Excerpt from TDT
The following was excerpted from a recent TDT. I sincerely catch the power of knowledge based on real-world experiences. Today, before we get into the trades, I’d like to introduce you to two friends of mine. They have the same name, sort of. Please meet Norm, as in normal, and No.R.M., as in No Required Movement.
Maybe be the end of this, we’ll all be able to add our voices to the good people at Cheers, and shout out, “Norm,” when they enter the room.
The first Norm, is an old adage: “Everything Returns to the Norm.” It’s fairly true, with few exceptions, and as you know, “All Exceptions have Exceptions, Including this One.” You may have a High School Basketball player averaging 16 points a game. Last night he was on fire, scoring 32 points against the dreaded Wolverines. But now what? Next game he scores 8 points, then 12 points, and his average for the year so far is about 16 PPG.
A stock may have a P/E ratio of 16, but has a great quarter in the bottom-line realm of earnings, driving its P/E down to 12. Many buyers rush in. The price of the stock moves up from $82 to $92, and guess what? The P/E ratio settles in around 16, once again.
Yes, there are many outliers, we deal with them daily, but all-in-all, things will settle back to where they are accustomed to existing. Variations of this theme: Always bet on humans being humans. My family raises Arabian Horses. Horses have they needs, three drives: 1. To protect themselves (even eating falls into the category), 2. To Procreate, and 3. To Herd.
Do you remember years ago, with PCs becoming so widespread, the word was out that every business would have all of their employees working from home? Offices would be a thing of the past. This was real. Here in the Seattle area, large building prices slumped, and construction lagged.
I said, to anyone who would listen: “Don’t bet on it.” I gave them the horse lecture above. “People will be people. They have needs, and one is to herd.” We call it the “gather round the water cooler personality or need.” Even when people saw the internet explode into every part of our life, many people use it to be human—online workout groups of ladies from all over the country; people saying, “I love you,” dozens of times a day to loved ones.
In short: Bet on people being people.
The next friend is No.R.M. He is a valuable part of our trading strategy, with Writing Covered Calls, and some Spreads. Oh, I’ve put some great information on TRAIL, showing a Bull Put Spread (BUPS) of Apple. First back to the first Norm, it’s normal for us to want to make money, to grow, to achieve. It's even better when we can get our money working hard for us.
Let’s think this through. When we have a stock at $8.60 and sell the $9 call for 75¢, what do we need to be successful? Not much. The trade is down. Do we need the stock to go up to make money? Nope. We just made $750, if we had 1,000 shares. Do we need the stock to go down? Nope. It’s fine just where it is. We took in $750. We can go shopping with that money. What about the stock staying right where it is? That’s perfectly fine with us.
There is truly No Required Movement. And the powerful extrapolation of this, is that we have put market forces—including the volatility (that helped make up the price of this nice fluffy option), and time to expiration—to work for us. These market forces are now our friend, not our foe.
In today’s TDT you will see all of this. And all of this is what helps us prepare for a better retirement, and hopefully a lot sooner than anticipated. So, it’s CHEERS to you and yours.