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2 Tools to Improve Your Trading Batting Average

2 Tools to Improve Your Trading Batting Average
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Thursday, 14 June 2018 03:54 PM Current | Bio | Archive

Nobody’s perfect. In life, nobody gets it right 100 percent of the time. Heck, most people don’t even get it right half the time.

Even baseball’s top hall of famer Ty Cobb has a batting average under .36. That’s just over one-third of the time. That means even the greatest baseball players who ever lived missed out nearly two-thirds of the time. The average players… well, it’s even worse.

Compared to Ty Cobb, investing can be a much better sport for getting a batting average over 50 percent, if not substantially higher. You can easily get a winning trade half the time, and as long as you limit your losses on the other half, even a 50 percent win rate can lead to tremendous investment returns.

All you have to do is focus on great companies that continue to deliver earnings to shareholders. Some patience helps a lot along the way, as great companies can go unrecognized for a while.

As an investor, I’m always looking for new investment opportunities. I don’t just mean a new company on my radar that’s trading far below what it’s worth. Figuring out a better way to strategize and allocate my scarce capital is important too.

That’s why I’ve turned to options as a useful investment tool.

And I’ll admit, when I talk about options, I can either see people mentally (or physically) checking out, or people agreeing. It’s a divisive way to invest.

Why? Probably because many folks who have tried to use options have failed. They put some money into an option trade, only to see it tank. Or to go up big, and then tank.

Options investing requires a bit more discipline, at least the way more people do it. That’s because most people buy call options. That’s a great way to leverage your return. When you buy a call option, you’re essentially leasing 100 shares of a company up to a certain date. If the share price rise, your option will rise. And your percentage return will be far better in addition to putting up less capital along the way.

That’s a win-win. At least, as long as the timing is right. If you buy a call option for a stock and shares don’t rally quickly, you’ll be fighting the decline in the option’s time premium. That’s why I prefer buying call options only on positions where I expect some kind of big move soon. Year-to-date, my subscribers and I have found this strategy play out pretty well with a number of technology companies, such as Snapchat (SNAP), Facebook (FB), and Advanced Micro Devices (AMD).

But exceptional profits in less technologically-inclined companies like Home Depot (HD), where Braintrust subscribers recently saw an option position there triple on us. Why? Because we bought that call option right as stocks were starting to recover from their February selloff. In other words, if your timing is right, even a company with lower volatility can provide you with a huge win in the options space.

Of course, not all companies are poised to make big moves at any time. Some companies tend to trade in price ranges for a few years, where they may move up 10 percent and back down again before starting the cycle again. While you could buy shares of such companies when they’re near their 52-week lows and sell them near the highs, there are other ways to profit using the options market as well.

This is the kind of stock that’s fantastic for selling put options. A bit more complicated than buying a call option, selling a put option is essentially a commitment to buy shares of a company at a later date, provided those shares are under a company’s strike price.

How many times have you said you’d buy shares of a company provided it fell below a certain price? Selling a put commits you to that, and it does so in a way where you get paid up front. That’s not a bad way to enter into a trade, but as far as options trades go it’s a far less leveraged one. That makes it a bit safer for investors to rack up high winning percentages, but it also means putting up more capital.

Year-to-date, a number of put sale trades have gotten attractive as well thanks to rising options premiums and the market selloff earlier this year. Companies for investors to get their feet wet with selling put options right now include telecom AT&T (T) and Disney (DIS). Both have been slow-moving companies that tend to rally and pull back within a price range with some regularity. AT&T tends to trade between $32 and $39 (while paying a hefty dividend), and Disney has tended to trade from just under $100 to around $115.

By understanding the companies you’re trading options, as well as how the shares of those companies are trading, you can better tailor your options trades accordingly. A range-bound stock is one where buying calls may be fine if you buy near the low range and shares decide to finally take off. But it’s not as good as buying call options on a company where shares are more likely to rally, such as the volatile technology names.

By combining aggressive and defensive options strategies, you can improve your returns and your proverbial batting average as an investor. Racking up winning trades ensures that your wealth will grow over time.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2018 Newsmax Finance. All rights reserved.

   
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AndrewPacker
By combining aggressive and defensive options strategies, you can improve your returns and your proverbial batting average as an investor. Racking up winning trades ensures that your wealth will grow over time.
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