Stock Market Savings

Exiting a position on rolling options is quite similar to a plain rolling stock play. If you find a stock which rolls (channels) within a certain range, and if the stock is optionable, then as it hits its low figure you purchase a call option at the next higher strike price. If it’s a stock under $25, you may want to purchase it two strike prices higher.

EXAMPLE: a stock rolls between $18 and $22. When it gets to $18 and bottoms out, purchase the $20 call. Its price is 62.5(2. Ten contracts would cost $625. Now wait or put in your GTC order to sell. Try to guess when to get out. After you’ve done it several times you’ll just know a good exit point. If the stock hits $21 (remember don’t get greedy) and the option then goes for $1.50 you could sell for $1,500 and have a cool $875 profit. Nice and predictable.

If the stock has frequently bumped against, and even gone over $22.50 (the next higher strike price), you may want to purchase the option at that strike price. It would be really cheap if the stock were $18. How does 12.5c (^!/8) sound? If you go to the next higher strike price, you should probably consider going out one or two additional months.

Instead of 12.5c the option may be 37.5(2, but that addi­tional quarter may well be worth it. And frankly, the stock may need more time to get close to, or over, the $22.50 strike price.

Realize also, you’re not doing this to buy the stock. You’re doing this play to wait for an increase in the value of your option so you can sell at a profit. Now where do you sell? Probably the same place as before—in the $21 plus range. It won’t take too much of a move for you to double or even triple your money. And again you could have a GTC order in place or watch and wait and sell at an optimum time.

You can also sell part of your position at one price and part at another. If you bought 1,000 shares at $3, you could place your GTC order on 500 shares at $4 and 500 shares at $4.25.

This is obviously personal to you. I can’t begin to tell you what to do, just as I can’t tell you all the ramifications of what you can do.

You can either place a GTC order and forget about it, or you can watch it closely and sell at an optimum time. Which method you use depends upon you; more specifically, on how busy you are. If you’re really busy, just place the GTC order and get on with your other business. If you have ample time, you’ll probably make more by watching the stock and figur­ing out the best time to sell.

Also note, on any given day the stock could move in tandem with the whole stock market. At least it could give it an extra 25c to 50c of profitability. For example: Let’s say a stock is rolling between $3 and $4. It hits $4.50 once in a while. You have a GTC order to sell at $4. The past few days it has run up quickly to $3.75 and the market is strong. Consider canceling your GTC order and watch it, or change it to $4.25 or $4.50. No, it’s not getting greedy, it’s just smart. The economy, or good news, or an up Dow could drive it up to its high or even beyond.

Conversely, a down market may drive the price to $2.50 or $2.75. If you buy now, you pick up an extra 25tf to 50c when you sell at $4. It’s not only a bargain but a super bargain.

In December of 1995, I had been intrigued by the reported returns in the mailers from Wade Cook Seminars. I had not made a commitment to attend the Wall Street Workshop but decided to “just try” a rolling stock strategy to see if it really worked. Wade had touted Cineplex Odeon (CPX) as a rolling stock. January 4th 1996, I bought (on margin) 2,000 shares of CPX at $V/2 and placed an order to sell at $2¹/2.

A month later, I was less excited when they hadn’t reached $2¹/2 and I adjusted my sell per share to $2. I decided to attend the Chicago WSWS in June. While I was there, CPX increased to $2 and my sell order was executed. The results were great.

—Steven M.

This one is easy because you can run a chart (go back six months, a year or even five years) and see the peaks and valleys. You look at the high point (it’s formally called “resis­tance”) and put your order in to sell at that point or just below that point: remember, don’t get greedy.

A stock may roll between $3 and $4.50, but it only hits $4.50 once in a while. Put your order in to sell at $4.25. You’ll probably want to put in a “Good Till Canceled” (GTC) order (and renew it if the sixty days expire). Look at the following charts:

You can see in   Royal   Oak Mines     (RYO) that    the    roll range changes. Most    people freak out if the stock   goes down—espe­cially after they just bought it. Only once in a while  have I been burned by this. You see, you have two choices. Look at a changing roll pattern with Cineplex Odeon (CPX).

For years (this is a one year chart) it has gone between $2.50 and $3.50. Then it dropped to $1.50.1 had just purchased 2,000 shares at $2.50 and then another 2,000 at $2 when it dropped to the $1.50 range. It even hit $1.25 once or twice. Now the two choices:

1.    Just wait it out. It may take several months for it to get back up to $3 or $3.50. But at least you won’t lose.

2.    Hang on to what you have and wait to see if it establishes a new roll range. A variation of this is to look for a significant bottom, real support and a genuine move back up in the stock. That’s what I did. I bought some at $1³/8 and $1 ^x/i and sold most at $l⁷/s and a little at $2. It went back to $172 or so and I bought back in.

As we were going to press with this chapter it looked like Cineplex Odeon (CPX) was establishing a new roll range. I’ll make more cash flow on quick rolls than anything I’d lose on the dip in value of the 4,000 shares. Plus, I still have the 4,000 shares with two more choices:

1.    Continue to hang on.

2.    Sell, take the loss, and get the cash moving on this lower roll range, or invest elsewhere.

I have given a lot of this information elsewhere: bits and pieces here, brief explanations there. It is probably the most visited area of all my seminars and personal meetings: “When do I get out (sell)?” I think people ask me this because from my real estate days on, I’ve advocated several generalized exit strategies, including:

1.    Know your exit before you go in the entrance.

2.    You capitalize your profits when you sell.

I’ve also made remarks like the following: “it’s easy to get into business; it’s hard to get out. It’s easy to buy real estate; it’s hard to sell. It’s easy to get into personal relationships with people; it’s hard to get out. It’s always easier to get in than to get out, but you make your money when you get out. Sure, you have to buy right going in (and if you do you’ll make a profit), but again, you get the cash (or cash flow) when you sell.”

Also, I mentioned to people at my real estate seminars that I felt sorry for them if they asked me a question about a problem they were having with their properties because I only had one answer: sell.

The reader must also understand my “cab driver” mentality background.

1.    The money is made in the meter drop. You make more by ending one run quickly and getting on to the next. I know this is contrary to all the current advice. I, too, buy and hold some stocks. But the cash flow comes from buying and selling—trad­ing, and getting on to the next deal.

2.    There’s always another cab (or bus or train). I once read an old Irish proverb that makes sense here: “the biggest fish you’ll ever catch is still swimming in the ocean.” I’ll add, “you’ve got to be out fishing to catch it.”

Remember, my style is to turn the stock market into a business. No business buys inventory to keep. The profits are in the selling process.

With all this in mind let me move on to the strategies that have helped me get rich. Remember, I use various formulas and processes, rules, if you will, to get me in and out. Each has a distinctive nature, and only occasionally are the rules the same. For example, selling a call on a covered call play is totally different than selling stock on a rolling stock play.

This chapter is about exiting. Obviously there will be more on getting into the stocks in the various other chapters on these formulas.

Let’s start with my old favorite, rolling stock.