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| Articles and Tutorials |
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| Stay The Course! |
| by Bob Eldridge |
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Today, most of us lead pretty hectic lives. We have four children in college at the present,
so if you're not familiar with hectic, you are cordially invited to visit the Eldridge household for a while!
While we're all being pulled here and tugged there, prudence dictates that someone in our household remain
focused enough on the big picture to be able to direct the rest of us along our paths. I'm sure we all have
similar situations in each of our homes. We can use this to draw an interesting parallel to our trading.
Three Requirements Of Any Business
Each day in the on-line trade lab, we busy ourselves with the "trade of the day." This is a good source of cash flow. However, it can be all too easy to fixate on that task,
forgetting all about the other two areas of trading which are designed to address two very different but no less important areas;
medium term stability and long term growth. A quick review of my trading business model might prove helpful here.
ALL business require at least 3 things; income, stability and growth. My trading business is no different. To accomplish this,
I trade in three different arenas; short term, medium term and long term. The short term trades we do in the on-line trading labs
are great examples of how we use the stock market daily to provide our daily cash flow. Daily short term trading can be a
very up and down affair so we occasionally need fresh capital infusion to continue to get the bills paid. This comes from
the medium term trading using covered calls and other forms of trades wherein we are able to plan (to some degree) when the trade
will mature, having some indication of how much capital will be available to move to the short term account. This feature
provides the stability mentioned above. There now remains but one area to address; long term growth.
Long Term Growth
As the name implies, trading for long term growth provides an ever increasing net worth for our business. While there are
certainly many ways to accomplish this in the stock market, I prefer to use the blue chip stocks. Understand what I mean by
"blue chip". Looking for a perfect blend of company strength, stability and growth potential, I combine the S&P 100 and those
stocks comprising the Dow Jones Industrial Average, trading only these 101 stocks in a very well defined manner; selling naked
puts for stock (or cash) acquisition. Here's how it works:
Acquiring Blue Chips
In very general terms, I will look for a blue chip stock on weakness, the current price being significantly lower than a
clearly visible PEAK value sometime within the last year or so. To me, a peak is a values to which the stock rose before
declining to it's present weakened price level. The RISING to that peak is an important aspect. For example, look at the
chart on AEP below.
Notice that the price is
comparatively weak. Also, looking back to early January of 2003, you will see that the stock attained a HIGH of around $30.
The PEAK aspect I look for is displayed very clearly for you here in that the stock price had to rise from a more or less
normal trading range of around $27 to attain the peak of $30, before declining to current levels. In other words, other
traders actually had to pressure the stock price higher and higher. The fact that they were willing to do that is what
encourages me to trade the stock. I'll enter a short put, selling the $30 strike price, picking up a premium of
around $11 or so. The fact that the stock attained $30 per share once indicates that it might do so again. If this occurs,
then I will have ridden the stock price as it moves from it's present level of around $20, garnering a profit if around
$10 or so. No matter what price the stock eventually attains, whether that is over $30 or near $30, I've made money. Choosing a
peak as the strike price is just my way of choosing a value to which the stock might be likely to rise, giving me another
way to trade!
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