Ted Olshansky began his investment career in 1968 as a registered broker with Dean Witter & Co., Inc. Mr. Olshansky was a market maker and member of the Chicago Board Options Exchange (CBOE) from 1975 to...
Publish Date: June 28, 2007
Ted Olshansky
Instead of discussing with you the economic factors affecting the market, I thought we would devote a monthly letter to explaining a trading philosophy used by professional traders. This philosophy is applicable for all investments from stocks and commodities to bonds.
Have you ever heard a friend tell you he/she sold a stock at the “top” or bought it at the “bottom”? You won’t hear these words from a savvy pro. In fact you will hear the opposite. They will buy a stock making a new high and sell a stock making a new low. Sound crazy? Let me explain.
A stock (or commodity) that is making a new high is in an uptrend. We don’t know how high it may go. Witness Google. Since the stock is making new highs, you don’t have a large supply of sellers. We don’t have the proverbial investor saying in his mind” When that stock gets back to where I bought it, I am going to sell.” With Google, we have happy shareholders.
Conversely, a stock of Enron continued making new lows. Anyone trying to pick a bottom quickly found himself in a hole. And what is the natural reaction? “When that stock gets back to what I paid for it, I am going to sell.” This creates a supply of stock. A savvy investor will continue short or more prudently long puts (a lesser risk) as long as the downtrend exists or until he/she has a substantial profit and exits the strategy.
In considering if a stock is making new highs (this does not mean an all time high, as we assume that most shareholders have exited a position purchased seven or ten years earlier) but it should be at a minimum a three year high. You should stick with the position and maybe take a little profit at attractive prices.
The same applies for the short side of the market. I recommend the use of puts for shorting since you are then limited as to your loss if you are wrong.
Remember, as I have stated before, “The Trend is Your Friend.” Trust it.
Quitters never win and winners never quit.
Bill Stern, Sportscaster
75
Question: When is the best time to use a covered call strategy?
Answer: The best time is when the market is in an extended narrow trading range. You will have option decay and generally make a better than average return. Also, if you are an investor and looking for additional income as opposed to large gains, this strategy can also work for you.
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