Stock Forex

One of my longtime favorite ways to make money on options is to buy when the stock takes a serious dip. Check the company’s story though, to avoid further downturns. Look at the following charts:

Motorola (MOT): The stock was $70 to $80 a share. It’s a great company. Earnings were up but not what analysts expected (the whole high-tech arena was

down) and the stock plunged to the low $50 range. I pur­chased the $55 calls and some $60 calls. When the stock rose, I sold the calls at a nice profit. I’m always doing this play with a dozen or so companies.

I like Orga-nogenesis (ORG). When it dipped down to $19, I jumped back in. I’m do­ing both a pure option play and a covered call play. There are so many companies which fall into this category.

Forex Trading Pal provide you with in-depth information on Forex Online trading. We list the best Forex brokers available and discuss the pros and cons of each of them. If you want to start trading Forex then Forex Trading Pal should be your place of departure. Forex Trading Pal FXCM Rebates program allows you to earn back a portion of the spread you pay on each trade you make.

Are you new to the Forex Trading market? In that case we recommend our section FXCM Forex trading platform for beginners to these deals with the basis of the market and help you as new Forex trader to go.

Supply and Demand. There is a common “wish” that all things be simple. And even if complicated, at least that they be explainable and definable. Do markets move due to a supply and a demand? Yes, to an extent, but there is too much sentiment, too many desires, and far too many biases which come into play.

Market Sentiment

When you have sentimental responses to hard facts, you are bound to get a distortion. Those who believe in equilib­rium or that the market is a zero-sum game are often fooled. A fund manager may make a clever play one day, but then be hoisted on his own petard the next.

Market sentiment is a combination of multiple dynamics at work. If we were to achieve perfect knowledge, have perfect competition, and perfect responses to all this, and more importantly, if we could be detached from the game, then maybe we could pre-guess a movement. But we get nothing perfect and we are not detached. Indeed, we are a part of the course of events.

When we buy stocks, we’re part of the process that drives the stock up; when we sell, we are the opposite. The amount of stock movement depends on where the market is headed— what stage, or cycle it is in.

Influence

We, individually, have little influence, but collectively we have a lot. If we are in the game, buying a stock or many stocks, we contribute. We become part of the trend. We want safety so we go with the numbers—the “herd.”

This has never made sense to me—as most of the stock market makes no sense to me. I love “crazy!” Since I accumu­late wealth through chaos—at least, figuring out part of the chaos and capturing profits amidst it, and since I don’t have to continue in the trend, in fact I can be detached from it (as you can)—then you and I can make incredible returns.

Capitalizing Profits

I wrote my first book almost two decades ago. I have had a wonderful audience—a very supportive following. Those of you who know how I write and how I think will definitely be unsettled by the following chapter!

There is a purpose, a rhyme and reason to my madness. Indeed, it is in my attempt to explain my “stock market madness” that the following is written. Why? People come up and ask me how I can make such fantastic returns. How do I consistently get 10,000% plus annualized returns?

So come along—I hope you’ll come to understand my rationale and my results. It will take a while, but the first part of this chapter is necessary to understand the last part, the crucial part. It may be slow at first, and you’ll have to wade through my “Wade-isms,” as I have never before tried to encapsulate my thinking process and results. This is new territory. Hopefully not the final frontier.

Holy Macro

I hope to give a “macro-view” and use micro examples to justify my reasoning. There definitely is a “herd” mentality and I am not the first one to try to understand it and to figure out how to profit from it, or how to not lose by following it. More importantly, trying to understand this type of stock market mentality is the perfect way to try to figure out just when the “herd” is about to turn. This turning point is the point when a lot of profits can be made. But I’m ahead of myself. That is the conclusion to this chapter. The profit-making point of reversal or correction of a stock is crucial. I bring it up at the beginning so you know where this chapter is heading. I will not be untrue to the theme that has worked well for me, both in my personal investing and my seminars: use a little cash to purchase an asset, get in, then get out with a nice chunk of cash (profits) or smaller cash flows (payments). In short, I want income (cash flow) from dividends, capital gains, option premiums, or whatever income that allows us to live, to pay the bills, and grow rich.

Another theme of my books and seminars is “to whom are we listening?” If you want to make $100,000 a year, why are you listening to anyone making under $100,000 a year? It is to this point that we’ll launch into this area of discussion.

There is a widespread belief that the market is always right. I disagree. There are too many variables. The market is not always right. When it comes to a particular stock, there is definitely too much sentiment to come to any conclusion that a stock’s price is “right.” (I’ll give in on this a little, if you’re determining a stock price based on a “best guess” midpoint price between a high and a low, or a recent support level and resistance level.)

I’ll get back to individual stocks later, but for now let’s deal with the stock market in general.

An  Introduction To Proxy Investing

More bang for the buck! That’s what we all want. Wise use of stock options is one way to get it. This chapter is about using a form of proxy investing to leverage greater returns. And returns, to me, mean extra income, not just an increase in value.

Throughout all my real estate books and courses and now in my stock market educational materials, I stress “cash flow” concepts and techniques. After all, is it not cash flow that pays the bills and lets us get into an ever-increasing upward spiral of income?

Buying or selling options to purchase stock are simple strategies loaded with opportunities. There are variations on purchase and exit strategies, and combination plays both with the underlying stock and with other options. Options are derivatives of an investment on an underlying security. A call option is the right to buy a stock at a fixed strike price anytime before a set date. A put option is similar, but is the right to sell. Both calls and puts expire. They end. This expiration is one inherent risk of option investing.

Why would anyone want such a risk? Simply because of the fantastic profits which can be made in a very short period of time. You see, an option moves up and down in value with the movement of the stock, but to be precise, it moves on an exaggerated scale. I’ll explain this as I go along and illustrate it with examples. Once we’re through with the basics (and I refer you to the book, Wall Street Money Machine for more details) I’ll show you a few, heavy-duty strategies to get you making more money.

Example: you could buy a stock for $86. The stock seems down right now; you think it will go back up to $92 or $96, where it’s been trading for some time. It’s March. You check the May $90 call options (the right to buy the stock at $90 per share before the May expiration date). The call options are $2.50 each. You’ll spend $250 plus commission for one con­tract (a contract contains 100 shares of stock). $2,500 would purchase 10 contracts. You could also buy the $85 calls, the $95 calls or other strike prices, and you might be better served by buying options with a different expiration month than May. (I explore short term and long term plays in my other special reports and in other chapters.)

Your $2.50 option premium gives you the right to buy the stock at $90. Obviously you want the stock to rise. Many people suggest the stock would have to go to $92.50 for you to break even and above that for any profit. A better under­standing of the strategy, though, will help you see that the stock doesn’t have to rise that high for us to be profitable.

Options are bought and sold like stocks. There is a trader (like a market maker or specialist) who buys and sells. Like stock, you don’t know who purchases your option—it just happens. Options have bids and asks. A bid is what you can sell it for, the ask is the price you pay to buy. The bid and the ask move up and down according to several factors: 1) the supply and demand for the option, 2) the time left before the expiration date, and 3) other market sentiments. For ex­ample, with tremendously erratic stock, the market makers keep a high option premium because they know the stock has the potential to make big swings. Also note: you do not have to trade at the current bid and ask. You can place orders to buy below the ask or an order to sell above the bid. These orders can be day orders only or “Good Till Canceled” (GTC) orders. It costs nothing to place the order.

Watch the movement of the option compared with the stock price in the following example. Look at the $88 price. The option is $3.75. This will not stay constant. This $88/ $3.75 quote is, say, six weeks before the expiration date. If it were six days, the option could be $1.25. You see, an option buys time. A part of the premium is the time value. In our example, the $3.75 is all time value. Why did it go down to $1.25? Because “the invisible market” doesn’t believe very strongly that in six days the stock will go up to or above $90. If the stock stays at $88, the option probably will expire worthless. However, look at what hap­pens when the stock goes above $90. The option has be­come more valuable. Someone is willing to pay $4.75 for the right to buy the stock at $90. If the stock goes to $98, the option could be worth $8 to $9 (or more), again depending on the time left before expiration.

If the stock is $92 and the option is $6.50, you see that $2 of the $6.50 is actually paying for stock. The option is “in the money” by $2 (intrinsic value). $4.50 of the option premium is time value (extrinsic value).

Now, the main question: what is our purpose in buying the option? Do we want to buy the stock? Maybe, but this author is waiting for the options to gain value so they can be sold at a profit. If we purchased the options for $2.50 and can now sell it for $4.50 (assuming the bid and ask is something like $4.50 x $4.75), we have a $2 profit. If we had purchased ten contracts, that would be $2,000.

Let’s review the word “exaggerated.” In this example a $1 movement in the stock means a 50tf movement in the option. Sometimes the stock to option movement ratio could be “tick for tick,” or dollar for dollar. A dollar rise in the stock produces a dollar rise in the option. The point is you have much less cash tied up. $2,500 controls 1,000 shares of stock. You didn’t invest $86,000 buying 1,000 shares of stock. Also, a $1 move in the stock from $86 to $87 is around a 1% gain. If this creates a 50c move in the option from $2.50 to $3, it is a 20% gain.

If you sell the $2.50 option for $4.50, the $4,500 cash will be in your account tomorrow. Options clear in one day.

After attending the first day of your workshop, I was confident that with some diligence one could in fact use the techniques you taught. The second day in class, with increased confidence, I made my first two rolling option purchases during the morning’s “early bird” session.

To my pleasant surprise, I was able to sell both options the following morning for a profit large enough to cover the complete cost of the workshop. I have contributed around $31,125 in the last 15 days, and thus have been able to clear a net profit of $23,252.35 after commissions. Yes, that’s right, 74.7% in 15 days and an annual percentage rate of 1,817%.

I’m still pinching my self to see if I’m awake! I am now eagerly waiting to attend The Next Step Wall Street Workshop and hold even greater expectations in mind.

Michael—Kent, Washington

Yes, we’ve all seen stock go up $2 to $10 in, or within, a day. Think about buying an option an hour after the market opens for 50c and selling it for $1.50 two hours later. Ten contracts would generate a $1,000 profit.

Let’s do the same on a put. Last year, Fannie Mae (FNM) did a 4 for 1 stock split. A few months later, the stock was rolling between $31.50 and $36. News came out that  the   long bond yield was down 3 points. This is the U.S. Treasury 30-year bond. The stock market was hammered that day. There were other things going on also. Fannie Mae is very interest-rate sensitive, as they borrow money at one rate and lend it out at another, higher rate. If the interest rates go up (that’s why the long bond was falling—fear of inflation and a rise in rates), the stock can really go down. Likewise, if interest rates go down, the stock might go up.

To put it mildly, the stock got slammed. I knew it would go down. I put it on the Wealth Information Network (WIN) immediately, telling my students how I was going to play it. The stock closed Friday at about $33. It opened at $31.75 (on a 30-minute delayed opening). I purchased the March $32.50 puts.

This lets me “put” the stock to someone else at $32.50. If the stock goes under $32.50, my put option becomes more valuable. It’s the opposite of a call. As the stock goes down, the put becomes worth more. I bought these puts for $lVs or $1,125. The stock went down to $27^! /i and as it bounced back up to $29 to $30,1 sold the put for $3⁵/8. That’s a four-hour play and a nice profit of $2,500. $3,625 minus $1,125 = $2,500 (minus commis­sions of about $110 for both trades).

If you buy options, you do not have the obligation to buy or sell the stock. You also don’t have to sell the option—you could just let it expire. You have the “right” to buy or sell. Again, though, I don’t buy the options to buy the stock. I buy options hoping for an increase in value and then sell them. It’s just quick-turn money.

I have a “bear market mentality” in the midst of a bull market. I really don’t like losing money. Options are very risky—only 15 to 20% of contracts ever get exercised. That’s not to say there are many losses, as some investors like me get in and get out rapidly. I have lost on several plays, and each time I do, I vow to never do that again. I want to learn from my mistakes; I’ve cut the losses to a bare minimum. I’m now somewhere in the range of one loser for every 18 to 20 winners. You can watch me do this on WIN, Wade Cook Seminars’ subscription internet service.

Here is how my trades have gone since I started using WIN I bought two Xerox (XRX) $125 April call options for $6.75 and sold them one week later for $10.75, a profit of $663 (49.1%). I also bought two Warner Lambert (WLA) $90 April call options for $6.75 and just sold them nine days later for $10.25, a profit of $562 (41.6%).

I’m shooting for 50% returns on covered call writing, all profits to be reinvested until I’m consistently pulling enough per month to be able to retire and do what I want with my life. Now there’s hope and light at the end of the tunnel. All my thanks go to Wade and everybody there on the WIN staff.

Augustin

You’ll see my “hunker down,” try not to lose a penny strategies permeating the following formulas.

Here is a micro point on these movements. I think good news plays out in days. However, it can take months for company’s stock prices to recover from bad news.

Now, if you’re playing the stock, either long or short, the length of time is crucial to your profitability. However, if you’re playing stock options, a high point and then small percentage down in the stock, or a bottom and small recovery in the stock ($1 to $5) could produce drastic profits.

Define A Joke

Watching “Data” on Star Trek is a lesson in human behavior. Laughing (getting a joke) is difficult—at least the timing is difficult. Data doesn’t get jokes. He can’t tell one, or understand the punchline. I saw a bad movie (Solo) and the humanoid (machine) questioned why everyone was laughing. “A joke,” he was told. Obviously, he wants to know what a joke is. No good explanation was given. Let me try my hand at it. I’ll then get back to booms and busts. A joke is a story, and at the end a complete surprise occurs, either in the actions of the participants, or a twist in words, with unexpected meaning, hidden meaning, or a nuance to something else. Based on your point of reference, the company you’re in, or the mood you’re in, determines your response—a chuckle, a scoff or a belly laugh, et cetera.

It is the twist, or reversal that interests me. Never has a movie brought tears to my eyes as the end of Steel Magno­lias—then in a half second, everyone is busting a gut laugh­ing. The writer played our emotions like a maestro. The markets also thrive on fear and greed, and unexpected rever­sals.

Change Is Inevitable

When stocks move up or down—either unexpectedly or in reaction to news, especially if they move quickly, there is a high incidence of a major divergence. A favorite play is to buy a call on the low-side turnaround, and buy a put on the top­side turnaround.

A perception of the facts (right or wrong), starts the move­ment. Activity breeds activity and more investors rush in. They listen to current events and future predictions and that subse­quently affects the price. Their purchasing/selling is integral to the process. New information—either right or wrong tests the strength or weakness of the previous assumption/activity, and the price is sustained or divergence occurs. A short term profit can be made. It’s quick and semi-predictable. Get in and out before anyone ever sees (or reacts to) the trend.

Now, use your profits to increase your holdings in great companies. It is the very boom and bust cycle (volatility) which gets me excited. Most investors run from the boom and bust scenario, however, some of us profit big time from this technique.