No one, least of all I, suggested that any specific income stream was completely safe. In fact, as far as I can tell, nothing in this world is safe. Breathing can be dangerous depending upon what is in the air we breathe; looking both ways when we cross the street doesn't absolutely insure that we won't get run over; putting helmets on our kids when they are engaging in activities may reduce the likelihood, but it doesn't prevent head injuries. Risk is everywhere and it is certainly present in trading and investing. I wrote "Trade Your Way to Wealth," in part, at least to show readers where the risk is and ways to reduce or manage risk in their investments.
In my new book, "Smart Investors Money Machine," I demonstrate a wide variety of ways we can create streams of income, but I also try to discuss risks associated with each strategy. In my view, one of the important ingredients in successful investing is knowledge of and management of risk. If the anonymous blogger was under the impression that I think simple diversification makes for safety, I failed to make myself clear. Diverse streams of income, like the helmet on a child, may reduce risk, but they do not remove it. Nothing removes all risk.
Recently a neighbor asked for some coaching as he was re-entering the investment world. He told me he wanted something safe with a very high income flow. I said I thought that is probably what everyone wants, but the combination is very difficult, if not impossible, to find. As a generality, the higher the potential reward the higher the potential risk and vice versa. Only by gaining knowledge can we make decisions and implement plans that help us manage the risk no matter what we are doing.
DRYS (DryShips, Inc.)
Company Profile
Sometimes cheaper stocks also offer option plays with seemingly high potential. DRYS, as an example, as been trending upward since early March but still remains quite depressed compared to highs seen as recently as January. Currently, the stock is pushing against a resistance around $6 and if it could break through, I am considering selling some Apr 6 naked puts currently trading around 85 cents a share. Even if the stock fell back a bit, I might not mind owning it for $6 less the premium the market is willing to pay for those puts. If I sold the puts and the stock was above $6 at expiration I would likely not be assigned the shares and would be able to keep the whole premium.
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains. With that opportunity comes additional risk so we try to watch trendlines and support levels in an attempt to minimize any losses.
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RSH (RadioShack Corp.)
Company Profile
This past week $10 Trader closed two winning trades. One of them, RSH showed a 10.8% gain before commissions in just 12 days. The stock has now retraced a bit but still looks like it could offer a good move to close the still large gap on an upturn.
COF (Capital One Financial Corp.)
Company Profile
COF, after coming off a double bottom trended up to resistance near the $15 level. If the market is, indeed, gaining strength and financials are coming back, a break above $15 could signal perhaps as much as a $10 a share move to a next target level.
GIS (General Mills, Inc.)
Company Profile
Our Success Trading Group members scored 2 more winning trades this week with winning trades on General Mills, Inc. (Ticker: GIS) and Wal-Mart (Ticker: WMT). With the current volatility we are watching our "regular favorites" for new opportunities for additional short-term trades.
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