or the $10,000. She does it again. This month, for December and Christmas, she takes in only $1,600 for selling the option. She pays off another $1,200 in bills and lives to fight another day. At this rate, all of her bills will be paid by April. AND SHE WILL STILL HAVE THE $10,000 (maybe more) IN HER ACCOUNT GENERATING MORE MONTHLY INCOME.
Grow out of your problems. Spend the profits, not the principle. Get assets producing income. Why don't more people do this? (1) They do not know what is available. This may be the first and only time they have heard of writing covered calls. (2) They only think of traditional bank accounts. Take $10,000 and put it in the bank at 3% and you get $300 for a whole year, NOT $1,850 or so every month. (3) No matter how safe and good this strategy, many people feel inadequate when it comes to financial things. That is why I blog, trying to help. (4) They have already mentally spent the money before they ever get it. They don't think of using the money to produce immediate, large and consistent profits. (5) The clamor for action is "NOW" and they grab at straws, not realizing the straws are temporary. They don't think ahead to permanent solutions.
Here's your problem, my dear readers. If you don't do something like this the money will be gone. It will not be available to work for you on a continuous basis. It is a wise person who realizes a need for an extra source of cash flow. Imagine what retired people can do with an extra $1,650 coming in every month. Imagine a young married couple, taking all their wedding money gifts and putting it to work this way. It's a way to put financial problems in your rear-view mirror.
John Wooden said: "Discipline yourselves and others won't have to." Many people lack the discipline to two-step their money, and their lack of knowledge and discipline exacts a very high price. Think of the life changing strategy that makes money for you so you won't have to keep working and stressing. "If you think education is expensive, try ignorance." ~~Derek Bok
Is there anything here that piques your interest? Yes, you'll have to learn, but you are just three to four hours from understanding the basics. There is help available. I spend a lot of time helping people get through the learning curve. Also, I do not get anything out of what you do therefore I can teach in an unbiased way. You learn, you earn.
You'll also soon realize that there are power-strategies to help you make even more. A quick example: If you had purchased 2,000 shares of the preceding stock, you would have done so with the same $10,000, now some on margin. You could have sold double the amount, generating $3,700 on your $10,000. Okay, does this get you interested to learn more? A little more risk, a substantially greater reward. And you do all of this in your pajamas and taking care of the kids.
Opportunities come and go. We all need education that gives more than it costs. Many people however hang on to their past so tightly that their arms tire and they fail to grasp these new opportunities. This is your time for your own economic stimulus program, your own economic recovery. Please don't judge this process by your knowledge level now. Judge it by us and what we can teach you. "When the student is ready, the teacher appears." We're ready, are you?
Henry Ford said: "If you think money is your hope for independence you will never have it. The only real hope that a man or woman will have in this world, is an abundance of knowledge, experience and abilities." To me, these traslate into skills, and we're here to help develop yours. Our success is not determined by what we put into people, but by what they get out of what we teach.
Copyright 2011 Epicenter, Inc. All Rights Reserved.
Gloria has trememdous needs for money. She's behind on everything, and some of the creditors are getting forceful. But help is around the corner. She is getting a gift from Aunt Emily of $10,000. That's enough to make a big dent in her obligations, and definitely will keep the wolf away from the door. However, it's not quite enough to pay off everything. She thinks and thinks. It's better to pay some now, even though she can't pay it all. That's the way most people think. Soon the money will be all gone, and that's it. It's gone. She will feel good for a few weeks.
Let me share another way of thinking: using assets, and the cash it can produce to get out of this problem. It's what I call "cash-to-asset-to-cash." I like it because it lets you grow out of your problems. And on the other side of the next couple of weeks, Gloria won't be left with receipts and still a lot of problems. Grow. Do More. Be More. In short, put your money to work for you.
I love writing covered calls. It gets assets producing income. You can make cash dollars of about 10% to 20% per month. Yes, per month, and maybe more as you get more skilled. I won't explain the whole process here, as I've written much elsewhere, especially in my book, STOCK MARKET MONEY MACHINE. Plus I load up these blogs with real deals that Gloria can copy. With $10,000 you can buy $20,000 worth of stock. It's called margin investing. The broker puts up the other half and uses the stock as collateral. Gloria doesn't like margin, so she'll use it sparingly.
She buys 1,000 shares of FAS (An Exchange Traded Fund in the financial sector). The options are nice. She pays out the whole $10,000 as the stock is $9.80 now. That's $9,800, plus she'll have commissions. Now she sells the November $10 call options, giving someone the right to buy her stock at $10, or $10,000. Those options were $1.85 to sell. She has 1,000 shares so she can sell 1,000 options, taking in $1,850. These are real numbers, though a few days old as of this writing. She now takes out the $1,850---all of it or part of it---and pays the urgent bills. This transaction took about 3 or 4 minutes---and it all happened on the day she received the $10,000 and put it into her account. The option money---that great amount of $1,850---hit her account the next day. She can pick up a check, have it wired to her account, whatever. It's her money to spend.
The other bills? Well the $1,850 went along way to paying the emergencies. In fact she has enough to take her husband and the kids to a nice night out. My advice: Don't spend the principal, spend the profits. She has 20% of her bills paid and she has an asset, this time FAS, still in to account, ready to go to work next month. We do this with several stocks of which many are household names.
Now what happens? Without explaining the buy-back and all the other great "covered call" strategies, suffice it to say, she waits until the third Friday of November. She either sells the stock at $10 (gets called out) or not. Either way she gets to keep the $1,850 and she has the stock in her account or the $10,000. She does it again. This month, for December and Christmas, she takes in only $1,600 for selling the option. She pays off another $1,200 in bills and lives to fight another day. At this rate, all of her bills will be paid by April. AND SHE WILL STILL HAVE THE $10,000 (maybe more) IN HER ACCOUNT GENERATING MORE MONTHLY INCOME.
Grow out of your problems. Spend the profits, not the principle. Get assets producing income. Why don't more people do this? (1) They do not know what is available. This may be the first and only time they have heard of writing covered calls. (2) They only think of traditional bank accounts. Take $10,000 and put it in the bank at 3% and you get $300 for a whole year, NOT $1,850 or so every month. (3) No matter how safe and good this strategy, many people feel inadequate when it comes to financial things. That is why I blog, trying to help. (4) They have already mentally spent the money before they ever get it. They don't think of using the money to produce immediate, large and consistent profits. (5) The clamor for action is "NOW" and they grab at straws, not realizing the straws are temporary. They don't think ahead to permanent solutions.
Here's your problem, my dear readers. If you don't do something like this the money will be gone. It will not be available to work for you on a continuous basis. It is a wise person who realizes a need for an extra source of cash flow. Imagine what retired people can do with an extra $1,650 coming in every month. Imagine a young married couple, taking all their wedding money gifts and putting it to work this way. It's a way to put financial problems in your rear-view mirror.
John Wooden said: "Discipline yourselves and others won't have to." Many people lack the discipline to two-step their money, and their lack of knowledge and discipline exacts a very high price. Think of the life changing strategy that makes money for you so you won't have to keep working and stressing. "If you think education is expensive, try ignorance." ~~Derek Bok
Is there anything here that piques your interest? Yes, you'll have to learn, but you are just three to four hours from understanding the basics. There is help available. I spend a lot of time helping people get through the learning curve. Also, I do not get anything out of what you do therefore I can teach in an unbiased way. You learn, you earn.
You'll also soon realize that there are power-strategies to help you make even more. A quick example: If you had purchased 2,000 shares of the preceding stock, you would have done so with the same $10,000, now some on margin. You could have sold double the amount, generating $3,700 on your $10,000. Okay, does this get you interested to learn more? A little more risk, a substantially greater reward. And you do all of this in your pajamas and taking care of the kids.
Opportunities come and go. We all need education that gives more than it costs. Many people however hang on to their past so tightly that their arms tire and they fail to grasp these new opportunities. This is your time for your own economic stimulus program, your own economic recovery. Please don't judge this process by your knowledge level now. Judge it by us and what we can teach you. "When the student is ready, the teacher appears." We're ready, are you?
Henry Ford said: "If you think money is your hope for independence you will never have it. The only real hope that a man or woman will have in this world, is an abundance of knowledge, experience and abilities." To me, these traslate into skills, and we're here to help develop yours. Our success is not determined by what we put into people, but by what they get out of what we teach.
Copyright 2011 Epicenter, Inc. All Rights Reserved.
Friday, October 14, 2011
STOCK MARKET MOVEMENT
Yesterday, Thursday, when the market took a brief respite, my calculations told me that it would go up today. It is now officially earnings season. It's a new period---what I call a green-light period. Now, the news could be bad, but there are so many American companies making so much money. It looks good, but remember it's not always the actual numbers, but the commentary about the numbers.
The adage is powerful that says: "A stock price today is based on the anticipation of future earnings." So, what some companies do is say things like: "We're doing well. We beat our estimates, but the next quarter (year) looks tough. Competition is up and expansion uncertain." Focus on the commentary.
Now, for next week? I think up, but I really don't have a feel yet. It will be up based on the earnings season, but any bad news, even international, could drive it down.
I'll get some closing prices later and comment on covered call possibilities at that time. The question is to do or not to do October Strike prices, or move out to November. My rule of thumb is to take what is on the table before you. November will be there after next Friday.
Happy Investing.
Wade
The adage is powerful that says: "A stock price today is based on the anticipation of future earnings." So, what some companies do is say things like: "We're doing well. We beat our estimates, but the next quarter (year) looks tough. Competition is up and expansion uncertain." Focus on the commentary.
Now, for next week? I think up, but I really don't have a feel yet. It will be up based on the earnings season, but any bad news, even international, could drive it down.
I'll get some closing prices later and comment on covered call possibilities at that time. The question is to do or not to do October Strike prices, or move out to November. My rule of thumb is to take what is on the table before you. November will be there after next Friday.
Happy Investing.
Wade
Wednesday, October 12, 2011
STOCK TRADE UPDATE
I like these trades on the Dow---using ticker symbol DIA. I haven't heard from Molly in the past few days. I heard she was traveling. However, I thought I'd weigh in on a few potential exit strategies.
Reminder: Molly played straight options on the whole market---at least the Dow. She bought call options on the DIA---and ETF, or Exchange Traded Fund. This ETF is a stock with $1 incremental strike prices. The stock trades at 1/100 of the Dow, plus a few pennies. For example, if the DOW is going for 11,240, DIA stock will be at $112.42. You can buy puts or calls; you can do spreads; and you can own the stock and write covered calls.
Simply put, it's a way to trade the whole Dow, which again, I think is the most widely followed Index in the world. I also think the whole market is in a rolling pattern. Why? Because it's range-bound. It has pretty solid support on the downside and pretty stable resistance on the top-side.
Reminder: Molly played straight options on the whole market---at least the Dow. She bought call options on the DIA---and ETF, or Exchange Traded Fund. This ETF is a stock with $1 incremental strike prices. The stock trades at 1/100 of the Dow, plus a few pennies. For example, if the DOW is going for 11,240, DIA stock will be at $112.42. You can buy puts or calls; you can do spreads; and you can own the stock and write covered calls.
Simply put, it's a way to trade the whole Dow, which again, I think is the most widely followed Index in the world. I also think the whole market is in a rolling pattern. Why? Because it's range-bound. It has pretty solid support on the downside and pretty stable resistance on the top-side.
OPTIONS AND CASH FLOW
Obviously options are not for everyone. It's almost an art rather than a "set-in-stone" technique.
Molly has exited her trade. Reminder: She bought 5 contracts of the DIA 112 calls for October. This strike price represents the Dow (DJIA) at 11,200. She paid $2.57, or $1,285. She had in an order to sell them at $5. She bought the DIA $114 calls for $$1.70. Again five contracts totaling $850. Her order to sell was at $3.40.
The market went up and down, time was going away. Monday was a good day, the Dow going up 330 points. Yesterday it was flat, arguing all day with being up then down. Her options were up. Today she canceled her GTC order and just sold them.
I thought that if the Dow went up another 200 points or so, that would be the time to get out, if I were doing the trade. She looked at it around 12:30 PM, just before the market closed, and changed the order to sell to a market order. She got out at $4.30 on the $112s and $2.77 on the $114s. Not a double, but pretty good for ten days.
Here's the math: Costs equal $2,135 (S1,285 for the $112s and $850 for the $114s).
Sell Price equals $3,535 ($2,150 for the 112s and $1,385 for the $114s).
Profit equals $1,400---minus a few commissions.
Way to go Molly. Congratulations!!!!
Wade
Molly has exited her trade. Reminder: She bought 5 contracts of the DIA 112 calls for October. This strike price represents the Dow (DJIA) at 11,200. She paid $2.57, or $1,285. She had in an order to sell them at $5. She bought the DIA $114 calls for $$1.70. Again five contracts totaling $850. Her order to sell was at $3.40.
The market went up and down, time was going away. Monday was a good day, the Dow going up 330 points. Yesterday it was flat, arguing all day with being up then down. Her options were up. Today she canceled her GTC order and just sold them.
I thought that if the Dow went up another 200 points or so, that would be the time to get out, if I were doing the trade. She looked at it around 12:30 PM, just before the market closed, and changed the order to sell to a market order. She got out at $4.30 on the $112s and $2.77 on the $114s. Not a double, but pretty good for ten days.
Here's the math: Costs equal $2,135 (S1,285 for the $112s and $850 for the $114s).
Sell Price equals $3,535 ($2,150 for the 112s and $1,385 for the $114s).
Profit equals $1,400---minus a few commissions.
Way to go Molly. Congratulations!!!!
Wade
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