Archive for the ‘finance’ tag
On the Eighth Day of Christmas – US Options Trading Part 2
On the the Third Day of Christmas I gave you a very quick and brief introduction to options trading, if there were any gaps or anything you didn’t understand feel free to chime in with a comment. Part 1 was an attempt to spark your interest; this post is to show you the mechanics of how it works. Again, there’ll be plenty of screenshots that enlarge when you click them, so this article is best viewed online.
Before we dive into the details, a small disclaimer: If option trading isn’t your thing or the details get a bit heavy, feel free to read the previous 7 days of Christmas! Now on to the practical, I’ll show you a process from start to finish, what you can expect if you use an online broker, a comparison between options and shares and a couple of case studies: one of a successful options trade, and one that wasn’t so successful! (Losses are referred to as ‘learning experiences’ or ‘donations to the market’) 
In the last week of trading I’ve said goodbye to a trade that I had stuck with through thick and thin (it was like saying goodbye to an old friend!). The next day I had the joy of the $1,200 windfall and I was briefly acquainted with ‘ENER’ (Energy Conversion Devices Inc.) before it dropped, hit my pre-determined stop loss and my trade was cancelled.
The US Market
So let’s start from the start, obviously. I trade the US market as there are more stocks, and more importantly more stocks with options attached to them. (Options aren’t available on all stocks) Also, the US market has more participants (buyers and sellers) so there are more stocks that are liquid.
Finding a Profitable Stock/Company/Option
All publicly listed companies put out an earnings report every quarter, this data is made available online (and to you and me) via several online stock screeners. Some of the more popular ones are yahoo, MSN Money and more recently I’ve been experimenting with Finviz. Plenty of information is available on combinations of financial criteria to use in your choice of screener, it’s a whole other article to explain the definitions of each criteria I use but the image below is an example of a screen that I use.
There are plenty of other ways to identify a profitable opportunity: listen to the news, keep your eyes and ears open, a technical analysis of charts & data (too complicated to explain right now!) or any of the following websites;
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Reviewing Profitable Opportunities
The selection criteria I use identify profitable companies that are under valued or have taken a down turn in the last 12 months. From the screener I’ll look into each company, see if there’s any relevant news, upcoming announcements or see if they have taken a drastic dive and a due to slowly return to their previous 52-week high.
Options versus Shares
As an example, today Google is trading at $596 a share. Now remember from the Third Day of Christmas that an option has three components, the strike price, expiry and premium. If you wanted to have the ‘option’ to buy Google for $600 up until June next year, you’d pay $44.20 for this option. For less than 10% of the cost of the share you have the right to buy Google at $600 up until June 2010. If Google went up to $1,000 you’d have the right to buy it for $600, realising $355.80 profit ($1000 – $600 – $43.50 = $355.80) Check out the options chain below to compare strike prices and premiums for yourself.
Winners are Grinners
I’ll use a profitable trades as an example. Once I’ve done my screen, confirmed the company is profitable, investigated the news or its past performance, any outstanding factors etc. I’ll select my combination of expiry month, premium and strike price. Upon placing an order and having it confirmed, I’ll then place 3 more contingent orders. One as a stop loss to sell all of my option contracts if the stock moves down (or the opposite direction I’ve anticipated), a break even price that gets my initial investment off the table & sells 1/3 of my contracts, a profit target that sells another 1/3 of my contracts and credits me with some profit and then finally 1/3 of my contracts are still ‘live’ and have the capacity to increase in value.
The image on the left is of ‘Astoria Financial’ (AF). When AF was trading at $9.40 I bought an option on AF to buy at $10 (strike price), this cost me a premium of $0.99 and lasts until April 2010 (expiry). Since then AF is trading at $11.86, the premium I purchased is worth $2.10. Let me repeat this, it’s important – the stock went up to $11.86 from $9.40 (26%), the option premium increased from 99 cents to $2.10 (111%). Ok so the stock went up by about ten percent, but by using the leverage of options, I doubled my money.
An Expensive Lesson
I’ve been playing with options for the past few months and virtual traded for a few months prior to that, so I’m still in a teething process myself and developing my own rules to trading, with the main goal to preserve my capital and manage risk.
As I mentioned before, I put a contingent order on a stock as a stop loss, if the stock/option goes belly up, I’ll be stopped out of the trade, take a small loss and move onto another stock. The leverage I’ve outlined above (26% versus 111%) also applies to a loss! I put one of my first stop losses on the stock, so while the stock didn’t reach my stop loss of 10% the option premium plummeted to nearly zero! I held onto this stock and luckily the price moved right back up, at this point I could place a new contingent stop on the option premium.
One day after this stop bounced back up to the tune of $850, the next day it dropped back down! As I had a stop loss on the premium I took only a small loss and exited the trade.
Try It Yourself
Now this post has been a bit heavy in detail but don’t let that scare you! The leverage of options and the opportunities out there are too many to ignore. Start small, get onto an online broker and start a virtual account for free and start experimenting. Obviously there’s a lot more to trading options that I’ve been able to fit in two posts on the site. Any questions, suggestions or any successful trades you’ve had? Leave a comment.
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My Subscribers Quadrupled in a Day!
Amazing results! So I wanted to have my own website, somewhere to post a few articles and get a few ‘subscribers’, to try and get people out of their cubicle jail cells and to start doing what they actually want as opposed to sitting at work for the pay, and also to give everyone a bit of a forum to discuss our plans to break out of Alcatraz.
I’ve written half a dozen articles, plenty more to come, enough cynical rants to keep you amused and a few helpful ones in between. Then it got to actually putting up a website, ‘blogging’ and all that jazz…
This is what really opened my eyes, there’s a whole community of people ‘blogging’ for a living, and this is their ‘job’, for better use of the word. There are however hundreds of websites about creating websites, blogs about blogs, no one* is really ‘writing’ anything of value unless you want to learn about how to create your own little website or blog. *(there are few great exceptions that I’ll link to in a post soon enough)
So I followed all the instructions out there, and now leadersofthefreeworld.org is here, somewhere for you to check in and hopefully check-out of the ball and chain that is your ‘job’. I’m not saying we should all slack off and play a lot of xbox, just that being employed by someone else isn’t the answer.
All of these professional bloggers out of there, websites with subscriptions everywhere wouldn’t be able to claim their subscribers quadrupled in one day, amazing results!? That’s right, on Friday the 18th September my subscriber count went from…. 1… to 4. Take that professional bloggers!
So check back in as you please, feel free to sign-up for the emails as I’ll be posting plenty more articles with a bit of a balance between employed life tirades, some useful online resources that’ll blow your mind, some property and financial who-ha and hopefully a bit of a kick in the arse to help you help yourself.
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The Water Cycle – Automated Banking
You’ve either stumbled across this article from the archives or been directed from [Your Name Here] Inc. In this article we’re going to touch on budgeting and setting up an automated banking system. This is one of my less cynical rants and is more of a ‘helpful guide’, who would have thought?!
Ever since as early as late high school, you got a job and earned some money, passed your driving exam and finally had the freedom you’ve craved! Freedom enough to go out and try and get the newest hottest car you’d be allowed a personal loan for.
So there you have it, you were free from the time you passed your driving exam to the time you ‘bought’ your first car (with a hefty personal loan). If you didn’t follow the crowd, and bought rust buckets to drive around for your first couple of years of driving (or had a silver spoon from your parents) then you managed to avoid the trap.
What trap? You knew what you were getting yourself into. You learned when you were about 8 years old and your science teacher taught you about the water cycle; Evaporation, Condensation, Precipitation, Collection, repeat. A basic example of a repetitive cycle.
And so it begins…
What does any of this have to do with budgeting, money and getting caught in the rat race? I found that nearly everyone I knew had a hefty personal loan on a car, to drive themselves to work, to get their pay check to pay their loan on the car, which they needed to drive themselves to work, they needed to go to work to pay their loan, for the car, for work…. that was annoying. See what I’m getting at here? This mentality and way of thinking is why the world is screwed into obscene amounts of debt. It’s ok to NOT keep up with the Jones’s, your TV is fine as it is, and you don’t need a new flat screen. Imagine if everyone lived within their means, focused on what was really important and enjoyed the simpler things in life?
The Budget
Before you cringe at the term ‘budget’, it’s your money, no one is making you do this, but you’ll be surprised what you spend. Once you write down what you ‘think’ you spend your money on, you’ll wonder where the rest goes? Start by listing your expenses you’re aware of, such as;
- Mortgage Repayments
- Household Bills (Gas, electricity, water, Telephone, Council Rates etc.)
- Insurance (Car, Home, Boat, Life etc.)
- Grocery Bills
- Gas/Petrol Bills
- School Fees/Tuition
- Birthdays & Christmas Presents
As you can see from the above list, you can include whatever you like; you can go to the extremes of haircuts, toiletries, clothing etc. However much detail you include, it will give us a place to start.
In your weekly budget calculate all of your expenses in the same frequency as when you get paid.
Example: Car Insurance = $500 per year, if you get paid weekly, $500 / 52 weeks/year = $9.60
In the example above you have to reserve $9.60 per week for your car insurance. We’ll apply this theory to the entire budget.
In my personal weekly budget I have the following categories; Credits (Gross Income), Bills (Automated direct debits), Expenses (Fuel, transport, Food), Spends (My weekly income), Savings, Trust (I put aside a few dollar a week for my younger nieces).
Now the key to all of this to make it work is to align your banking system with your budget. This isn’t hard and anyone can do it, it will however cause some people a bit of temporary pain to have to actually visit their bank! (Check the place out, chat to the tellers and steal some pens; it’s what you pay fees for.)
The Joys of Automated Banking
All banks these days allow you to set up multiple ‘sub-accounts’ within your bank account. You can choose where your ‘gross income’ goes into, and you can set up sub-accounts for your bills, spending, expenses etc. Most banks will even let you rename your accounts, so instead of having account no. 228374 you’ll be able to have your ‘bills’ account. Below is an example of how I have my accounts structured;
Automated Banking Structure
My gross income goes into my ‘credits’ account on a Wednesday afternoon from my employer (hopefully not for much longer!), on a Thursday morning I get to witness the glory of automation, and the money is distributed (you can set up automatic transfers) to my sub-accounts, giving me my weekly pocket money to spend, knowing that I’ve already put all my money aside for bills, expenses and savings. Going even further, to complete the ‘system’, a debit card is linked to the ‘spends account’ so your ATM card is linked to your pocket money account. You know that you have $150 (you define the amount) to spend for that week and once you’ve spent it, you’re done. If you ‘borrow’ from your savings account or bills accounts, you’re going to come up short at some point. This system is 100% better than seeing your ‘gross income’ in your account, going out with your mates on a Friday night, getting drunk and withdrawing $1000 to put on a bar tab and go to the casino!
Once you have your automated system up and running, after a while you’ll see your savings balance swell, be able to pay your bills comfortably and enjoy yourself spending your weekly pocket money. But hopefully at some point you’ll think to yourself, is this it? You’re saving $100 per week, that’s $5,000 per year, which if you work for the next 40 years is $200,000. Congratulations! That’s no mean feat, not many people would have the discipline. But surely this will make you realise that after 40 years you’ll only have saved enough money to by a modest home in the suburbs?
Is working hard and saving your pennies the answer?
