I told you a few months ago that Wall Street would probably start hyping up the market once we got a year-end rally. The "year-end" rally was delayed in December, and was reserved instead for the opening weeks of the New Year.
The Spin Begins
November 28, 2005
We began getting severe cross currents as to whether the market would decline in the first half of 2006, followed by a new bull in 2007, or vise versa. The jury is still out on which one will occur.
Something that is clear is the market is overbought, and was due for a pullback anyway.
This morning we woke up to news that the Asia Pacific markets were taking it on the chin. The Japanese Nikkei was up 40% last year, and their market has fell 6% in the past two trading sessions. It is still unclear as to how and why the sell-off was so severe. I guess the "big boys" who have access to the button that can sell a billion dollars worth of stock in a matter of minutes were getting an itchy finger.
It amazes me how news of a regulators investigation of a Japanese internet company can trigger such a dramatic turn of events. We hear news of financial probes almost weekly, and we don't see that kind of reaction in our markets.
SHORT A STOCK & SELL A PUT
Ever since the NYSE began preventing investors from selling "short against the box", I have looked for innovative ways to short a stock, collect income, and provide myself will a "little" upside protection in case the stock continued to rise.
I have found a way to do this. You are probably aware of the strategy of buying a stock, and selling the call. This is called "covered call writing".
You can basically do the same thing when you short a stock. This is called "shorting a stock, and selling the put".
For example, let痴 assume you want to short XYZ stock at $35. Let痴 also assume the XYZ 30 puts for the following month are selling for $1.00. You can sell the $30 put, and collect the $1.00 ($100).
In this case, you have protected yourself by $1.00 or 1 point on the upside, and if the stock drops below $30 you would collect 5 points on the short, 1 point on the option, and deliver the borrowed shares back to the brokerage firm for a $600 gain. If the stock does nothing, you keep $100.
As is the case with buying a stock and selling the call, you must have a stop loss target in place, or a strategy to average down. In any event, if you enjoy shorting a stock, you now have a strategy that allows you to collect income while giving you some limited upside protection.
