What
kind of software do you use to keep
up with your trades?
We
recommend you try Option
Money software. It is the
first complete software program
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transactions. It produces
financial reports, account summary,
and holding reports that is kept
current with market information.
What
is your strategy for Money
Management?
I
have 3 brokerage accounts. (You
don't have to have 3)
Account #1. This is my risk money.
Money that I am very aggressive
with, take some big risks, and have
fun with. I buy calls and
puts. This is the emotional
account. I holler
and scream at it. I fuss and
cuss at it. Throw things and
jump up and down. Get so
excited when Yahoo goes up 30 points
that I kiss the computer screen.
This is risk money. It is
funds that if I lose it all, my life
will not be destroyed. It
isn't rent money, retirement money,
kids college funds .... none of
that, truly risk money.
When this account builds up profits
and reaches a point that it's too
much money to be playing with, I
write a check (all my accounts have
check-writing service) and deposit
it in to Account #2.
Account #2. This is where I trade
more conservatively, but still take
on certain levels of risk. This is
where I usually sell naked puts.
Selling naked puts is deemed to be
very risky, but my attitude is that
when done right, it can be quite
conservative.
Actually my returns are more
consistent in this account than the
other two. When
this account reaches a predetermined
level, I write a check and place the
excess funds in Account #3.
Account #3. This is the 'keeper'
account. Here I buy stocks
that I want to own for a longer
period of time, and I sell covered
calls on them. I do not take
much risk here. I don't buy
just any stock. I buy stocks
that I want to own for whatever
reason. I manage this account
by allowing stocks to be called out,
or if I want to hold on to the
stock, I'll buy back the call and
keep the stock. Likely I will
sell another call next month.
These are my long-term investments.
My point to all this is that as you
earn profits, manage them in such a
manner that your money isn't always
at risk. If your risk money
increases significantly, say it
doubles, take some of it and put it
in a safer place, instead of all of
it remaining at risk. You
don't have to have more than one
account to do that. You can do
it all within one account. It
just works better for me to keep it
all separated.
That way if my losses in my risk
account get out of hand, then I've
got to cool it some, because I'd get
in trouble around here if I were to
take money out of account #2 or #3
and put it in #1. It's
supposed to work the other
way. Account #1 supplies
2 and 3.
How
do you figure the yield on your
covered calls?
A
complete explanation can be found in
our tutorial, but if your numbers
don’t match ours, keep in mind the
leverage offered with margin.
If you buy a stock on margin, you
only have to put up 50% of the
money. So calculate the
returns based on your out-of-pocket
money and the numbers should line up
with ours
If the stock
dips, should I buy back the covered
call?
That
depends on a number of things. If
the stock dips and you expect it to
go back up, it can be very
profitable to buy back the call, and
if the stock makes a quick recovery,
sell the call again. If the stock
dips and you think it is headed
lower, you might wait and buy the
call back even cheaper. Of course,
if you think the stock is in trouble
and headed much lower, then you
might want to just close out the
deal.
If
the stock runs up big time,
should I buy back the covered call?
Again
that depends on your expectations of
future moves. If
some big news event has driven the
stock up and you think there’s
much more to the upside, then yes,
it would make sense to buy back the
call and ride the stock higher. But
be careful here. If you buy
the call back at a higher price and
the stock then dips, suddenly the
trade isn’t as good as it could
have been. Generally if
the stock rises to a point where
I’ll be called out, I don’t buy
it back unless I want to keep the
stock.
What do you
mean you are an "Event"
trader?
As
an event trader, I trade for a
specific event. I don't trade
just to be trading.
When I first started trading options
it was tough. Everything I
touched turned to crap. I
didn't know why. I knew that
people were making money with
options, but I couldn't. I
took a good hard look.
First, the market stunk. I
couldn't do anything about that.
Second, every stock I picked turned
out to be the wrong one. Or
the wrong option. Maybe I
could do something about that.
And third, I was so anxious to make
some money that I thought I had to
be in the market at all times.
Well, the market didn't improve much
for some time. But after I got
my brains bashed in I did do
something about the stocks I picked.
I used a very tough discipline to
"buy only when I had a
reason". I'd pick up the
paper and see people getting rich.
I'd see stock options that tripled
and heck I didn't own any. I
quit buying just anything. I
learned to look for an
"event" that will likely
cause a stock price to move. I
learned that stocks will rise in
anticipation of earnings. I
learned that stock splits can drive
the price. And most
importantly, I learned the typical
behavior of 1 stock. That's
one! ONE! Not to be confused with
more than one. I watched one
stock until I thought I knew
everything there was to know about
it. That stock was MCI.
It was a new company and had a lot
of potential. I haven't
watched it in years. But when
I bought options I had a reason.
It was because they were about to
announce earnings. They had
opened a new market. They were
about to announce a stock split.
Or whatever. But I did
not buy just to be buying.
Most
of the time I sat on the sidelines.
To quote Jimmy Rogers, "I’d
wait for the stock to be so
compelling that it was like picking
up money off the floor".
I still try to use the same
strategy. I think I KNOW a few
stocks. That does not mean
that I know what they'll do
tomorrow. But I have a
pretty darn good idea of what
they’ll do in a given
market. Of course I can
be wrong, but the edge is with me
because I know them. I watch a
lot of stocks, but I KNOW five or
six. I trade the same ones
over and over. My knack
is that I know when to invest
heavily, and when to stay light.
I can take as many losses as I do
wins and still come out ahead.
Because when I win, I try to hurt
‘em.
I learned how to buy. You can
sometimes be in the right stock but
the wrong option.
Normally I like in the money calls
or at least close to the money,
unless the market is having triple
digit moves in a day and risk is
much greater. Then I’ll buy
out of the money calls just to limit
my total risks.
Learn
to sit it out until you think,
"this is without question the
time to be in the market" then
take your position. Don't be
in the market just to be in.
Have a reason. And the only
way you'll know what that reason is,
is to get to know your stock.
Trade for the "Event".
How do you
"build" a position in
options?
If
I plan to build a position for an
"event" trade I
methodically ease in and out of the
trade. This is not the only
way to make the play, but it is a
style that suits me. Here’s
an actual trade that is typical of
my style.
Around
the first of December my research
revealed that Yahoo will announce
earnings on Jan 12. For
various reasons I wanted to take a
position in the stock using options.
Now this is not a trade that I’m
looking to get in for just 2 days.
This is an event trade. My
plan was to buy 15 calls that were
in the money. That’s all the
risk money that I wanted to put in
this trade. I purchased
5 contracts initially. Now I
wait and see if there’s strength
in the sector and in the stock.
It took a few days, but finally the
stock headed higher. It showed
signs of real strength. But
now I have to wait for a pullback, a
correction, some profit-taking.
I don’t want to chase it.
Then the stock dipped. The
price dropped several points and I
bought 5 more contracts. I
paid more for them than I did for
the first five, but at least I’ve
seen some strength in the stock.
Now I’m nervous…. The stock is
going lower still. Aw, what
did I do? Look at the market.
What is happening? Don’t see
any major crises. My stock’s
not going up. Throw
something at the computer – see if
that’ll help. It didn’t.
One more day of this and the little
men in the white coats will have to
come get me! Then, pop!
Up and away. We’re off and
running again. Suddenly
my options are worth a lot more than
I paid for them. Time to buy
the last 5? Nope, not yet.
Now let it run, and when it dips
again, if all still looks well,
I’ll buy the remaining 5. It
dipped again about a week and half
before Christmas. I’m in.
My position is built. I
won’t buy anymore. The stock
continued to rally and Christmas Eve
I was in good shape. The
last 5 contracts were already
profitable and my original contracts
were up over 150%. The week
after Christmas the stock went up
and down – mostly up.
Then the week before earnings
announcements, when the stock is
screaming and everybody wants to
know if they should buy Yahoo, I’m
already set. The stock ran up
big time a few days prior to
earnings. I sold 5 contracts.
Now on the actual day of the
announcement I sell 5 more, and hold
the remaining five another day to
see how the earnings turn out.
Close the deal.
Now
with hind-sight, I should have
bought all 15 contracts in early
December and sold them all at
earnings date. But I don’t
have a crystal ball. When
testing to see how deep water is,
don’t use both feet.
Should I hold
my options over an earnings
announcement or stock split?
Normally I’d say no. The
risk is so great it’s usually not
worth the potential reward.
However, if you’re holding
multiple contracts, you could sell
most of them, and hold a few just to
see if there’s some fish left
behind the boat. (See the
above notes on "building a
position").
My
broker says I'm crazy for wanting to
sell naked Puts.
I’m
sorry, but it’s a fact of life.
Most brokers have a fit if you tell
them you want to sell naked puts.
There are some very knowledgeable
and options-friendly brokers out
there, and I pay due respect to them
here. But they are few and far
between. Most brokers
sleep well at night if they put you
in a stock that loses 50% of its
value in a year, and if they put you
in one that goes up 5% they’re
hounding you to sell it, and expect
a Christmas present. Slap him.
They scream at you and
tell you that people got burned
selling naked puts during the crash
of ’87. Slap him. I
can not live my life based on that
single event. We’ve had 12
years of a roaring bull market since
then. Was I supposed to miss
it? What about the billions of
dollars that have been made since
then? Those who used every
penny they had to sell puts in ‘87
were foolish. And it’s still
foolish to risk everything selling
naked options. But with
a small portion of your portfolio,
with conservative positions and
proper money management, selling
puts can be a great strategy.
No one should ever bet the farm on
any one trade or type of trade.
But your broker’s going to argue
with you. "You don’t
have any protection in the event of
a total crash," he’ll say.
If you explain that you could maybe
"Sell the Feb 50 and buy the
Feb 45" for insurance, then
he’ll say, ‘Ah, that’s a
spread. You can’t do that."
Slap him. If you’re
persistent and he gives in, and says
"Alright! If that’s what you
want to do… but I can’t be
responsible for anything. This
is your doings and not mine."
Fire him! I’m not
gonna pay somebody to do something
for me who takes that adversarial
position toward me due to his
ignorance. Life’s too short.
Of course I wrote the
above paragraph tongue-in-cheek.
You know your broker. You
don’t know me. If he has
gained your confidence and served
you well, then I’d say follow his
advice. But if he’s bashing
your brains in on all fronts, I’d
look for someone who’s
knowledgeable in options and
customer-oriented.
Is there
a way to get
"crash-protection" when
selling Puts?
Of
course there is. The
greatest risk of selling puts is
that a stock can totally tank.
Your losses could be considerable.
Let’s say xyz stock is selling at
72. If you decide to sell the
Jun 70 Put and can get 4 for it,
then you’re safe and profitable if
the stock remains above 70.
Actually the stock can drop to 66
and you’d still break even because
you collected 4 dollars in premium
for the put. But if the stock
collapses and drops to 30, you’ve
got some serious losses. The
stock will be put to you at 70, or
you’d have to buy back the put and
pay around 40 points for it.
There’s
a little insurance policy you can
buy. If you were to sell
the Jun 70 put and buy the Jun 65
put, then your losses are limited.
You’re actually setting up a
spread. Let’s say you pay 2 points
for the Jun 65 Put. If the
stock drops below 65, your losses
are limited because you own the Jun
65 put. Your maximum potential
loss is 3 points. If the stock
drops all the way to zero, your
losses are still limited to the 3
points. By taking out
this insurance, you also cut your
potential gains. When you sell
the 70 put you collect 4 points, but
then you buy the 65 put which costs
you 2. So you maximum
gain is 2 points. But this insurance
can allow you to sleep at night, and
if your stock every tanked, it’s
great to have.
