Accredited Investing Education

Don’t be a Stock Fan

The word fan is short for fanatic – a person filled with excessive and single minded zeal. It’s about passion, commitment, and dedication.

Living in greatest sports city in the USA – Chicago – I know a thing or two about being a sports fan. The Blackhawks – best hockey team in the world. The
Bears – didn’t you see the 1985 Super Bowl? The Bulls – Michael Jordan. The Cubs – Ok. But, anyone can have a bad century. (I heard there’s another
baseball team in Chicago, but I don’t anything about that.)

Being a fan is all about emotion. But there is no place for that when you are in the market. Investors and traders can experience more than a depressing
Monday if they let their emotions control investing decisions.

A while back, couple was telling about some of their investments. They noted that they had over 20,000 shares of their former employer’s stock. The stock
was trading around $30 and their cost basis was well below $10. When I asked what they were doing with the stock – other than collecting the dividend –
they replied “nothing” and went on to say that they could never sell it.

Puzzled, I asked why. They couldn’t articulate a good reason. It was clear they had an emotional attachment. They were fans.

They had good careers and were treated well by the company. They owned some of the shares for almost 30 years. They loved the company and, apparently, they
felt that they owed something to the shares that they held.

It’s not an uncommon emotion. But it’s irrational. Stock is an instrument for making money. Nothing more. Nothing less. You don’t exchange Christmas cards.
It doesn’t send you birthday gifts. It won’t give you a ride to airport.

If you honor it, cherish it, or love it, there is no quid pro quo. As a shareholder, the company doesn’t owe you anything but the dividend, if it pays one.

Holding on to stock for 30 years is probably better than stuffing cash in a mattress. But there are ways that you can make more than the dividend – without
necessarily having to sell the stock.

If you look at your stock like an investment property, you can “rent” it and collect some cash each month. This strategy is known as a Covered Call and
involves long stock and selling a short call.

When you buy a call option you have the right to acquire stock at a set price within a set period of time. On the other side of that transaction is the
call seller. The call seller collects a premium, but has the obligation to deliver stock, if the call buyer exercises their long call.

This approach is a lot like being a landlord and having “rent to own” agreement with your renter. In exchange for the rent that you collect, you’re giving
control of your property to someone else and they have the right to buy it, at a prearranged price.

If the covered call trader setup the trade correctly, they will have a several strategies that can be employed to avoid selling their stock. If the stock
remains below the short call, it will expire worthless, and there’s no worries about selling the stock. Then the trader can do it again next month.
However, if the stock is above the short call strike on expiration, they will be called and need to deliver stock to the long call owner.

If the covered call trader wants to avoid selling their stock, they may choose to simply buy the short call option back before it is assigned. If enough
time has passed by and the stock hasn’t risen too much, they can do this for a profit.

Another approach is to roll the short call out to another expiration. Rolling involves buying back the short call and selling another in the same
transaction. This can often be done for a credit – thus improving your profit position.

But, making an adjustment to avoid selling the stock should not be done because you are a fan of the stock. It has to make financial sense. Remember: the
stock doesn’t care about you and you owe it nothing. Winning is winning. If you are making money say “au revoir, mon ami” to the stock. Then take your
profit and do another trade.

The key to winning in this strategy is to setup the right trading the first place and then knowing what to do when the trade doesn’t do what you hoped it
would do. There’s a lot more to it than I can explain here. But, this is how OptionsANIMAL traders are able to make profits in more than 90% of their
trades.

Eric Hale
OptionsANIMAL Instructor

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