Thursday, November 15, 2007

I found my thrill, on Blueberry Hill

Had the trigger ready to put some shorts on at 1495 SPX, just a bit outside, would have been nice. Ah the beauty of the market, you can get another shot if you preserve your capital. One way to do this is to trade options. Yes, that is the derivative of choice by myself. Having grown up in the pits with my values on paper, it is the only way I can make rhyme or reason of any trade. Today I will start on some basic strategies:

I. Buy writes. Get long a stock you like and sell a slightly out of the money call. Very simple, able to earn good returns with some downside protection. What every investor is looking for. Of course I look for large cap names that have a nice spread between the 30-day historical and implied volatility. Stay away from any event like earnings or merger plays. You want a flat to mild up trending stock. For example, if you bought KO when it broke 50, wrote 55 calls all year, rolled the last one up to 60, you would have easily turned a 20% gain into 30%. That buys a few extra cases of diet coke.

II. Straddles. When a stock hits a 52 week low, I like to buy the ATM straddle to see if we bounce or break. Look for more than 15 day paper, and keep the trade on a short leash. Some recently good trades were on the financials as panic selling created the waterfall and then a mild bounce.

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