How to turn a loss to gains

It is no secret that I love MSFT and very much!! I cannot remember how many times I have talked about it here. MSFT is truly my darling as it has let me make reliable and consistent gains and incomes over years. Needless to say, when people hate it and dump its shares, I’m the buyer. I can hardly lose money by collecting MSFT shares during panic sales. The most recent experience just a few weeks ago was interesting as I initially had significant paper loss but I eventually turned it to notable gains. Thought to share with you how I did it.

Since peaked around $50 end of last year, MSFT had entered into a notable downtrend. It dropped to as low as $40 in the past few months. As I said, when people dislike MSFT and are selling, I’m buying and I  was actually aggressively buying  when it started to go down below $45. I used call options to do so. Here is the first trick how to play with options. Unless you are very savvy with options, it is very difficult to make money with out of money options. Statistically over 70% of chances options will expire worthless. With this in mind, I generally buy deep-in-the-money options for those I don’t mind to own if I’m wrong. This was exactly how I played with MSFT calls. I bought March $40 calls when it was around $45. Unfortunately my timing was off as MSFT continued to go down and in Mar it plunged to close to $40 for a short while. Well, when my March call options expired Mar 20, I could choose to close my calls to take the big loss (almost $4/share). But I sticked to my strong belief in MSFT and I excised my calls by buying MSFT at $40. My paper loss obviously did not go away as I still had $4/share loss in my account with now holding my MSFT stocks.  Then came with the April 20 earnings report and MSFT surprised everyone (except me of course) that it was doing much better than expected. Its stock shot up by 10% the next day and is now trading around $49 as I’m writing. Well, this magnitude of rally in one day for this size of the company is usually a result of short squeeze as apparently there was too much short interest floating around before the earnings call and people had to rush to cover their shorts when they were caught up by surprise. Now actually I feel MSFT is in a short-term extreme overbought condition at a nose-bleeding level. I don’t want to give up my nice sizable gains I have got. So I’m now selling calls against my existing stock shares. In addition, I’m even sell short MSFT stock naked. It’s obviously very risky but I’m so convinced that MSFT has to “crash” first before being able to go up again, I’m willing to take the risk.  So here are two takeaway messages:

·    Don’t play with out of money call options lightly unless you really know what you are doing

• For long term great stocks that you want to own, stick to your plan and don’t give up easily.

Remember this: When you buy good stocks at good prices, good things will happen!!