MANAGING GREED

张玉

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
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9 X6 |' ^9 R% z2 P+ p# G! r9 g5 tMy 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.
  
5 z9 `# u& _/ h: E* J( NNow, 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
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! ^( L8 h4 I" y. Y! zIf 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
2 u& [* y8 x0 ^& l0 F9 nsell 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!
  
5 t4 @( A$ w( jMy 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.
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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.
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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