How to Buy and Hold Stocks
Several members have been asking about stock strategies and I just had a great conversation with Trading Goddess on the subject so I figure now is as good a time as any to discuss them in detail.
As with any purchase, the key is to scale in and out of positions (this is something we’ve discussed on many occasions) so you can’t get burned by something like yesterday’s action. While some may find scaling in dull as it takes a long time to build up a full position, I have a very simple way to make it much more fun and profitable: When you go to buy a stock - DO NOT BUY THE STOCK, SELL THE PUTS.
You must, of course, be buying 100 share blocks but the logic is this. If I think Apple is a good deal at $180 and I’m about to buy it, then I can, instead SELL the $180 puts for $8.95. Since I was going to spend $18,000 anyway for 100 shares, the money is obviously in my account so the margin is a non-issue. Rather than spending the $18,000, I’m collecting $895 and I have the obligation to buy 100 shares of Apple for net $17,005.
The downside to this strategy is that if I did happen to pick a perfect bottom on Apple and it jumps back to $200, rather than the $2,000 I would have made by committing $18,000, I "only" make $895 for doing nothing. I could, of course, make another attempt to buy Apple at $200 by selling the $200 puts for $10 (now $22.58) which means I would have collected $1,895 without ever taking possession of the stock.
If that pesky Apple refuses to go down and next month climbs to $220 and I still really want it. I can sell the $220 puts for $10 and will have collected $2,895 while I wait for the stock to go down so, even if it triggers on me at $220, my net cost is $19,105 when my original intention was to buy the stock for $18,000. That is the downside but you can see how, if you do this as a habit, you will generally make a lot of money and hold less shares of stock.
You can, if you are one of those people who hates to lose. Also buy something like the July $210 calls for $17.95 to stop Apple from getting away from you. Assuming you want the same $18,000 worth of Apple you buy those and sell the $180 puts. Now you have no negative if the stock goes up and if it takes you those same 3 sales to get filled you would still own the stock and some pretty valuable calls as a bonus. If it goes the other way quickly, you still get the stock cheaper than the $18,000 if you would have bought it straight and the July $240s (a drop of $30 in Apple) are $10.60 so the net loss on the calls vs. the money you collected on the puts still leave you better off than if you had just bought the stock for $18,000.
Another bonus to this strategy is that, on a steep drop, you can buy out your putter for less than the drop when the stock moves against you. I thought Google had bottomed at $680 on Thursday and…
Sorry but you will start seeing this sign a little more often in the future as we move towards our new site system, there will be more articles and more information but we need to pay the bills so some content will not be available to the general public. Basic membership is going to be reasonably priced and there are all sorts of discounts available including a way to earn, not just a basic membership but a Premium membership to PSW ABSOLUTELY FREE.
It all starts with making sure you subscribe to PSW via Feedburner and the easiest way to start getting a discount is to go to the above link and get the super-secret discount code and then decide how best you can help us spread the good word about PSW. You can Email this URL to your friends ( http://www.feedburner.com/fb/a/emailverifySubmit?feedId=614817 ), ask them to sign up (it’s an opt-in system so you can’t spam people) and simply keep track of who you gave a free Email subscription to. Every 3 people you give something away to is another 1% off your membership.
Even if you don’t have any friends, the discounted introductory annual membership is $18.69 a month for people who don’t have $20 worth of friends - this is less than the average commission you pay to a discount broker for a single buy and sell, if your broker gives you better advice than I do then by all means, consider this a bad deal…
THIS WILL NOT LAST! We have a limited amount of members we will be accepting, even to the Basic site as the trades we give out there are going to be a notch above what we generally put out on the public site. The reason for this is, so we don’t end up like Cramer and having people stampede in and out of stocks and options, distorting the true value and doing more harm than good. As with our Premium membership, as we fill up we simply raise prices to slow down the growth of subscribers…
You cannot subscribe to the basic membership yet but in 10 days it will be the only way to read all of Phil’s Stock World. I hope you have enjoyed reading us this past year and that you will continue to do so in the future as a subscriber.
All the best,
- Phil