Loading ...First post and TA question
Hello Goldtenters,
I have enjoyed reading the content here for quite a while now (a couple years probably) and am glad for the information. The covid totalitarian takeover stuff was a welcome bonus; I originally was following for the charting and technical analysis. Still a newbie and trying to learn.
In that spirit I have a question I’d appreciate feedback on from anybody who is willing.
Starting premise (I have heard this): If you want shares of something, one good way of doing it is to sell puts at the lower Bollinger Band. I guess my question, in addition to ‘do you think that is generally a good policy,’ is what other factors might support or invalidate that premise? I’m including an example here in case it helps.
Today, NEM is/was at the lower Bollinger Band, and Monday also. But the trend is obviously down including the 50-day having already crossed below the 200, RSI looks to be pointing down, Stochastic turning up. Is selling puts on NEM at this level a valid idea, or does some other factor invalidate it? (Like, ‘PM stocks are going lower you idiot, can you not see that?’)
I’m trying to keep things simple as I go, but that seems difficult so far. I’ll probably get the Weinstein book too, as I’ve seen it recommended here. Thanks for any replies to this and, again, I appreciate the forum.
Others with more experience will hopefully comment, however, my initial reaction is that you are contemplating a VERYYYYYY dangerous transaction for (as I understand it) there is no limit to your liability should the market move opposite to your position. Selling put’s or call’s is not for the faint of heart — be careful!!!!!!!!!!!!!!
Thanks for the reply. There is a limited/known loss in the case of selling puts, not unlimited. To continue this example, let’s say I sold one put contract on NEM with a $58.00 strike price expiring on August 20 (next Friday). If I had done that today I would have received about $1.10 premium ($110.00 credit to my account because one contract is for 100 shares), and if the stock price of NEM closed below $58 next Friday I would have to buy 100 shares at $58.00. So my ‘loss’ would be $5690.00 ($5800 minus the $110.00 credit I received for selling the put) and I would then own 100 shares of NEM at a cost of $56.90 per share. If instead NEM closed above $58 I would just keep the $110.00 and would not have to buy (be put) the shares. Now, it WOULD be a bummer if in this case NEM closed at $52.00 next Friday, in which case I would have effectively ‘lost’ another $490 by paying $56.90 for shares I could have gotten for $52.00 — so at that moment that would probably feel pretty bad. But if NEM closes at $52.00 next Friday I suspect we will all feel even more ‘pretty bad’ than we already do now.
I think the inference in the suggestion to use the lower BBs for timing put sales is that the odds are increased that the stock will move UP from there rather than continue down.
No limit to your liability??? Of course there is a limit. The stock can’t go lower than zero.
True enough, and looks like we are headed that way now, but probably not NEM.
Welcome to the Forum Randerson
Glad you are enjoying it from both angles
I do not trade options but Kewl’s comment applies
It is not uncommon for stocks to trade outside the BBs for a few days
Look at that big drop in the middle of your chart for example
Good luck and don’t be a stranger…we all learn from these questions
Yes, that is a monster drop, and it reminds me of another question: Does anyone here follow Ira Epstein at all? I have heard him say that since a stock will stay inside the BBs 95% of the time he counts each day outside the bands as equivalent to one percentage point, and if he sees five days outside the bands he figures the odds are then REALLY high it will not stay outside the bands for a sixth day. That may be too much of a simplification, I don’t know. He acknowledges that it is a generalization, so usually but not always true in his experience.
EVERY technical strategy is capable of working in one regime, then failing miserably when the regime changes (bull to bear to whipsaw).
First order of business is to assess The Primary Trend, however you want to define that.
Welcome Randerson. The chart you showed only went back a few months. A longer look back might add additional perspective. You understand how selling puts work from your response earlier. My only question is are you looking to do this for short term trades or if you wanted to buy NEM in your example is it with the idea of being a long term holder? Using the low end of the Bollinger band may be good timing strategy for a short term trader if you also set a stop(even if only mentally).I don’t do much short term trading and only look at BB’s in context with other indicators. If you are a longer term investor and you have adequitely assesed the chart to see where a stock should hold, selling a put to buy it a little cheaper makes sense to reduce your cost. Like any trade getting the entry point right is very important, in longer term investments not as crucial if the stock is a value and you get the long term trend correct. Hope that helps.
It does help yes, thanks. If I look back two years I can see what looks to me like pretty good support around 55-ish. And then getting the trend right seems up for interpretation so with my short experience I’m not overwhelmingly confident there (cyclical bear inside a secular bull? Plunger has me a bit freaked out, given that I have a lot of miners that I don’t want to sell at a loss so I’ll probably just ride the bronco and hope it doesn’t buck too hard, and that the secular bull is big enough and comes to fruition in my lifetime).
I believe Plunger used the phrase ‘hard decisions’ and apparently selling stocks in the red that I thought I got at decent prices and that I still think might pay off exceeds my threshold of difficulty. You can draw trend lines a lot of different ways, from what I’ve seen so far, and the farther back I look the more NEM or AEM look like uptrends (though the ‘in my lifetime’ thing comes into question a bit more) but if I look at say GDX or AG, which don’t go back as far, those do not look like uptrends to me.
If you are a long term investor NEM 55 puts is a reasonable strategy. I doubt the stock gets put to you but if it did a good entry point.