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My first options trade

August 24th, 2010 at 07:16 am

I just checked my account and saw my dividend payout for Best Buy stocks I bought earlier. I lost a little bit of money on that trade, but the dividend helped even things out.

Also, I just saw Sandisk drop substantially today. This company is pretty solid and has great growth prospects. I don't know why it's falling by that much, but I bought some up.

My stock trading is evolving more and more, and right now, it's at a point where I am more passive than I am speculative.

I mean, yes, who am I kidding? Stock trading is still a speculative activity, but it's quite tame compared to my fast trading BP days not too long ago. Here's all I do right now: I keep an eye out for great companies that are selling at a great discount. When I see one, I analyze the company financials and stock technicals. If it still looks good, I buy it, set it (with a reasonable limit sell) and forget it. That's it. Easy peasy.

I've also experimented with some covered calls for the first time. Ironically enough, I haven't gotten around to them until now. I don't know why. It's a great way to add an extra layer of income generation, especially in a flat market (which is what we appear to be in).

I guess the thing is, I still don't have a firm grasp of the options market just yet. And frankly, this is something I just don't want to rush into, even with covered calls. That's also why I'm sticking only with covered calls right now.

But I did it with the Sandisk stocks that I just bought. The options symbol took a little bit for me to get it just right, but when I did, the transaction went right through. I earned a tiny profit from selling the contracts (the commission fee for the sell is still the same), and we'll see if anyone exercises the contract.

Edit: Just wanted to add some details to this trade (for anyone curious and for my own reference). The contracts are $45 calls that expires on Sept 10th. Right now, my SNDK stocks is showing a $100 paper profit, and I locked in an extra $100 from selling the contracts.

It is unlikely, but always possible, that the contracts could be exercised, but the upside is that at least I will be selling at a price I want. If not, I can keep writing contracts on them and make more income.

Also, writing covered calls means that my gains will always be capped at $45 in this case, but that's not a huge deal to me considering that that would be a very profitable sell, and I still made income on the contracts. In any case though, that's the risk, although it's worth explicitly noting that writing these calls actually LOWERED my overall loss potential than just sitting on the stocks.

So, yeah, I think I can really get used to this. Still, one baby step at a time. In the future though, I think I will write contracts with longer expiration dates, so I can earn more on them, but also so I can sort of go back to my "set it and forget it" attitude. So, yeah, this appears to be a great replacement for limit sells or trailing stops that I've been using.

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