The Tycoon Report

Don't Sell Stocks Like Halliburton For Free!

They say you should sell on good news. But who wants to sell a Stock breaking 5– 7- and 8-year highs?

Today I’ll show you why a more disciplined investor would sell calls on his/her position rather than having his blood pressure fluctuate with the price of a stock.

Take Halliburton (Symbol-HAL) for example. A few analysts recently Increased their price targets for the stock to $65 or $70 per share. The stock just broke its August 2000 high and its April 1998 high, and is approaching its October 1997 all time high (yeah, THAT October- when the Dow dropped 1200 points).

The Bull would argue: Stocks breaking major highs trade higher!

Halliburton certainly has plenty of bulls backing the share price. I don’t know what happens to it here. My name is not Madame Cleo or some tarot card reader. But what I do know is that if you are going to sell the stock on good news, you might as well not sell it for free.

Make someone pay you for the right to buy your stock!

The Bulls might be right. Maybe the stock does eventually trade higher. Or maybe it’s overbought. Why guess?

Here’s my problem: ever since the market bottomed in March 2003, HAL traded 25% over its 200-day moving average three times. All three times the stock price pulled back.

First Time: pulled back 17%, recovered 5 months later. Second Time: Pulled back 21.5%, recovered 7 months later Third Time: Pulled back 10%, recovered 3 months later.

THINK LIKE AN OPTIONS TRADER:

I’m not saying that it trades higher or lower. I’m simply telling you not to just GIVE it away.

If you sell the stock at the market, you are selling it for free. You’re leaving money on the table. Even if you put a limit out to sell it at a certain price, you are selling it for free. I’ll explain:

If you sell the stock, you can have someone pay you an additional 5% for the right to buy it from you. In other words you can have someone deposit your share amount times $2.60 into your account, for the right to buy the stock at $55. So if you have 1,000 shares for example, you can have $2,600 deposited into your account today. You might be able to do this several times before the person actually buys it from you.

If the stock pulls back, you keep the money that the speculator paid you, and you keep your stock. If the stock starts to trade higher again, just sell someone the right to buy your stock again…and again and again.

THINK ABOUT IT: At today’s rate, you can have 5% of your stock’s value deposited into your account for the right to buy the stock at the current price within 2 months from now. What if the stock trades flat and you do this every 2 months? That means you can do this six times per year.

If the market offers you the same premium for the option, you could conceivably make 30% on your stock even if it is still at $55 12 months from now! (6 x your 5%)

Keep in mind: The (call) option contract to buy a stock (at $55, for example) will command a higher price when the stock is in a bull rally like HAL is this week. That’s because the buyer of a call option is obviously willing to pay more for the opportunity to reserve his buy price ($55) since more people are bullish on the stock.

On the flip side, a (call) option to buy a stock (at $55, for example) will have less value when the stock is flat or down. The premium varies depending on the recent bullishness or bearishness of the stock’s movement.

So in today’s example we can collect about 5% of the stock price by selling someone the right to buy our stock at $55 within two months (since it has a bullish outlook). But if the stock was declining, we might only be able to collect 3.0% or 3.5% for the same deal.

Stock does nothing? YOU MAKE MONEY.

Even if we take the lower premium of 3% deposited into your account, it would still be fun to make 3% six times a year. It adds up to 18%. That means that if the stock price is the same in 12 months, you made 18% more than the rest of the shareholders. If the stock traded lower, it means that even if the stock traded to $45 you would be up on the overall position.

Don’t leave money on the table due to lack of education. If you learn this simple conservative strategy, you might make an additional 20-30% this year!