Tibits I learnt from "Generate Thousands in Cash on your Stocks Before Buying or Selling Them"

I'm still brushing up my knowledge on Options writing as a means to enhance and complement my investing methodology (you can see the first post here).

First to note is that the book is almost a pure TA book, annoyingly (with methodology rather subjective to me, don't have much luck with triangles and candlesticks, etc), and trading on sentiments (which I don't have much luck either). That being said, the various custom indicators he used (probably because charting software was rather old during the 2000s), could be replaced and similar indicators should give similar results (he has MACD, ADX, MAs though). Some examples are:

• 5 Day Oscillator (short term strength), can be replaced with Percentage Price Oscillator (?)
• 3 Day Difference (price delta), probably Rate of Change (?)
• Buy and Sell Envelopes, feels like a Bollinger band or even a Keltner Channel (?)
• Buy Below/Above and Rally Numbers (price delta)

The only one I am confused is the Convergence-Divergence charts which compares share price/index price against price? Doesn't seem to be useful. Can use MACD with volume.

I am also rather confused by Deep In-The-Money covered calls which seems to be not exercised if the share prices fall and caps your upside? Just that the premium covers to the lower strike prices (not sure if it helps) and if it runs back up, you miss the long term upwards movement? Maybe someone can correct me on this.


So off we go:

Why Sell Puts over buying shares direct?

• You raise cash before buying it to reduce cost basis before you get a position
• If the put is exercised and share price continues to fall, you can buy the put back and sell a new put at a lower price to bottom fish. Unlike buy orders where if it is filled, you can't exactly cancel it.
• Make it a habit to start raising cash on any stock you intend to buy by selling puts.

Use fundamental analysis to decide what to buy and technical analysis to decide when to buy.

Some amount of technical analysis is ideally required for writing options

• At the very least, looking at support and resistance zones will help you to write options and collect the premiums without exercising
• Selling options with strike prices near resistance zones to minimise the chances of buying back the option.
• Sell calls when prices are rising towards resistance, sell puts when prices are falling towards support.
• As share prices move towards resistance, we sell calls and buy back any puts for a profit and vice versa. Repeat this until support or resistance is broken.
• If there is news behind the move, do not be so hasty and sell calls/puts. Wait for momentum to fade before selling.
• Indicators like volume, MACD, MA crossovers and price channels helps identifying trend and price divergences to get better premiums
• Divergences or short term retracements helps with getting the maximum premium with the least amount of chances exercising
• Sell puts on downwards trends with fading momentum, sell calls on upward trends with fading momentum
• Rule of Three
• A stock is likely to rally for 3 days after a breakout from a consolidation pattern before pulling back
• A stock should break out of a consolidation pattern after no more than 3 attempts.

Selling cash secured puts

• Place a target price of 10-20% below the current price, then look for the price support closest to that and price the strike price 1 level below the support
• Sell puts on one-half of the position you wish to accumulate first before selling another
• Cannot pinpoint exact bottom
• Raise a higher premium for the 2nd put at a lower stock price
• End up with lower average price
• Twice the amount of shares you have is a powerful cash generating technique. You will aim to buy back one of the puts and replace the shares you presently own with the new shares assigned to you.
• Sell the put when the market price is less than 1/2 point above strike price

Selling covered calls

• Place a target price of 10-20% above the current price, then look for the price resistance closest to that and price the strike price 1 level above the resistance.
• Do not sell covered calls right after a steep fall, wait for it to recover from the lowest point prior to selling
• Do not buy calls back if the option is close to expiring unless you have to do that to avoid the stock being called from you.
• If you sold covered calls on all shares of the position you hold. Do not sell another unless you are willing to buy both back if the strike price is hit.
• Remember not to sell your position before closing any call positions open on the counter.
• Selling calls in more than the amount of shares you have is highly discouraged, unless you are sure the stock is unlikely to hit the strike price and be called. You have to be ready to buy both calls back or risk selling a stock you do not own at a lower price than market price.
• Close any open call positions before initiating new calls
• Sell the put when the market price is 1/2 point or less below strike price

If there's news such as earnings, news related to the industry of the counter or even Fed interest rates the following in the month where you are selling options, be conservative,

• Markets may become rather volatile
• However, where possible, you can use news to your advantage to gain extra premiums

Always buy back puts or calls that are worth 25% of the premium you received

• Allows you to lock in profits and repeat process
• Put option value will reduce in price when share prices move up while call option value will reduce in price when share prices go down. This allows you to buy back the option cheaply.
• You need to sell the new option with an expiry date far enough into the future to give you sufficient premium to pay for the option you are buying back. Generally, if the time left to option expiry is little, you will not need to sell a option too far out into the future for it. By picking strike prices carefully, this situation should rarely occur.
• Before buying back any option to prevent it from being exercised, remember
• Options are seldom exercised unless they are at least 3/4 of a point in money
• Options are seldom exercised more than 2 weeks before expiration
• So when your option reaches strike price, do not make a hasty decision and keep the above in mind before acting. In most cases, both conditions must occur for the option to be exercised.
• When an option is 3/4 point in the money, that implies the market price of the stock is 3/4 above the strike for a call option and 3/4 below the strike for a put option

Using a combination of a put/call selling strategy is highly effective when share prices has gone down. Generate maximum cash to achieve break-even by reducing cost basis of stock.

As a rule of thumb, if your premium is more than twice by waiting an additional month, go with the later date. It helps to get a higher premium while saving commissions

When a few days (i.e. 3 days) before expiration, check open interest of calls and puts, if calls open contract volume is at least twice of that of puts, you buy the puts and sell on expiration day at a higher profit.


Phew, that's finally all for this post.

If you are confused, don't worry. I am kinda confused too ^^", it is the best I could distill out from the book.

I'll probably pick out some ideas that makes sense and complements what I am doing than using all the ideas in the book.

Hope it helps.