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.
Tuesday, November 22, 2011
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.
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