Brian Lee
Jun 23, 2025
We’re going to build toward complex, high-volatility covered call strategies eventually. But first, we start simple: buying and selling just 5 shares. It’s low-cost, low-risk, and perfect for learning the core mechanics of buy low, sell high. We’ll use a low-volatility stock to focus on the basics.
I’m sorry for not adding article publication date in the previous articles. Now that I’m talking about “today,” I included the publication date in this article.
There’s no magic formula. You can’t make sound investments without understanding the business. Most of my holdings are in high-tech because that’s what I know. Warren Buffett says to invest in what you understand, and unless you think you’re smarter than him, that’s advice worth following.
When the market turns, understanding your investments gives you peace of mind. You’ll sleep well knowing you can wait. If you want quick profits, I hope you brought millions. Otherwise, we stay patient and profit from panic, fear, and hope.
In the US, publicly traded companies (all companies on the stock market) must file an annual financial report called Form 10-K. This report outlines the company’s finances in sufficient detail for investors to understand the health of the company. These forms are reviewed by the SEC, and it is illegal to lie in them.
Therefore, I spent quite a bit of time learning how to read them. To do so, you must learn basic accounting and study balance sheets. I’ll perhaps cover how I review these in the future.
Please let me know if information on reading Form 10-K interests you.
I recommended using limit orders in the previous article but left out an important detail: all stock market orders carry an expiration.
I only use two types—Day and GTC.
A Day order is only active during regular market hours on the day it is placed. If the order doesn’t get filled by the end of the trading session, it expires. This makes Day orders useful for buying, since it prevents you from accidentally purchasing shares at an unfavorable price the next day.
A GTC (Good-Til-Canceled) order remains active until it is either executed or manually canceled, up to a maximum of 90 days on most broker platforms. I use GTC orders for selling, since they let me set the price and work on other projects without checking the market constantly.
Entry price is the price at which you buy a stock. It represents your cost basis for the trade.
Exit price is the price at which you sell the stock. It determines your profit or loss relative to the entry price.
Opening price is the first price at which a stock is traded when the market opens for the day.
In my strategy, I use the opening price as the mean (\(\mu\)) when applying daily volatility. This is another area where I’m unsure how optimal the decision is and perhaps it can be improved. The actual mean derived from calculating HV30 may differ from the opening price. But in practice, this shortcut has proven quite useful.
It would be nice to have a rigorous analysis on how to choose \(\mu\) for the day. But until I see that my strategy is ineffective, I choose not to spend time agonizing over it.
For this example, we’ll trade Ford. I picked Ford for several reasons.
It’s cheap. The risk of loss is low, although the return will be very small. But that’s okay—we want to learn the basic mechanics first.
It pays quaterly dividends. When you own 5 shares, the expected dividends are very small, just a few cents. However, if you happen to hold the stock across the ex-dividend date, you’ll see how dividends work in practice. The ex-dividend date is the cutoff—if you own the stock before this date, you qualify for the next dividend payment.
It has high trading volume, so you have some chance of selling shares at a later date.
It has low volatility. Therefore, you won’t be losing much even if Ford stock drops.
It is optionable. In other words, there are options available for Ford stock. Not all companies offer options. Since Ford options move slowly, you have a chance to take your time and really study how the strategy works in action.
I use Fidelity. All information regarding Ford stock and options are found in Fidelity internal websites and trading software.
Today, Ford opened at $10.60 with an HV30 of 22.58%. That gives a daily volatility of
\[ \frac{\pm 22.58\%}{\sqrt{252}} \approx \pm 1.42\% \]
This translates to
\[ \$10.60 \times \pm 1.42\% \approx \pm \$0.15 \]In other words, Ford will likely stay between $10.45 and $10.75 today—and probably hover in that range for the next few days.
Let’s use a limit order that will expire by the end of the day to buy 5 shares. At what price? This really depends on the stock. I found that low volatility means we can’t take full advantage of \(1\sigma\). So I’d be inclined to either buy at the opening price or at a slight discount, perhaps
\[ -0.3\sigma = -0.3 \times \$0.15 \approx -\$0.05 \]Therefore, the entry price would be
\[ \$10.60 - \$0.05 = \$10.55 \]Since we’re buying 5 shares, we look to spend about
\[ \$10.55 \times 5 = \$52.75 \]I recommend watching stock prices for a few days to get a feel for calculations like this. When you are just starting out, it’s better not to spend money, but to place orders that don’t execute by using conservative prices. This will teach you the mechanics of purchasing stocks using a limit order.
In the simplest case, you can place a GTC sell order at $10.65, which is the opening price plus \(0.3\sigma\). But this price may or may not be realistic. To get a better sense, we can check the option deltas.
Option deltas tell us the Black-Scholes estimate of the chance that a stock will reach a certain price. As mentioned earlier, both strike price and delta matter.
Strike prices aren’t continuous—they’re spaced evenly. For Ford, they’re separated by $0.50, such as $9.50, $10.00, $10.50, $11.00, and so on.
To estimate the delta for $10.65, we can look at the deltas for nearby strikes. Let’s say $10.50 has a delta of 0.4 (40% chance of reaching that price), and $11.00 has a delta of 0.2 (20%).
I usually eyeball the delta for in-between prices. A more accurate method is needed, but linear interpolation doesn’t work well because deltas follow a normal distribution, not a straight line.
Let’s not worry about complex details for now and keep the example simple. Therefore, let’s assume a delta estimation for selling stock at $10.65 is about 0.30. This is a pretty low chance of execution, but we look to profit 10 cents a share or
\[ \frac{\$0.10}{\$10.55} \times 100\% \approx 0.095\% \]So perhaps, $10.65 is not the best price since the stock price crossing $10.65 may only have a 30% chance. Should you lower the price? That also depends on your situation.
I don’t mind waiting on slow-moving positions with low value, since if I can’t sell it for a long time, I’m bound to collect dividends. Personally, I would stick with the exit price of $10.65 to take about 10% profit.
I also find that aiming for a smaller profit is possible with high-volatility and high-volume stocks, since I have many chances to repeat the buy-and-sell cycle.
Since I often stay within the bounds of \(\pm 1\sigma\), the rule isn’t quite useful in setting exit prices—the rule applies to \(\pm 1\sigma\), \(\pm 2\sigma\), and \(\pm 3\sigma\) ranges. This is not a problem. By choosing to work within \(\pm 1\sigma\), we define a price range in which we wish to trade. It’s sufficient to know that price changes larger than \(\pm 1\sigma\) are unlikely and set the exit price accordingly using option delta.
There are always exceptions. For example, TSLA traded outside of \(1\sigma\) today. This is a great example of why it is important to understand the rationale behind the system. A good foundation allows you to spot unusual movements like this and capitalize on them. This will make more sense once I explain option delta hedging.
The total profit is 50 cents if you buy 5 Ford shares at $10.55 and sell them at $10.65. It’s important to keep this in perspective. Percentage-wise, this is a good profit—beating most basic investment vehicles.
The key here is to see that making more profit simply requires that you invest more money, not that you work longer hours. In other words, making more money doesn’t require a promotion, working overtime, saying yes to everything, etc. You can increase income over time by learning and investing more capital.
No, once you become proficient at making decisions like this, it takes only 5–10 minutes of simple calculations in the morning. If you are conservative, you may only make one or two trades every few days.
At the end of the day, the core principle doesn’t change: you are buying assets that will pay dividends in the worst case, and you may profit from iterative buy-sell cycles. Over time, you can grow your assets using the profits.
As you may have noticed, I’ve done everything I can to avoid giving you a list of stocks. For one, I don’t want you to go out and just blindly buy what I trade. You will likely lose everything if you do. I watch my portfolio like a hawk. Unless you are ready to do so, do not risk your money.
Secondly, I want to make sure that you read everything I write to the end before you invest your money—and at least see what’s involved in trading for a living.