Archive for the ‘options trading’ 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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The Sixth Day of Christmas – Research & Development
You haven’t forgotten that you’re your own little company have you? How’s your Research and Development department ticking along? Have you managed a break through this year? Why not?
There’s been plenty written lately about the past year, reflecting on personal events, milestones and goals achieved. Soon enough we’ll be into New Years resolutions. You can pick from your standard range: get fit, quit smoking, save more money, be nicer to people etc. Why not resolve to do something that can benefit you in the long term and open up your eyes to a world of possibility?
I’m talking about learning something new: experimenting with additional income streams, setting yourself up as a small business, anything that’ll help you get out of the rat race!
You’ve spent more time figuring out which bank would give you 3.75% pa on your $5,000 term deposit than you have even thinking about getting out of the rat race! (By the by, making your money work for you this way would net you a whopping $187 profit for the year before tax)
I’ll cut to the chase, you can get your tax rate down to the low 10 – 15%, increase your net worth & asset base, get involved in the stock market, have a look at an eBay store… the list goes on!
If you went to college or university you’ve spent anywhere from $20,000 upwards on a qualification that’s going to tie you to a job until you retire, but you might turn your nose up at a stock market seminar that’s charging $1,000? Think about it.
The Sixth Day of Christmas is going to be short and sweet; if you haven’t already you should kick your Research and Development department into gear in ‘10.
Make your New Year’s resolution count for 2010, maybe turn off your TV and learn about drop shipping a product online? (Turning your TV off will give you an extra week and a half of time to lead your own free world)
What’s your resolution? Leave a comment below, follow me on twitter, sign-up for the RSS feed or join the facebook group? If you’ve got something to say that’ll help us all lead our own free world contribute and write an article for the site!
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On the Third Day of Christmas – US Options Trading Part 1
On the Third Day of Christmas My True Love Gave to Me, $1,200 Credited Into My Bank Account Last Night!
I’m very excited to be able to write about this today! I initially had ‘US Stock Options Trading’ as the 6th Day of Christmas to keep you in suspense, but last night’s windfall was too much to contain!
One of my Free World income stream experiments is US Options Trading. It’s one of the online streams of income that doesn’t involve blogging, building a reputation, getting subscribers or trying to sell anything. The results are based on you and you alone and is one of the primary ‘location independent’ revenue opportunities.
So this isn’t going to be a get-rich-quick scheme, there’s nothing to sell you at the end, but the idea is to show you what I’ve been tinkering with on the options market and that I’ve been able to make some small (but significant %) profits. (And that you can too)
I’ll explain a bit about Options Trading (it’s not daunting, don’t worry) and then about how to find profitable stocks and what tools you can use to kick things into gear. There’ll be a few links at the end of sites you can check out, sign-up for free online brokers and do some ‘virtual’ trading on your own. (not real money, but it uses the real results from the stock market).
Things might get a bit confusing as we go along, but I made $1,200 last night without lifting a finger so it’s worth you getting a cup of tea, having a good read once or twice, following the links, and if anything doesn’t make sense then either drop a comment or send me an email. If you’re viewing this post via the email subscription or RSS feed, it’s probably better to head to the site as some of the images enlarge if you click on them.
Introduction to Stocks & Options
Late last year I attended a seminar on shares, options and CFD’s (ignore the last one). This piqued my interest so I read a few more books and found that most of the information was readily available for free in books, none of the theories were new or top secret and what wasn’t available in books was available online. I got hold of a good course of DVD’s and CD’s and studied away, eventually starting up a free account and experimenting, reading more books and found that the whole game was about learning, getting some experience, risk management and not putting all your money on the table at once.
It doesn’t matter if you don’t know anything about the stock market, stocks or shares and all that jazz. The words ‘company’, ‘shares’ & ‘stocks’ all represent the same thing, if Ford Motor Company came out tomorrow with the flying car then their share price/stocks/company would increase in value. If their flying car crashed when you drove it then their share price/stocks/company value would decrease.
What is an Option?
So anyway, what are these options I keep going on about? An ‘option’ is based on a stock. An option has three components; time value, a premium and a strike price. Confused much?
Time Value
Like car insurance, you buy an option to last for a set amount of time; one month, two months, six months, a year, it varies. (Consequently the more time you buy, the more it costs) You’re not actually buying the ’stock’, in essence you’re taking out a policy that will give you the ‘option’ of buying the stock at a set price further down the track.
Premium
This is the ‘premium’ you pay for the option, similar to the cost of your car insurance. The backbone of options is that the premium is more often than not only about 10% of the cost of buying the actual stock. (Think about it, $10 stock that you control for $1, if it goes up to $12, you’ve made 100%).
It’s worth jumping in here to give you the textbook definition of an option to help clear things up; “An option gives the buyer have the right, but not the obligation, to buy or sell the underlying stock at a specified price (strike price) until the 3rd Friday of their expiration month (Time Value).”
Strike Price
From above, the ‘strike price’ is the price at which the buyer can buy the stock for. So if you buy an option on a $10 stock for $1, and your stock moves to $15, you have the right to buy that stock at $10 (and here you’d have $5 profit as the stock has moved to $15).
Hopefully you’ve just had a light bulb moment from the above paragraph and probably asked as I did “surely that’s not possible?” I probably haven’t done the greatest job at explaining all of this so head here when you’ve got the chance to read up on it.
Sales Pitch
So if you do a few google searches or even attend a seminar or two, you’ll hear/read a few of those gimmicky sales pitch catch cries to reel you in. Here’s a few I’ve put together that ARE true and should make you stand up and want to get into this for yourself;
Options Trading will take a whopping 15 minutes of your time per day- You can double or triple your money rather easily
- You can profit hugely from stock going down
- You can make money if stock goes sideways (neither up or down)
- You don’t have to know which way the stock is going to make money
Ok that’s the gimmicky sales pitch crap out of the way, and I’m not even trying to sell you anything!
The whole options trading thing is full of strategies, you can; buy, sell, make money on stock going down, all sorts of stuff, but to ease you into it I’ll work through some real examples that I’ve used myself.
If you missed the two screen shots within this post scroll back up and check them out. The first screenshot is of the daily account email I receive which outlines my overall position and the second screenshot is when one of my orders gets filled and I make a profit! If you want to learn some more right away you can google ‘options trading’ or go to one of the many online brokers and sign up for a virtual trading account, I’ve used optionsxpress and they were fine.
In US Options Trading – Part 2 I’ll show you a behind-the-scene’s look at how I find trades (companies), what to do with them once you’ve found them, and how to place trades.
Receive the Twelve Days of Christmas (and Part 2 of Options Trading) delivered directly to your inbox here. If you’ve got twitter it’d be great if you would retweet the article. 
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Monday Mornings – One Thousand Seven Hundred To Go…
Hip hip hooray, we’ve survived the worst of the Global Financial Crisis… Wait, what? What crisis? Oh that’s right, consumers in too much debt, over their heads, and banks giving it to them. Or was it the media talking about a ‘looming’ crisis, so we stopped spending our money and guess what happened? – A crisis. Make a prediction, instil fear, sit back and watch it pan out, confirm prediction, rinse, repeat.
How does this help you and me and can we learn from it? So we’ve had the GFC, now I’m in the middle of a QLC – Quarter Life Crisis for those of you wondering. I think we can learn from big business and the state of the working world and embark on our own individual QLC, instead of sitting around and waiting for it to happen.
Are you stuck in a job you don’t particularly like? Your finances a bit out of control? Heading down a road that doesn’t look too appealing? You can stop it all and act now, or wait until you’re 35, overweight, sitting on your couch with your second husband/wife and three ‘miracles of life’ running around the house screaming their heads off.
Your own personal business (you) has assets, an income stream, has a research & development department (potentially) and you could (should) also have a business plan, your future goals.
Numbers Game
Let’s say you’re successful, worked hard, took time out to travel in between and managed to retire at 55. Now at 55, you can start enjoying yourself…
Sorry to spoil the party, but you;
- Worked for about 70,000 hours
- Enjoyed getting out of bed 1,700 times on a Monday morning
- Spent almost 15,000 hours commuting in peak hour traffic
And you know those annoying co-workers who gave you the shits? You’ve had to say hello to them every morning – about 8,000 times.
You must have REALLY enjoyed your job.
Hopefully, you’re a few years away from your own personal QLC, so you can ready yourself and be prepared.
The Alternative?
Let’s say you don’t mind a nice holiday, you could spend the next 6 months saving your butt off for your one month holiday, but why not spend the next 6 months setting up a location independent job/income stream and travel indefinitely? Sure it’s nice to go to Bali for a week because everything is SO cheap, but what if you could live wherever you wanted, spend rupiah/pesos/thai baht and continue to earn dollars or pounds?
You don’t know what you don’t know…
If you spent 20 minutes of your lunch break researching, everyday for the next year, that’s the equivalent of 80 hours full time study, two whole weeks! Imagine what you could learn about in two weeks? Here’s the kicker, and you might have to read this slowly for it to hit you, you don’t know what you don’t know. The ultimate chicken/egg conundrum.
Here’s a shortlist of what you could learn in two weeks;
- How to profit unbelievably from a company’s shares that plummet downwards!
- How to make money from a website/blog
- How to reduce your tax rate to around 12-16%
- How to make some pocket money easily using Google
- How to develop a website from scratch in an afternoon!
- How to control $27,000 worth of stock for $1,500.
- How to live a location independent lifestyle, turning your current employment situation into one of no fixed address…
The list could go on for a long while yet, but the idea is to inspire you to take some action! You really ‘don’t’ know what you don’t know, you should have been taught along the way, maybe at a… ‘school’? But hey, if you were taught how to make money without working, then you wouldn’t go to work, follow the ‘normal’ path or be under some sort of …. ‘control’? There’s something to think about! (And too much of an issue to delve into here!)
28 Days in the Free World
If and when you decide to ‘have a go’ and step out of employment, take a chance on yourself and see what it’s all about, you don’t have to tell the world! Or launch a website and tell everyone what you think of the working world! Unfortunately, or fortunately, I did?…
I could tell you that the free world outside of employment is all sunshine and lollipops, it will be soon, but establishing things does take some initial time & effort and in spite of everything I’ve read that clearly says “don’t quit your job first”, I chose to ignore that!
You know that feeling you get when you resign from one job, and are yet to accept another? Complete freedom, like a childhood summer holiday from school, 3 months off, sunshine, sleeping in… Well that’s never going to happen again! Once you make a commitment to pay yourself for a few months, now who are you ripping off if you sit around and waste time during the day, no more paid facebook unfortunately…
The first 28 days in the free world has been an eye opener, but very productive. There’s no longer a 5 day working week. Life, work, play, socialising and exercise, everything rolls into one….
Here are the highlights of the first month;
- ‘Finally’ figured out how to get free $ transfers to the US (options trading)
- Made $3,280 from a $1,200 investment (Very excited about the prospects of this!)
- Took some cool photos of my rather annoying nieces1
- ‘Found’ Locationindependent.com (thanks Wayde!)
- Have had A LOT more time to work on the software development side project (coming soon)
- Got asked to write a guest post for website-in-a-weekend.net (about being a complete beginner but learning how to develop websites)
- Setup a small business for some summer pocket money
- Made my first ‘premium’ website!
All of the above was MUCH better than being stuck at work. This next month will be more of the same, possibly setup a photography side project1, toy around with a few other websites, write a few more articles for the free world, who knows? But I do know that I won’t dread getting up on a Monday or have to commute in peak hour traffic.
If you’ve got a spare minute, head to Location Independent, they’ve got a truck load of resources and articles to read through. Read the last paragraph of ‘one idea’ and take a look at any of the free resources there.
I’d like to hear from you. What are you working on? What do you want to work on? Is work killing all of your motivation? Want anymore information or have you got any suggestions for article topics? Feel free to leave a comment, share this with your friends or send me an email. I’ve read more than my share of books & start-up guides, there’s a fair chance I’ll be able to help if you’ve got an idea you want to launch!
What else can you do? I’m going to focus my upcoming articles on a bit more in-depth ‘how to’ get involved in some of the things i’ve mentioned previously in this article, subscribe to the site (below) and you’ll receive the latest articles in your email.
And keep in mind, if you don’t initiate your own Quarter Life Crisis, you’ve got 1,700 Monday mornings ahead of you!
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