AN IMPORTANT STRATEGY

AN IMPORTANT STRATEGY

Today’s blog will be short but important. Strategy is important and an area not to be overlooked is news. Routinely first thing each morning, Monday through Friday, I have all of my televisions in the house preprogrammed to tune into CNBC and find out what they are talking about. The first thing I want to know is what they are expecting the “Futures” to do. Will they open higher or lower? If they are expecting Futures to open at least 3% higher, you can with caution, expect the stocks you are interested in to open higher. This is not a hard and fast rule but simply begins your day with some educated expectancy.

Another strategy I use and have used in the past is listening to what companies CNBC newscasters are talking about. I normally try to start listening to CNBC about one hour before the market opens so I can catch up on any early news about companies I may be interested in. I do not recommend the following strategy, but it worked for me once. CNBC was talking about a cheap stock. I am talking about a $3 or $4 dollar stock. This happened several years ago so there is no way I remember all the details, but I definitely remember the strategy and what happened. A visitor to the program commented the stock was much undervalued and should be worth about $50.00. Immediately the stock began to climb. As it approached the $50 dollar level, I sold the stock. I did not own this stock but I sold abut 1000 shares short. Selling short is selling shares of stock you do not own, you are borrowing the stock from the market. This kind of trading is extremely risky, and I do not recommend it. I had plenty of money in my account and took a chance. Fortunately, the stock did exactly as I expected. It started to tumble and at the end of the day, I bought the stock to cover my short making a tremendous profit. I cannot emphasize enough the risk involved in this type or trading. If the stock had continued to go up, I would have had to buy the shares at the higher price to cover my short sell. I mention it to show the importance of listening to news. Stocks move on news.

Normally I want to watch for stock that is going up. I buy low, and as soon as the stock is bought, enter a high sell order. That is not always possible. A lot depends on the market and the overall picture. A few years ago, Krispy Kreme Doughnuts (KKD) got into financial trouble. The news broke they would file bankruptcy. I was in a motel room away from home. I quickly put all the numbers into my computer and decided to buy a “put.” I have not discussed puts. I will explain puts so you will know what my trade strategy was.

There are two types of options, calls and puts. A call gives you the right but not the obligation to purchase a stock at an agreed on price during the agreed time. A put is just the opposite. A put gives you the right but not the obligation to put the stock to the market at the agreed price during the agreed time. If you are buying calls, you are expecting and hoping the stock will go up. Conversely, with a put you are expecting the stock to go down. In the case of KKD, the bad news would drive the price of their stock down, so I bought several contracts of puts for KKD. Immediately their stock began to fall and as a result, the puts I bought went up in value. True to my nature, I did not own the puts very long. I did not know how long I would be in the motel or how long I would have internet service so I entered a sell order as soon as I owned the puts. I sold my puts before the trading day was over and made a handsome profit. I still like KKD stock but only buy it when it is heavily discounted. I may be a little philosophical but one of the reasons I like the stock is because I like their donuts. Try to figure that out.