Stock Forex

One last use for options is a “hedge.” A hedge is like an insurance policy. You hedge to limit your downside.

Let’s say you just spent $10,000 and purchased 100 shares of stock at $100 each. You think the stock is low (either the company is really profitable or that the stock has gone down — hit a low). That’s a lot of money to have tied up. You have unlimited upside potential and all the time in the world because you actually own the stock. Your only risk is a dip in the price of the stock.

To ensure against a loss in your stock value, buy a $100 put, or even a $95 put (if you are willing to lose a little). Yes, you could put in a stop loss, at, say, $97 and only lose $300, but what about a drop to $70 wherein you could lose $3,000. The $100 put is, say, $2. One contract (controlling 100 shares—the same amount you own) would cost $200 plus commission. If you never exercise the put, that’s $200 out the window. You bought the stock hoping it would go up, and if it does your $200 ($2 put) goes down in value. Any increase in the value of your $10,000 investment will be offset by this loss. However, if the stock goes down, and I mean seriously down, this $200 will be money well spent. If the stock goes down to $80 (assuming this is still before the expiration date of the put) your put will be worth at least $20. It could be $22 to $25 depending on any time value still built into the put premium.

Think of this. You could sell the stock for $80 and also sell the put premium for $20. That’s $8,000 and $2,000 respec­tively. You’ve broken even. You see the insurance-against-loss aspect of this. You could lose $200 or at least have your profits offset by this amount, but you can make up all your losses with the proper put.

Two more ideas: the $95 put might be purchased for 25tf when the stock is at $100. One contract would be $25 plus commissions. This lower strike price and the corresponding lower put premium will let you buy a put further out (say 5 to 6 months) for a lower price. Your risk is $500 plus the put premium. Why $500? Because you’ve lost the amount between $100 for the stock and $95. 100 shares times $5 equals $500.

The $100 put is $2 and it’s only out one to two months. I usually buy the short term puts at the higher strike price (out one to two months and then reevaluate the situation: com­pany news, the stock price near the expiration date, et cetera) or further out puts below the strike price. They’re cheaper but also give you more time.

By looking at the company’s chart you can determine how much you want to spend, how much time you want to buy, and how much risk you want to hedge.

Combo

You could also buy a call with a $100 or $110 strike price. If you’re certain this stock is a winner, go ahead and buy the stock for $10,000, but spend $500 and purchase the $105 calls out two to three months. If the stock rises, you’ll see first hand how the riskier option plays produce the greater returns.

By definition, a straddle is writing (selling) a call option and a put option on the same stock with the same strike price and expiration date. In the sameness is the simplicity. The same stock. The same number of contracts (call and put). The same strike price. The same expiration date. Notice that I am selling both a call and a put, which generates money into my account from both sales. Though it is not exactly doubling my cash in, it does come close to doing that.

There are some potentially expensive risks, however. This is not a strategy for everyone. If the stock suddenly makes a big move in either direction, I could be caught. Remember, I haven’t bought any stock and I have sold someone the right to force me to sell the stock to or buy stock from them.

If the stock goes up and I get called out, I will have to buy the stock (in order to sell it). Since the stock went up, the person who bought the put option (who was betting that the stock would go down) is not likely to exercise his or her option. This is because he or she can sell their stock for more on the open market than they could force me to buy it for. The put option will expire.

If the stock goes down or stays under the strike price, I don’t have to worry about being called out because the person who bought the call option from me can buy the stock on the open market for less than they would have to pay if they exercised the option and bought the stock directly from me. The person who bought the put, however, can force me to buy his/her stock for the option price.

This is not a loss. I am simply paying more for the stock than I might have. What I get when I sell the stock will determine whether I have a gain or loss. The money I received from selling the options will offset the difference between what I paid and what I sold the stock for.

Before I write a straddle, I spend a lot of time with my broker evaluating what the cash flow will be and what the risk of loss could be. I won’t typically write a straddle unless the risk potential and the cash flow is substantial. You’ll need to make your own decisions in this area. Most of the time, the stock stays close to the strike price and both options expire leaving me with all the money. Occasionally, one of the options will be exercised and I’ll have to give back some of the premium I received from selling the options, but I get to keep most of it.

You can’t always tell where the your business is going without any help from the experts. You could use forex trading signals to help you make the right decisions.

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.

Choosing Stock Wisely

If there is a way to make the selection of a stock and building a portfolio of solid stocks a fun process, we’ll make every attempt to find it. A few assumptions: 1) we want to find stocks at bargain prices, and 2) we surely do not want to overpay for our stocks.

Isn’t that the essence of it all—to find great stocks at bargain prices? Also, we want to buy stock with the highest likelihood of increases in value and the lowest likelihood of losing value. If the stock produces a dividend (income) that would be nice too.

Real Estate: A Foundational Example

Determining value is very perplexing and very diffi­cult. Over the years many ways of determining value have been proposed. Whether we’re buying or selling, we want the best price. The three most common ways to determine real estate value are listed here. After this short exploration we’ll use what’s applicable from this to aid us in choosing stocks.

1)  Cost or Replacement Value

Buildings and land have value based on how it is being used. We’ll explore more of this in the income section, but we’ll cover it briefly here. A building used as a factory will be worth so much: use it for residences and it may go up in value. Turn it into a shopping center and it goes up again. You can’t do this with stock, but what the company does with its assets can change what it’s worth.

With real estate we just figure what it costs to replace the building—including the land—and that’s the replacement cost. Is it this simple? Well—not quite.

2)   Income

The gross and net income and the use of income multipli­ers are the most commonly used basis for the determination of value. You see, the cost of replacing a structure is not adequate to determine the full or accurate value.

What income does a building make? And even if you know that to the penny, other factors enter in:

A.   How long has it been since a rent increase?

B.   How expensive is the debt? And can it be refi­nanced or paid off?

C.   Can other expenses be lowered?

And none of this has to do with the tax deductions. How does it affect our tax bracket? All sorts of other variations occur. If we raise the rents, will the income remain stable? If we “net” more, the value will increase—could it be refi­nanced at a higher price and the new-found money used to buy more properties?

3)  “Comps”

One common way to value real estate is to find properties in the area which have sold recently and determine the value of your property based on an average of several properties— taking into account the differences. This is one of the func­tions of appraisers. Banks use this method extensively so they are not giving mortgages above “what the neighborhood will bear.” Extensive appraisals can be done using all three of these methods. It is wise to use all three with a more nebulous “growth potential” factor thrown in. The potential for growth or increase in value is a reason why many real estate investors invest in the first place, but so many things change, and there are so many chances to be wrong, that hardly anyone uses it as a main factor in determining current value.

I could go on, but since this is a chapter about stocks, let’s just take from real estate the thought behind the process. The example of real estate cannot solve all the problems, or answer all the questions, but it is worthwhile. It’s good to have another point of reference. I’m good at many of my stock decisions because I integrate knowledge I gained in real estate.

The point is not that many companies own real estate, but that the price of the stock, the income, and tax consequences have many similar characteristics.

This is a simple way of finding stocks which are severely underpriced, or at least ones which you think have a high likelihood for going much higher.

Stocks in this category could come from:

•     Really bad news.

•     Bankrupt companies on their way out of bankruptcy.

•    Turnarounds.

•     Companies just going public or just getting listed on an exchange.

•     Companies breaking out of their roll range with better earnings, new products, et cetera.

•     Traditional penny stocks with some reason (pres­sure) for the stock to go up.

I do bottom fishing stocks all the time. I bought 141,500 shares of one company at around 6cent and sold it 18 months later for $1.40 to $1.50. A nice $200,000 plus profit! I look for more opportunities like this all the time.