Page 422 - How to Make Money in Stocks Trilogy

292 BE SMART FROM THE START

It’s difficult enough to just pick a stock or an option that is going up. If you
confuse the issue and start hedging (being both long and short at the same
time), you could, believe it or not, wind up losing on both sides. For
instance, if a stock goes up, you might be tempted to sell your put early to
minimize the loss, and later find that the stock has turned downward and
you’re losing money on your call. The reverse could also happen. It’s a dan-
gerous psychological game that you should avoid.

Should You Write Options?
Writing options is a completely different story from buying options. I am not
overly impressed with the strategy of writing options on stocks.
A person who writes a call option receives a small fee or premium in
return for giving someone else (the buyer) the right to “call” away and buy
the stock from the writer at a specified price, up to a certain date. In a bull
market, I would rather be a buyer of calls than a writer (seller) of calls. In
bad markets, just stay out or go short.
The writer of calls pockets a small fee and is, in effect, usually locked in
for the time period of the call. What if the stock you own and wrote the call
against gets into trouble and plummets? The small fee won’t cover your loss.
Of course, there are maneuvers the writer can take, such as buying a put to
hedge and cover himself, but then the situation gets too complicated and
the writer could get whipsawed back and forth.
What happens if the stock doubles? The writer gets the stock called away,
and for a relatively small fee loses all chance for a major profit. Why take
risks in stocks for only meager gains with no chance for large gains? This is
not the reasoning you will hear from most people, but then again, what most
people are saying and doing in the stock market isn’t usually worth knowing.
Writing “naked calls” is even more foolish, in my opinion. Naked call writ-
ers receive a fee for writing a call on a stock they do not own, so they are
unprotected if the stock moves against them.
It’s possible that large investors who have trouble making decent returns
on their portfolio may find some minor added value in writing short-term
options on stocks that they own and feel are overpriced. However, I am
always somewhat skeptical of new methods of making money that seem so
easy. There are few free lunches in the stock market or in real estate.

Great Opportunities in Nasdaq Stocks

Nasdaq stocks are not traded on a listed stock exchange but instead are
traded through over-the-counter dealers. The over-the-counter dealer mar-
ket has been enhanced in recent years by a wide range of ECNs (electronic