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.

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.

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.

Options (calls and puts) on stocks opens up all kinds of infinity-type returns and many ways to earn a free ride.

This is not the place to discuss all the aspects of options, but a few things are important to this discussion. Options allow you to control a large amount of stock with relatively small amounts of money. Also, small movements in the stock usu­ally produce magnified movements in the option. Simply put, you can double, even triple your money, a lot faster. With these profits, a whole plethora of opportunities open up.

Remember though, we purchased the option for a specific purpose and at/for a specific time.

1.    CALL OPTIONS (We think the stock will rise). The stock is…

A.   rolling

B.   on a dip (slam, bottom fishing)

C.   doing a split

D.   coming out with news

2.    PUT OPTIONS (We think the stock will go down). The stock has…

A.   bad news

B.   a reverse split

C.   peaked out—run up on good news, unsus­tainable

D.   come within a few days of the split date (give or take two to eight days)

Let’s stick with call options for this example. Put options are the same, but in reverse. The above is for purchasing calls and puts. Selling them is a whole different story.

The stock is at $40. It has traded as high as $50 and has been down to $38. You think it has potential. It seems to have bottomed out in the high $30 to low $40 range. It’s August. You purchase 10 contracts of the October $40 calls for $3.75; your cost is $3,750. You also purchase 10 contracts of the January $45 calls for $4.25. Total outlay is $4,250. By September 8 the stock is at $44. Your October $40 calls are $6.25, or $6,250. The January options are up also, but because they’re further out they haven’t moved as much. They are $5.75—still a $1,500 profit.

Now what do you do? Check again why you bought the options. If you’re following the Wade Cook method, it was not to purchase 2,000 shares of this stock. But wait. What do I see? A nice quick profit—extra cash generated in hours or days.

Look what you can do with these profits. Let’s just deal with the October calls.

1.    Continue to hold for greater profits.

2.    Sell some—say eight contracts for $6.25. That’s about $5,000. We have all our cash back and we can even take some profits and buy more options on this stock or other stocks. In this case we would only have to sell seven to recover our investment and get a FREE RIDE on the other three.

Note: if this run-up of $4 (10% of the stock price) had occurred in a one or two day period, I’d probably sell all of the options. Barring additional news, most of these quick spurts are not sustainable. Sell, then buy back in on a dip at an expiration date a little further out. The October options were purchased in August. If it’s now mid-September we should probably look at the November or December options.

3.   Sell all or part of the options and buy some of this stock.

This point is very important to me. I’ve written on it elsewhere but it is also appropriate here. I am big into building a solid portfolio of well-run companies with good earnings and hopefully in­creasing earnings. I like companies with expan­sion dynamics at work. Most people who read my books and come to my seminars need more cash flow. They, like me in the beginning, need a more aggressive approach with a small amount of money. They need to develop their own money machine.

Then they should diversify into real estate, gold, or other investments like small businesses, energy resources, et cetera. The stock market is too risky for all your money to be in one basket. Some of this diversification could be into stocks in great companies—even recession-proof companies. Get back to fundamentals and doing your homework.

Speaking of homework, part of the homework you did to decide if you wanted this option in the first place—and which option (strike price, expiration date), will now help you decide if you should buy or sell this stock, or hold on to it.

Remember, if we’ve sold ten October contracts for $6.25, that’s $6,250, of which $2,500 is profit. Yes, we could take all of this money ($6,250) and buy more options, but if you follow this thought, your portfolio will be full of risk. Options expire. Be careful. A downturn in the market could wipe out a sub­stantial part of your assets.

Let’s use all of the $2,500, or even half of it, and buy some stock. If you like the $44 stock, buy 10 shares, or 50, or even 100. One hundred shares would cost $4,400, but only $2,200 on margin.

You’re free riding again. Your $2,500 is put to a good, yes boring, but still a good use. Use your $3,750 (your option/profit seed money) for your next quick play.

There is an advantage to owing stock in a lot of companies. One is that shareholders receive news from the companies: updates, reports, and shareholder voter information. Get them, read them. You’re learning about earnings, expansion plans, stock splits, changes in management, et cetera. Part of good investment habits is to get, and act upon, good and timely information. Shareholders get this all the time.

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.