In# 3 Above, The Stock Simply Moved Sideways

Category: Finance.

We ve talked about the fact that in any business, there are three basic financial needs.

For growth in my net worth, I utilize long term trades involving mainly high quality blue chip stocks. Cash flow, stability and growth. The correlation between long term trading and the quality of the underlying company being traded should be obvious, so we ll leave that alone. First, let s find a quality candidate stock on weakness. Rather, let s discuss how to increase your likelihood for profit as the stock price goes back up. A Likely Candidate.

You can see that the stock is off a recent peak value of around$ 9Due in part to the quality of the company, it s very likely to re- attain that value. Here s one, Lehman Brothers. Our trade of course would be to ride the stock price up. View BetterTrades Chart. But the HOW here is important. The HOW.

Let s simplify that a bit by agreeing on only three. The stock price is free to move in any of several directions. Up, sideways and down. If we BUY the stock, the stock must go up in order for us to benefit. Our job is to select a strategy which will profit most often from each of these directions. Any other movement could easily result in a loss.

If we buy a CALL OPTION on the stock, the stock must likewise go up for us to profit. So our chances of being profitable here are 1: 3, about 33% , not good. Movement to the side would result in the time value erosion from the premium, netting us a loss. Again another loss. Downward movement would result in loss of intrinsic value for in the money options or just overall premium deterioration for out of the money options. So buying call options has the same likelihood of profit. 1: 3.

Bump UP Your Chances. About 33% , still not very good. Rather than being a BUYER of anything here, let s SELL a put! View BetterTrades Chart 2. Check the figure below. By selling a put having a strike price at or near the previous peak value( $90) , your chance for profitability have increased considerably. You are profitable on the put you sold.

In# 1 above, you ll see the stock moves above$ 90 by expiration. In# 2 above the stock moves higher but does not quite reach$ 9That s okay, you re still profitable, being able to buy that put back for LESS than what you sold it. This could have resulted in a loss had you bought a call option, but selling a put allows you to build profit as the time value erodes, lowering the premium. In# 3 above, the stock simply moved sideways. As before, buy your put back for less than what you collected when you sold it. Left unchecked, your potential for loss here might be significant.

In# 4 above the stock price slips below the level where you sold the put. However, if you are paying attention to your trade, you can mitigate that potential for loss with a simple stop loss, getting out until the stock price starts up again! #1- #2- #3- #4. Of the 4 stock price moments described above, selling puts would have made you a profit in THREE of the four! These results speak for themselves. Take a closer look at selling puts. Make it a great day!

It s NOT the get rich quick" strategy of the 1990s dot- com bubble days ! Bob