--Warren Buffett, Investor, Billionaire.
The key to making money in the stock market for me is not only knowing which way the market is being pushed but specifically which way a particular equity is being pushed. The resultant decision to either buy or sell is ultimately dependent upon that knowledge. If a stock is being pushed up then I want to be long. If it’s being pushed down I want to be short. For me, it’s that simple.
Going long to me means I’m either buying stock or selling puts. They’re basically equivalent trading positions. Going short to me means that I could either short (sell) stock or sell covered calls. These two are also basically equivalent trading positions. The difference in these trades for me is that I never ever sell stock short. There’s nothing wrong with doing it but I’ve made the personal decision not to. The other option is to sell covered calls. This is my preferred choice as long as I own the underlying stock (which is why they’re covered calls).
If my understanding of a particular chart starts telling me that a stock is poise to move up, I need to determine how high it will move and how quickly it will move, at least for the short term. That knowledge will allow me to determine which strike price and which expiration date I’ll sell against. If I can get very close to a return of at least 1 percent on my money in one to two weeks then I’ll probably go with selling the put, especially if it’s an out-of-the-money put. If I can’t get that type of return, then I’ll try to determine if I can get a similar return in a similar time period by simply buying the stock. If I can’t expect to do that with either selling the put or outright buying the stock, then I’ll move on to another candidate stock.
If I see that a stock that I already own is starting to roll over I have two choices. One is to sell covered calls and another is to simply sell out the entire position. If I don’t want to sell out the position because of an upcoming dividend payment or for tax reasons, then I’ll sell an out-of-the-money covered call. I will sell that call regardless of the percent of income I’ll receive. This is just free money to me and I’ll take any free money the market decides to send my way. This is not a time to get greedy.
So my strategy of trading stocks is based on a structured trading plan that tells me to go either long or short. Which way I decide to trade is based on a fundamental understanding of whether the market is being pushed up or being pushed down. Once I determine this, I trade in the right direction and constantly monitor my positions because if I’m wrong, I need to immediately exit and reverse. Cutting losses is critical to my success in the markets. I intend to continue trading the markets well into my 90s.
Good Luck and Good Trading.