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When you are short a cash secured Put, because you would like to own the stock at a cheaper price, it often happens that once the stock begins to fall, and continues to do so beyond your strike price, you suddenly feel like “well, I don’t know….now I don’t want to own it so much anymore. Look at all the negativity around the name!”
It-always-happens. Business we were a short time ago convinced we would like owning at cheaper prices are suddenly disliked by analysts and the crowd of individual investors. Our herd mentally then tricks us into fear.
When stocks fall, especially hard enough to penetrate your out of the money short Put, it is usually because of some “bad news” of the moment. The ideal would be when a stock falls just as a result of general fear in the markets, and the indexes tanking, take down everything along with them even for companies where things are perfectly fine. You can distinguish those occasions and act without so much fear on that particular name. After all, there’s nothing wrong with it. But this is not the most common scenario. The usual scenario is negativity, downgrades, earnings below expectations and other type of “bad news”. It is in these circumstances that we tend to be more fearful and sabotage our Enhanced Investing approach.
Imagine, if you close your short Puts out of fear every time a stock you are playing falls a little and momentarily puts your option position in loss territory? The number of losing trades would be abysmal. Almost all the short Puts I trade are in loss territory at one point. A perfectly well thought out strategy can be sabotaged this way by our instincts, resulting in long-term failure.
This is why, CONVICTION, when using Cash secured Puts is the most crucial aspect in my opinion. I’m talking conviction in the businesses of the stocks that you play. Conviction in their fundamentals and in the fact that the business model is not broken long-term, only facing temporary problems.
So, Rule Number One: only deploy short Puts in companies that you would ABSOLUTELY love to own at a cheaper price. This will give you the required staying power when things go wrong, and this will provide you indirectly, with the necessary patience to let the probabilities and the positions play out over time.
In Enhanced Investing Premium, we have a permanent list of businesses already pre-selected which are re-analyzed every weekend. No need to analyze 3,000 securities. Just a list of less than 100 is good enough for our purposes, knowing that we are dealing with businesses that have stood the test of time and that for the most part show consistent growing revenues year after year.
If you enjoyed this content, consider acquiring the Enhancing Investing Premium. Where you will learn to properly value companies and adopt strategies that truly minimize your risks while increasing your probabilities of making money. Read more details.
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When you are short a cash secured Put, because you would like to own the stock at a cheaper price, it often happens that once the stock begins to fall, and continues to do so beyond your strike price, you suddenly feel like “well, I don’t know….now I don’t want to own it so much anymore. Look at all the negativity around the name!”
It-always-happens. Business we were a short time ago convinced we would like owning at cheaper prices are suddenly disliked by analysts and the crowd of individual investors. Our herd mentally then tricks us into fear.
When stocks fall, especially hard enough to penetrate your out of the money short Put, it is usually because of some “bad news” of the moment. The ideal would be when a stock falls just as a result of general fear in the markets, and the indexes tanking, take down everything along with them even for companies where things are perfectly fine. You can distinguish those occasions and act without so much fear on that particular name. After all, there’s nothing wrong with it. But this is not the most common scenario. The usual scenario is negativity, downgrades, earnings below expectations and other type of “bad news”. It is in these circumstances that we tend to be more fearful and sabotage our Enhanced Investing approach.
Imagine, if you close your short Puts out of fear every time a stock you are playing falls a little and momentarily puts your option position in loss territory? The number of losing trades would be abysmal. Almost all the short Puts I trade are in loss territory at one point. A perfectly well thought out strategy can be sabotaged this way by our instincts, resulting in long-term failure.
This is why, CONVICTION, when using Cash secured Puts is the most crucial aspect in my opinion. I’m talking conviction in the businesses of the stocks that you play. Conviction in their fundamentals and in the fact that the business model is not broken long-term, only facing temporary problems.
So, Rule Number One: only deploy short Puts in companies that you would ABSOLUTELY love to own at a cheaper price. This will give you the required staying power when things go wrong, and this will provide you indirectly, with the necessary patience to let the probabilities and the positions play out over time.
In Enhanced Investing Premium, we have a permanent list of businesses already pre-selected which are re-analyzed every weekend. No need to analyze 3,000 securities. Just a list of less than 100 is good enough for our purposes, knowing that we are dealing with businesses that have stood the test of time and that for the most part show consistent growing revenues year after year.
If you enjoyed this content, consider acquiring the Enhancing Investing Premium. Where you will learn to properly value companies and adopt strategies that truly minimize your risks while increasing your probabilities of making money. Read more details.
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