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Picking Strategies -- By: Bill Kraft
Copyright 2009, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
In both my books, "Trade Your Way to Wealth" and "Smart Investors Money Machine" , I have emphasized what I consider to be the importance
of having a business and trading plan. In "Trade Your Way to Wealth" I cover
how to go about creating such a plan and discuss elements that I believe
are important to include in your own personal plan. In "Smart Investors Money Machine" , I illustrate considerations people at varying stages of
life may want to incorporate into their investment strategies in order
to produce added streams of income no matter what their stage in life
and no matter what their time constraints. Overall, one significant
consideration is what strategy or strategies may be best for you.
Many, if not most, investors use only one strategy; they buy a
stock with an aim to sell it some time in the future, hopefully at some
higher price. Some have exit strategies, some don't. What few seem to
realize is that buying a stock with the intent to sell it in the future
and without some exit plan is one of the riskiest things we can do in
the markets. When we buy a stock, our whole investment is at risk. My
guess is that few "buy and forget" investors ever give serious
consideration to that risk when buying the stock, but only become
concerned if or when the stock price begins to fall. Please don't
misunderstand what I am saying. I do not mean to suggest that one
should never buy a stock. I do mean that when that is the strategy to be
employed the stock buyer should be aware of the risk.
Some say selling a naked put is very risky, but is it as risky as
just buying a stock? When we sell a naked put we are undertaking an
obligation to buy a stock at a specific pre-determined price (the strike
price) if it is assigned to us and for undertaking that obligation, we
are paid a premium. Let's take a look at a present day example of the
risk in selling a naked put versus just buying a stock. What follows is
definitely not meant to be a recommendation, only an example of a
scenario taken from real prices at the time I am writing this article on
July 21, 2009. Suppose we like GE stock. As I write, the last trade was
for $11.41 a share. At the same time, I could sell the August $11 naked
put for 34 cents a share. That means that someone was willing to pay me
34 cents a share if I were willing to buy GE stock at $11 a share (41
cents less than it was currently trading) anytime between the time I
entered the contract and the third Friday in August (31 days from the
time I am writing). Now, what are the relative risks? First, if I just
bought the stock, my risk (however unlikely) would be that the stock
would go to zero and I would lose the $11.41 a share I paid for the
stock. On the other hand, if I sold the Aug 11 put for 34 cents, I
would have 34 cents a share coming into my account the following day.
Though I would have money on hold in my account, I would have invested
nothing. Would there be any danger of having the stock assigned to me
at $11 if the market price stayed above $11 a share? No, since the stock
could be sold on the open market at a higher price, why would anyone
want to force me to buy it at $11 when they could get more elsewhere?
Suppose, though, that GE fell below $11 and the stock was assigned to me
for $11 a share. What would my risk then be? It would be $11 a share
less what the market paid me to sell the put or $10.66 a share.
Obviously, the lesser risk would have arisen from selling the naked put
and having the stock assigned to me than having bought the stock at
$11.41. In fact, the risk would be 75 cents a share less.
That example is only one of many considerations that are available
in choosing a strategy. In the example, the naked put portion of the
play is over in no more than 31 days. I either just get to keep the 34
cents at expiration or I have to buy the stock at $11 but still keep the
34 cents that went to help me buy the stock. Other factors that an
investor might consider in choosing a strategy besides risk might be the
time required to monitor the position or the likelihood that it might
require adjustments (that could be good or bad), and the amount of
capital that may be required. In "Trade Your Way to Wealth" , I discuss
a number of strategies and for each, look at potential risk, reward,
initial capital required, the projected time frame, what protection may
be available, the level of monitoring required, and the market direction
for which each is suitable. In "Smart Investors Money Machine" , I
explore various types of investments including stock, options, MLPs,
bonds, annuities, and others with an emphasis on what types and what
strategies may work for investors ranging from novice to relatively
expert and showing how much or how little time may be required in
establishing and maintaining regular added income from each.
Each of us is able to structure a plan that fits within our
personal parameters, whatever those parameters may be in terms of
available capital, risk tolerance, time we can afford, and knowledge we
have or can gain, and personal financial needs and goals. First,
though, it is important to engage in a bit of introspection to see what
it is that we want and then find the strategy (or strategies) that best
enables us to achieve that end.
Good Trading!
Bill Kraft
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McDonald's Corp. (MCD)
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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:
Constellation Brands Inc. (STZ)
Option Trader opened a synthetic long position in STZ on
Wednesday, creating a risk graph that is essentially equivalent to
owning the stock, but at a much lesser cost. On Friday, I closed the
position for an *84% gain in two days* before the small commission! A
retreat to and bounce up from the trend could create another potential
opportunity.
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:
CONSOL Energy Inc. (CNX)
I see several positives on the chart for CNX including a
positive moving average crossover, positive MACD, a cross above the 50
day exponential moving average, and what looks to be a reverse head and
shoulders. As a caution, however, the reverse head and shoulders has not
yet completed and there is resistance around $36. I am watching to see
how the reverse head and shoulders pans out as well as how the market
deals with the resistance. Definitely worth watching for me.
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:
China Precision Steel, Inc. (CPSL)
This stock has been trending up since the March low and
recently retraced to form a double bottom before beginning the current
run up. I see $2.75 as an important level of resistance and it looks as
though it might make a 15% run if it can clear that hurdle.
Good Trading!
Bill Kraft
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