How much weight do you give institutional ownership of stocks?
Institutional ownership of a stock is where a large investor such as a mutual fund or insurance company owns a stock. For a stock to really make powerful, long-term moves, you almost have to have institutional sponsorship. Although individual investors are flexing their muscles and having their impact, on a stock such as CSCO with billions of shares, individual investors cannot buy enough shares to move the stock. You have to have institutions that can afford hundreds of thousands of shares buying into a stock. Small stocks with small floats cannot sustain institutional sponsorship-there are not enough shares available. Thus small stocks have a dilemma: they need institutions to really make long term, sustained moves, but to get enough shares they have to dilute their stock.
We really like to see institutional buying in our plays. It gives great power to moves, especially those long term moves where a stock can move up several hundred or thousand percentage points (e.g., QCOM, CSCO). Also, when we see institutions buying shares of a stock that is in a good technical pattern, we like the play even more. That buying will eventually have the effect of pushing the stock higher. That does not, however, mean that we always require institutional buying in all of our plays. On smaller stocks there may not be any institutions buying, but we may see a lot of accumulation going on by smaller investors. Moreover, some patterns are just good patterns regardless of whether institutions are buying at that point or not. Still, we always look to see if we can determine if institutions are buying-if they are, that is always a positive. It never is the determining factor, but it is a factor in analyzing plays.
If I think the market is going to fall, should I buy protective puts on my long term holds or should I sell calls on them?
This is a matter of personal preference. Buying a protective put allows you to almost capture the dollar for dollar decline in a stock you hold when it is selling off. That is because the put is growing in value as the stock sells off. There are disadvantages. First, you have to spend money to buy the put. That is money you have to have in your account. For retirement accounts, that can be a problem. Second, the put is a wasting asset. You want to buy a put option that has enough time to cover the period you think selling will occur. If selling continues beyond that time you would have to buy additional put options.
With selling covered calls, you don't capture the dollar for dollar fall. You take in a limited amount of funds that you will keep if the stock continues to fall. Moreover, you run the risk of losing your stock if the stock runs up instead of down. We like them, however, because we are taking in money, not expending money when we sell calls. We also have more control over the time frame-we like to sell the next month out so time can work for us, not against us as with a protective put. Further, if the stock keeps falling, we can buy back the calls we sold at a lower price and then sell lower strikes to take in even greater premium. This strategy works well with retirement accounts as it generates capital instead of expending it.
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