Many low priced stocks remain in a narrow trading range for many years and do not
offer any opportunity for making profits buying Puts and Calls. Therefore, if you bought
too often without waiting for definite indications on low priced stocks, you would just lose
the money you paid out for Puts and Calls.
You must have a rule to determine when to buy Puts and Calls on low priced stocks
because at times there are really big opportunities for making profits if you study and watch stocks when they start to move from low levels. You either have to wait until stock holds in a narrow trading range from 4 to r6 months or until it holds in a narrow trading range for several years and then crosses the old top levels and shows activity; that is when you can buy Calls. For example:
1929 – February, Johns Manville advanced to a high of 242. There is no use talking
about how much money could have been made buying Puts even 20, 30 or 50 points away on high priced stocks in 1929 or buying Puts to protect stocks that people were long of. The opportunities were certainly there. But I want be conservative and point out how profits can be made trading in Puts and Calls in normal markets.
1932 – During April, May, June and July Johns Manville made a low month at 10 and
the high during that period was 16. It started up around the middle of July, 1932, after the
general market had made bottom. Of course, after it stayed several months around 10, you could have bought a Put probably one point down and could have
bought the stock, out the safest and best time was in August when it crossed 16; then you
cou1d probably have bought a Call at 19 or 20. It was then above a four-months ‘ range
and showed that it was going to move up. In 30 days it advanced to 29 and in the early part of September sold at 33. There was certainly an opportunity to make 10 to 12 points’ profit buying Calls on a low priced stock after it gave a signal to advance.
1933 – March, Johns Manville declined to 13, 3 points above the old low level of 1932
and a place to buy with a stop under 10 a or a place to buy Puts and buy the stock; also a
place to buy Calls.
In May the stock crossed 33, the high of September, 1932, which indicated activity and
higher prices. You could nave bought a Call after it crossed 33, which would have made
you at least 15 points’ profit in 30 days. In July Johns Manville sold at 60.
1935 – In July Johns Manville crossed a series of tops at 57. This was the time to buy
Calls. In August, 1935, it crossed 67, the top of February, 1934, another time to buy Calls
because it indicated a definite trend up. It never reacted over 10 points until it sold at 129
in February, 1936. You could have bought Calls right along all the way up or bought Puts
to protect your profits on Calls and made large profits.
September, 1934, to July, 1935, this stock had a range between 11¼ and 6¼, or a range
of 5 points. From March, 1935 to June, 1935, it moved in a range of 2 points between 6¼
and 8¼. In July, 1935, it advanced to 9, crossing the tops of the previous three months, This
was a place to buy Calls. However, if you had waited until it crossed 12 in August and
bought Calls when it was above all these, you could have made big profits because it never
sold below 12 until it advanced to 26½ in January, 1936. Notice how much faster the stock
moved, up after it reached high levels. I have told you that when a stocks get above 36 to
40, they move much faster. In March, 1937, Boeing advanced to 49½, up 13 points in 13
1935 – March, low 17½. October and November, high 35. December , low 34. Then it
crossed the old high levels and advanced to 59 in the same month, making a range of 25
points, the first month after it got above 36. Of course, there was big money in buying
Calls good for 30 days.
1936 – January, Douglas made a low of 50½ and the same month advanced to 75½,
making a 25 point range in 30 days, again proving how much faster stocks move after they get above 50 and the greater opportunities for profits as they move into higher levels bottom at 29¼ in August, 1934, and made a double bottom at 293/8 September, 1934. This decline to 31 was a third bottom at a higher level and would have been a place at which to buy the stock with a stop under 29¼ or to buy Calls because this was a double and triple bottom. Around that time you could probably have bought a Call around 34 or 35 because the stock had been narrow for a long time. In 4 weeks it advanced to 37 and the trend continued up until May 25, when it reached 49½, giving an opportunity for a profit on at least 10 points net. Then the stock reacted to 41½, which was an old top and a place to again buy a Call or to buy a Put and trade against it.
In July and August, 1935, Chrysler crossed 60, the old top of 1934, and held for 4
weeks without breaking back under 57, which according to the rules in my books, was a
place to buy with a stop at 57. Having crossed the top of 1934, it indicated higher. After
holding for 4 weeks in a narrow trading range, around September 10 you could probably
have bought a Call at 65. In 30 days it was up to 74½ with the main tread strong up. You
could have bought another Call and also bought a Put and held your stock after calling it at the time the first option expired.
In November, 1935, Chrysler advanced to 90 and at no time had it reacted 5 points after it crossed 60. This was another opportunity for making 25 to 30 points’ net profit on an original risk of $142.50 and you might even have bought more Calls on the way up after you had profits and started handling a pyramid and made much larger profits.
Always watch a stock if it makes a top or a bottom and holds for several months without breaking the first support level; then when it begins to show activity by breaking to new lows or advancing to new highs, it is the time to buy a Put or a Call. (Refer to Rule 4)
1936 – February 3, Chrysler declined about 10 points, making low at 91½, than advanced on April 13 to 1037/8; then again declined on April 30 to 915/8 and held in this range until June 5, when it was again down to 915/8. From February to early June, nearly 5 months, it held in a narrow range without breaking the low level of 91½, and making bottom for so many months around this level indicated that it was due far a big move one way or the other. In the early part of June you could probably have bought a Call on Chrysler around 97, good 30 days, but i£ you waited until it crossed several weeks tops at 98, you would have bought a Call in the early part of July good 30 days, which you could probably have bought around 100 to 101. In 30 days it was up to 116, when you would have a profit of 12 to 16 points, It went right on up to 1247/8 on July 27, advancing 32 points from the low of June 5 Without ever reacting 5 points. If you had bought stock when it was near the low or bought a Call, you could have called the stock; then bought a Put to protect it, and kept it right on thru, or you could have put a stop lose order on it and carried it thru. In the November, 1936, Douglas high 77. December high 77¾.
1937 – January, high 77, Three months with tops around the same level. This would
have been a time to buy Calls and go short because the high level of the stock was 82, made in October, 1936. It was also a time to buy Puts because they could probably have been bought 5 points down or you could have waited until the stock broke 68, the low of
December, 1936, and then bought Puts good 30 days. The stock declined fast and after you had profits on Puts, you could have bought a Call and carried it on down.
In May, 1937, Douglas declined to 47½, down 30 points from the January high, affording excellent opportunities for pyramiding on the way down and selling the stock short or for staying short after you once had a profit in a Put and a chance to protect it with a call. The percentage of profits compared to the risk would have been enormous. The above examples show you the advantages and opportunities of using Puts and Calls at critical times and when stocks are active. No one can expect to make a great success in any line of business unless they study it contant1y and learn more and more about it. There is no business in the world that wi11 return greater profit on the risk and the capital than speculation, using Puts and Calls, provided you keep up monthly and weekly high and low charts on quite a few stocks and study them. Follow the rules laid down in my books, Truth of the Stock Tape, Wall Street Stock Selector, and New York Stock Trend Detector, and you will learn how to trade successfully in Puts and Calls.
The more you study the market and the more you study Puts and Calls and learn how to
operate, the more advantages you will see in using them.