May 10, 2017
@ajharart choosing the right #moneymanager #stockmarkets #investing #fishinglife #igotone #boatfishing #stockpicking #barrons #illustratoroninstagram #characters #ajharart #brianajhar #watercolorlove
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@ajharart choosing the right #moneymanager #stockmarkets #investing #fishinglife #igotone #boatfishing #stockpicking #barrons #illustratoroninstagram #characters #ajharart #brianajhar #watercolorlove
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Learn how to find long-term stocks using a smart buying checklist. Evaluate fundamentals, risk, and growth potential to make confident inves
Long-term picks need more than a good story. Here’s a practical checklist to find stronger stocks and avoid weak setups: https://www.chartwise.app/blogs/how-to-find-long-term-stocks
Funda-Techno Approach for Stock Picking
In this insightful episode, @VijayThakkar and Prasiddh reveal a powerful investing concept the Funda-Techno Approach that helps you discover stocks backed by both strong fundamentals and technical strength.Instead of relying on just financial results or chart patterns, this approach blends the two identifying companies with excellent quarterly results and bullish technical setups helping traders and investors make smarter, high-conviction decisions.
Use Covered Call Writing to Increase Income & Reduce Risks with Stock Investing
What Are Covered Calls and How Do They Work?
Covered call writing involves selling the right for someone to buy your stocks at a set price by a future expiration date. You collect an upfront premium, which lowers your cost basis. If the option is exercised, you sell at a profit. If not, you keep the premium. When you own 100 shares per call contract, it's considered "covered" because you can deliver the shares if needed. With uncovered calls, you don't yet own the underlying stocks.
Step-By-Step Process of Writing Covered Calls For example, say you buy 300 shares of XYZ at $48 in August. You then sell 3 covered call option contracts with a $50 strike expiring in January. The buyer pays you a premium of $3.50 per share, totaling $1,050 upfront. By January, either the calls execute at $50 per share or they expire worthless. Either way, you keep the premium.
Benefits of Using Covered Calls
Covered call writing offers several advantages for stock investors: - Establishes a profitable sale price when you purchase stocks - Reduces risks by lowering your net cost basis - Generates additional income beyond dividends - Allows staying invested in stocks you want to keep long-term With the premiums collected, you lower your breakeven point. This helps offset any decline in the share price.
Risks and Drawbacks to Consider
However, there are some limitations to be aware of: - Caps your potential upside as you sell off upside rights - Doesn't protect against falling share prices - Requires closely tracking options for adjustments - Can have tax implications if exercised before one year You give up participation in any gains above the strike price. So you must choose strike prices carefully based on price targets.
Adjusting and Managing Covered Call Positions
To manage covered call risks and drawbacks, there are a few key strategies: - Buy back options if you want to capture more upside - Hedge with protective puts to limit downside - Only use high quality, stable underlying stocks -frequently roll options forward to collect more premiums Actively monitoring the options and underlying stock is crucial for maximizing covered call results.
Conclusion
Covered call writing requires some research and active management. But it can help conservative investors earn extra income while holding stocks long-term. Just be sure to learn about options risks and mechanics first.
FAQs About Covered Call Writing
What is the ideal strike price for covered calls?The ideal strike price is slightly above the current market price - enough to collect solid premiums but low enough where the calls have a good chance of expiring OTM. Around 5-10% above market price is a good target.What happens if the covered calls get exercised early?If the options are exercised before expiration, you must sell your shares at the strike price, even if the market price is higher. Be prepared to either buy back the calls or sell the stock.Should covered calls be used with stocks you want to keep long-term?Yes, covered calls work well for long-term stock holdings you want to keep for dividends and growth. You collect income from premiums as you wait for the share price to rise.Is covered call writing a bullish or bearish options strategy?Covered calls are a mildly bullish to neutral strategy. You profit from modest upticks or sideways trading in the short term. Very bearish or bullish outlooks may warrant other options approaches.Should you use covered calls in an IRA or taxable account?Using covered calls in a tax-advantaged IRA helps avoid tax headaches from option exercises or short-term capital gains. Ideally use them in a Roth IRA where premiums and gains aren't taxed. Read the full article
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Stock Picking: Top Down Approach
The Top-Down Approach to Stock Selection If you've ever heard fund managers discuss their investment strategies, you're likely familiar with the top-down approach many employ. In this method, they initially decide on the allocation of their portfolio between stocks and bonds, considering foreign and domestic securities. Subsequently, they determine which industries to invest in. Only after these decisions are made do they delve into analyzing specific securities. However, a moment's reflection reveals the inherent flaws in this approach. Examining Earnings Yield and P/E Ratio Consider a stock's earnings yield, the reciprocal of its P/E ratio. A stock with a P/E ratio of 25 carries an earnings yield of 4%, while a P/E ratio of 8 corresponds to an earnings yield of 12.5%. A low P/E stock can be likened to a high-yield bond. Reconsidering Low P/E Stocks Contrary to what one might think, many low P/E stocks boast more stable earnings compared to their higher multiple counterparts. While some low P/E stocks carry significant debt, it's worth noting that, not long ago, stocks exhibited earnings yields of 8-12%, dividend yields of 3-5%, and minimal debt amidst historically low bond yields. This situation suggests that investors, in their pursuit of bonds, might overlook the potential of stocks—a bit like shopping for a vehicle without considering various options. Focusing on Cash Flow Evaluation Investments fundamentally revolve around cash flows. Consequently, they ought to be evaluated based on a single criterion: the discounted value of future cash flows. Thus, the top-down approach appears nonsensical. Starting with preconceived notions of security forms or industries is akin to a sports team manager selecting a pitcher based on their handedness before assessing individual players. This approach is not only hasty but also misguided. Embracing a Different Strategy All investments share the common currency of cash. Hence, they should be compared on a level playing field: the discounted value of their future cash flows. The top-down method is akin to preferring all left-handed pitchers over right-handed ones. Instead, focus on evaluating each security individually, considering the form of security only insofar as it affects the assessment. A Prudent Path Forward Ultimately, the wisest course of action involves evaluating each security in relation to others, considering security form only as it influences individual evaluations. The top-down method proves to be an unnecessary complication. Though some savvy investors have navigated and transcended this approach, there's no need for you to follow suit.
Frequently Asked Questions (FAQs):
What is the top-down approach to stock picking?The top-down approach involves making broad portfolio allocation decisions before delving into individual stock analysis.Why is the top-down approach criticized?The top-down approach might overlook the specific potential of individual stocks and hinder focused evaluation.How is a stock's earnings yield related to its P/E ratio?The earnings yield is the reciprocal of the P/E ratio; a lower P/E ratio corresponds to a higher earnings yield.Is the top-down approach common among fund managers?Yes, many fund managers use the top-down approach, where they decide on portfolio allocation before analyzing individual securities.What's the alternative to the top-down approach?An alternative approach involves evaluating each security individually and assessing their future cash flows, regardless of security form. Read the full article
Mastering Profitable Stock Picking in 3 Simple Steps
Stock picking might seem like a labyrinthine process with diverse investor perspectives. However, adopting a structured approach can mitigate investment risks. This article unveils three fundamental steps that pave the way for identifying high-performance stocks. Step 1: Define Your Investment Horizon and Strategy The initial step is crucial, as it dictates the type of stocks you should focus on. If your goal is long-term investment, prioritize stocks with sustained competitive advantages and stable growth. To pinpoint such stocks, delve into their historical performance over decades and execute a simplified S.W.O.T. (Strengths-Weaknesses-Opportunities-Threats) analysis. For short-term investors, two strategies beckon: a. Momentum Trading: Seek stocks that have recently experienced both price and volume surges. This strategy resonates with technical analysis, but opt for stocks exhibiting gradual, steady price rises. The logic lies in riding the upward trend until it falters. b. Contrarian Strategy: Detect market overreactions. Research suggests markets aren't perpetually efficient; prices might inaccurately reflect stock values. When a company faces adverse news, knee-jerk reactions can lead to price plunges below fair value. Evaluate if the news impact is recoverable. For instance, a 20% drop post a non-business-detrimental legal case indicates overreaction. Identify stocks with recent price drops, assess reversal potential (via candlestick analysis), and scrutinize news for reasons behind price dips to spot oversold opportunities. Step 2: Conduct Tailored Research Next, research aligned with your investment horizon and strategy. Utilize online stock screeners catering to specific needs, simplifying stock selection. Step 3: Optimize Your Portfolio After shortlisting potential stocks, diversification takes center stage. Achieve a rewarding risk/reward ratio through a Markowitz analysis. This quantitative technique allocates funds optimally among selected stocks. Diversification, often termed the 'free-lunch' of investing, enhances your portfolio's resilience. With these three steps, you're primed to venture into the stock market with confidence. Your journey will not only bolster your market knowledge but also equip you to make prudent trading decisions. Remember, stock picking is both an art and a science, and these steps provide you with a structured framework to navigate this dynamic landscape. Happy investing! How do I determine the ideal investment horizon for me?Consider your financial goals and risk tolerance. Long-term horizons suit wealth accumulation, while short-term horizons might align with specific objectives.Are there specific online resources for stock screening?Absolutely! Websites like Finviz, StockFetcher, and TradingView offer customizable stock screening tools based on your criteria.Can I use both momentum trading and contrarian strategy simultaneously?While it's possible, focusing on one strategy at a time usually yields better results due to their distinct approaches.What's the key takeaway from diversification?Diversification reduces portfolio vulnerability by spreading risk across different assets, enhancing your chances of overall success.How often should I review my portfolio?Regular reviews, perhaps quarterly, help ensure your investments remain aligned with your goals and risk appetite. Read the full article
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