Steve's options strategy notes.
I think that very few people can execute any options strategy and make money.
Maybe 1-5 out of 100 can execute this strategy.
Somehow greed, tendency to gamble ,emotions, and need for patience
keep people from executing this strategy. Many people also get caught up in their love for a stock and cannot buy puts when needed. Puts profit if stock goes down and is a bearish position.
Steve's strategy is different than most major strategies in several ways.
* We do not just select stocks for the premium. I think those premiums are there for a reason and to indicate risk. We select a stock that has the fundamental's of a company we want to hold long-term. Many option players just have search programs that pick off the stocks they can buy with large one month premium and then buy stk. and sell calls. We do not do this.
* Most stress to diversify into 10 and 20 and 100's of positions. I don't think that the normal person can do this. We don't. I will now start to roll into 3 stocks. I have to keep the industry the same because I work in the memory industry and I'm an expert in who uses the product. Many of you may have heard of Wade Cook. His method is definitely not what we do.
* I've never found a book that used this upstrike call position after selling the calls and steps into the positions. 100% of all books buy all the positions at once. This means no matter what you are paying a premium for one end of the position. We buy the puts on rallies and the upstrike calls on retreats and sell the calls on rallies.
Jireh's strategy is you want to own the stock and you use options to
enhance your monthly income while owning the stock.
You do this by selling cover calls and then stepping into a strangle
of buying the call that is upstrike from your cc strike point and
buying the put to protect your downside. You buy the put to protect
yourself ahead of big announcements and the upstrike calls to protect
against runaways when you sold your cc's You buy the upstrike call
while the stock is retreating and the put while the stock
is rallying. All the positions can be created at separate times. You
use the stock's volatility to step into these positions. These
insurance positions are difficult to execute if you are wanting to
hold on to all your profit. But, unemotional investment style
will let you buy those puts on a stock you love and support.
These insurance puts and upstrike calls usually cost 1/8 to 5/8.
Don't give up much for these. If you buy the put on a rally and the
upstrike call on a retreat then there is enough negativism to reduce
premiums in those positions and make it worth the insurance.
Typical position is own 5000 shares and sell the 32.5 cc's for 3
then you buy the upstike call during a retreat back for 5/16 and the 30
put during a rally for 9/16. If the hedging positions are not cheap then
we do not buy them.
The volatility of stock allows this.
By selecting a stock that you know instead of the alternative method of
just searching for premiums then you have some idea what the pattern is on
a stock during earning announcements. And, you know and don't have to
continually find solid companies that are volatile but fundamentally
sound.
1. More than anything study and start out small. Mistakes early can be
common.
2. If you tend to be greedy , then stop reading here. Greed or a tendency
to not be able to resist gambling are sure ways to lose everything you
have quickly.
3. You must be very patient. You need to wait for the right times to
trade.
If you feel like you have to trade every day or miss a call and just
will jump in even though you've missed it then stop here. Covered
calling with step in strangles are not for you. Be Patient.
4. You need to learn. The Mcmillan book "options as a strategic
investment" ,"options seminar book" by Scott Fullman, read books by
Kolb and Anbacher. Then Trester has two books . All but Trester can be
had in book stores. Trester number is 1-800-769-4572.
CBOE has free video and an options toolkit for $30.00
5. I think the adage of diversifying is false. I think you want to own
stock of company you like. You diversify to the point that you think you can keep up with the company and the industry. For me this is one and I'll add anothers soon.
Pick industries you think you can understand. I don't know a lot about
banking or real-estate. .So I don't covered call that industry.
6. The company has to have a highly volatile stock but it is volatile for
industry or external reasons not the fundamentals of the company. Compaq computer used to be a super volatile stock even though it reported record revenues and earning and broke every modern record for growth, but their stock was constantly up and down.
It is best that the stock is in the 20-30-40 dollar range. Remember cc
strategy rewards you by number of shares. Don't be religious here. Some
stocks like to push alittle past the 50 then split so that's still a
candidate. Having stks you can roll to while one is moving from 40 to
a split is best idea here.
7. You make option money every month. Pull that money out of the position.
Pull that cash off the table monthly. Put it into a long-term buy and hold or t-bills. Blessing a charity is a great way to spend it. During the beginning while you are trying to build up to an adequate
option position , you may want to reinvest it in the cc strategy but, I
would recco to get this money off the table. If you do this then in 14-18
months your original investment is completely returned and you are
investing with the market's money. I hesitate to tell you that it can
happen quicker than 12-18 months.
8. Remember the books talk about a strangle and stepping in all a once.
But, you are going to step in when the premium is to your benefit. The put on rally and the upstrike call on retreats.
You may not get the opportunity to get all the positions.. then you just
don't get then. Be patient buy when it profits you.
9. This one will be hard to do, but if you cannot pay for these then maybe
you shouldn't be doing this at all. Use a real-time pager alert system. Alert is the company at 1-800-316-8932. Cost per mo. including pager $60
You put in criteria and this sends you real-time alpha trades . So, may
want signals when the stock moves 1/2 points or an option moves 1/4 points.
And, at 30 minute intervals.
(cost after you buy the pager is about $20-30 month)
For your research and real-time news to your email system and real-time
quotes, zacks and nelsens, options analyzer and options chain and just
about anything you want. Cost about $110/mo.
And you access through Internet.
Get a broker that has computer trades and must give you low commissions.
Most discount brokers add additional discount for volume traders and
online traders. This provides access to research data and graphs also.
Broker should allow IRA's to cc's and pp's no upstrike calls.
10. I would say if you get to the point of doing naked positions then
forget it. This strategy is you want to own good company and sell cc's and protect with upstrikes and puts sometimes when their protection is greater than their cost. So this is not an excuse to just buy puts and calls.
There are several exceptions to this.
A. buying puts to protect against an industry or market crash
B. selling naked puts when you are in cash and need to buy the stock.
This is good move after your stock as been called away.
C. maybe knowing enough to buy deep in the money call and
executing strategy(watch it here you need to know the stock and what you
are doing).
11. Learning all you can about the market maker and specialist of your
company stock. Some of these Market makers give seminars.
12. Read 1 and 2 and 3 and 7 again
frequent mistakes are
1 greed
2 like to gamble
3 not enough patience
4 cannot invest unemotionally
( need to be able to buy 200 put contracts on a stock you love)
5. don't study the books and mat'l first
6. don't get real-time news and pager and research database
7. don't paper trade first
8. select the wrong stock to cc
not fundamentally sound, not high volatility
9. tendency to over protect with puts when they are too high
10. don't plan well and get the upstrike calls cheap
11. don't do 1 ,2,3
12. Need to vary the approach. some months use the strangle for big
announcements. but you don't need it all the time
13. use the buy upstrike calls cheap then as the stock moves up sell the
stk and keep the upstrike calls for the payoff
( use this last strategy in real danger periods)
14. sometimes just switch to day trading when it jumps all over the place. |
