MANAGING GREED

张玉 · 发表于 2009-12-16 13:14

MANAGING GREED
I find that the more details/indicators you use to study a stock, the more confusing it gets in terms of when to get IN and OUT.  To me the price line is the main big picture (daily, weekly and monthly). All, and I mean all, other indicators either support it or show some divergence.  I use a trading channel along with the price to see where the price is going or how much it can drop and still be in an UP trend.  I started using the 10 and 40-day moving averages as well sometimes.  In the 2nd window I use the BOP and Money Stream and sometimes the Rubber band (RSI).  In the last window I have the volume, TSV and a Moving Average too.  I am not going to detail how I translate them, since everyone should figure out for them selves what indicators work with what charts.  I find some indicators are wrong very often for a few of the many
Stocks that I track.

My main strategy involves my medium-term trades (3-9 months), I pick a stock that I like (their business model for example) for the last 1 year they have been in the Tech/Internet area.  I pick one that is in my opinion oversold and a bit volatile.  I tend to buy what I think are large amounts (10K-20K).  I immediately "Sell to Open" options against them at a price that is out of the money.  Say I bought @ $50. I then sell options with a strike price of $80 - $90.  If they are volatile enough, the premium is high enough to make another $25 - $30.  I always sell options with an expiration date 3-6months away.  Mostly six months out, that is how I make large premiums.  I am explaining this like a lesson for those vaguely familiar with covered calls.

Now, what have I achieved, you ask, and what do I do next?  Well here is a little math first: If I get assigned (i.e., someone exercises their options and wants to buy my shares at the strike price set), I make, lets say, 10,000 shares X 80 (strike price) = 10,000 X 30 (profit portion) = $300,000 + lets say 10,000 X 25(premium) = $250,000, for a total profit of
$550,000 for a 6-9 month wait.

If I do not get assigned, I keep the $300,000 profit and I still get to keep my 10,000 shares, and I start all over at step one.  What has greed got to do with all this? Well, a lot of EXPERTS will tell you that you have capped/(limited) your upside potential. That is, the stock could run up to $180 after 6 months, or even $200 (like some do in a week or so).  But you can say "So what, I am happy with what I made."  That is what I say.  Repeat to yourself "I cannot lose money taking a profit no matter how small a profit."  It has taken me a long time to understand that simple phrase.  Whenever I am in doubt as to what I should do with a position that has a profit (big or small) and shows no indication as to its next price move -- I sell.  I sometimes break my own rules too, and lose money. Investing is one thing, but the minute you buy and
sell you are trading and not investing.  I trade and I lose money sometimes (when I break my rules) and I make money too, like 1999!

My strategy has worked for me so far, even this year. I have losing positions too (ATHM, BRKA etc.).  With ATHM I bought for the wrong reasons and then I failed to write the option that I thought I should have.  BRKA I intended to keep.  The trick is to pick the right stock (which I am sure we all know how to do (grin)) first and IMMEDIATELY write the covered call for a strike price + premium  that gives you a fair profit that you can live with.  Then do not get greedy.  When you make the profit, take it and give yourself a pat on the back.  I have never been able to buy at the bottom or sell at the top. If you know how, let me know.  Building wealth is about taking profits small or big.

After you write the option, you get a little of your capital back for other things, like rolling up your position, and especially for buying back your options if the share price drops enough to make a tidy profit on the buy back price.  So much of my little wisdom/strategy.

Do not try this at home until you have an understanding of options, premiums and the all important time value of option premiums.

Thanks for letting me share this with you, I used to work in private banking in HK (I am from there) for Chase. Then when I came here with my wife, I started my own business as a software designer/programmer and consultant.  I worked very hard for 8-9 years, long days, etc.  I did well, but I put all my money into my software products that I produced. I then created a great email client that was/is very good. This was before the Internet was known very well.  I came close to doing a big deal with an ISP and it would have made me very happy and feel successful.  I lost the deal to MSFT. No hard feelings. It is business after all.  I then stopped my business and felt very sad.  I got into trading as a temporary thing till I could figure out what I wanted to do.  Since then, I have made a lot of money (more than the prior 8-9 years collectively), but the irony is that I do not feel I produce anything anymore.  I am making money out of someone else’s hard work in the stock market.  I do enjoy trading now, and my new passion is flying.  I have my license and love flying.  I also ride horses and speak 3 languages. Regards, RP

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