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Income for Bears: Covered Call Strategies

There are times when a trader is certain prices will fall. At times like this, they can sell stocks they believe are overvalued and move to cash. But there could be valid reasons that make a trader reluctant to sell. For example, selling a position that has been held for years could create a large tax bill. While selling could avoid a loss the tax bill could be more than the amount that would be lost. Or the trader might believe that prices are likely to decline in the short term but believes the stock will deliver large gains in ...
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Volatility Might Be All That Matters to Traders

Volatility is a term that almost every trader is familiar with but it is also a term many traders may not fully understand. The textbook definition of volatility isn’t very useful to many traders and that can lead to misperceptions. When properly understood, traders can benefit a great deal from volatility.For some reason, volatility is usually considered to be equivalent to risk. This seems to have grown out of the way risk is defined in the academic community. In financial theory, the idea of volatility is defined as the amount a stock goes up and down in price and is ...
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Options Strategies to Benefit When Markets Are Going Nowhere

Traders often hear options are a versatile trading tool but it’s not always clear why that’s true. Options can be used to benefit from bull and bear markets with limited risk or they can generate income when a trader has a clear opinion on the market direction that turns out to be correct. But options can also be used to profit when you don’t have a market opinion. Straddles, strangles and spreads can be useful tools and add to the versatility of options.Straddles allow a trader to take positions on both sides of the market (straddling the strike price) and ...
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Why Stock Prices Move

Stock prices move up and down but much of their movement is difficult to explain. We often see headlines explaining that changes in the price of oil or the Japanese yen affected stock prices but that seems unlikely to be the real reason the price of a company that sells sports collectibles in California, for example, moves up or down 3% in a day. In addition to headlines, there are a couple of academic theories about why stock prices move. The Efficient Market Hypothesis (EMH) is probably the most popular academic theory but a new theory, the Adaptive Market Hypothesis ...
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Generate Immediate Income Selling Puts Like Warren Buffett

Almost every investor wants to be like Warren Buffett in some way. While there is unlikely to ever be another Buffett, we can certainly learn from studying his investments. Many analysts point to his ideas about value investing and being patient as keys to his success. What they could be missing is how, at times, Buffett has combined value investing, patience and a desire to generate cash into a successful investment strategy. The strategy associated with this lesson is one any individual investor can apply.One of Warren Buffett’s biggest winner is Coca-Cola (NYSE: KO) according to Berkshire Hathaway’s latest annual ...
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Trading the End of the Year in the Stock Market

In everyday living, we expect certain seasonal patterns to unfold every year. In the fourth quarter of the year, we expect Halloween to give way to Thanksgiving and then Christmas. Each holiday has its own customs and decorations and each is unique. But each follows a well-defined pattern.  It’s human nature to expect this level of predictability to be seen in the stock market simply because we like to see some sense of order in the chaos of the market action. The result of this is popular strategies like “sell in May and go away.”Testing has shown that you can ...
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Benefiting from market selloffs: A Low-Cost, Low-Risk Bear Market Trade

In hindsight, we all know it was a good idea to short internet stocks in the first quarter of 2000. Shorting a stock involves selling it without owning it. You borrow shares from your broker. Eventually you’ll need to buy the shares to repay the loan. If the price drops before then, you are buying at a lower price than you sold at and you earn a profit. The idea of short selling is essentially the same as with any other trade. You want to buy low and sell high. With short selling, the selling comes first.Short sellers can make ...
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Nobel Prize Winning Ideas Can Help You Become a Better Investor

Finance and economics professors have spent years trying to explain how stock markets work. One of the most popular theories, the Efficient Market Hypothesis (EMH), starts with the assumption that investors are rational and they rationally set prices using all of the information that is available. This theory fails to explain market crashes like the one that occurred in October 1987.There was no news to justify a one-day, 22% selloff in the Dow Jones Industrial Average. If investors are rational, there was no need for selling. In fact, they should have been buying under the EMH since prices were quickly ...
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