by Bryan Perry 10/01/08
Everyone wants to know where to make the most money in the shortest amount of time.
Sometimes, however, it's just as important to know where you aren't going to make the fast money -- and right now, at least, it's tough to make money by owning common stock.
As a professional trader with more than two decades of experience, I can think of no greater pleasure than banking sizeable gains via a quick trade. It's just really fun to moving from one position to the next, and to ride the success of your last great trade like Tarzan swinging from vine to vine.
More Trading Ideas
Unfortunately, in a range-bound market it's hard to trade like Tarzan by just investing in common stocks. So, what's the better way to invest?
If you're like me, I suspect you crave just a bit more excitement in your portfolio, and the best way I know of infusing both excitement and a whole lot of potential profits in your portfolio is through options trading.
Through disciplined use of options, you can achieve the same kinds of gains you would typically enjoy from owning stocks in a fast-moving market, but without the long-term time commitment or the intensive capital outlay required with common stock.
Of course, before you trade options, you had better have a sound strategy in place.
B.Y.O.O.E. -- Build Your Own Options ETF
I am a big fan of exchange-traded funds (ETFs), as they allow you to essentially buy a group of stocks in a particular market sector or wider market segment. But one problem with ETFs is that you have to take the good along with the bad. While some stocks in an ETF might perform well, if there are a few dogs on the list they have the potential to infest that ETF with fleas.
One way to replicate the benefits of owning an ETF is to simply cast a net over the top three to five names in a specific sector. My criteria for findings these names are relatively straightforward: I look for big-volume trading in companies that have had stellar recent quarterly earnings (i.e., they beat estimates, raised forward guidance and maintained/raised their dividend, if they have one).
Once I've identified these top companies, I search the available call options on each and then begin to build positions in those with the most attractive strike price and enough trading volume to let me easily move in and out of each position.
By buying call options on the best stocks in a specific industry, I am able to build my own "options ETF" for whatever sector is "hot." And how do I find hot sectors? Simple -- I follow the money.
Use Option Collars to Button Up Gains
If one of your stock has made some significant gains, a collar is an option strategy that can help you preserve your profits and protect you in case the shares take a tumble.
Exchange-traded funds (ETFs) are turning into the 'next big thing' in many investment circles.
Take Options Profits in STRIDES
Learn about a type of hybrid security that is structured like a bond and matures in a fairly short time frame, and even pays dividends.
You don't have to buy the same number of contracts with every options trade you make, especially when trading the options of higher-dollar stocks.
