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Put Selling
Why Sell Puts
Example Trade- Selling Puts
Tools For Picking Naked Put Strikes
Selling Puts Is Superior To Covered Calls
Understanding The Naked Put
4 Basic Rules For Selling Puts
Selling Puts For Profit & Avoid Assignment
Caterpillar Naked Puts
Put Ladder On Barrick Gold Corp
Rolling Put Options Strategy
Covered Calls
Earn 3% With In The Money Covered Calls
Rolling Covered Calls Down
Staying Positive
Other Strategies
Moving Averages On Cisco Stock
Writing Uncovered Calls
Long Straddle
Miscellaneous
Importance Of A Plan, Goal & Objective
Early Warning Tools
Understanding The VIX Index
The Cautious Bull
Averaging Down In Stocks
"Squeaker" Option Trade On JNJ
Dividend Stocks That Cut Dividends
Hedging Downturns With SPY Puts
Defensive Stock Investing
Moving Averages Trading Strategy
My Strategy Explained
Rescue Strategies for Bank Of America
 

 

Jan 20 2011  / Stocks - NUE, JNJ
The Cautious Bull Strategy

STRATEGY DISCUSSION
For those who are following my last two trades (Jan 20 2011), they are in tune to my strategy of the CAUTIOUS BULL. On Jan 1 2011, I indicated my stance this year would be the CAUTIOUS BULL.

In Oct 2008 to March 2009 Stocks set new lows during the market collapse. However since then many have recovered to their old trading ranges. While many have not hit the highs they saw in 2007 (which is a possible warning that this bull market may not recover all stocks) before the bear market took hold, most have recovered to the trading ranges they were in from 2006 to early 2007 and certainly many blue chips have put the Lehman Brothers collapse behind them.

But from spring 2009 to December 2010, selling naked puts was an easy strategy on many stocks, mine included. As stocks recovered it was a matter of selling naked puts at the money and just out of the money and for the most part stocks just kept climbing, leaving me with naked puts that expired or could be rolled.

In my view based on being an option seller for 35 years, the easy money has been made and this now requires a more cautious approach. I call this my Cautious Bull Strategy.

I believe stocks have to perform based on earnings or at least the belief that earnings are improving. Once the Fed money taps start to dry up the floor under this market may get a little "creaky". (Read the article Dance Near The Exit) Remember that markets are driven by fear and big players with billions of dollars in the market - the so called "smart money". A whiff of a trouble and they will bail like they are fleeing the Titanic. In my opinion "smart money" is really no smarter than the retail investor, but their sheer size of holdings can push a stock to extremes both up and down if they are fearful. I have always believed that it isn't fear and greed that drives stocks, but FEAR alone. There is fear of missing out on the rally and fear of losing capital in a decline.

For those who believe "smart money" really knows what they are doing I can only point out that while retail investors sustained large losses in the 08-09 collapse, it pales in comparison to what "smart money" lost. When stocks like Citicorp fell to .99 cents, it was not caused by the retail investor fleeing ship. It was caused by "smart money" bailing out. When I put in my offer to buy Citicorp for 1.00 I laughed because my offer was for 1000 shares. A thousand shares is not going to move Citicorp. If "smart money" was buying Citicorp with billions throughout the crisis the likelihood of it falling to .99 cents would have been unthinkable. In Canada my son and I started buying Bank of Montreal in March 2009 at $28.00 in lots of 300 shares until we owned 3000 shares. We bought it all the way to $25.00 over a period of 5 days. The dividend is 2.80 which was our pivot to jump in. At 2.80 they are paying us 10% a year to hold their stock. Our buying did not support the stock. Retail investors did not move any of these stocks, but "smart money" with billions of shares traded certainly did. As we bought BMO it continued to fall on huge volume. My son and I wondered if we were the "dumb money". I think the important aspect of "smart money" is to remember that when they buy or sell, it is their fear that can really hurt your position. Years ago my mentor told me, that the only way to beat smart money is to stay out of their game, be patient, watch volumes and charts. This is why I sell options only against stocks I would own, because in the past I have been assigned in market meltdowns.

I like to be prepared for any eventuality. While some see another collapse, I doubt anyone can truly predict what is going to happen. There are many analysts who have recently (Jan 20 2011) predicted that the NASDAQ will hit 3700 this year. I have a section about Gurus, so you know what I think.  The overall market trend is what is important. Right now the trend seems intact, BUT the Russell 2000 is showing signs of "strain" which may mean a pullback is coming before a move higher.

My strategy for a market that has recovered is to create my list of stocks (and yes I write them down on paper). Then I look at the charts each day to see those that are pulling back and wait for a jump in volatility. Normally when a quality company pulls back, it can be dramatic, like VISA has been and it can also be short lived. I then write on paper the strikes I would be happy to own the shares at, if I WAS ASSIGNED, because it is important to remember that once I have sold the put, if the stock falls I am open to assignment at any time. I then write down the premiums I would like and then I wait.

It's a simple strategy and doesn't require a lot of watching. If you look at my VISA chart (Jan 20 2011), you can see that VISA reached the lower Bollinger a few sessions ago. That's when I get ready. I watched it, saw Wednesday's selling, and I put in my price of .85 cents on the Feb $65. I got a fill which actually rather surprised me. Today (Jan 20 2011) I saw $65 naked puts go through for 1.10 and then 1.15, I put in my offer for 1.20 and waited. I got filled on the 1.20.

The same with NUE. Today I got some filled on the Feb $41 put and I had offers out to sell the April $38 at .90. I saw some puts of other investors get filled at .70, so perhaps in the next few sessions I may get a fill.

The Cautious Bull strategy is not to hold onto these naked puts until expiry. Far from it. If the stock holds or climbs and I can close those puts for decent profits, then I close them and free up my capital to go back to my list.

The important point here is to stay as liquid as possible. When the trade has worked, close it, take the profit and keep cash on hand. I set a realistic goal of 12% for the year. Many of my readers know that I aim for about 1% a month. If though I have realized 6% within 4 months, then my goal is now 6% for the remaining 8 months. This reduces my having to take higher risks to reach my goal and reduces the amount of cash I need to have in the market.

My return is still 12% for the year, but with each passing month of gains:

  • I can reduce the amount of capital I need use
  • I can stay further out of the money with my naked puts or naked calls
  • I can turn to less profitable but more secure option strategies such as spreads
  • I can focus on fewer trades and stay with those that are more profitable with less risk

I have no set amount for what I would consider decent profit. I pick and choose as the trade unfolds. This will be a major part of my strategy throughout the year. I have used this strategy in every recovered market since 1979 and it has served me well. The last time I used it was during the bear market of 2001 to 2003 and after stocks had recovered. This also reminds me to mention that it is is important to remember, just because stocks have recovered just as they did in 2004 - 2005, doesn't mean the uptrend is over. It just means it may be more difficult to judge when that maturing bull market is ready for a rest. For me, it just means the easy money has been made and now I have to watch for my opportunities and take advantage of them, when and as they appear.

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Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed or presented are financial advice, trading advice or recommendations. Fullyinformed.com is a private website. Everything presented and discussed are the author's ideas and opinions only.
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