The expiry of options for May 18 show the real power of Put Selling. When people buy stock they hope for capital appreciation. The problem is most investors never know when to sell, let alone when to buy. The amount of buying at present is a sure sign that investors never know when to buy. Where were all these investors in 2008, 2009, 2010, 2011 and 2012 when all the stocks I trade against had considerably cheaper values. Their PE levels were higher in 2008 to 2009 but once the economy turned around in late 2009 and 2010, PE’s plunged. 2010 was the year when the markets did not collapse, 2008 to 2009 was over and despite the doom and gloom, earnings rebounded 25% for S&P stocks. Investors should have been buying then, but they were not.
Yet today investors are back buying and worried they are buying at the top of what they perceive as an overvalued market which could collapse again, so why are they buying? Simple – they think they are missing out on gains and that they could be wrong and the markets are not about to collapse.
10 Steps To Investor Success
It just makes no sense at all that investors buy because they fear they may miss out on substantial gains but worry daily that it is the wrong time to do it. This is the worst reason to be buying stocks and yet it is happening every day.
If investors would take time to learn these 10 steps they would be amazed at the results they could achieve:
- how to set realistic goals and establish strategies they understand to meet those goals
- how to select proper strategies they understand that will meet establish goals
- how to stay consistent to those strategies and not “second guess” a trade
- how to allocate a proper mix of stocks, bonds and cash and learn when to apply them and when to hold back
- how to properly paper-trade a strategy until profits are consistent and then risk capital but not before
- how to aim for consistent annual realistic returns on large cap stocks and forget the hot stock of the day
- how to select strong large cap stocks that will withstand everything from recessions to management errors and provide confidence to buy on declines
- how to take profits consistently and continuously in up and down markets to provide income as well as control risk of capital loss
- how to scale into positions for credits not debits
- how to stop listening to the daily noise of analysts and doomsayers
May Options Expiry Shows The Value Of Strategies
My May 18 options results show the continual strength of why strategies work in any market condition. With Friday’s options expiry, more than half of my capital in use is no longer in the market. All my naked puts positions expired out of the money despite the “Sell in May” worries. This success is not just because I picked put strikes that ended up out of the money. It is because of strategies that are being used to grow my portfolio while at the same time protect my capital from loss. A great example has to be Coca Cola Stock.
Coca Cola Stock – Simply Stellar
In a number of articles recently I have mentioned the 7 years of decline in Coca Cola Stock. Yet during this period I continued to sell puts, own some stock, sell stock and earn profits. I never once worried about Coca Cola Stock because it is the kind of company that will outlive me. Today everyone talks about Coca Cola Stock like it should be in everyone’s portfolio. I can guarantee you that this was NOT the talk about Coca Cola stock from 1998 to 2004 when it was stuck in a terrible bear market.
But Coca Cola Stock is a prime example of why strategies work. If you look at my Coca Cola Stock returns for 2013 you can see that the total amount of capital earned since 2009 is $41,932.50. I am presently holding naked put positions that if I was assigned shares in a downturn would now have a cost basis of $6.02. In other words if assigned on my Coca Cola Stock naked puts, I have earned enough income through my strategies that the cost of the stock if assigned is $6.02. This is the real power of using strategies to consistently earn actual profits and grow those profits monthly.
Strategies Lock In Gains
As explained in the 10 steps to success, using these types of strategies continually lock in gains. They force the investor to take profits continually as the stock moves higher or lower. When an investor buys stock or an ETF they are never sure where to sell or at what price. They know that if they sell today, it may be higher tomorrow. If they don’t sell today, it may be lower tomorrow. That’s the problem with investing. However through applying stock and option strategies to investing, investors are locking in their returns continually. In other words, the profits are being taken in small amounts throughout the period in which I am in the stock. I do not have to know what is the optimum time to sell my shares.
Beauty Of Strategies
The most beautiful thing about applying a strategy and consistently earning profits is that when the stock market does corrects, I have already made my profit. For example when I started in May 2009 selling puts against Coca Cola Stock (select this link for 2009 trades) Coca Cola Stock was trading for $42.53 and I started out by using the Walk That Profit Home To Momma Strategy and sold naked puts into June in the money at $45.00. I started with 10 puts which would have meant 1000 shares.
If I had simply bought stock I would have owned 1000 shares at $42.53 for a total commitment of $42,530.00. Including the stock split from last year, this year if I had sold on May 17 at the close of $42.97 I would have earned $43,410.00 in capital appreciation plus the dividend of $4525.00. An excellent return to be sure, but would I be selling my shares today? Probably not because as investors know, rarely do investors sell at the best of times. Therefore other than the dividend, my returns are paper only as they are unrealized gains.
Instead I have earned $41,932.50 which is almost the same amount as the unrealized capital gain in owning shares. But my return is real. It has been received and reinvested in further Put Selling. In other words, when I started I committed $45,000 to the trade and with each passing month the amount of capital I needed to stay within the trade of Coca Cola Stock became less and less until at present the amount of capital that I have in the trade is now just $7828.25. Eventually my capital in this trade will be zero.
I am not saying simply investing and holding the shares and earning the dividend is wrong or a worse strategy but for most investors it does not work because when stocks collapse investors dump their shares which is exactly the wrong thing to be doing. For example, if you look at the 5 year daily Coca Cola Stock chart below you can see the crash of 2008 to 2009. Volumes escalated as investors typically worry when stocks correct and they sell out when in fact they should be buying more.
Coca Cola Stock 5 Year Daily Chart
Therefore for most investors they never realize the paper gains in their stock positions because they do not know when to sell their shares. Through Put Selling and other strategies that is never an issue as the profits are being made along the way.
In my case, if Coca Cola Stock started a severe correction I could commit the capital I have earned and simply buy the shares and wait out the rally since I am only committing the capital earned. I could also buy to close naked put positions, roll them lower, or buy puts for income if I thought the stock had a long way to fall.
When stocks fall investors at the start of the decline hold their positions and confidently tell their friends and family that they are not worried because they are in the stock “so low” that they cannot be hurt. Then as stocks fall further they become a bit more concerned and might even sell a handful here and there just to “take profits” as they tell their friends. But when the decline continues and becomes more widespread, investors dump their shares often back at prices they once had bought the shares for in the first place. In other words they make very little.
Forced Buying
Put Selling forces investors to take profits and to establish clear valuations on stocks. For example I am holding the $32.50 and $40 strike put positions on Coca Cola Stock. If the stock falls, the average cost is $38.27. By selling these put strikes I have indicated that I think at $38.27 Coca Cola Stock is fairly valued. I would own shares at $38.27, but if the stock kept falling, I could decide to roll lower and further out simply because there is a profit to be made by rolling further out and delaying assignment of shares. So while other investors are worrying that their stock valuations are plunging, I am enjoying earning more income while eventually I will accept shares at an even lower price than I originally had sold puts at. At some point in the decline I will pick up shares through assignment. I will force myself to buy shares at a lower price. This means I am forcing myself to buy shares at the best possible time, when the stock is collapsing and cheap.
Strategies Are Important
The expiration of options on Friday and the return of so much of my capital to my investment account is an important aspect of investing. Once naked puts expire the capital being used to secure those naked puts is freed. There is no longer any further encumbrance on that capital and it can go to work and earn even more income. This means that continually I am able to take advantage of different changes within the stock market and the stocks I trade. If a stock turns back down I can reassess it and sell more puts to take advantage of increased volatility which means higher premiums.
It is strategy then and applying it that provides the confidence to stay invested in any market condition and the ability to keep growing the portfolio through realized gains that are taken monthly rather than seeing paper gains which I may in fact, never realize at all.
It only takes a few options expiration periods to see the wisdom and value of why Put Selling strategies are so valuable for investors. This past Friday with so many naked puts expiring and more than half of my capital being released for future trades, it gives clear indication of why this is, without doubt, the best way to stay invested in the stock market no matter whether it is pushing to all new highs or all new lows.
Internal Stock and Option Trades Links
Put Selling Strategies For Members
Covered Calls Strategies For Members
Profit And Income Strategies Index
Stock and Option Strategies For Members
Stock And Option Trades Explained For Members