The time to buy to buy Puts and Calls is when stocks are very active or just before activity starts. You can determine when to buy Puts and Calls and on what stocks to buy Puts Or Calls by reading, studying and applying the rules in my books, Truth of the Stock Tape, Wall Street Stock Selector, and New York Stock Trend Detector.
I will give you a few rules that wi11 help you to determine the time to buy Puts or Ca1ls :
RULE 1 – Buy Calls around double bottoms or triple bottoms, or buy the stock. around double or triple bottoms and buy Puts, which will protect you should the stock break the old bottom. By this I mean, if a stock has held at a low level, then advances ; then reacts to that same low level months later and makes a bottom, this would be a double bottom. Then if it advances and reacts the third time to around the same level, this would be a triple bottom.
Reverse this rule at tops. Buy Puts around double or triple tops, or sell the stork short, and buy Calls for protection in case the stock should cross the old tops.
It is always well even when stocks are moving very fast and are very active to wait several weeks or several months if a stock holds around a bottom or top before you buy Calls or Puts, giving the stock time to complete accumulation or distribution because this has to take place before there is a reverse move of a 1arge number of points. You can easily see this by a study of past action of stocks on charts.
RULE 2 – Buy Calls when old levels are crossed. If a stock stays for several weeks, several months, or even several years in a narrow trading range around top levels, as referred to in my books, then when it breaks over the previous tops, it certainly will indicate activity. That is the time to buy a Call as I will prove in examples later. Reverse this rule. When a stocks holds for a long around low levels, then breaks the first support point, buy Puts or sell the stock short and buy Calls for protection.
RULE 3 – If a stock advances to a top that it has made many months previous or many years previous and fails to go thru, then has a reaction; then rallies and makes a lower top, that is, a third top and fails to go thru, this would be the place to sell the stock short and buy a call for protection in case the stock went higher. I would also be the place to buy a Put for 30 days, because if this top is a final top and the stock is starting on a long decline, you would make money on the Put and could also be short of the stock at the same time by putting up margin.
Reverse this rule after a prolonged decline. If a stock makes a second or third higher bottom several weeks or months apart, then shows activity on the upside, it is the time to buy Calls or buy the stock and buy Puts for protection.
RULE 4 – When a stock holds for several months around the same level and fails to break the first support point , buy a Put and buy the stock when it begins to show activity, or buy a Call as soon as activity starts on the upside.
(See example of Chrysler February 3, 1936 to June 5, 1936)
Reverse this rule when a stock holds for several months around top levels and fails to cross the first top. Buy a Put when activity starts an the downside or buy a Call and to go short.
RULE 5 – After a stock advances thru an old top where it has held for several weeks or several months, and advances several points above this top, then reacts to the old top, buy Puts and buy the stock, or buy Calls.
Reverse this rule in a bear market. When a stock breaks thru an old bottom and goes several points below it, than rallies back to the old bottom, buy Calls and sell short against them, or buy Puts.
RULE 6 – In a Bull market when trend is up wait far reaction of 5, 10 or 12 points, then buy Calls, or buy the stock and buy Puts to protect the purchase.
In a Bear Market, wait for rallies of 5, 7, 10 or 12 points , then buy Puts, or sell short and buy Calls to protect the trade.
RULE 7 – Buy a Call when a stock reacts 40 to 50% of the last advance or buy the stock and buy Puts to protect it.
Reverse this ru1e in bear market: Buy Puts when a stock rallies 40 to 50% of last move or buy Calls when it rallies to protect short sales. For example: Suppose a stock advances from 100 to 120. A decline to 110 would be one-half or 50% of the advance. If all indications point to a bear market with the main trend down, then you would buy Puts when the stock rallied 40 to 50%.
Example: U. S. Steel, March 6 to 11, 1937, made top at 126½. After an advance of over 50 points, a big reaction could be expected and it was time to buy Put. March 22, U, S. Steel declined to 112½, down 14 points from the top. A 50% rally would be 7 points or to 119½, where you would buy Puts. Steel advances to on 123½, on March 31, better than 50%, giving a good opportunity to buy Puts for 30 days, which made good, as Steel declined 24
points in 30 days.
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