In last weekend's article, I suggested that a potential strategy might be to capture 8% or 10% income and that a given investor might be willing to exchange that regular income for potential capital appreciation and that as long as he was getting his 8% or 10% it might not matter what gyrations the underlying investment might undergo. That was not meant as a recommendation, only as a method someone whose priority was income might undertake.

An anonymous writer on the blog challenged the theory saying that he/she would be happy with the return, but wanted safety. I would suspect that safety is something that many would like, but my question to the writer was how he defines safety. The term is amorphous; it is relative, and it is not particularly helpful without greater definition. What I might consider safe another might consider to be somewhat risky or vice versa. Let me say that the markets are not safe. There is risk in every investment. There were certainly times when people believed that companies like Bear Stearns or General Motors or Enron were "safe" investments. As it turned out, they weren't.

Highly rated bonds were often considered safe, but we have seen that it "ain't necessarily so." Safety in life, I believe is an illusion. Is it safe to walk down a set of steps? I had a friend in her 40's who died in a fall down the stairs. How about taking a walk? People fall, get hit by lightening, run over by cars, etc., etc.

Complete safety is unlikely. I have found that trading safety in my world is best established by exit strategy. Like most safety it is imperfect, but it has worked well for me over time. Other safety strategies may involve buying puts or creating hedges. However, it seems to me that ultimately the trader must begin with his or her own definition of what constitutes adequate safety for him or them. That understanding is one of the elements necessary to address as the trader formulates a personal plan as I have often mentioned in these articles and treated in detail in my book "Trade Your Way to Wealth" .

Some time back I wrote an article on understanding oneself. I believe that self-analysis must be the starting point for any successful trader. He must understand his personal risk tolerance, what he demands in terms of relative safety, what he is endeavoring to accomplish with specificity, and the strategies and tactics he intends to employ. It is simply inadequate and superficial to say he wants a "safe" investment without understanding what "safe" means to him.

Good Trading!
Bill Kraft

Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with real-time alerts intended to provide you with the opportunity to make many, many profitable trades.

Here is a play from the Success Trading Group:

AT&T, Inc. (T)
Our Success Trading Group will be watching closely for entry points next week. We currently like AT&T Inc. (Ticker: T) at its current price for new positions.

Have a great weekend and we'll trade next week.
Success Trading Group Team

Our Option Trading Service is for conservative traders that understand leverage principles and enjoy the challenge of options trading. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on always minimizing our losses!

The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.

Here's a look at a trade Bill is currently working on:

AMR Corporation (AMR)
With the recent jump in volatility, I like to look at candidates where I can sell premium to take advantage of high implied volatility that often translates into expensive options. They can be particularly when they also appear to be overvalued. In the case of AMR, I see a relatively low priced stock that appears as though it has formed some support with options that appear that they may be relatively expensive and somewhat overvalued. As I wrote this on Friday, the out of the money June $6 puts were offering a static or unassigned return of over 4% for the month. When selling naked puts, there is always the risk that the stock may be assigned to me if the share price falls below the strike I have sold so I have that amount less what the market pays me as the overall risk in the trade.

Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!
"Smart Investors Money Machine" is Bill Kraft's most recent publication.
"Trading for Keeps: Making Money with Low Risk Option Trades" a trading DVD by Bill Kraft