November 23, 2004

Questions and Answers, Part II
by the CallWriter Staff

Here are more questions from CallWriter members, along with our answers. We try to promptly answer questions from members, and non-members, too, for that matter. We like to feature the good ones that are not too esoteric.

Question: Mr. Brasher once voiced the opinion on a TeleLab call that there are no "safari trades" - what does that mean?

Answer: It mostly means JB is a colorful cuss. Seriously, what Mr. Brasher really is referring to by the term safari trade is that mythical trade, sought by all traders, that is lead-pipe cinch... so safe that one can run the trade, then forget about it and go on safari for a month. We've never found that elusive safari trade, although we've looked. All trades require some watching - even covered calls - and appropriate action as needed. There are trades that come close (the Synthetic C/D, for example), but none really are safari trades. (We're still looking)

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Question: I'm not great at picking stocks and am not a market timer. Are there any trading strategies where I don't have to be good at stock picking?

Answer: Yes, there are strategies for the stock-picking-impaired. Keep in mind that there really are two types of trading, known as directional and static:

Directional: Trade success relies upon the stock actually moving in a particular direction, and moving enough to make the trade win. Day trading and swing trading meet this definition, as does simple long stock ownership. Speculative buying of options and puts falls under directional trading. So do straddles and strangles (buying both the call and put).

However, directional option trades require even more... they not only require that the underlying stock move and move enough to generate a gain, but that it do so on time - before the option expires.

Static: Trade success relies on the underlying stock not moving directionally but essentially holding its price. Actually, in a static trade, the trade will win if the stock merely holds its price or moves in the "right" direction for the trade. Bear call and bull put credit spreads are good examples of static trades. So is a covered call trade. Why? The covered call wins if the stock goes up a lot, goes up a little, holds its price or goes down a little, and loses only if the stock drops below the trade's breakeven point. In other words, the trade has a huge profitability bandwidth. Odds are odds, and the more of them you have in your favor the better your trading will be.

It is, generally, far easier to make money on static trades because the market is much more forgiving to them, especially on short-term trades. The key to good static trades is avoiding stocks likely to cause a loss, which is much easier than picking both the direction and timing of a stock. So why doesn't everyone do static trading? For one thing, static trading tends to be an incremental strategy - make a little each month for consistent returns that nonetheless add up to substantial annual returns. Directional trading offers far greater potential returns, but they require much more skill to get, and involve greater risk and greater losses, even for legendary traders. If you want to double and triple your money in a trade, you have to trade directionally; but be prepared for a lot of wipe-out trades. For example, if you buy calls on a stock and it tanks, your loss on the trade will easily be 50% of the capital involved, and an 80% or greater hit would be more likely (even worse on margin).

Also, many people think that directional trading (like the craps table) provides more action and more fun. We don't agree, but it all depends on how you trade. For example, not all directional traders are adrenaline junkies, but all adrenaline junkies seem to be directional traders. Seriously, a big part of finding trading success is finding a trading strategy that fits your personality. A lot of times when people fail at trading, it isn't due so much to a lack of trading skill as doing the wrong kind of trading.

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Question: I am a trader from Sydney, Australia. Is it recommended for me to trade on the US market? Would it be more difficult to control and manage from Australia?

Answer: No worries; of course you can trade from Australia. The US stock and options markets are the deepest and most liquid stock and options markets in the world, and thus the place to be. The only issue would be whether you can consistently get good fills on trades due to the time difference, since the US options markets are only open from 9:30 am to 4:02 pm Eastern (NY) Time. However, please note that we have members in Australia, NZ and other Asian locations, and in Europe, who use CallWriter for options trading, so writing covered calls from around the world is indeed possible.

Good luck and good trading!