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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
My blog:
Thomsett Options
My book:
Getting Started in Stock Investing and Trading
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  • Are You Really Conservative? -- 5 Reasons You Might Not Be

    Many traders define themselves as conservative. But is this accurate? or does your trading style contradict the standards of "conservative" trading? Here are 5 ways to test how conservative you are in your trading and investing.

    1. How do you investigate a company before you invest? Do you look at the long-term fundamental trend for key indicators, check annual statements and read current news about the company? Or do you actually invest on tips or advice without asking questions?

    2. Do you know the business the company is in? This might seems obvious but it is not. Many self-defined conservative investors or traders know the names but really don't know what product or service the company sells. To be truly conservative, you should have a sense of the sector the company is in, and how strong that sector is today.

    3. Where does this company stand compared to its competitors? Is the company the leader or a strong second? Or does it lag behind in terms of market share and profits? You want to find companies that compete successfully with other, similar companies. If you don't know, you are not investing in a conservative manner.

    4. Has the company made a profit in recent years, and is the profit increasing each year? Why would you invest in a company whose revenues and earnings are leveled out or falling? or if the company is even losing money? A conservative principle includes a requirement of financial success.

    5. What is the health of key indicators? Have you checked dividend yield, P/E range, or debt ratio? Is the dividend rising each year? Is the P/E consistently in a mid-range (often defined as between 10 and 25, for example)? Is the debt ratio level or falling, or is it growing each year? These are essential financial signals and true conservative strategies rely on them to choose companies as potential investments.

    These five steps are necessary in order to qualify you as a true conservative investor. In fact, even conservatives should never settle for below-average returns on their investments. A very appealing definition of conservative investing is: focus on strategies or a series of strategies designed to reduce risk while increasing income.

    That is a goal worth setting and then putting into action.

    Michael Thomsett blogs at, CBOE Options Hub, and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website ME = mct

    Nov 27 8:20 AM | Link | Comment!
  • 4 Ways To Pick Stocks For Covered Calls

    You can make a good double-digit return with covered calls (on an annualized basis). In fact, the shorter-term expirations yield more, so you're better off writing several smaller premium calls per year than one or two big-dollar but lower-return strikes.

    A common error is picking stocks based on premium of the call. The more volatile the stock, the more implied volatility in the option and herein lies the problem. If you pick stocks just tow rite covered calls, you may be taking on more risk than you actually want.

    If you are conservative, use four basic guidelines for picking solid, safer stocks for covered call writing:

    1. Revenues and net profit should be rising every year. When you see erratic operating results, net losses, or falling profits, you should be troubled. Look for stocks to buy in profitable and competitive corporations.

    2. The debt ratio should be small and either falling or staying steady. Avoid companies whose debt ratio is higher than the average of its competitors, especially if that ratio keeps rising every year. Total capitalization (long-term debt plus equity) should include a sensible mix between equity and long-term debt, but when the debt side starts climbing, it gets more and more difficult to get out of the hole.

    3. The P/E should be moderate. As a general rule, look for a P/E ratio between 10 and 25. Any P/E under 10 indicates lack of interest in the company; any P/E above 25 starts to get expensive. Also, don't just look at today's P/E. Compare high/low P/E levels over several years.

    4. Pay attention to dividend yield. If all else is equal, select the company with the higher dividend. The yield is the dividend per share divided by current price per share, so the yield you earn is based on the price when you buy. Also seek companies whose dividend has been increased every year for at least 10 years. These so-called "dividend achievers" tend to be the best-managed companies.

    Once you qualify companies in terms of value and quality, buy shares and then begin writing covered calls. It only makes sense to pick the companies first, and then write covered calls, instead of the other way around. To keep track of current news about the companies you track, you need a real-time, updated new service focused on the markets.

    Michael Thomsett blogs at, CBOE Options Hub, and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website

    Nov 25 9:24 AM | Link | Comment!
  • Options – A Better Alternative For Swing Trading

    Swing trading works well with options for many reasons, including being able to execute the strategy with less risk and more leverage.
    Swing trading is an attractive strategy for short-term traders. Similar to day trading, the swing trader normally expects to profit from three- to five-day short-term price swings. The theory is based on the observation that short-term price movement is invariably an over-reaction to whatever is taking place - earnings reports, rumors, or even market-wide movement. These over-reactions correct within that three- to five-day time frame, and swing traders seek entry and exit signals.

    Most swing traders use stock, but options may be a better choice. This is especially true for options expiring within a couple of weeks because, unlike most other options strategies, the lack of time value is advantageous when the option is slightly in the money.

    There are four specific advantages to using options for swing trading:

    1. Risks are lower. The market risk of owning stock is a well-known factor in buying and selling stocks. A single option gives you control over 100 shares, for costs between 3% and 5% of the cost of 100 shares of stock. You can never lose more than the cost of buying the option; and although that is 100%, you have much less cash at risk. This market risk is always present whether you buy and hold stock for the long term, or take profits whenever they materialize. Options in a swing trading strategy reduce market risks instead of increasing them.

    2. There is no need to go short. A big risk in short selling when using stock is that you have to go short to play the downside. At the top of the price swing, you expect a reversal and a decline. With stock, you have to go short to take a position, which is a huge risk. For this reason alone, many traders swing trader only at the bottom of a price decline, just to avoid shorting stock. This means they miss out of half of all possible swing trades. When using options, you can buy a comparatively cheap put and get the same swing action with much lower risk.

    3. Options give you greater leverage. Because options require 3% to 5% of the cost of buying stock, you can use the same amount of money to control up to 20 times the stock in swing trades. This means you can involve more stocks in the strategy and even expand your positions more through multiples of two or more options.

    4. Options allow you to diversify your swing trading strategy. By swing trading a higher number of stocks, you get more effective diversification, which further lowers your risk. The greatest problem in swing trading with stock is that diversification can become expensive and, thus, impractical.

    You cannot get away from risk completely; and options are exceptionally complex vehicles for any activity. But if you are knowledgeable about the options market and you like the idea of swing trading, options deserve another look.

    Michael Thomsett blogs at, CBOE Options Hub, and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website

    Nov 24 8:30 AM | Link | Comment!
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