If this market hasn’t convinced you that buy and hold is a gamble- I don’t know what will.
Holding any stock for more than a day has been a sure recipe for heartache (sometimes just an hour will do it) but we have been having a good time at PSW, during our member sessions,bottom fishing andconcentrating on plays that give us much better prices than the ones paid by the average retail investor using very basic option strategies.This strategy, which we call a “buy/write”, as we buy the stock and write options against it, is one of our most effective tools for dealing with a choppy market.
There are, of course, many, many stocks tradingnear multi-year lows and it’s still important to select ones that have strong underlying fundamentals that we actually don’t mind holding long-term but, as long as you are willing to own200 shares of a stock – this system can reliably give you a 10-20% discount off the current market price. It’s simple, easy to follow and is ideal for trading in a volatile market.
Of course when we buy any stock or long-term option position, we should be scaling in. In other words – we don’t assume our timing is perfect and we enter a position in stages. In our Strategy Section I discuss the 20% entries and the various rules for that so I won’t get into it here but, effectively, selling puts and calls against a stock entry is a way of automatically following the scaling system without having to monitor your position that closely. I will give a few examples here and, if you sign up for our newsletter service, PSW REPORTS, using this link, we will be waiving the fee during a trial period and there will be follow-up trades each week throughJune options expiration (19th).
Let’ssay, for our firstexample,we want to buyBAC at $8.26. If our goal is to buy 200 shares we buy instead 100 shares and also sell the June$8 puts for $1.65. Additionally, we sell theJune$8 calls for $1.77. The two sold contracts reduce our net basis to just $4.84 and we have taken on two obligations. The call we sold, obligates us to sell our stock for $8 on June19th IF the price ofBAC closes above $8 on June 19th – we have sold someone an OPTION TO BUY our stock for $8 on that date for $1.77, which we keep, whether they exercise…
