Stock Market Savings

Some of you have heard me tell the story of a certain gentleman in one of my early seminars who was disagreeing with me and dominating the seminar for two full days. Finally, someone asked me, “Wade, what is the single best investment strategy you know of? Where can you generate the richest returns?”

I saw the chance to make a point, so I turned to my heckler and handed him the question. He said, “Easy. Sell puts.” And then I said, “I agree, but now aren’t you people glad you paid me to teach you investment strategies instead of attending this man’s seminar, because he would have spent two days teaching you to sell puts, and you would have gone home and discovered you couldn’t do it. You can’t sell puts until you have both a lot of experience and/or a substantial reserve of cash set aside in your account.”

Well, people have always been grateful that we teach them eleven strategies at our seminars which they can imple­ment immediately to generate cash flow. And many of our students have done just that. In fact, they have gained so much experience and generated so much cash that they are ready now to sell puts! And so the time has come for this chapter.

Most of my stockbrokers are so busy they won’t do this strategy, however, the ones who really watch out for my best interests, will.

WANGO means Watch And Get Out. Let’s say a stock is having a nice run up. You are quite profitable on your option but want to get out at maximum profit. Ask your stockbroker to keep an eye on it. If it peaks and you can catch it at or near the peak, then you can get out with an even greater return.

An example: the stock was at $80 after a slam, or other bad news, or even after good news. It goes to $81. You call your stockbroker and buy the $80 calls for $3 and the $85 calls for $1.25. The stock goes to $83, then $84, and one hour before the market closes it’s at $85—almost $86. The stock hangs around $86, seems to have stalled, backs off to $85.50 with 10 minutes before the close—this is it—(yes, there is tomorrow but this is today). Carpe diem. Seize the moment. Sell and take your profits. The $80 call is $6.25 and the $85 call is $3.75. That’s a $3.25 profit on the $80’s and a $2.50 profit on the $85’s. It’s been a nice day.

Yes, it may still go up tomorrow, but many times they fall back. This stock had a 3%, then 4%, then 5% run up in one day. Surely I can’t tell you what to do, but I usually take my profits and wait for another dip.

Two more points:

A. The options market closes ten to fifteen minutes after the stock market. If you are willing to buy at the ask and sell at the bid (buy or sell at the market), you can still trade options at 4:05 pm, 4:10 pm, sometimes even 4:15 pm (Eastern time). Why do I bring this point up here? Many times, stocks go up or down a few dollars right at the close. If the options have a corresponding move, you could get out at a higher price or get in at a lower price.

However, unless there is really spectacular news (good or bad) which comes out over night, the options are usually pretty much the same the next morning. Just once in a while, I do option trades after the stock market closes.

B. If you have a good profit you could sell part of your position and keep part active. You don’t have to sell all four contracts you’ve purchased. Sell part to capture some profits now and keep some to cap­ture larger profits later.

You might even be profitable enough on the ones you’ve sold to regain all the money spent on all four contracts—you now own the two contracts you’ve kept, for free.

I know this sounds ambiguous but it’s important to realize that there is not just one time to get out. If you have invested $2,000 in ten contracts of a $2 option and one hour later it shoots up to $3 or $3,000, you have an hour profit of $1,000. If YOU’RE HAPPY, then get out. Take your profits and go to a movie.

Of course you shouldn’t get out if there’s more potential, but if this was initiated as a quick play, then take your profits and look for another deal—dips, new stock splits, et cetera. So what if it goes to $4. The next day it could be at 50tf.

Stocks and options are like ocean waves. They ebb in, they flow out. Nothing stays the same.

I don’t want to wear out this concept, but for many plays it’s very important. Here we’ll deal with a few option plays. We’ve already covered rolling options. Let’s now cover a peak or a slam.

Peaks

When a stock has a tremendous run up, say in one day it goes from $52 to $63, because of good news, unless there’s more good news coming out, it will probably back off. If you own the call options, get out. If you want to get in and play the downturn, buy puts on the stock and ride it back down. If the increase stalls, or even comes down a little, you could sell the options and buy back in on the dip.

If you own the stock, you could also write a covered call and again, ride it back down. You collect the premium and you also keep the stock.

Slams

When a stock takes a hit, you could buy a call and get out with a profit in hours. Here’s how it works. The company comes out with lower than expected earnings (it’s still highly profitable, but not up to what analysts expected). The stock falls from $62 to $54. The next day it finds support and even goes back up to $55. Consider buying the short term option and purchase the $55 call. It needs to be close. It’s going for $2. (Note: the $50 call is $6: $5 in the money and $1 time value. This costs more but may be a better play. Think it through.) A move to $56 or $57 could easily drive your $2 option to $3. Then get out.

You could have gone further out (two to four months) on the $55 call or the $60 call but that was not this play. This is short term. You should have placed the order to sell at $3 (especially if you can’t sit and watch it) right after you purchased it for $2. You know your exit before buying.

I have covered exit strategies on covered and uncovered calls and on selling puts elsewhere. I’ll only add this here: They are options. They have a fixed life. If you’ve sold a call or put and generated cash you have two choices.

A.   Let the option expire and keep the cash.

B.    If the option shrinks significantly and you think the stock might bounce, then you could buy back the option and sell it again as it gets more profit­able.

The best “out” enhancement strategy is to have gotten in at a bargain in the first place.

A lot of your investing will come down to how you feel. Your fears may keep you out of trouble. Your desire to get in when you hear great news will usually help you get great results. For example, all your research says a stock could hit $30 in a short time. It’s currently $20. If it gets close to $28 you may want to sell. If you had purchased the $25 call option (or even the $30 option) and it’s had a nice run, check the news, see if there’s more potential upside and consider selling. If the stock is at $30 and no new news has come out, definitely sell.

Remember options have a short life. If you own the stock you could hang on and wait for the next earnings report or whatever. But you don’t want the option to expire. Sell it and then buy back in at a higher strike price; or wait for weakness and buy back in at the same strike price—just out another month or two; or take your money elsewhere.

The point is this: if you wouldn’t buy the stock or option at a certain price, and you do in fact own it, then sell it at that point where you wouldn’t buy it. That sell point is your best-guess summation.

A variation of this point is using the “percent to double” or points to double rule which I’ve written about in the Wall Street Money Machine. We use the “%Dbl” to determine if buying an option is a good deal. Many brokers can get access to the on-line computer services which have this program. It’s a computer model whose “bottom line” tells us how much a stock would have to move for us to double our money on a particular option. I like low percentage movements (under 10%)—take a quick profit and get out.

Let’s say a stock is $82. The $90 strike price on the call option is $2.50 and the percent to double is 6%. The stock (at this particular point in time) would have to go up almost $5 for our $2.50 to double to $5. (6% of $82 = about $5). If the stock has an upward trend or good news, et cetera, then this could be a great play. Remember, your $2.50 option doesn’t have to go up double for you to make a nice profit. A 50c move would be nice, especially if it’s in a few days.

The point though, in this chapter is not to determine when to get in, but when to get out. If the stock and option have an upward move, check the %Dbl. If it’s high, say 13%, then you should sell. Think of it: you probably wouldn’t buy an option with a 13% to double. Back to our example: If the stock has moved to $88 and our $2.50 option is $4, and at this point (time remaining and other factors involved) it would require a $10 move to take the $4.50 to $9 then you may want to sell for the $4.50.

You’ll probably get your biggest profits shortly after you’ve bought in at a really low price, then get out on a quick up-tick in the stock.