Stock Market Savings

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.

There are four major strategies for determining when to get out of options. I’ll cover these as I blend in specific formulas on option plays. We’ll look at:

- Peaks

- Slams (“Dead Cat Bounce”)

- 90 degree angles

- Covered Calls

- Selling Calls

- Selling Puts

- Stock Splits

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 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.