Moraine Lake in the Canadian Rocky Mountains  *  Photography by Dennis Phan






I did my studying, training and actual trading simultaneously during my learning process with Investools.


I remembered my first few trades after the 2-day stock seminar were both excited and frustrated. I made money in one trade and gave it back the other trade on a 50/50 basis. I was naïve to think every thing should be “automatic.” The green and red arrow system should make easy money for me. I later realized I am not living in a perfect world; therefore, I should work for the better result, not just waiting for it to happen.


I was still basically a stock trader before I finished my advanced option courses. The call and put give me great leverage.  However, they are directional investment vehicles. If the market moves in the direction against my trade, time decay will eat me alive. That was one of the reasons I was not trading long call and put a lot even after I finished my basic option courses. I, however, sell covered calls against the stocks I own because it is relatively safe and time is not totally against me. Before I started my advanced option series, I basically bought stocks and sold covered calls. I made a lot of “rookie” mistakes in my covered call trading. After I bought the stock and sold covered call against it, the stock sometimes dropped in value. I then aggressively sold the covered call again either at-the-money (ATM) or in-the-money (ITM) to get more premium and further reduced the net cost of my stock. However, if the stock moved up before option expiration day, I helplessly watched my stock being called out unprofitably. I later learned how to buy back the call and sell next month call at a higher strike price to avoid unprofitable trade. I also found a way to make quick money during the 2nd or 3rd week of the month. I bought a volatile stock and immediately sold ATM or ITM covered call depending on the premium. As long as the premium of the call exceeds the intrinsic value, I make money. Since the stock is already at or above the strike price, there is a good chance I will be called out on the 3rd Friday. The key here is to find volatile stock so there is still time value left even if there is only a little more than one week before the option expires. It takes time, practice and experience to do these tasks.


After I finished my advanced option courses, I loved selling naked put and playing diagonal bull call spread in addition to my covered call strategy. Selling naked put is by far the most successful strategy I trade. I prefer selling naked put to bull put credit spread because I don’t mind to own the stock and I have enough capital to buy the stock if it is put to me. Selling naked put, in my opinion, is another way to buy stock at a discount price. If the stock closes above the strike price, I keep the premium with 1% to 2% monthly income. If the stock closes below the strike price and it is put to me, I consider buying it at a discount because I wanted to buy it from the first place anyway. In my opinion, selling naked put is relatively safe if we know the strategy well enough and have capital to cover ourselves. I am known as “the naked put man” in my master mind group which meets monthly to discuss our trades and to learn from each others.


I always trade with two golden rules in mind:


·        Rule #1:  Do not lose money.

·        Rule #2:  Never forget rule #1.


It sounds silly at first but I realize it helps down the road. To enforce these rules, we need time, patience and skill. I admit I am still working on it. I made two bad trades last year not following those rules. I paid big for my mistake and because of it, I remember my lesson well.


During live seminars, some traders told me stock takes the steps up and takes the elevator down due to …gravity. Well, I guess we all know the real answer is panic selling is usually more intense than panic buying. Sometimes we need to make joke just to lighten up our day. From their comment, I began to include bearish strategies in my trading plan.


Time is one of the most important factors in option trading. I try everything in the book to make time to be my ally, or at least neutral, when I trade option. To enter a bullish trade, I prefer selling naked put to buying long call. By doing so, I make time to be my ally instead of being my enemy. When I sell naked put, I make money if the stock goes sideway or up and time is on my side. Selling naked put will limit my gain to the premium I collect and my loss is, in theory, unlimited if the stock continues to go down. In exchange, I make time to be my ally and I can make money 2/3 of the time. If I buy long call, I can make money only if the stock goes up and time is against me. Buying long call will limit my loss to the premium I pay and my gain is, in theory, unlimited if the stock continues to go up. In exchange, time is against me and I can make money only 1/3 of the time. To enter a bearish trade, I prefer selling short call or play bear call spread to buying long put. When I sell short call or play bear call spread, I make money if the stock goes sideway or down and time is on my side. If I buy long put, I can make money only if the stock goes down and time is against me. It does not mean I never buy long call and put. I occasionally buy long call and put when I see a good chance to make quick money. At one time, I got in and out of the SPX in one-hour time span and made quick money by buying long put and selling it a bit later.


When I first started trading, the questions of what, when and how to invest were important to me in that order. I needed a fundamentally strong stock for my bullish trade; I relied on the green and red arrow system to give me the buy signal; and I sold the stock when I felt happy with the profit. When I got deeper into my studying, I learned in details about trend, volume, resistance, support and candlestick chart reading. The knowledge I learned enables me to raise my trading to a higher level. The what, when and how to invest questions are still important to me but the order is now reversed. I now concentrate more on how to trade the option. I currently have a set of stocks that I traded in the past. By trading them regularly, I pretty much recognize their price patterns. As long as the company does not go bankrupt in the near future, there is a good chance I will make money trading it. Now, when I want to buy a stock, I do not buy it right away. I sell naked put ATM or OTM. If the stock is put to me, I buy it at a discount price and immediately sell the covered call against it, usually at the same strike price. If the stock is not put to me, I keep the premium and recognize the monthly income. When I want to sell a stock, I do not sell it right way. I sell covered call ATM or OTM. If I am called out, I make money selling the stock plus the premium from selling the covered call. If I am not called out, the net cost of my stock is reduced and I can sell the covered call again the following month. That is what I mean by calling the combination of selling naked put and covered call my monthly “money machine.” I realize that sales equal incomes; therefore, I sell a lot and I buy only if I have to.


Emotion is also a critical factor in my trading. When I first started, I let my emotion trigger my decision. I was reacting to my emotion. I later learned to observe my emotion and let the technical dictate my decision. The price patterns and candlestick chart lend me big help in accomplishing this task.


The trading experiences I described above maybe confused to some readers but they make perfect sense to those with option trading knowledge and experience. Trading naked option is risky for beginners and hence, it is not recommended.




请阅读潘家墉作品 * Xin mời đọc một số tác phẩm cuả Dennis Phan.




Dennis Phan   家墉

Khai Minh, UCLA & Investools Alumni

Los Angeles, California, U.S.A., 25 May 2007





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