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Options in the Stock Market
Since October of 2007, markets have declined nearly 45% with the likelihood of even more weakness in 2009. In previous articles I have written about shorting double beta ETF's like the DDM or QLD, or trading inverse ETF's like the DXD and the QID, both of which will go up in value as markets tumble. These two strategies have been remarkably profitable during the last 18 months.
But as the bearish longer term trend takes an expected breather now and then, and as markets can move sideways sometimes for months, I regularly get this kind of question, "Is there anything I can profitably trade during these choppy periods?" Actually, there are many approaches to profits at such times, but one I like to trade, which doesn't require a lot of baby sitting, is that of selling options. I use a strategy called a "bear call credit spread".
It sounds like a mouthful, but basically it is a simple strategy where you sell an option to collect premium, and then use some of that premium to buy second option as a hedge. In this case, our goal is to earn an income instead of price appreciation. Here's how it works:
When markets have high volatility but lack a real trend, option prices tend to explode and then implode on a shorter term basis. That sets up a good opportunity to simultaneously sell an option closer to the "at the money" strike price, and buy a second, less expensive option at a strike price slightly further out of the money. In this strategy, you hope both options will lose time value and ultimately expire worthless. If they do, you keep the difference between the two option premiums.
For example, when the intermediate cycle, which is one of the best market trends to follow, topped out at the beginning January, the first consideration might have been to buy an inverse ETF, secondly to buy puts on the indices, and thirdly, you could have sold a "bear call spread". Using the latter strategy, here's how it would have played out:
At the time, the QQQQ was trading for a living around $30-$31. The QAVBF (Feb 32 Call) was selling for $1.15. The QAVBH (Feb 34 Call), was selling for around $.40. The net difference between the two was $.75. By selling the QAVBF and buying the QAVBH, you would have had $75 added to your account for every contract pair bought and sold. Ten contracts would have added $750 to your account (minus commissions).
Your blow-up risk, had the market moved strongly against you to the upside, and you had for some reason, failed to close the short call position (QAVBF), would have been $2 per share. That represents the difference between the two strike prices ($34 minus $32) minus the net premium you collected. In other words $2-$.75 or a risk of $1.25 per contract.
Today as I write this article - February 3rd, the QAVBF is selling for $.18 and the QAVBH is at $.03. In other words, both are nearly worthless, and although you could wait for them both to expire worthless, I prefer to "unwind" the short leg of the position, and buy back the QAVBF contracts so that only your long call remained. Doing so would let you keep the remaining $57 per contract (sold for .75, bought back for .57, minus commissions), with the possibility that if the markets again turn up before expiration, your long QAVBH contracts could go up in value too.
When you get familiar with the strategy, it can become a great tool to generate monthly income in almost any market. I like to describe it as "selling stuff that is likely to become worthless, to anxious buyers who are willing to pay you good money for it right now." Almost sounds a little like online auctions too, doesn't it? Except in this case, you are always guaranteed a buyer!
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Begining Your Investing Career in the Stock Market
Beginning your career in investing can be very difficult especially if you're not that ready to lose the money you have saved for your investments. For assets in investing, owning some real properties will always be a great choice that most people prefer. These kind of assets for investment that most people dreamed of having is a house or a home.
Take a moment in reading this article as you discover how you can reach your dream of real estate ownership as well as preventing some risks. Let's go over on some frequently asked questions that you need to ask yourself before you begin you investing career.
How to earn money through internet? Would I make money from buying shares of stocks? It is best that you have the answer to this question as offered return of investments is one of the effects that will attract you into investing your money in stocks. You should understand that in buying stocks, you can actually earn money through dividends and increase in the price of the stocks.
Are you investing or gambling? Knowing whether you are investing or gambling is always a tough decision when you invest. The Wall Street journal is treated by some people to be a huge casino for investing purposes. It is a recommended source where you can buy your stock shares. However when using the journal you need luck and skill to be able to reach your goals of earnings careful analysis of the stocks you are considering. And also luck is not regarded as the determining factor in succeeding or failing your investments, but having good luck doesn't hurt.
What does high P/E ratio means in stock market? With this question, you need to fully understand what P/E ratios do in the stock market. P/E ratio mean stocks are overvalued but not at all times. Sometimes P/E ratios are just results from an analysis from an investor based on cash flows that sometimes lead to higher earnings yield in the future.
What is your opportunity cost? In becoming an investor, knowing your opportunity costs is essential as you build your portfolio. Scarcity of resources result in trade offs which result in an opportunity cost. Opportunity costs refer to the profits or earnings of the next best kind of investments that is available to you. Or in other words the opportunity cost of a decision is based on what must be given up as a result of that decision. Any decision between two or more choices has an opportunity cost.
What are the primary types of financial capital? There are three primary types of financial capital that are important for you to know when it comes to analyzing your business as well as your potential investments. Each of these types has their own characteristics and benefits as it includes specialty capital, debt capital and equity capital. Specialty Capital provides market strength by creating unique financial solutions to complex business situations. Debt capital is the capital that a business raises by taking out a loan. Equity capital is the capital raised from ownership of assets, real estate for example.
What are dividends? Dividends are a type of way you can earn payments from your investment in the stock market. If you got paid this way you would actually be earning a portion of companies earnings for every share of that companies stock that you owned.
What is a stock broker? In beginning your investing career, you may find it helpful to have a stock broker since he or she can help guide you in as you begin investing your money. You should know though that they are not free and do charge fees for their services. Aside from stock market, there is also the money market account that is one of the easy ways of saving money as you earn higher rates of interests.
What is a money market account? Money market accounts are a savings account that is insured by the Federal government. Money market accounts offer many similar benefits and services as checking accounts do, although transactions may be somewhat more limited. Money market accounts are usually managed by banks or stock brokerages firms, and can be a secure place to keep funds that are to be used for future investments or moneys received from the sale of recent investments. They are very safe and highly liquid investments, but offer a lower interest rate than most other investments.
The above mentioned frequently asked questions are just few of the things you need to learn to begin your investing career. Understand though that this just scratches the surface and it would pay to seek more assistance from other professional stock trading resources. There are several well known educational companies marketing their services, such as Invest Tools, or Teach Me To Trade to name a couple. There are also professional trading clubs available to join that can help provide you with greater knowledge. Good luck on your career as an investor.
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Become a Day Trader - 3 Simple Steps to Consistent Profits
To become a day trader and to be consistently profitable, there are 3 simple steps you must follow unless you want to lose a lot of money getting there.
You want to become a day trader and make consistent profits. You also want to reliably repeat when you hit winners, right? Of course you do! The first goal in trading is profiting. Goal #2 is then making money consistently. Goal #3 is steadily increasing profits.
Your trading profits are primarily controlled by what YOU do, more so than what the markets do. There are traders profiting every single day, so pointing your finger at the markets is simply an excuse. If you want consistent profits, then get more consistent in what you do in your trading.
How to become a day trader begins with understanding that trading is a repeated activity. That's why making use of a proven trading system is so important. If you truly desire to make improvements in a process, and particularly when your goal is achieve greater consistency, the three steps below are ones you can take to dramatically improve your consistency.
Step 1. Clearly detail and document your system. One of the more common mistakes made by traders, particularly regarding consistency, is that they don't have their system well-defined and written down.
When you have an activity that isn't documented, there will probably be inconsistencies in how the task gets performed. The reason the military is so big on following procedure: they insist that things be done in a uniform, reliable and predictable manner. The same thing goes for your trading.
Step 2. Measure your trading system's critical factors. A wise man once stated that for you to improve anything, you must begin by first measuring it. In what other way are you to know if you're making progress? With trading you have several measurable aspects that determine your bottom line, in addition to the all-important profit/loss number at the end of the month.
Businesses in all industries have certain aspects that directly affect the profitability of the business. Savvy business owners know to track those aspects and assign measureables to them. The reason that these are so important as you become a day trader is because through a calculated analysis of these factors, you can then see specifically where to focus your efforts to make specific improvements.
Step 3. Make improvements in a controlled manner. Once you've conducted an analysis of your system, you can now focus on specific facets of your system to make improvements. By having a method for this analysis, you can make changes to the system and test - without risking money - either through back-testing or in a demo account and determine the true impact on the system's performance - and if there are any trade-offs.
As an example, let's say you analyze your system and find that your winning percentage is currently 48%. You've got an idea on how to improve it to 55%, which you "think" would increase your overall returns. Next would be to run the analysis on the system with the change on real market data. By looking at the results, you can see if this change indeed did what you expected, but also if there were trade-offs in other aspects of your system performance, such as a reduced number of trading opportunities. It will be clear now whether you should stick with your current system or go with the modification.
Conclusion. Trading is a process from which you want consistent - and reliable - results. Trading your system is an activity that you do regularly, so if you want want to become a day trader that makes consistent profits, focus on making your actions consistent.
Step 1 is to make sure that you have clearly defined and written down your system. By clarifying your system and then documenting it, you are more likely to repeat what you do consistently.
Step 2 is to run the metrics on your trading for a baseline of where you are now versus your desired goal where you want to be. This also let's you see where to focus for improvement.
Step 3 is to track your metrics and make improvements in a meticulous manner and keeping your risk very controlled.
There are a handful of metrics regarding your trading system that have substantial impact on your profits as you become a day trader. Through analyzing your system's performance and paying particular attention to these metrics, you give yourself the best means to increase your profits. Additionally, this will provide a major boost to your ability to consistently produce profits.
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Online Trading and International Stock Markets
The innovations of the Internet have contributed to numerous changes in the ways that we lead our lives and our affairs. We can pay off our accounts online, shop online, deposit money online, and even go dating online! We may even buy and sell stocks via the Internet. People enjoy having the power to view their accounts whenever they prefer to, and agents like having the ability to accept orders over the Internet, as contrary to the phone.
Just about all brokers and securities firms now provide web trading to their clients. Additional beauty of trading online is that fees and commissions are much lower. Although online trading is neat, there are a few drawbacks. If you're fresh to investing, holding the power to actually talk to a broker could be rather beneficial. If you aren't apprehend in stock exchange field, online trading might be a risky thing for you. If this is the event, make certain that you pick up as much as you can about dealing stocks before you begin trading online. It's as well an effective idea to go with an online brokerage house company that has been in business for a while. You will not discover one that has been around for 50 years naturally, but you can line up a company that's been in this line of work that long and now provides online trading services.
There's a whole universe and trillions to be made in markets outside the NASDAQ. Foreign online stock dealing has made it attainable for bold investors to capitalize on investing in some of the secondary stock markets around the globe. When USA financial market is inconstant or if you just wish to distribute your investment dollars across the boarders, sometimes it's worthy to determine what some of the transnational market professionals are executing.
US, Asian, European, Australian and Canadian stock exchanges can have varied parties and stocks in their financial markets exchanges, but the fact is a wise investor studies the yields of the individual company's stock and scans what the charts tell him about the history of that stock prior to investing hard earned cash in international businesses, countries and economies. Due to the high flexibility of many online trading systems, this implies you can broaden your investment portfolio and possibly profit from the overseas markets trends.
Employing an online program to transmit your global stock trading also means you may order your trades wherever and whenever you decide - even in the middle of the night. You could even prefer to place trades across various stock markets, but the finest part about a multinational online trading account is that you can do it from a uniform account, instead of having to log into many different ones to get into the international markets you want.
Make certain you explore your international stock dealing information exhaustively and take some time to learn about numerous of the outstanding opportunities that await you around the globe.
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Should You Invest in Just a Small Number of Stocks?
A lot of investors spend hours on end searching through thousands of different shares in order to find potential investment opportunities. However it could be argued that a better strategy is simply to pick the biggest and most established companies and invest in them when the timing is right.
These types of companies include the big multi-national companies that are at the forefront of their industries and are likely to be in that position for many years to come. They will also generally have long periods of continued growth both in terms of dividends and profits. So in other words they should continue to grow in the years to come.
Once you have identified these companies then it's basically all a matter of timing. You should always invest for the very long-term in order to ride out any peaks and troughs, but even so it's still a much more profitable strategy to buy into these companies when they are temporarily weak. Even the strongest companies suffer share price falls at some point, often as a result of the wider market falls, so these moments present excellent buying opportunities.
Just because these companies are huge profitable companies does not necessarily mean that they are certain to continue growing in the years to come, but they are definitely more likely to do so than most of the smaller companies listed on the stock market. Indeed they will certainly help you to sleep easier at night than most companies out there.
So as I say a good investment strategy is simply to pick a handful of top quality companies that have long records of profit growth year after year, and buy when the share prices are temporarily weak. If you want to take this strategy one step further you can trade these shares as well to achieve short-term gains as well as long-term gains. For instance if one of your investments has gone up a lot and is looking overbought, at least in the short term, then you could still hold on to your initial shares, but open a short position to capitalize on any possible retracement which may occur. This is a popular strategy amongst long-term investors and helps to return a profit even when the wider markets are weak, or when their shares look like they have temporarily peaked.
Whichever strategy you adopt, the basic message I want to get across is that if you are stuck for investment ideas, then you could do a lot worse than simply choosing to invest in a handful of the best big-cap stock market listed companies. These companies are the ones that should still be turning over handsome profits in ten or twenty years time, and the ones that will usually deliver long-term profit growth and therefore handsome gains for their shareholders |
