Stock Market Savings

I’ve repeatedly said that two things make stock market investing profitable:

1. Be right more than you are wrong.

2. Be willing and able to act quickly. If you haven’t figured out by now that options move extremely fast and big when the underlying stock moves even a little, then there may be no hope for you. It’s not this aspect that I want to deal with. It’s the first point—being right more often—that I’ll write about. You’ve heard the one about Babe Ruth striking out more than 3,000 times on his way to the home run record, so I won’t bring it up here. And even if I did, that’s only part of the point I’m about to make. I want to help you stack the deck in your favor.

So, after all this set up, let me just say the main point—the theme of this chapter. Then I will explore it, dissect it and put it to work.

Here it is:

The deck is stacked in your favor. I’ll follow up with diagrams and explanations, but first let’s look at the four plays.

All of these deal with options, a derivative based on an underlying stock. I like stock options because they are not a pure gamble (as are index options, currency options and interest rate  options) and  you  actually can buy or sell the underly­ing stock.

 

Buy	Stock Price	Sell
Call	Rises Steady	Call
Put	Falls	Put

 

Let’s quickly review the basics. A call option is the right to buy a stock. You can buy call options and you can sell call options. A put option is the right to sell a stock. You can buy put options and you can sell put options.

Look at the diagram closely because we’re going to ex­plore variations of these options.

Let’s explain this further and then see how you win two out of three times—and maybe every time if you do it right.

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