Trading Stock Options - ScanIAm's System

OK, first, I'll get the parts out of the way that is most open to mockage:

     The guy who wrote the book gave it a very, very silly (and suspect) title:  How to make $1,000,000 in the Stock Market.

Seriously, the book title screams multi-level marketing and pyramid schemes.

That said, it gets worse.  The first 1/2 of the book (I have an earlier version from the late 80s) is full of homespun storytelling that will leave you wondering if you've been ripped off. 

You haven't been ripped off.  If you make it past the "Golly Gee, It suddenly dawned on me" crap, you'll see a pretty decent plan for investing that will keep you from screwing yourself in either up or down markets.

Here's how it basically works:  You put half of your money in what is called a 'high beta' stock.  High beta is another word for very volitile which means "You could lose your money". 

You put the other half in a very safe place (cash or super low-risk money market).  If the high risk (high beta) stock goes up, you sell off a small portion of it and put the money in the cash.  If the high risk (high beta) goes down, you buy a small portion.

The formula can be recreated in an excel spreadsheet and you can decide to 'adjust' as often as you wish, but you have to follow what the formula says. 

There are a few 'safety' features in the formula that keeps you from getting greedy and they'll help you out in times where you might try to overthink the market. 

I use it on a number of personal stocks and I've used it on my 401(k) and after about 8 years, I'm quite pleased.  I lost money during the dot-com bust like everyone else, but I'm in a really good position now.  For example:

I had $2000 to spend from an old IRA.  I started the formula and bought Lucent stock at about $70 a share.  Lucent stock currently trades at about $2.75 a share.  I've been staring at a massive loss, but because the formula forced me to buy small amounts with the cash as the lucent stock went down, It only has to go back up to $6 a share for me to break even.  I lost money and I'm still in the red on it, but I don't have to wait for the magical pixie fairy to boost lucent shares to $70 again.

There are a number of websites that have sprung up over the years that have forums and stuff and in fact, you can probably gain the formula itself from them.  I'm more than happy to give my spreadsheet away for free if you are interested.

The only thing I would encourage you to do buy the book and make sure you understand how the formulas work so you understand what is going on.  

I've never traded stock options...how does it work?

Larsenal wrote:

ScanIAm, the idea of easing into a position is not a bad one.  However, that does not necessarily prevent catostrophic loss.  Even when you think a stock has bottomed out, never discount the possibility of it going lower (unless it trades at $0.00).

Also, my personal goals are a bit more agressive than breaking even.  So if the strategy has no potential for big payoff, then that's too much of a risk for me.

My goal is to learn how to manage my positions better.  If you do much trading, you'll soon find that there's more to it than merely "knowing" a stock will go up or down.

I'm interested to hear how you work it.  You are correct, though, my deal is more a plan to avoid loss and to take profit within a reasonable range. 

That said, I've been thinking more and more lately about using some expendable cash to attempt some timing.  One thing I've noticed is that many of the scandal stocks of the last few years have emerged and made massive amounts of money for people willing to buy an undervalued stock.  Worldcom would be an example of this.


Edit: Larsenal, have fun!

Sven Groot wrote:

Funny story: you can get options not just on stocks, but also on a lot of other things. Potatoes, pigs, orange juice, you name it, anything that is sold at a varying price, you can get options on. In the olden days, if these options expired you would actually get the items they covered. There are stories of people going on vacation, forgetting to sell their options before expiring, and upon coming back the found out they suddenly owned ten tons of potatoes. Even worse are put options, when you suddenly are legally obliged to sell ten tons of potatoes (and whaddya know, we've just ran out ).

Not sure if these things actually happened, but such are the stories.

Nothing personal, but this is why I play with stocks...not stock options.   I didn't realize what they were until larsenal and sven described them, but: buying stocks is a risk.  Betting on the future price of stocks is fricken crazy!

And if you make money at it, GFU