Stock Market Cash Flow: four pillars of investing for thriving in today’s markets [PDF]

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Stock Market Cash Flow: four pillars of investing for thriving in today’s markets Book

Is it possible that a stock price could ‘jump’ over your exit price? Absolutely. This can happen around earnings announcements or other newsworthy events such as a pharmaceutical company failing to gain FDA approval for new a drug. This is another place where an education in options will be valuable.

At this point, you know how options can be used to generate cash flow. For serious investors, options also can be used as insurance on their investment positions. For example, if you are investing in a company that has an erratic stock price that jumps around a lot, a good insurance policy can protect you in the event those jumps don’t go your way.

A good example of this kind of stock was Research in Motion (RIMM), makers of the Blackberry phone and other electronic devices and services. This particular stock had a tendency to gap, meaning its stock price made huge jumps or drops in price that appear to leave gaps on a chart.

Much of the time investors can see these coming on the earnings calendar. If you happened to have a long position in a stock like this and have your safety stops in place for protection, what would happen if the stock gapped right over your stop? Suppose you entered a stop at $34.50, but the gap meant that your stop triggered much lower at $29.50 (the next price after it gapped). Suddenly, you are facing a loss you didn’t expect.