Finding Value in Trading
This is an options strategy whereby an investor holds a stock and sells options against the stock to generate income. This is also known as a “buy-write”.
- Benefit: This strategy can give you extra income on positions in your portfolio or add insurance to downside loss.
- Downside: A covered call will limit you upside profit if your stock should pass the strike price of the option. A covered call can also limit your movement in and out a stock.
For more information see here.
Puts For Income
Selling Puts for income involves selling a Put against a security to collect the premium.
- Benefit: It can be used as an income stream if markets are moving up or a way to enter a stock you like at a lower price.
- Downside: You have to secure you Put position with cash in the event the stock drops below your strike price. In this case you are obligated to buy the security at the strike price even though the stock is lower. The open Put maximum loss is exactly your strike price times the amount of shares you are obligated to purchase (example 2 put contracts equals 200 shares of the underlying stock. With a strike price of $20 your maximum risk equals 200 x 20 = $4,000 )
For more on puts see the CBOE explanation here.
Buying long calls or long puts gives you an option to buy or sell a security at the strike price. This strategy can be used as an inexpensive way to make bets on the direction of a security. Straight calls/puts can also be used to hedge risk on other strategies.
Benefits: Inexpensive way to make a predication play on a security. Also can be used as inexpensive insurance in positions you own. Limited risk, unlimited gain.
Downside: Often these strategies are an all or nothing game. If you are betting on a downside or upside move and you are wrong, your option will expire worthless. In addition, time is your enemy. The longer the time frame the more expensive the purchase is and the more you will need to risk.
Learn about options here.
Buying stocks for dividend income can be a great strategy that does not take the time to manage such as option strategies. When looking for dividend strategies, it is good to diversify across sectors and find stocks that have a long history of paying dividends. Typical high paying dividend sectors include Telecommunications, Energy, and Real Estate.
As explained by Optionseducation.org
A long condor consists of being long one call and short another call with a higher strike, and long one put and short another put with a lower strike. Typically, the call strikes are above and the put strikes below the current level of underlying stock, and the distance between the call strikes equals the distance between the put strikes. All the options must be of the same expiration.
- Benefits: Can collect premiums based on the spread between you long and short positions. This strategy has a limited upside as well as a limited downside risk.
- Downside: This strategy can be difficult to build, expensive in broker fees, and has limited upside.
As explained by Optionseducation.org
A bear call spread is a limited-risk-limited-reward strategy, consisting of one short call option and one long call option. This strategy generally profits if the stock price holds steady or declines.
The most it can generate is the net premium received at the outset. If the forecast is wrong and the stock rallies instead, the losses grow only until long call caps the amount.
- The description above is for a bear call spread, you can create spreads in any way, long, short, calendar, bear, bull, etc. They have similar structures but can vary in the risk/reward charts. The best way to understand spreads is to visit the site above and learn their examples.
- Benefits: Can collect premiums based on the spread between you long and short positions. Strategies can be built to almost any type of risk/reward chart depending on your tolerance. Spreads can be used to collect income, build insurance, hedge against up/down turns, and be built for down/up/ or flat markets.
- Downside: This strategy can be difficult to build, expensive in broker fees, and sometimes complicated to understand your risk/reward. Spreads take a good deal of time to build properly.
Following these simple rules can help you perform better than the average portfolio. If you are looking for the next get rich strategy, this is not it. The problem with the get rich strategies is that they are similar to playing the lottery but with a lot larger bets. Having a system with rules is the best strategy to have. Consistently testing the rules and refining them is just as important as following them. For some it is buy and hold, others it is short term trades, and others it may be Options. The success or failure of any one system is entirely dependent on the time you put into it and a bit of luck. If you do not have time to devote to your portfolio then use ETFs or Mutual Funds as they have professionals managing the assets. I use both and only devote amounts to high risk investing to which I have time to monitor.
This section of FBV illustrates some of the trading strategies I use to help you build your own system and see by example what is needed to manage an active portfolio. I am not a professional trader by any means, but I do actively trade based on systems I have developed over time. Follow the FBV Trader here and on Twitter!
|AAPL 10/18/2014 103.57 C||Buy/C||$1.24||Call||>103.57|
|GRPN 10/18/2014 7.00 C||Buy/C||$0.45||Call||>7.00|
|SLV 01/15/2016 36.00 C||Buy/C||$0.26||Call||>36|
|GDX 01/17/2015 42.00 C||Buy/C||$0.09||Call||>42|
|PLUG 07/19/2014 6.00 C||Buy/C||$0.15||Spread||>6.25|
|GLD 01/15/2016 150.00 C||Buy/C||$3.10||Spread||>150|
|WY 07/19/2014 32.00 C||Buy/C||$0.15||Short Call||>32.50|
|ZU 07/19/2014 40.00 C||Sell/C||$0.90||Covered Call||>40|
|IWM 07/03/2014 109.50 P||Buy/C||$0.08||Insurance||<109.50|
|NQ 07/11/2014 8.00 P||Sell/P||$1.35||Income||>8|
|OHRP 07/19/2014 7.50 P||Sell/P||$1.65||Insurance||>7.5|
|PLUG 07/19/2014 2.50 P||Buy/P||$0.05||Spread||>7.5|
|GLD 01/15/2016 100.00 P||Buy/P||$1.85||Spread||<100|
- Diversify your positions. Typically no position in my portfolio will be larger than 10% of the portfolio.
- Trade only what you can afford to lose.
- Eliminate “I should of”. Learn from missed opportunities and adjust if needed. Sometime no adjustments are necessary
- Even $1 is a win. Move on and be happy that you did not lose.
- Set your target profit, exit points, and your max loss. Follow those targets.
- The idea is to win more than you lose, but you will lose. Eliminate emotion and stick to your strategies.
About the Stock Portfolios
The FBV trader portfolio. Active trade positions are updated weekly with profit and loss percentages. This portfolio includes active option strategies, dividends, and other strategies taken. Follow FBV Trader on twitter to see new targets setting up to be added.
The five year old portfolio. I have seen many stories that claim over time you could pick almost any group of random stocks and have decent returns. In a very scentific manner, I want to see if my five year old can beat the S&P 500? The portfolio will be a hypothetical $10K starting on 7/1/2014 with 10 stocks she can pick. I will post weekly performance of the portfolio to see how she has done.