Dive! Dive! Dive! As I write this on Friday morning, the markets
have been falling through the week. The Dow industrials, Nasdaq and
SP-500 have each fallen down through the uptrend and the 50 day moving
average. The Nasdaq is already well below the 200 day moving average.
These are not signs of bullishness. At the moment, the question is how
far is down and what can a trader do about it. For the Dow, the next
critical level is 11000 and below that, the 200 day moving average.
The SP-500 is rapidly approaching the 200 day moving average and after
that, I am looking at a bit of resistance near 1245. The Nasdaq is in
freefall at the moment. In my Trend Trader, I have been careful to only
enter a couple of positions, one primarily for income and which doesn't
move very much (NSL) and the other (PPL) that has stayed in its uptrend
and is moving upstream against the market. My $10 and Under trades are
down slightly or treading water and I am only adding positions carefully
since I am buying stocks and that is bullish. As a general rule, I
don't try to play against market direction, instead choosing to go with
the flow.
Recently, I have added puts on QQQQ and a fairly large bearish call
spread on DIA to my Option Trader trades. The QQQQ (commonly called
the Q's) follow the Nasdaq 100 so my puts have been gaining value as the
market dropped. The DIA (known as the Diamonds) follow the Dow so that
position is making money with the drop as well. In addition, I have
spreads on the SPY that follows the SP-500 and XLK that follows the tech
stocks. The short legs on those positions are also making money as the
indices drop. You can see then how option positions, in addition to
limiting risk in many situations can also be useful tools to garner
profits even in a down market.
Of course, there are many strategies that permit profit as markets
move down. They have varying degrees of risk, of course, and should not
be used unless the trader is familiar with the strategy used and
appreciates and is willing to take on the risk of a particular play.
Included among the many strategies to profit in down moves are: selling
stock short, buying puts, creating bearish spreads, even selling naked
calls. Each has risk and each requires that you meet a certain level of
experience and have some minimum amount of money in your account before
your broker lets you employ the strategy.
Interestingly, one of riskiest of all strategies is simply owning
stock. Suppose you buy a stock at $50 a share. What is your risk? The
answer is $50 a share. Stocks can and do go to zero. In my Trend Trader
and $10 and Under Stocks, I am always buying stocks. How can I protect
myself from downdrafts? Well I can place stop alerts so I know when a
stock drops below a certain critical point, I can place stop loss
orders, or I can buy protective puts. Placing the alert only tells me
the stock has reached a certain predetermined point and I should act.
It does not mean I will get out there because the stock may continue
its decline. Similarly, while I believe a stop loss order is often a
good idea, "stop loss" is a misnomer. It only means that when a stock
hits or goes below the number, I will be sold out automatically. It
doesn't mean I'll get the number. Suppose a stock I own closes at
$30.85 and I have a stop at $30. The stock is going up and I'm happy but
overnight there is really bad news about the stock. The CEO and his
secretary have run off to a foreign country and he sold the company's
secret process to a competitor before he left. Well, the next morning
the stock gaps down and opens at $10. My "stop loss" would be activated
and I would be sold out around 10, not the 30 I was expecting. Buying a
put does afford some protection, but at a cost. If we have the same
scenario, stock at $30.85, but I buy a $30 put, that means I can "put"
the stock to someone (force them to buy it) at $30 anytime before my put
expires. In order to obtain that right, I must pay a premium just as I
would if I purchased an insurance policy.
Right now, as the market decline continues I am extremely cautious
about buying stock, but at the same time, I am more active in my Option
Trader trades since I see many opportunities to profit if the drop
continues. How long and how far will the descent go? I can't know.
What I do know is that I should be willing to take what the market will
give me. I may well be able to do that with my current option positions
and others I may add. At the same time, I know I must be patient with
my Trend Trades and my $10 and Under Stock Trades. I need to be
prepared to cut losses and even hold off from entering new long stock
positions until the markets again turn up.
Good Trading!
Bill Kraft
SUCCESS TRADING GROUP -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or pager alerts intended to provide you with the opportunity to make many, many profitable trades.
Details Here.
OPTION TRADER -- by Bill Kraft
Our Option Trading Service is for conservative traders that understand leverage pricinciples. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on minimizing our losses. We always know our downside potential in a trade.
Details Here.
TREND TRADER -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.
Details Here.
$10 TRADER -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Details Here.
COVERED CALL SERVICE -- by the Covered Call Team
Details Here.
