Stock Forex

After a company takes a big dip, the climb back up is volatile. Sometimes it stays down for a while and starts trading between a certain range. I call this rolling stock. If you follow my formula for a pure rolling stock play as outlined in the Wall Street Money Machine and at our live Wall Street Workshop, you’ll realize that $50 to $100 stocks don’t fit the formula. They’re priced too high. Your cash goes a short distance with an $80 stock. $8,000 buys 100 shares. Yes, a move to $85 would make you $500, but a $5 move on a $5 stock would also make you $500, but with only $500 tied up. A better example: $8,000 would purchase 1,600 shares of a $5 stock. A $5 move up would double your money. Upon selling you’d have $16,000—a profit of $8,000. Now to make it more exciting and still double your money (because there are many more companies at $80 which can easily go to $85 than there are companies at $5 which go to $10), let’s play an option.

The stock is at $80. You call your broker and buy the $85 call options, say two months out. You pay $1.25 per option and buy ten contracts for $1,250. The stock moves up to $84. Your option is worth $3.75. You sell for a $2.50 profit and make $2,500. Look at the power of leverage.

Options allow you to invest in the big stocks by proxy, using a small amount of money.

Look back at the chart on Motorola (page 90). Every time the stock goes down to $50 to $52,1 buy the $55 call option. I’m not hoping the stock goes back up to $100, though it would be nice, and I’m not doing this to buy the stock. I’m simply going to sell my $1.25 option for $2.50 or $3.50 when the stock rolls up. Another day, another week, another $10,000 profit.

Some stocks just seem to trade in a certain range (support at the bottom, resistance at the top.) Check out Ford (F). It rolls between $27 and $34. When it gets down to $27 or $28, I buy the $30 calls or the $35 calls if they are cheap. I sell them when the stock gets to $32-$33. Don’t get greedy. Get out, get your profits working better somewhere else. If it gets to $34 or $35,1 then buy the $35 puts. As it falls back to $30 or under, I sell them. This past year, this has been a bankable play.

I also like to share in the profits of the company. I take all the dividends I can take, but for the most part I’d rather the company keep the profits and expand the business.

These dividends include regular dividends, irregular divi­dends (which I look for all the time), a cash distribution (which may not be taxable, but which reduces the price of the stock which could be sold for a loss), and MIPS, or Monthly Income Preferred Securities—large companies which pay out monthly checks.

One of my strategies is to own the stock long enough (sometimes as little as one day) to capture the dividend. Wait until it increases in value, then sell it. I do this every quarter with certain stocks.

Options

Buying stock options gives the investor a chance to control large amounts of stocks with a small amount of money. An option gives you the right (not the obligation) to buy or sell a stock. Because options end—they expire—they are very risky.

If you learn how to play them well, the profits can be phenomenal. I’ve written extensively on many forms of options investing elsewhere, so only a brief synopsis is here.

CALL OPTIONS: a right to buy stock. You buy these when you think the stock is going up. This could be on a SLAM (serious down movement), a roll, (when the stock is at the bottom of the roll range), or a stock with good news, et cetera. In short, when you think the stock has pressure to move up, buy a call, ride it up, and sell.

PUT OPTIONS: a right to sell stock. You build value in your put option as the stock decreases. Buy puts when the stock hits a high, or is at the top of its roll range, in short, when you think the high price can’t be sustained.

ROLLING OPTIONS: buying calls or selling puts when a stock is at its low range and then buying a put, or selling a call, when it peaks out and starts back down. Look at the following:

This gives you a way to make money on both sides of the movement.

SELL CALLS—COVERED: writing covered calls is perhaps my favorite way to generate consistent cash flow. Yes, there are other ways I make more money, but not as consistently. This method lets you generate income (in one day) by selling a call option on stock you already own or stock you’ve purchased for just this purpose.

The rules include:

1.    Buying stock on margin—this allows you to double your rate of return.

2.    Volatility—almost like a rolling stock so we can take advantage of the swings.

3.    Keeping within the $5 to $25 price range for maxi­mum returns with a small amount of cash tied up.

There are many variations, techniques, and examples found in my other books.

As the stock moves down, the price of the options moves down also. In writing covered calls, we either sell the call (uncovered—if we don’t own the stock) or buy the stock (hopefully at the low) and wait to sell the call as the stock increases. We want maximum cash flow so we sell at the “maximum” time.

We bought the stock at $4 and sold the $5 call (about 35 days away—the next month) for $1.25 when the stock was $4.87. At the time we bought the stock, the $5 call was 12.5c We take advantage of the stock movement, hence compounding the option rate of return.

UNCOVERED CALLS: many of you won’t be able to do this until you have more experience or more cash in your account. This is called “going naked,” in that you don’t own the stock. You use this strategy when the stock is at the high part of its range. You sell the call—generating pure cash. You wait. As the stock moves down, your obligation to deliver (sell) the stock goes down and eventually disappears as the time expires. You made money with no investment. The risk is that if the stock goes up, you’ll have to buy it at a higher price (offset by the cash you made for selling the call). Don’t sell calls on stocks you think are going up; either buy the stock low (covered) and wait to sell the call—get­ting a higher premium for the options and eventually sell­ing (getting called out) at a higher price, or sell the call when the stock is high—wait for a dip and then:

a.    buy the stock or

b.   buy back the option or

c.    just let the option expire and keep the cash!

SELLING PUTS: this is a great way to make money. You sell a put, generating income. You are selling the right for someone to put (sell) the stock to you at a fixed price. You use this strategy when the stock is low and heading up. The income (premium) you received is yours to keep. As the stock rises, the put option you sold goes down in value. You could either buy back the option at a lower price and keep the difference, or let it lapse on the expiration date. If the stock has risen above the strike price, no one will put it to you. If you do have to buy the stock, the cost is offset by the premium received—like buying wholesale.

TANDEM PLAYS: there are many combinations, but my favorite is a combination of buying/selling calls and buying/ selling puts. Here is how it works (see the chapter: “Tandem Plays” for more on this).

When the stock is low, sell a put and buy a call—both strategies gain advantage with an increase in the stock price. You make money now selling the put and you make more later selling the call option you purchased.

When the stock is high, sell a call and buy a put. You make money on each as the stock moves down. This gives you four plays on a rolling stock with options.

SHORT SELLING: short selling allows you to borrow stock, sell it and generate income. As the stock moves down, you purchase it, pay off the loan (borrowed stock) and pocket the difference. Its easier said than done, but in my case, I’d rather buy puts if I think the stock is going down. I use short selling when I’ve sold a na­ked call and have to per­form. I’ll bor­row stock to cover my posi­tion and hope it turns down.

BLUE CHIPS: there are so many definitions of blue chips that you need to make up your own definition.

These are the stocks you want to own for a long time. They could be brand name stocks, large companies that have fallen out of favor, even regional companies you can identify with.

Cash Flow

Use your profits from selling stocks/options for investing in real estate or other investments like businesses or put your money into good, solid, Blue Chips. The name of the game is to get your stock market profit buying your “hold” invest­ments.

You choose the percentages of your money that work best for you. This is a good solid growth.

There are certain stocks which trade within a certain range. Some brokers call this channeling. They move up to a high (resistance) and then to a low (support). Many stocks do this, but the ones I like (so I don’t have a lot of cash tied up) are cheaper stocks—say in the $1 to $5 range. I find a stock which goes from $2 to $2.75. It doesn’t seem like a lot of profit, but 75$ on a $2 investment in one to three or four months is not bad. Look at the following examples:

The three rules of rolling stocks are:

1. You always know your exit before you go in the entrance.

2. Don’t get greedy—sell below the high for quicker and surer profits.

3. Stick with the less expensive stocks—so you can buy more.

Many high-priced stocks roll. Look at the following:

These are nice predictable rolls, but they are high priced. I play them, but with options. See the section on Rolling Op­tions. (For more information on a rolling stock, see Wall Street Money Machine and Zero To Zil­lions,   and   of course, the Live Wall Street Workshop.)

Now, let’s move on. Take $100,000 or even $200,000 and buy more blue chips. Take the other $50,000 (or more) and keep it generating cash flow. You see, that’s the point I’ve been making at my seminars and in my writings. Use the formulas for income generation to build up your cash flow, so you can accelerate the purchase of stocks in great companies.

Here is a list of my cash flow strategies:

1.    Rolling stocks

2.    Slams—buying stock on dips

3.    Bottom Fishing

4.    Peaks (short sells or buy puts)

5.    Rolling Options

6.    Writing Covered Calls

7.    Selling Naked Puts

8.    Dividends (I have many Special Reports and taped seminars explaining these)

9.    Stock Splits

10.  Turnarounds and Spin-offs . ..

They are to be used for cash flow. They put the emphasis on selling—getting out. You only purchase them to resell them at a profit. They deal with two-week and one-month 15 to 55% returns. They spin off cash. Real money. “Send it to my house and let’s go shopping” type of money!

If you choose, you can use some or all of this cash flow to build a wonderful, safe, “proud to own” retirement portfolio. But one which accumulates quickly because you’re able to add to it repeatedly, month after month, with the profits from the smaller cash flow part of your system. Look at the following:

Look at the diagram on the following page. Study it. You’ll see at first, and in most cases continually, a strategy to keep up the income but move profits into safer investments.