Tom Dorsey Q&A Part 4. Wednesday, Feb 18
Q) When is it a bad idea to buy options as opposed to buying stock? Do you ever use options to actually buy the stock? How about covered writes? Do you do those? I've heard covered writes don't make sense.
A) Buying calls can in many cases be more productive than buying the underlying stock. The reason is a term called Delta. Delta is a term that describes how much an option will move in relationship to a one point move in the underlying stock. Deltas expand and contract with the movement of the stock. A deep in the money call will have a delta approaching 1 or a point for point move with the stock. If the stock declines, the delta will contract thus, causing the investor to lose less than one point for each point in the stock. Never buy more calls
than you would ordinarily buy round lots of the underlying stock. This will prevent you from over leveraging.
Over leverage is the primary cause of disaster in the options market. Covered writes typically don't work well because they cap off all upside above the strike price sold but leave all the downside minus the premium taken in. I do use covered writes but generally only when a stock has moved up to a resistance level, I sell the calls against the position expecting the stock to stall out for a short while. In many cases I have had to sit tight while my stock rose through the upper strike price. It's a judgment call.
When you buy a call, hold it until expiration.
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Q) Do you have a favorite trading tactic? What has worked best for you?
A) I simply love to own stocks and quality ones at that. My idea of technology is Campbell's Soup. My objective is to build wealth and I feel much more comfortable buying high quality stocks. I guess that would be my favorite strategy. I do however use options periodically and hedges. I almost always try to keep it as simple as possible.
Q) I would like to know what Tom feels are the assets which a stock trader should possess. A top 5 list would be fine. I am trying to do this for a living and have paid the bills so far, would like to know if my traits can carry me through years of market research. So far I really enjoy it (5 months of trading) Thanks, David
A) David, this has been a good market for a trader. Things have been very easy. You must be willing and comfortable to go short as long. You must trust above all, I say above all, your indicators. You must never second guess them. When you begin to second guess them you are finished. Find a method that is comfortable for you and don't deviate at all from it. Keep it as simple as possible. Write down why you buy or sell every position so you can go back and see what went wrong and what went right. Never throw good money after bad i.e. continue to believe in a position and average down until your capital is gone. When a trade is over, don't look back to see what could have been, it's over. Don't tell anyone what your positions are, you will psychologically find yourself defending them if they do not work, once others are watching your positions.
Don't try to catch the bottom 20% or the top 20%, be satisfied with the middle 60%. Happy hunting. |
