The Fear of the Day
A Barron's TV commercial shows a man laying on a float in a pool. The commentator says "the market goes up, you make money." "The market goes down, you make money." The implication is that if you buy Barron's you will learn "THE SECRET." Guess what, I have read Barron's for three years and have never learned this secret. In fact, I have never found tradable information in Barron's or in the Wall Street Journal, Fortune, Business Week or most other publications. The only way that I have received timely tradable information is by reading OIN, other sites and reading Investor's Business Daily. These aids, however, are only aids. They will give you an understanding as to which stocks are currently moving and give you an idea of the economy. Even these aids cannot substitute for your own hard work.
At times, I do not have the time to spend all day exclusively on the market. Therefore, during these times, I lower my expectations and place myself in a position where I can truly make money if the market goes up or down. How can I do that? When I know that I will be very busy for an extended period of time, I employ a system that has four parts:
1. Build 2. Cover 3. Scrape 4. Wait
Below, I will describe the system:
1) Build. Suppose I realize that I will be too busy to watch the market for the next six months. I would select great stocks (high relative strength, high earnings) and write a six month call on the stock. Typically, I will get a 25% premium. For example, I bought CHKP at $220 per share and wrote a January 2001 $220 call (YKEAU for $60). This means that I have downside protection to $160 and even if I am called out, it will be the same as if I sold the stock at $280. Furthermore, I am not stuck in the play until January because if the stock really roars, the extrinsic value of the call will evaporate quite rapidly. At that point, I would be able to buy the call back and begin a new play.
2) Cover. Instead of buying the stock back at that point, I may instead choose to cover my position by buying a $220 put for a small amount of money. Once that put is in place, there is no longer any downside risk. The profit I make will be the difference between the call premium and the put premium. For example, if CHKP were to run to $300, the $220 put may be worth $12 to $15. By buying the put, I have locked in the difference between $60 (the price in which I sold the call) and $15 (the price in which I bought the put) and have eliminated absolutely all of the downside risk at that point. The advantage of having the put in place is that markets these days tend to be quite volatile. The put insures not only downside protection but allows you to be profitable in the event we have the typical late summer dive that has occurred over the past two years.
Obviously, there is any number of ways to play it if the market were to tank after the July earning run. You could buy back the call on a dip and wait for the stock to rebound. You could sell a put on a dip and wait to buy it back on a rebound. You could do both. In other words, in this scenario, if the market goes up, you will make money. If the market goes down, if played properly, you will make money.
3) Scrape. If you are trading in the market to obtain current cash flow, once the put is in place, you have the opportunity to scrape your now risk free profits off of the top and use that money any way you choose.
4) Wait. Once both the put and the call are in place, you are now profitable. There is no need to press the market, just simply wait for the next extreme move either to the high side or the low side to take your next action.
Again, this is just one of many strategies that are employable. This strategy still maintains a healthy return in light of the effort required to implement it. Obviously, if you have more time, more aggressive strategies could be more lucrative.