If you sell a naked call and the stock price moves against it, buy the shares before the strike price is reached, and sell another naked call at a new and higher strike price. You need adequate amounts of a cash position to cover all your naked calls with such stock buys. If you buy the 100 shares before the strike price is reached, you then want it to be reached, as this will make for a small gain on the sale of the stock and will also free you of it.
The big risk here is a gap up in stock price that goes well past the strike price, preventing you from buying the stock at a price below the strike price. Quarterly earnings or a takeover bid or some other unusual event can cause such a gap up. You might consider rolling the losing call out and up to get it closer to the higher price of the stock if you think this rise in the stock price is not going to be sustained. If you do think the stock price will be sustained and may well rise even higher, then take the loss and buy back the losing call — some losses are inevitable and are therefore part of the cost of trading options.
The other risk is if you buy the 100 shares before the strike price is reached, and then the stock price collapses — so you are left with 100s shares going into the red. If the stock price drops precipitously enough, but you consider this a normal and reasonable correction, consider selling a put to collect premium and establish a strangle. The premium on the sale of the put will lower your average cost of the stock.
Paul Morphy’s Games
Will this chicanery of the Federal Reserve end badly? They are doing what they used to tell banana republics not to do — trying to dig yourself out of a financial hole by printing money. It worked 10 years ago, but will it work this time, on a much bigger scale? If the markets ever begin to doubt it, then all hell breaks loose. It’s a credibility game. Belief can crumble quickly — virtually overnight. One day you have total faith in them, the next none.
Worse Case Scenario
Stock Market Collapse?
If the S&P can’t break through the 2940 level, the bull market is over. The 2940 level has now been tested 5 times and failed each time. Failing to break through 2940 would make 2940 the first lower high.
Scuttlebutt that a worldwide economic slowdown will cause the the debt-induced China bubble to pop, like the Japanese bubble popped in 1989. The tipping point for the central-bank induced euphoria in all the stock markets could come from China.
Ban share buyback. A good idea long overdue. It used to be that stock buybacks by companies was considered illegal as a form of price manipulation, which it is.
Bill to Ban Share Buybacks
The new financial bubble is government debt. When that bubble bursts, the house of cards will collapse everywhere. It happens when the bond vigilantes demand higher interest rates.
Capitalism is the only economic system that produces any value, in the form of new products and new services and all the employment necessary to produce those products and services.
But you do need some government oversight. Private companies are driven by their financial self-interest, not the public good. A company will sell you arsenic if they can make a profit and think they can get away with it. So that’s where government comes in — a watchdog to make capitalism benign instead of predatory.
I have an investment analyst who has the theory that a very long sideways move will have an exceedingly large and long breakout to the upside or down when the breakout finally does happen. Gold has been in a sideways movement now for 7 years. I think its time has come, especially as the Fed seems to be talking easy money again. The government thinks nothing of trashing the currency if that is the way to keep the bull running. I leave it to you whether that is wise.
Wow, I’m rich. I’ve made 20 cents in 5 months. WordPress is so lucrative.
All those young investors who have never tasted the bitter taste of a bear market are about to get a nasty surprise when they see their accounts at the end of this month. The market fell through long-term support in the middle of last week and now could plummet to any level lower. Eventually you can expect sharp, short covering rallies that, when they hit their peaks, will then collapse very sharply to new lows, as most of the buyers propelling such rallies were not longs but rather shorts just covering their positions. You can trade bear market rallies but you don’t want to be long in them. Bear markets are a lot more treacherous than bull markets. You have to know what you are doing in bear markets. If you don’t, stay in cash or CDs. Not bonds this time, as bonds are in a bigger bubble than stocks.
Will be interesting to see if gold finally wakes up from its long hibernation. Oil and commodities in general are dead in the water.