Re: Steve's Option Strategy in My Own Words.
Steve,
Sometimes it helps if the student repeats what he learns from the teacher so the teacher can see if the student understands what the teacher has taught. The following is my understanding of your option strategy. Please review it and let me know if I have understood your methods. Have I left out anything important.
Have the right Attitude:
1. Start out small. Practice the strategy. Make your errors with small positions. As you gain experience and skill, start establishing larger positions.
2. Don't get greedy. Don't try to milk every cent out of a position. Establish reasonable goals, achieve them, and move on. Greed can paralyze. Paralysis results in inaction and results in you doing nothing. A missed opportunity.
3. Be patient. Make sure all of your trades make sense. Always know your cost basis. Sell your calls at strike prices at or above your cost basis. You also want to protect profits. This is why you recommend taking the money off the table.
4. Don't get emotional. Avoid getting so attached to your stock position that you become inflexible. You need to be able to buy puts on a stock you love. Sometimes you may need to sell your stock with the purpose of protecting your profits. You can always get back in later or go on to something better.
5. Learn the trade. Read the books of the masters:
a. "Options as a Strategic Investment" by Lawrance G. McMillan
b. "McMillan on Options" by Lawrance G. McMillan
c. "Options Seminar Book" by Scott Fullman
d. "???" by Kolb (Does anyone know the titles of these books?)
e. "???" by Anbacher
f. "???" by Trester
g. "???" by Trester
Stock Selection Criteria:
1. Select stock for fundamental reasons. The companies stock should be trading at a discount or there should be strong potential for capital growth based on projected earnings, new products, industry conditions, etc. Choose companies you want to hold long term.
2. Do not select a stock just because the call premiums are high. Sometimes those high premiums are a sign of high risk. Your goal is to sell covered calls at a strike price above your stock basis (your cost of purchasing the stock). There is nothing worse than getting into a negative cost basis position right of the bat by having the stock price drop dramatically. This occurrence can really put you in the hole.
3. Know and keep current on the company and its industry. Establish positions only for stocks in industries you understand. Only diversify into as many positions as you can effectively keep up with this step. Don't spread yourself two thin.
4. The stock you choose should have a good amount of volatility. Use fifty percent as a minimum number. The more the better. This volatility should not be because of fundamental problems with the company. The company must be fundamentally sound. The high volatility should be due to industry or external conditions.
5. The price of the stock should be less than $50. This is a guideline, don't be two hard over on this rule.
Establishing the Position:
1. Buy the stock on weakness.
2. Sell the call on stock strength. Sell the call for the next one or two months out. Always know your net cost basis. If the stock price looks somewhat overvalued and on its way down, you may want to sell at a lower strike price. Keep above your basis.
3. Always look towards buying the calls back when the stock price weakens. The exception to this is when you are near the expiration date. Keep your next move in mind. Always be prepared to act. This is why Steve recommends using a beeper service.
4. Repeat 2 and 3 for as long as you own the stock. Your goal is to get income every month.
5. Continue monitoring the fundamentals of the company. If they change for the worst, you may want to close out all positions and move on to a better company.
6. If you get called out you have two choices.
a. Begin again with number 1 (buy the stock on weakness). You may want to sell puts.
b. Move on to a better company.
Insurance:
1. Buy insurance during dangerous times. These times are near big company or industry announcements. This is where knowing your company and industry pays off.
2. Establish a walk-in strangle. This is where you buy both puts and calls to protect your downside and upside. Don't do this all at once. You do this by buying the calls when the stock price is weak and buying the puts when the stock price rallies. You don't want to pay very much for this insurance. Don't pay more than 5/8 for these contracts. Try to get them as close to their minimum (1/16) as you can. The strike price should be as near your target covered call price as possible. Buy these for expiration dates just beyond the danger date.
3. You do not need to establish the walk-in strangle every month. Only do it in times of danger. If you feel you need the protection of protective puts and calls at other times, make sure you don't pay to much for them.
Thanks,
Blaine |
