*Volatility* -- By: Bill Kraft
Copyright 2008, CutLoss, Inc., All Rights Reserved
Bill Kraft
Editor |
What a wild market we've seen. Volatilities reached levels not seen
for 5 or 6 years. The Dow was down almost 800 one day and up nearly 500
by the close of the following day. These have been hard, fast swings
and they can be very difficult to trade. Straight directional trades
have been dangerous. What can a trader do in circumstances like these
to protect himself or herself? In "Trade Your Way to Wealth" I
described some strategies that can save the day in circumstances such as
these. I personally use protective puts to "insure" stock positions at
times and I often place collars on high priced stocks. Collars, as I
describe in the book, can even be set up with zero risk and even with an
assured profit at entry. As an example, back in June, I bought shares
of Baidu.com (BIDU) at just over $323 a share. A couple of days ago, I
sold the stock for $230 a share. It had gone down more than $90 a
share, but I made a profit overall. When I bought the stock, I also
bought the $320 puts and sold the $340 calls. The call premium just
about paid for the puts I bought. Between June and the end of
September, I bought back then resold calls against my position about 7
times, making a profit on the individual trades each time. When I
closed my positions, though I took a big loss on the stock, I realized a
big gain on selling the protective puts. In these transactions, I
initially used the premium I was paid for the call to pay for the
protective put. Thereafter I traded the calls depending upon movement
in the stock price to achieve an overall gain from the stock and option
trades.
I describe the BIDU collar to illustrate that there are strategies
by which we can protect ourselves on the one hand and earn good profits
even when we are in a market that is as wildly unpredictable as our
current situation. In order to accomplish those trades, we need to
acquire the knowledge. I cringe to think what may be happening to the
fellow I recently wrote about who was going to learn by doing. I have
no doubt that recently he has learned quite a lot about what markets can
do. Circumstances like those we have been experiencing can provide a
much more costly education than what one may pay to buy a good trading
book, or a DVD, or a seminar, or for private coaching.
Another way to work wildly volatile markets such as those we have
seen recently may be to sell option premium. When implied volatility is
high, that means that option prices are high relative to their norm.
Selling options to open a position when prices are high and then buying
later to close the position after volatility has dropped and some time
has passed can lead to some very profitable trades. The trader, for
example, could do that by selling naked options with the risk attendant
to those strategies or he can sell spreads (though they somewhat negate
the high volatility) for pretty decent potential returns on a
specifically limited risk.
Investors who are not familiar with volatility trading or who don't
know how to place and trade collars or who don't understand or won't buy
protective puts may best be served by remaining on the sidelines until
volatility diminishes. I always remind myself that being in cash is a
position, too. Depending upon our level of knowledge and individual
risk tolerance, that may not be a bad place to be when volatility is
soaring.
Good Trading!
Bill Kraft
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Kinder Morgan Energy Partners LP (KMP)
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Option Trader -- by Bill Kraft
Our Option Trading Service is for conservative traders that understand leverage principles and enjoy the challenge of options trading. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on always minimizing our losses!
The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.
Here's a look at a trade Bill is currently working on:
SPDR Gold Shares (GLD)
GLD appears to have formed the second cheek of a double
bottom. Traditionally, gold has been a safe haven and GLD may now offer
a position to buy slightly in the money LEAPS calls. If it begins
another leg up the calls could profit fairly quickly. If the expected
move does not occur promptly, I would look to the possibility of
creating a calendar spread or a diagonalized calendar spread by selling
calls against a long position.
Good Trading!
Bill Kraft
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Trend Trader -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.
Here's a look at a trade Bill is currently working on:
FGX International Holdings Limited (FGXI)
FGXI has formed a double bottom support and at Friday's
closing price looks like it could make a move as much as 19% before
reaching the next level of resistance around $12.40. If it can't muster
the steam to move up, loss could be cut just below the current support.
Good Trading!
Bill Kraft
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$10 Trader -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Here's a look at a trade Bill is currently working on:
Colonial Bancgroup Inc. (CNB)
The theory, at least, is that the bailout will assist the
credit markets and accepting that it should give some short term relief
at least, stocks like CNB (a regional bank ) could well see a
continuation of their uptrend. On Friday, the stock traded over a fairly
wide price range on above average volume.
Good Trading!
Bill Kraft
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