Stock Market Savings

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.

If you want to play more options on this same company, consider the following:

Wait for dips—be patient. Study the charts and pick the most opportune strike price and expiration date.

Sell out, take your profits, and buy back in at a higher strike price. Once again, the assumption has to be that the stock will increase.

Selling the option profitable opens up another possibility. If you sell part of your position, and if you think the stock has peaked (you still own a few call options) then buy a put with the profit. You now have created a straddle for FREE.

A pure straddle is one where you own calls and puts on the same stock, at the same strike price, and for the same month. Your straddle does not have to be pure. You can buy a call at one strike price, and buy a put at another strike price.

Either way, as the stock moves up you sell the call, as the stock moves down you sell the put. Something for nothing, I can’t add more. It’s a great way to enhance your cash flow and/or add to your portfolio.

If you think the stock is going up, why not buy a call option? My standard answer is, “You can do that too.” Think about it. You’ve bought a call and sold a put on the same stock. Why both, or why sell the put? Simply because selling gener­ates income. Buying costs money. It’s a way of getting more cash into your account more quickly. Look at Interdigital Communica­tions (IDC) and Gaylord Con­tainer (GCR). There are too many to list.

The  only hang-up is this. Many beginners reading this chapter will not be allowed to sell naked puts (a covered put would be a situation where you’re in a short position on the underlying stock) until you have more experience and/or more cash in your account. You see, you have the obligation to perform if the stock is put to you so your broker will require you to keep that amount of money (or 20% plus if you are on margin) on hold until the expiration date.

If you are just getting started, you may want to stick to call options. I did and it worked for me quite nicely. But once you get familiar with rolls, peaks and valleys and predictable stock movements, the put option tool gives you a way to truly enhance your income stream. Indeed, you can make twice as much as you catch the stock coming and going.

The development of this formula has its genesis in my rolling stock strategy. Play options on stocks trading within a specific range. I like the less expensive stocks because it doesn’t take too much movement to make a great profit. However, most stocks that are doing nice, steady rolls between a high and a low are in higher dollar amounts, say between $27 and $33, or $98 and $104. It would take a lot of cash to buy them, and there just may be better uses of our money. If the roll continues, there is definitely a better way to play the roll: proxy investing. Do options on stocks that trade within a certain range.

The strategy is simple: buy call options when the stock is low and wait for the roll up. Next, sell the call option and then buy put options when the stock peaks. Take your profits when it rolls back down. I’ve written about this concept elsewhere so I won’t belabor the call play here. Let’s explore the put strat­egy-Volatility and predictability and using the extra cash you can afford to lose, bring a higher degree of certainty to this risky arena. This is a tremendous formula in which you can get to be an expert.