One fact has been brought home time and again from the readers'
responses to Newsletter articles. There are lots of ways to achieve
positive results in trading. If I mention 'buy and hold' I'm certain
to get emails saying: "'Attaboy,' way to go. Buy and hold is the only
way to make money investing in stocks." Someone else is sure to say
something like: "Sure, pal, how long did you hold Enron?"
Mention trading options and I get the same sort of responses.
One reader will write about the killings he has made in trading
options and another will tell me flat out that you can't make money
trading options over time.
Write about brokerages or commissions and I'll get email that
says only a fool would pay more than a $1 commission to trade a block
of stock while another will write that they rely heavily on their
financial advisor who has made them a pile of money and it is worth
the extra commissions to get that help.
I have often written that I don't believe there is any
mathematical formula that will work every time. Boy, do those
articles bring the engineers and math folks out of the woodwork. I
guess I haven't made it clear that I don't dismiss mathematical
formulae completely and out of hand; I'm only saying there is no holy
grail. I just don't see how math, alone, can account for some of the
emotional aberrations that sometimes do move the markets. Fact is, I
do use math related indicators myself all the time. I just don't
expect them to be infallible.
Once again, the point is that there are many strategies by which
the trader and investor can make money. If what an individual is
doing is working well, keep doing it until it stops working and if it
never stops working, great! If it stops working, remember that each
plan is always a work in progress and can be amended, enhanced, or
abandoned, if the practicalities dictate. Each trader can increase the
likelihood of success by understanding his trading personality, his
risk tolerance, his bias for bullish or bearish trades, and by
learning various strategies inside out and then using those that
appeal to him. Discipline may well be more important than the
specific strategy chosen. The wise money manager is likely to outpace
the trader who fails to manage his money.
Which is better in a bullish market - writing covered calls or
selling naked puts? Before answering that question, would it be good
to know the risk you are undertaking by entering either position?
What are you risking when you sell a naked put? What is the potential
reward? When you sell a covered call, what is the total risk? Where
is the potential gain capped?
I say that either the naked put or the covered call can make or
lose money and that the choice between the two strategies may simply
come down to the trading personality of the trader. What do you think?
Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
You can comment on this article!
Mr. Kraft's past articles are posted on our website for your review.
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