In a short sale, you do the selling first and then buy back later. If prices are lower when you buy back, you have a profit. If prices are higher than when you sold short, a loss occurs.
If you do not want to sell a portfolio, but feel that stock prices will be declining over the near future, a trader can sell a futures contract, buy a short mutual fund, or utilize a ETF (exchange traded fund) in the amount of his portfolio. A hedge can be total, meaning equal the amount of the portfolio, or for a portion of the portfolio.
Many a trader struggle with their trading. They will sometimes blame it on a learning curve or the type of market that exists at the time. These traders will ask me for advice and suggestions to speed up their learning curve.
The questions usually have several common areas.
When do I buy a stock?
How large of a stop loss should I use?
When do I get out of a stock?
What stocks should I be trading?
The questions are valid. The trader is really asking for a trading plan. A trading plan answers all of those questions.
A trading plan specifies –
Covered calls are not a difficult asset class for investors to use, but it is one of the least used. It has great flexibility and can help reduce volatility in a portfolio.
Buying a stock and then agreeing to sell it at a specific price at the time of purchase is one way of choosing an end point for a trade. The nice part is than you can anticipate profit and loss at various price points as well.
There are 3 things a stock can do after you purchase it. It can go up, it can stay the same or it can go down. When you put on a covered call position, 2 of the 3 are OK for you.
Some traders believe that the exit is actually more important than the entry to a trade. One of the best traders I know says "you can give any position long or short, I'll manage the risk, have a specific exit strategy and the trade can be successful." He takes the approach that he does not know where a stock is moving, but he always knows what he is going to do to let profit run and manage risk.
I asked this trader for some exit strategies that he uses. He gave me the exits for long positions. A trader can reverse many of these for short positions. Here are some of his favorites.
Success in business, life or trading has one very important similarity. A Plan. A plan is essential for success. The top traders in the country all have this one similar trait and it is an absolute. I feel that this confuses new traders who are constantly being told about success in a specific type of trading method.
You may read a book about a method of trading that the author claims makes him money. The one common denomination that the successful traders I know have, is a plan. Let's look at some of the more recognized approaches to the markets.