3 Lessons Investors Need to Learn
Generally, I do not believe in stop losses on long-term investments. I consider ZNGA long term, however, it's a speculative long-term investment. Because I do not want it to turn it into NOK, I manage it differently than I do less speculative, core positions in stocks such as Intel(INTC) and Time Warner(TWX) .
Unless something fundamentally changes in a powerhouse like Intel or Time Warner, I buy more consistently. And, on weakness, I double down. While I will do that to a certain extent in a more speculative stock I am confident in like ZNGA, I operate with additional caution. That includes less of an appetite for on-paper losses and a quicker trigger finger for taking profits.
Despite having a reputation as risky, options can be incredibly boring.
In my history, covered calls always seem to end well, particularly relative to a speculative play on a low-priced stock.
In recent months, I pocketed entire premiums as covered calls on INTC, Pandora(P) and other stocks expired worthless. Just the other day, I closed a P covered call for an 88% gain.
Boring trades like this tend to provide consistent and somewhat predictable results. When I write a covered call, it's straightforward, a clear-cut proposition. The call expires worthless. I win. I buy it back at a profit. I win. My shares get called away. I win. If I intend to hold the underlying stock long-term -- irrespective of coupling it with a covered call -- I really cannot lose.
If a stock I own drops from $10 to $9, I lose (on paper if I do not sell) $100 on 100 shares. If I hedged the position with a covered call and collected a premium of, say, $0.25, I am only down $75 on the stock.
Boring, but incredibly effective. There's really no question -- you're better off slowly building gains via income generation than you are watching the value of low-priced holdings plummet at the rate of something such as Nokia.
Reviewing something as simple as a gain/loss statement and looking for multiple occurrences can help you improve or, at the very least, double-check yourself as an investor.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, the author was long INTC, NOK, P, TWX and ZNGA.