gdl,
Gee ... you haven't said anything I can disagree with. What will I do now (running in circles, screaming and pulling my hair out)!
I think the best approach going forward is to not be skeptical, but to be guarded. Or, better yet, more guarded. Because one should always be guarded when investing in a stock market. Isn't the first rule of investing: don't loose the money? The second rule: don't forget the first rule?
That said, my current method makes heavy use of options, most often along with long stock positions. In other words, I prefer to hold stock as margin instead of cash as margin. The method is designed to be guarded -- I'm long the stock by owning it, but I go short the stock by selling Calls on it. If I pick the stock right, it just churns up and down and I usually break even of make a little by the stock is assigned. But it gives me a continual monthly income by selling Calls. The minimum return I look for is 3% per month, or the stock doesn't interest me. As it has turned out, I have never gotten less that 3% per month. Most of the time I'm in the 4s, once in a while in the 5s. Three percent per month compounds monthly to 43% annually. Aim for too high of a return, you are almost guaranteed to get in a stock that is a trap as its floor drops out.
To make the most on that type of trade, I time the sale of the options using an indicator that suggests the stock has started a downtrend. I try to select stocks that will normally only go down a few percentage points then reverse back upward. Some stocks which have already dropped by a large amount, but which still have good fundamentals, are good candidates to trade this way. They also tend to have high intrinsic volatility after a large drop, so you get more for the options (very easy to get over 3%).
One possible problem with that method is that the stock can go down more than anticipated while I'm holding Calls, and I can't sell more Calls to make up for that (because I already own Calls), but I can buy Puts. Also, when the Calls expire, I want to sell more Calls but I wont get anything worthwhile if I sell those that are priced at the level that I purchased the stock, so I have to sell at a lower price. That means that the stock might get assigned at expiration at a price lower than I paid for it. To handle that, I calculate Support and Resistance levels, so I'll sell Calls at a price that is lower than the purchase price but higher than a resistance level, then wait for expiration while monitoring what happens. If it gets assigned that time, then I'll loose money on the stock, but I've been making money by selling the Calls, but it's possible that there is an overall gain. So far I haven't had that happen (where the stock has been assigned for a loss on the stock). Though I do have a position now where that could happen (CLF).
I thought in the past that CLF would be a bad stock to trade (it's fundamentals go against all the rules I use to select stocks to trade this way), so I recommended against it and stated all my reasons (which for some odd reason totally pissed off someone who thought it would be a good stock to own long). Then I decided to do it anyway and to use it as an example of how to trade it in the above manner and still make money on it overall, while anyone who only bought the stock would loose money over the same period. So far, I've sold Calls on CLF twice (the current Calls expire Mar 22) and I bought very short-term Puts (expire Feb 22) as insurance just before earnings release last week. Turns out I didn't need to buy the Puts, but it was a wise thing to do and I wouldn't change anything.
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