Thursday, June 3, 2010

How To Win by selling stocks and being bearish when the market stays flat

Inverse ETFs are actually not the way to go if you're bearish. The trick is to know which stocks to buy, and which stocks to sell. Ha, I lied, the real tricks are in betting against the obvious. Think about it, the game is rigged so a casino wins, why not become the casino rather than be a player. If you trade back and forth with a group of people and you buy and sell stocks a million times everyone goes broke and the stock market brokers win. Buffett teaches you that buying stocks and tradin them constantly is a way for 99% of people to lose money, .9% to basically break even, and .1% to do really well. However, fees, taxes, expenses and difference in bid/ask price along with brokerage fees and such can be the death of you. If you are simply trading stocks you are speculating. So what's the solution?
You can use income strategies.

The mildly bullish income strategy is covered calls. You own a stock and you sell calls against it. You still are at risk if the stock goes down, but you are given a premium which you instantly can invest... Overtime if the stock remains relatively unchanged, you still collect the premiums and those add up. You are basically rewarded when people buy calls to speculate. You are guarenteed the premium, and the premium is the amount the option trader is willing to risk in order for bigger gains. You sell the dream of bigger gains like the casinos do, and you receive a slight edge that adds up over a period of time. The problem is you have to own the stock long enough so that the calls can be constantly written off to pay for the stock, and the stock has to maintain enough value so you can continue writing calls at around the same price.

The mildly bearish strategy is to short stock, and sell puts against your short position. This is where you are still at risk of the stock going higher but you constantly receive premiums in the same way the covered call strategy works.

Neither of these strategies work that well in my opinion. The reason is, if a stock goes higher you miss the gains, and you constantly have to pay fees anyways. Although you may make a profit beyond what you pay for the fees, it's hardly worth it.

So now we have another strategy, and that's to sell etfs that don't work.
Leveraged ETFs are going to provide income based upon the inverse of the daily return. This basically guarentees that it will lose value over time.
Look at FAZ, or SRS or QID. All these are leveraged inverse ETFs. Shorting them would be a bullish strategy. However, shorting leveraged ETFs like URE, QLD, DDM and others is a bullish strategy. The trick is to short both of them, leave enough cash in case the difference between the bid and ask goes crazy and liquidity becomes a problem, but short slightly more of the leveraged long funds if you're bearish, and short slightly more of the leveraged inverse funds if you're bullish. If you're neutral short them both.

Owning puts works as well, but you do lose value over time when you own options. The trick is to mitigate the risk of buying an option by selling one at a different strike price. You own a long term option that loses less value over time than a short term option, and you sell a short term option. Then you sell your longer term option when a fair amount of time runs out as the time decay increases exponentially over time. So this strategy can work. But you can also sell calls to pay for the puts, but that takes on added risk. You can trade both inverse and regular ETF options as well.

For example. You are bearish on real estate. You own puts in URE because you know that is a better long term bet than calls in SRS. At the same time, you sell puts in SRS. You also can own a call in SRS and sell a call in URE. But this gets complicated, tricky, and options and bearishness is usually not for most investors. Actually it's probably too much risk. You will have to trade at your own risk and stuff and make sure you manage your money so as you can handle the risks. That's another story though. For now learn how to sell stocks, short stocks, buy stocks, and make good decisions.

By the way, I found an awesome site called stock trading investments, it has tons of great info, although I'm not sure why, but some of the posts are not nearly as good, but the ones that are, are certainly worth sorting through the ones that are not to find the good ones. I say check it out, because it's most definately worth it if you have the time. Either way, I suggest you find a site like or yahoo finance as well, read up and get educated I prefer stock trading investments though as the site is better and specific to mostly stocks.

No comments:

Post a Comment