Selling Options

If you can put in a limit order and purchase a stock, then you can put this strategy to use. It’s even safer than buying stock in our opinion.  When you put in a limit order, you have two options.  If your order is filled you will get in at a significantly lower price, in many instances, you can lower your entry price from 5%-15% lower than where the actual stock is currently trading at. In other words, other investors will pay 5-15% more for the same transaction, and more importantly, this is legal.

Simple but Hidden Strategy

So what is this secret strategy?  You sell puts.  Selling puts if properly implemented is just as safe if not safer than buying the actual stock, with the added benefit of getting paid to purchase a stock. If you order is not filled, you get paid for trying to. What could be better?  You have your cake and your pie.  Implemented properly this strategy can significantly boost your investment returns.

Selling puts the most misunderstood and least used option strategy.  Fixed income players should be using this strategy more often than simply selling covered calls. Covered calls which can be a good strategy if you utilised adequately, which in most cases it is not, can also be an excellent strategy to employ. In this instance, you sell calls on a stock you own.  The benefit is that you get an additional stream of income, the downside is that if the stock trades above the strike price you sold the call at, your stock will be called away.

Before you start selling options

If you can allocate some time to mastering the basic principles of Mass psychology, it will pay off a 100 fold.  Furthermore, if you combine this principle with Technical analysis,  the odds will be in your favour instead of the house’s favour.

The most fundamental principle of mass psychology is to understand that emotions drive the markets; identify the emotion, and you can spot the trend. Once you know the trend, the rest of the work is straightforward.  Don’t listen to the experts, as they love to spin tales regarding how fundamentals or the technical state of the market is more critical; nothing is more important than the emotional state of the crowd.  In the initial stage of the bull market you can put the basic principles of contrarian investing into play, but when the bull starts to mature, instead of bailing out, let mass psychology take over.

Technical analysis is important, but

It plays a secondary role and not a primary role; once you know the psychological state of the market, you can put the principle of technical analysis into play.   Technical analysis helps one identify when a market is trading in the extraordinarily overbought and oversold conditions.  Don’t confuse market topping or bottoming action with trying to determine the exact turning point.

Those attempting to determine the precise bottom or top are fools who seem to have an inordinate appetite for pain and misery. It’s like catching a falling dagger; if you succeed your hands will be far from happy.   The most important factor should be to identify the trend; once you know the direction, the rest is easy.

You have to be in it to win it

If you are not in the game,  you can talk all you want but other than barking loudly, nothing you say is going to increase the size of your portfolio. The only way to win is to have some skin in the game.  Buy when the masses are panicking and sell when they are euphoric.

Slow and sure wins the race

Don’t day trade; over 90% of day traders make absolutely nothing; in fact, they lose almost everything before they decide to change course.  Learn from others mistakes and position trade as opposed to making very short-term investments.  Identify the trend and hold your position till the trend ends.

The early bird gets the worm the late one the bullet

If you talk too much and or panic, another bird will find the worm. To lock onto big gains, you have to get into the game early.  When you get in early, you are likely to experience some pain. Warren Buffett put it nicely; if you can’t deal with as much as 50% move against you, then you should not be in the markets.

Excellent words of Advice 

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher

“In investing, what is comfortable is rarely profitable.” – Robert Arnott

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

“Invest in yourself. Your career is the engine of your wealth.” – Paul Clitheroe

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki

“Know what you own, and know why you own it.” – Peter Lynch

Other articles of interest:

• most common trading mistakes
• Technical Analysis
• Why Mechanical and Technical Analysis Systems Fail
• The Limitations of Trend Lines
• Portfolio Management Suggestions
• The Good And the Ugly On Trading Futures
• Ultimate Timing Indicator
• Esoteric Cycles
• Multi-Time-Frame Analysis 
• Free Trading Resources
• A clear Illustration of the Mass Mindset In Action
• Inductive Versus Deductive reasoning
• Mass Psychology Introduction
• Comic Strip Illustrating Mass Mindset(July 2015)
• Mass Psychology or Contrarian Investing(Aug 12, 2015)