After the turn down, what do you sell?

  We prefer to sell at the money calls, usually in the current month of expiration. That way you get the best movement in the option price as the stock falls in price as at the money calls close to expiration are the most volatile. We can sell out of the money calls, but it takes a greater drop in the stock price to hit a decent point to buy them back-has to do with the way option prices are calculated. An at the money or slightly in the money call will fall in value much faster than an out of the money option. You do run the risk of having the stock turn back up on you while you are still in the money, but you are in the play a shorter period of time if it moves your way as you hit your target faster. You can eliminate most of the doubt by doing your homework and getting to know your stock. Look at charts of its movement and volume on those movements. When did it move up and down? Were there specific events associated with those moves, or does the stock just move that way?

When you enter your sell order, enter your buy back order as well. You should know what you want to make based on your understanding of how far the stock will fall. We have stocks in our retirement accounts that we own several thousand shares of, and making $0.50 on a call sell and buy back has a big impact. With AOL and CMGI, however, we have on many occasions made $3, $5, $7 or more on call sales and buy backs. That leads us to the next point. While we set our order to buy when we sell, we keep tabs on it in the event some bad news comes out good news comes out. We may need to close a position down in a hurry. We always keep extra cash in the account for that purpose. If bad news comes out, there is no reason we cannot let it slide down further and make more on the trade. Be careful with this, however. You don't want to get greedy and get yourself in a bind.

Now if you do get in a bind, you do have choices. First, you can pony up and buy the calls back right away for a loss. Over the years, you will easily get that back (retirement accounts, right?). Or you can do what is called a rollout to the next month. This is where you buy back your calls and sell the same or higher strike price the next month out. You should be able to get a little more money for the sale to help offset the cost of buying them back. Then, you just wait for the stock to fall back. This is risky if the stock is on a strong move-it may get away from you. We sold calls on INTC back in 1998 when we got frustrated that it was not going anywhere-sold them at the wrong time (June). It started a $25 run, and we were in a fix because we did not take care of business soon enough. We kept rolling them out, and guess what happened? The market cratered in early September-lucky. The point is, don't get frustrated! Stick to what you know about the stock and play it accordingly. Have patience. Remember, this is in a retirement account-time is your friend.

Before you risk your retirement stocks, paper trade them for a month or so. Get the feel down of how the stock moves and the options with it. Then pull the trigger. You will have learned a great secret to supercharging your retirement.


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