Hope and pray that the stock you just bought will go up is not the best strategy to use, but it is a very frequently used by the average Joe stock traders stock trading online. The only salvation they have is that in bull markets, most stocks will go up.
Statistics show that a bull market about 75% of stocks will follow the general trend and go up and in a bear market 75% will also go down. Trading with the trend is the best way to act as 9 out of 12 stocks will review progress and give you the best chance of making gains on your stock purchases.
But what if you have some good stocks and do not want to sell when the market is clearly going down, or go down?. There are a few tactics you can consider both of which involve the use of options, call options and put options. It is generally known strategy called Covered calls, and the much lesser known one called Married Put.
To trade options, it is important that before you start trading you get the best solution for trading education as you can. You should also practice stock trading until you are familiar with the process. It is a very important point to be taken seriously if you do not understand the terminology and theory so do not be trading opportunities. If the Put Option, Call Option, Married Put and Covered Call is new to you so do not trade until you have studied enough.
Selling calls against your animals in 100 shares ranges are the foundation of the covered call strategy and it can give about a 2-7% buffer against losses in share price. But a major decline in stock prices will not be compensated for by using the covered call strategy in general.
Stocks in a bear market and even in a bull market may fall quickly on the news or earnings releases, as much as 15 to 40% within a month. Using covered calls to protect your equity provides little protection in less than 7% at best and will not save you if the stock takes a 40% tumble.
The better solution is to provide downside protection, the stock option strategy called the Married Put. As the name suggests PUT you buy is used to provide protection when the stock goes down because the Put options increase in value when the stock falls in value. The term poison is used because the option chosen must be highly compatible with the material, in other words a good game if strategy is working.
The selection of the best Put Option is not straightforward and involves a number of criteria which are listed below:
1st Strike price of the option
2nd The current share price
3rd Selecting options in or out of the money
4th Put expiration
Although the married Put protection only has a limited lifetime, if offers much more protection than the covered call. It can provide as much as 90-95% loss recovery in the event of a significant drop in share price.
The downside of the good protection is that you buy Put, which is a debit while the covered call is a credit. But there are ways to offset this cost and there is much more to this strategy when executed correctly. The Married Put can be made to pay for itself and used to generate very good return if the market or stock to be practical, moving a lot.
The general idea of the Collar Trade is to combine the covered call and married Put strategy into one, it is what is called the Collar Trade. Because you put a collar around the stock, sell a call and buy a PUT. If you do this correctly, most of the cost of Put may be offset by credit from the covered call so you can protect your valuable stock at almost no cost. Yes it is a great strategy, as the general public are unfortunately very ignorant about, and most brokers do not understand.
The strategy we have outlined above, is unknown to the average stock market trader, but is one of the best venues you might have.
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