Saturday, December 22, 2007

Traders Run the Gamut

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?

by Bill Kraft, Editor
Copyright 2007, Makin' Hay, Inc.
All Rights Reserved

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Anonymous said...

First, Mr. Kraft, let me wish you very Happy Holidays and a happy and very successful New Year!!
I have enjoyed once a week reading your column about trading in 2007 and look forward to reading it in 2008!! Thank you very much for taking the time to write a column!! It is very helpful to me always!! I learn new things everytime I read a new column. I am still learning a lot about trading and I think everyone can and still does learn more, the more they study!!

Again, Thank you so much for your column
Your admiring friend
Myrle Catherine Whiting

Bill Kraft, said...

Thank you, Myrle. I really appreciate your kind comments and agree completely with your analysis that all of us can always learn more about trading. As we do, I also believe it also important to hearken back to the basics of plan, money management and exit. I hope you have a wonderful 2008 as well.