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Buy Puts

A useful strategy to protect stock gains is to buy puts. Many sectors of the stock market have experienced a good recovery since the stock market crash of 2008. However, the economy is not out of the woods yet. A market reversal could erase many gains of the last year or so. Thus, a useful trading strategy to protect gains in a stock portfolio is to buy puts on stocks that may be prone to price correction. Identifying stock price reversals is commonly possible using Candlestick pattern formations as a guide. Candlestick charting allows traders and those more interested in long term investing to let the market tell them what the market will do. The active trader or long term investor will see the possibility of a pull back in stock prices by the use of Candlestick analysis on his stocks. He will buy puts and thus gain the option to sell these stocks at the options contract strike price in the case that the market price or spot price falls. He is under no obligation to sell his stocks and will continue to gain as the stock price rises. In the case of stock price decline, however, his stock options will act like an insurance policy.

To buy puts is to purchase options contracts that will allow the individual to sell stock at a specified price on or before the end of the contract period. The individual pays a premium for this option. The owner of stock may buy puts in order to protect his gains after a big run up in stock price. He will protect himself again a big price correction. However, one does not need to own a stock in order to buy puts on it. For the investment price of the contract premium, a stock trader can buy puts on a stock that Candlestick chart analysis indicates will fall in price. He will only exercise the option in the event that the stock price goes down. In that case he will buy stock at the new, lower price and sell the same stock at the strike price of the options contract. Since options contracts are for 100 shares of stock, his profit will be the difference between the spot price and strike price times one hundred for each contract, subtracting fees, commissions, and the price of the premiums to buy puts on the stock.

The owner of a stock will believe that, after a correction, the stock price will continue to rise. Thus he does not sell the stock but will buy puts to protect himself against the investment risk of a big price correction. Stock traders using options trading as a trading strategy will take advantage of the leverage that options trading offers. They will only pay a premium of a few percent of the price of the stock and will stand to gain substantially if they should buy puts on a stock that is about to drop substantially in price. The ability to do so will typically depend upon the use technical analysis with Candlestick signals in order to accurately anticipate a fall in stock price.


Market Direction: Today the markets formed Bullish Harami's. Knowing what a Bullish Harami represents allows for a more refined analysis of what might be occurring in the market. Friday's hard selloff was blamed upon the Egyptian situation. The Egyptian situation had not changed much over the weekend but there was clearly a different investor sentiment in today's market trading. The bullish Harami's may be an indication the selling has stopped. This would be more beneficial for the analysis of the NASDAQ. Two weeks ago it pullback fairly hard while the Dow continued its uptrend.

dow

nas

The NASDAQ appears as if a support level is setting up. This may also reveal a sideways moving Wave Two is in progress. If this is the case, it becomes more relevant to identify which stocks/sectors are continuing to act well. The oil drilling stocks showed good strength on today's open. There are numerous oil stocks that are creating J hook patterns. This is where one should be placing a percentage of the portfolio's funds. Having the ability to identify which sector is showing the most strength allows an investor to pinpoint which stocks at the biggest breakout potential. That was evident in today's recommendation of LNG. As it opened above Friday's open today, it started creating a strong buy signal, the Kicker signal.

LNG

This chart is being illustrated for a very simple purpose. This demonstrates why candlestick investors have a great advantage for participating in large price moves. Knowing that a potential kicker signal could be in progress and that signal would be an additional confirmation of a J hook pattern forming, this makes for all that much more credence to establish this trade. It has been noted that on the majority of the trading days for the past few weeks, at least one of the recommendations have popped for a nice big upside move. These moves have been in the range of 7% to 15% in one trading day. This result has nothing to do with one's ability to stock pick. It is merely the result of analyzing candlestick signals and price patterns that have a high probability of performing. Please make it a self-induced project to learn each signal thoroughly. That includes recognizing the surrounding indicators as well as understanding the psychology that created the signals.

I am FAT! Better stated, I need to lose 100 pounds just to get back to "fat." My goal is to lose 130 pounds. Fortunately, every magazine ad and every other television ad is touting a fantastic diet. Which one is the best one? Which one would be the one I could implement effectively? That is the problem most people have when they're trying to reach a goal. Personally, I would rather have somebody recommend a diet that they know has actually worked, maybe not for themselves but somebody they know. A good diet may work for one person but not for somebody else. That same scenario is true when it comes to successful investing. The reason I have stayed with candlestick signals is because they are a proven trading program. However, what works for me may not work for somebody else. My combination of Worden brothers TCNet and CQG works effectively for me. But it may not work for somebody else even though they have a good grasp of candlestick analysis. There are other tools that should be utilized for trading successfully.

When a good trading tool makes itself available, I would not hesitate to present it to everybody. This is not to be construed as a full-fledged endorsement. It should be considered a recommendation as a product to be investigated if you are looking for the right combinations to improve your investing. Please be assured that any product that is presented to you through the Candlestick Forum has been discussed and researched. If you occasionally receive e-mails on outside products, please look at them with the frame of mind that they are something worthy to investigate. However, the final decision should come from each individual.

Chat session tonight at 8 PM ET.

Good Investing,

The Candlestick Forum Team


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