Sell 700 shares at $12. That generates $8,400. After taking out commissions for both trades, you should have your $8,000 back, and look what you’ve done—the impossible. You own 300 shares of a $12 stock for zippo. Hopefully, this stock is in a great company. You have your cash back and 300 shares with no cash tied up.
I told you it wasn’t that complicated or difficult. And there are still even greater things to think about. Before I delve into these, I’d like to discuss a point. Many people, I’m sure, have thought of this, or at least, have done it intuitively. Most powerful ideas are really quite simple.
When you have profits now paying for your investment, and all your cash is out, then several things need to be discussed.
1. You can take your cash and wait, and buy this same stock on a dip. Maybe next time, you’ll get 1,000 more shares at $7.
2. You can take your cash and buy a different, more promising opportunity.
3. The stock you still own (300 shares) is available for:
A. Selling at a higher price.
B. Writing a covered call—generating more income.
C. Holding a good stock, thereby increasing your margin account. 300 shares at $12 is $3,600. This could turn into $7,200 (on margin)—or another $3,600 in buying power.
4. If the stock goes down, it’s a worry of course, but it didn’t cost you anything.
5. If it goes up to the $20 range you could sell all of it, or part of it. Selling all would generate another $6,000.
No one knows what the picture will look like. You can draw it yourself, but you should also know what you want it to look like before you start drawing. Stay a step ahead by knowing what your investments will do for you.
What if you ignore this last piece of advice? What if you don’t know why you purchased the stock? What if you purchased it just because your stockbroker told you to? What if you didn’t check the charts to see the highs and lows, the incline or decline, the range and time it takes to move from support to resistance? What if you haven’t the foggiest idea of why you’re in this stock?
Then how do you know when to get out, or buy more, or sell off part? You’ve got to know your exit before you go in the entrance!
One more point. If you know about this particular company, you’ve tracked its earnings, growth, et cetera and you still like it—you still think it has potential, then:
1. The 300 shares you own may prove profitable.
2. You could buy call options at $10, $12.50 or $15. Again, use some profit (maybe sell 50 or 100 more shares) to buy these options.
3. If you wait for another dip, your chance of increasing your next returns will be quicker.
4. You could sell puts (see the chapter on selling puts) for more cash flow.
5. If you think the $12 is a high and it’s going to go down, you could buy puts and sell them as they get profitable.
But what if the story (where you think the stock is heading) isn’t very good? Yes, there’s a chance it might go up and your 300 shares may be more valuable, but if the story line has lot’s its momentum, then looking for similar opportunities elsewhere may be more profitable.
By the way, a lot of people find my tapes and seminars very helpful when beginning to trade, or when learning to trade options. If you feel like you’d like some more information on the topics covered in this chapter, or in any of the other chapters in this book, please call the 1-800 number on the back of the book. We’ve put together some helpful free audio cassettes about these same stock market investment and asset protection strategies that I think are really great.
A lot of people tell me I’m crazy giving this kind of information away for free instead of writing another book and making people buy it. But I don’t write books to make most of my money. I make most of my money from trading and doing business. I write books and give seminars because I truly believe that this is the kind of investment information everyone should be getting already from their stockbrokers or other financial advisors.
Anyway, look at the three graphs and explanations on the following page. They are staggered to prove a point. As the door closes on one opportunity it opens on another.
This stock went from $8 to $12. We sold at $12. The stock went nowhere. We felt $12 was the high. We were glad we did it, too, because the stock went nowhere for several months. We bought Perseptive Biosystemsat $6 and… after a rise, then a decline, it went to $8. We sold at
$ 1 0 and bought into Wendy’s. Wendy’s stock was then purchased at $17 (near a bottom). We sold it at $19. Again, you’ve got to decide if the play is over, then stay in or get out. There are always more opportunities.
Each time profits are created it gives you an opportunity for another free ride.
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