TipSheet #5 - Hedge your stocks against a possible market downdraft...
Stock lists, stock lists everywhere, and ever they all seem to shrink...
It seems like every day a new list of hot stocks appears. Newspapers, magazines, web pages, newsletters...They all have their favorite stocks. If you're tempted to buy any of those stocks, here's a couple of ways to hedge your purchases so you win no matter what direction the market goes.
Although it seems easier to rely on hot picks and the never fail lists, most of these services that provide those lists will not tell you how they were picked. You may get a small description stating that "these are high performing companies that outperformed such and such..." or "these picks are based on strong, high volume, high demand companies..." But what determines a strong company? Who are these people that compile these lists? What happens to you when the "never fail list" fails? Is that service going to cover your losses?
Investors who plunged into the market last year and bought based on some of the hot stock lists and predictions came up short at the end of the year...But in many cases they would have made profits if they hedged their investments with stock options.
If an investor focuses on in-the-money (ITM) covered call writing, they can collect a high premium for the write and increase their downside protection. Yes, you are giving up potential profits by writing ITM, but you protect yourself for a 5%, 10% possibly even a 15% drop in the underlying stock price. And if the stock moves up and you get assigned at expiration, you can still obtain a profit of at least 2%. Now, that might not seem attractive right off the bat, but it isn't a loss now, is it?
If an investor wished to hold the stock but still wanted to collect some capital, they could always write out-of-the-money (OTM) covered calls. With an OTM covered call you collect less premium, but you have a less probability of getting assigned at expiration. You hold the stock, keep the premium from the write as the option expires worthless, and you can repeat the pattern month by month. If the stock does drop against you, you can always roll down your position and hedge the loss you took on the underlying security.
The SmartSearchXL allows you to pull up profitable Covered Call transactions based on your own individual parameters. You can see exactly what inputs are used, so you know specifically why these transactions appeared. You are not blinded by undefined 'Hot Stock Picks' or 'Never Fail Lists'. However, if you still wished to use those hot lists, the SmartSearchXL allows you to input your own personal stock lists into the system (see the tipsheet on 'Setting up your own Personal Lists and Settings). In this way you can use the SmartSearchXL to find hedging option transactions that will help protect on losses from those 'Never Fail Lists.'
Step-By-Step Procedure - Finding ITM or OTM Covered Calls with the SmartSearchXL:
Use the steps below to learn how to protect your stocks with ITM or OTM hedging options:
If you have not done so yet, go to http://www.poweropt.com/logon.asp.
Enter your User ID and Password then click the [Log On] button.
When the MY HOME page appears, click the "Covered Call" navigation tab in the top left.
Now click the "Search" link in the "Covered Call Tools" section of the page - near the middle.
Scroll down the page until the search settings area appears. In the area labeled "Search Settings Saved As:" click the drop down menu to view the different pre-set criteria that PowerOptions has supplied for you.
To find profitable and protected ITM covered call transactions, select "ITM (in the money)." The system will load the parameters and display the results of that search automatically.
Note that the exact parameters of the ITM search appear in the parameter field of the SmartSearchXL. Not only can you view the search parameters we used, you can also change those parameters any fashion you like - make the search match your individual investing goals. (Of course we can help you get the search setup if you need some guidance, just send us an email or call the office.)
Now, go back to the "Search Settings Saved As:" field and select the "OTM (out of the money)" pre-set search. The system will load the parameters and display the results of that search automatically.
As before, you can view the exact parameters that were used to find these OTM covered call opportunities, and you can adjust them as you see fit for your individual investing ideas.
For more information on what the column headings mean, move your pointer over one of the underlined headings and in a few moments a definition will appear.