us stock market, understanding the stock market

Over the last couple of weeks, I have discussed vacations and some orders that a trader might consider placing when he is not going to be looking at the markets. Not all brokers will offer some of the orders I discuss in these articles, but most of the better internet brokers do permit their use. Each trader will have to check with his or her own broker to see what may be available.

Suppose an investor likes to write covered calls against his stock portfolio to bring in some additional income on a monthly basis. Writing covered calls is a bullish strategy so the investor probably would not want to stay in the stock if it begins to fall. Of course, if just the stock were sold, our investor would have naked calls (a potentially dangerous position) sitting out there. In all liklihood, the investor would not be permitted to be naked a call position unless his brokerage had assigned him Level 5 status. How can that situation be handled in the trader's absence. Some brokerage firms permit a contingent stop loss order so the investor could place an order to buy to close the calls he had previously sold if the stock price fell to a certain level. At the same time, the investor could place another order that would be triggered by the buy-back of the calls. That order is commonly known as a "one triggers other" order. In this case, when the contingency stock price is hit, the covered calls would automatically be bought to close and that would automatically trigger a sale of the stock so with the combination of the contingent order with the one triggers other order the whole position would be unwound. In all likelihood, the trader would have made a profit on the calls and taken a loss on the stock, but he would no longer be in a position where his underlying asset, the stock, would be continuing to lose him money.

Another example of the use of a trigger order would be the situation where the investor has been watching a particular stock for a break above resistance. He wants to buy the stock if it gets above a certain resistance level. Suppose the resistance is at $38.50. He could place a buy stop order contingent on the stock hitting somewhere above $38.50, say $38.75. Once the stock price hit $38.75, it would automatically be purchased. Now our friend would own the stock, but would have no protection. However, in conjunction with the buy stop order, he could have also placed a one triggers other order that would be triggered by the actual stock purchase. The order to be triggered could be a buy protective put order or a stop on the stock just purchased or a trailing stop on that stock. Now, everything is in place even though our trader may have been floating the Amazon in an innertube.

In my estimation, it is well worth learning and understanding some of these orders. Your brokerage web site will ordinarily have in-depth explanations of many of these and similar orders. The orders can also be very useful even if you are not floating the Amazon. If you think through what you intend to do in any given play, you may well be able to place every order you will ever need for that complete trade at the time you make your entry. If you can do that, and then resist the temptation to mess with it later, you will have gone a very long way to removing the enemy, emotion, from your trading.

Good Trading!
Bill Kraft

Mr. Kraft's past articles are posted on our website for your review.

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