1. In mid-November 2003, Walmart opens down $1.50 to $56.25
and proceeds to trade down from there breaking the lower end
of an uptrend channel.
2. Wal-mart then has a quick consolidation in mid-November around
the $54.50- $55.00 level followed by a small technical rebound
back to around $56.25. This may have been due to some investors
thinking that the consolidation was a bottoming and thus a buying
As it turned out, it was a false bottom and the stock options
investment traded back down rapidly to lower lows. A purchase
at that level probably led to losses.
3. In early December, Walmart starts another consolidation around
the $52.50 level. It seems to be another buying opportunity
for bottom fishers. There has already been one false bottom
that has cost someone a lot of money. If that investor employed
a protective put, the loss would have been limited and they
may have been able to purchase again at this level if they wished.
4. The $52.50 level turns out to be another false bottom and
the stock options investment trades down another $2.00 to $50.50.
Here again, the same opportunity exists. Is this the bottom?
If it is, a nice profit can be made quickly. If not, losses
can mount quickly as another false bottom occurs and the stock
trades down rapidly. This level, so far,
turns out to be a good buying opportunity as the stock options
investment rebounds back up to $52.50 quickly.
Conclusion: Bottom fishing can be a very risky endeavor; however,
an investor can not ignore the potential reward that comes with
the risk. If the risk can be minimized without affecting the
potential reward to a significant degree, the risk/reward scenario
will be an advantageous one for a potential investment in a
stock options investment.
The protective put will accomplish this perfectly. In a case
like this, the protective put strategy should be employed at
any level where the investor deems it worthy of a capital commitment.