Suppose a stock breaks out on the upside, moves up fast and shows uptrend. You have bought Calls and have profits in the first month. The trend still shows up and when it crosses previous tops or Resistance Levels, then you buy Calls the next month and can
protect the protects the to you have on the first Calls by buying Puts under the market
and still carry your original stock. Many traders do this when a move of 50 or 60 points
takes place in two or three months. They continue to buy Calls every month and continue to carry their stock and then often buy Puts to protect their profits instead of placing stop loss orders, thus making a large amount of profit on a very small risk.
How to trade 6 GAMT puts and calls
Suppose you buy a Call on General Motors at 50. At the time you buy the Gall General
Motors is selling at 47. You have bought a Call at 50, good 30 days. When General
Motors advances to 50, holds for several days and doesn’t look like going thru, you
could then sell short 50 shares of General Motors; then no matter which way General
Motors went, up or down, you would make money. If it advanced to 55, you would still
have a profit of 5 points on your; Call, and on the stock that you sold short at 50, you
would have a loss of 5 points, but this would be made up because you could call 100
shares. After you sold short at 50, if you were right and General Motors declined to 45
or to 40, then when your Call expired it would be of no value but the stock that you sold
short would be down a 5 points or more and you could close your short trade with a
Example of trading against a Put: Suppose Douglas Aircraft is selling around 50 and
you buy a Put on 100 shares, good 30 days, at 46. Douglas declines to 46 or to 45 and
holds for several days and looks like making bottom and not going any lower, but you are
not certain which way it will go for the remainder of the time for which your Put is good,
so you buy 50 shares of Douglas at 46 against your Put, then if it goes up 5 points you are
making profit on the stock. you bought and you cannot lose because you have a Put. Then, if it should decline 5 points, you could have a profit of 5 points on your Put and could deliver 100 shares against what you bought and have no loss except the cost of the
commission and the premium paid for your Put.
Many shrewd traders who buy Puts and Calls make money trading against them and at
the and of the time the Put or Call expires there is no profit in it but they have made a profit because they traded on the fluctuations of the market. Often you can sell against a Put or buy against a Call, several times during the month and scalp anywhere from 2 to 5 points or more and possibly make 10 points’ profit and be protected all the time and yet at the and of the Put there would be no profit in it.
Some traders handle Puts and Calls in this way: Suppose they have bought a Call on a
stock at 100 and it advances to 110; then they buy a Call for 30 days longer at a higher
level, and when the first Call expires on which they have profit, they ca11 the stock in and
do not sell it out; then buy a Put to protect their profit and continue to buy Calls and buy
Puts, pyramiding all the way up, not selling out their stock until they think the time has
come for a change in the main trend.
This way of trading is reversed on the downside of the market. Buying a Put and
getting short, buying more Puts an the way down; staying short; then buying a Call to
protect the short stock, following the main trend for several months or as long as it indi-
cates that it is down.