WHAT HAPPENS WHEN YOUR COVERED CALL STOCK GOES DOWN IN VALUE?
This report is about protecting yourself from the downside price movement of a stock, especially in stocks used for covered call writing. I have four strategies to share with you, but before I do, it needs to be understood that writing covered calls has a set of rules, that once understood and used, will help you avoid problems and make more money. The first thing you need to understand is that this is a cash flow strategy. We are not buying a stock at $6 hoping it will go to $60. If it does so, great, but that is not why we do this. Think monthly income, even income several times a month (See TWO-STEPPING, Part 4, coming soon).
You must know the why and the how of doing covered calls. "The person who knows how will always have a job; the person who knows why will always be the boss." (Diane Ravitch) Once you understand the why, then you'll realize that you can make just as much money on your $6 stock if the stock goes to $4. But I'm getting ahead of myself.
FOUR PROTECTIVE STRATEGIES
1) The first strategy to protect yourself from a downdraft in a stock price is this: "An ounce of prevention is better than a pound of cure." I know it's cliche, but it's true. People get a little angry when I say this: "If you think a stock is going to go down, or back off, then don't buy it." I too get angry.
Do your homework. Is the company making money? Does it have a P/E and/or are the earnings growing? This demonstrates a solid picture. The options say a lot about the stock. They should be about 6% to 10% of the stock price. An $8 stock should have an $8 call for a month out around 8%, mas o menos.
The best way I've found to find a good stock is to check the support level. You do this simply by looking at a chart. I like 6 month charts, but you may want to look at one going back a year. Say the stock trades between $8 and $10. It's been doing so for about nine months. Once in awhile it goes below $8, but every time it hits $7.60 it bounces off that number. I call this hard support. You can look at soft support, say a comfortable range, but I like hard support or a price the stock does not go below.
You can use any charting service. Most are free. Check out yahoofinance.com; bigcharts.com; or stockcharts.com. Your brokerage firm probably has a free charting service. Charts are like a map. Use them as such. Sure, the stock can break down more. EPILOGUE DOES NOT MEAN PROLOGUE. If you can, go back and check the news when a stock changed price---up or down---by a 10% to 20% move. There is always a reason for movement. Check the market at hand, especially red-light periods (no-news) or green-light periods (news, as in quarterly news times).
Looking at charts will reveal a lot about your personality. Are you an optimist? Then your thoughts will go in that direction. Sometimes it pays to be a pessimist, or at least a skeptic when looking at charts and trying to project movements. I heard an old expression once: "I'd rather want what I don't have than have what I don't want."
2) The second protective strategy is to practice trade, or what I call paper-trade or simu-trade, as in simulation trade. Practice with pretend money first. On paper, buy the stock, then sell the option or put in an order to sell the option at a certain price (Limit order). Many online accounts have a practice trade section, some with real time, streaming quotes.
Can you imagine a rookie baseball player making it to the majors the first day out? A few do, but not many. They work their way up through the minor leagues, working on their skills. Day in and day out they grind it out, sometimes for years. One of my favorite admonitions (because I received it from a wise person and have had to be reminded of it many times) is this: "Everything you have learned to do and do well, you were hand-trained by someone else." You don't learn to drive a car by reading a driver's ed manual. You don't learn how to ski by watching a video. You need to get in the game, but practice first.
This is one reason why I like blogging. It's lets me teach and share my knowledge. You can learn from my experiences which have cost me dearly. "Perfect practice makes perfect." Paper trade each strategy at least ten times, of which six in a row must be profitable, before you ever use real money. This will help you avoid mistakes. Oh, and keep paper trading even when you've invested all your money. You may be waiting for the next deal, or for money to come in, but whatever, paper-trading helps you stay alert, in-the-know, and on-the-go. When the money comes in, you're ready to take action.
3) This third strategy will save you from losing a lot of money most of the time if your stock goes down. It's called a "stop-loss." You place a stop-loss order when you are afraid the stock will go down past the point you don't want it to go to. It costs nothing to place the order and you can change it anytime.
Back to our $6 stock. It looks solid here, but you fear it may go down some more. You place an order to sell the stock if it hits $5.50. If it moves down to that price the computer will trigger a sale. You're out of the stock and in three days the money will be back into your account. There may be a problem with stop-loss orders in writing covered calls. Remember the word covered means you own the stock. Well now, if you sell your stock, you don't own it anymore. In most accounts, the brokerage firm will buy back the option for you. They will not let you stay in an uncovered position, unless you have secured the right to do so. I won't comment much more on this part of this topic, suffice it to say, you should ask and get the right to write uncovered calls. Now, I didn't say to write uncovered calls, where you don't own the stock. To do so, creates a new batch of risks and concerns. Some people only write uncovered calls. Good for them, but for the average investor, it's not worth it. It is a very bearish strategy. Why do it then? You could stay in an uncovered position for a day or two, just before expiration, let's say.. Now the stock hits the $5.50, and you're out of the stock. There's little chance you'll get called out at $6. Why spend 5 or 10 cents, $50 or $100 to buy back the option on Thursday, the day before expiration? Use this right sparingly.
Also, today, with the speed of computers, you can place a hard order to sell a stock at a certain price, and you can set alerts at a different price, or have your broker do so. You place a hard order to sell the stock at $5.50, but you have an alert at $5.60, so you can look at the whole picture, before your order goes off. This way you can make a better decisions. I really like alerts. They help a lot.
Another problem with stop-loss orders is this: you can get picked off in a second. The stock takes a brief dip, and your order goes off. You're out of the stock and the stock goes back up to $5.90 before the next commercial. You see, these market makers see all orders. They can drop down and pick you off before you know what happened. So set your order low enough to avoid this.
How do you choose the right price for your stop-loss order? I have found three ways. I disagree with the first way, but it's what everyone else teaches and writes about. I am also not fond of the second way.
A) Use a percentage you're happy with. Some say 10% of the stock price. Sorry, I don't like it.
This is an easy way to think of it, but it just doesn't make much sense.
B) Use a dollar amount. Some use the amount they made off the option, so they'll break even.
If they buy the stock for $6.00 and take in 60 cent for selling the option, they will subtract
the 60 cents for the $6, setting the stop-loss at $5.40. I'm okay with this, as I think it shows
some thinking and strategizing, but I think there is a better way.
C) Look at the charts. Find the support level, again what I call hard support. Now place the stop-
loss order just below that. Yes, just below that. Say the chart speaks to you. The hard support
looks like $5.20. It's only hit there twice in the last year. Now set the order at $5.10 or $5.00.
This works best for me.
One more point on this topic. If you have a stock you like, and you feel it's weak, sell the in-the-money call. I.e.., you stock has gone from $6 to $5.20. You're not sure of the direction, but the whole market feels weak, so sell the $5 call, not the $6 call. When you do so, you're selling everything above $5. It's more cash into your account.
AUTHOR'S NOTE:
There is one other aspect to this. Some say it's a good strategy. I've never been able to see the need for it. I've never seen it work the way people think it will. They say to take some of the option premium you've made from selling the option and using it to buy a lower strike price put. A put goes up in value if the stock goes down. Okay, I get it. But like a call, everything has to happen in a quick and timely manner, or you will lose. Example: Sell the $6 call for 75 cents, or $750. Now use $150 of that to buy the $4 put, protecting the downside. I ask: Why spend the $150 as it will probably be wasted money. If you were to sell the $5 or the $6 put, it might be better, but it would more than likely cost you all of the $650 you took in. I don't get it. I suggest the other strategies.
4) The fourth way is to quit being so pessimistic and look for an opportunity to make more money. I'll say it simply: You can make just as much money on a monthly basis with the stock at $6 as you did when the stock was at $8. I agree that no one wants to see their investment go down. In fact, many people bail out. That might be the right strategy if you've checked the news and other factors and think the stock may go down further.
Here's an example involving two of my friends. They participated in one of my tele-seminars and loved buying stocks and doing covered calls. They had purchased 1,000 shares of ELN for around $11 each, or $11,000 plus. Over the next year they made about $11,600 cash profits, or about 10% a month. Then the stock dropped to around $9. At first they were devastated. This down movement paralyzed them. They were stymied and did nothing for a few months, waiting for the stock to recover. I joined in their discussion and asked a question: "Why did you buy the stock? Was it to wait and hope it would go up to $20 or $100 a share, or was it to use as the asset, the base for covered call writing?" They answered that it was for generating monthly income. Back then I called it R.I.G. That stands for Repetitive Income Generator.
I had them look at the $8 calls and the $9 calls. The premiums were quite large. Oftentimes when a stock tanks the implied volatility goes up, fluffing up the options. They were still able to make $700 to $1,000 a month. To make the larger amount they had to double dip---work a little harder and make more.
I've said for years that one of the keys to wealth is to "grow out of your problems." As long as there are call options available, there is money to be made. So don't belly-ache, grow, increase---create your own stimulus package. And a quick note to all of you who have had stocks go down in price, and you're still holding them, FIGHT BACK. I call this a stock repair kit. It may take years to wait for you stock to recover lost ground. You don't have to be a victim of this downturn. You can develop the skills and pound cash back into your account. R.I.G. to the rescue!
Also, one other consideration. Say you have a $10 stock that is now sitting at $6. Maybe selling it and finding a better covered call stock is the way to go. It's all just inventory. Re-deploy your money where it will do the most good. Think like a cash flow millionaire.
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Copyright 2011 Epicenter, Inc. wadecook.blogspot.com. All Rights Reserved. Watch for news announcements.
Tuesday, October 25, 2011
Sunday, October 23, 2011
STOCK MARKET AND THE CLOUD
I read and watch the news, especially as it has to do with politics and investments. With every new technology or application of that technology, disparate effects arise. My thought is simple: "Could does not equal should." (See 1 Cor 10:23) Just because there is a new way to transfer news, and/or manipulate that news, does not mean you should give it equal weight.
Lately Twitter is the format for sparking interest in stocks. This is mainly garbage, and you should be careful. You have no idea what the proponents of a certain stock propagate, and what they're pushing.
Tweeting was for keeping in touch with your friends, and for a few movie stars. Even jocks would tweet from the end zone after scoring a touchdown. It has moved way beyond that. I've always said, "Consider the source. Watch out to whom you are listening." Now, tweets are everywhere, commenting on everything. Be careful where you get your advice. First, find out what everyone gets out of the deal. Second, always have a healthy level of skepticism. Challenge all facts and numbers.
Mike Hogan writing in Barron's said, these tweets create a "misdirection for the misguided." Later he called it just noise and "pointless babble." These words are meant for the mindless comments made by unknowledgeable people. However, keep in mind, it's not just about the people, it's about muddy thinking, possibly by agenda driven propagandists.
If I could get a tweet from Warren Buffet (definitely not about his taxing comments) or from Peter Lynch, or from that renowned author of "Wall Street Money Machine," I'd be very happy. Consider the source. Is the message important, well founded and timely?
I wonder how I'm viewed. I comment on what I think are good ways to create income. I don't look at the market to find the next hot stock. I want to find and share the next hot strategy, or use and explain how to apply these strategies for making extra income.
What do you think? How am I doing? Watch for an upcoming blog on my comments the first part of August 2011. You'll then see how I thought and vicariously played the market at hand.
Abundantly yours, Wade
Lately Twitter is the format for sparking interest in stocks. This is mainly garbage, and you should be careful. You have no idea what the proponents of a certain stock propagate, and what they're pushing.
Tweeting was for keeping in touch with your friends, and for a few movie stars. Even jocks would tweet from the end zone after scoring a touchdown. It has moved way beyond that. I've always said, "Consider the source. Watch out to whom you are listening." Now, tweets are everywhere, commenting on everything. Be careful where you get your advice. First, find out what everyone gets out of the deal. Second, always have a healthy level of skepticism. Challenge all facts and numbers.
Mike Hogan writing in Barron's said, these tweets create a "misdirection for the misguided." Later he called it just noise and "pointless babble." These words are meant for the mindless comments made by unknowledgeable people. However, keep in mind, it's not just about the people, it's about muddy thinking, possibly by agenda driven propagandists.
If I could get a tweet from Warren Buffet (definitely not about his taxing comments) or from Peter Lynch, or from that renowned author of "Wall Street Money Machine," I'd be very happy. Consider the source. Is the message important, well founded and timely?
I wonder how I'm viewed. I comment on what I think are good ways to create income. I don't look at the market to find the next hot stock. I want to find and share the next hot strategy, or use and explain how to apply these strategies for making extra income.
What do you think? How am I doing? Watch for an upcoming blog on my comments the first part of August 2011. You'll then see how I thought and vicariously played the market at hand.
Abundantly yours, Wade
Tuesday, October 18, 2011
TWO-STEPPING, Part 2
The blog I wrote yesterday has caused quite a stir. Thank you for your comments and questions. I honestly have enough to write 5 or 6 more blogs, and maybe this will be the start of a new book or study course. Your questions mean a lot to me, and they lead me along.
In the next few days I'll write about 1) the downside of a stock we choose to use for writing a covered call. More specifically, what we can do if the stock goes down in value; 2) Finding the right kind of stock; 3) Double-Dipping and extra monthly cash flow; 4) and other enhanced techniques for safety and generating even more income. It will be fun. Just because I listed all of this, please feel free to keep sending your questions.
I'm going to give several examples of stocks we looked at today. We'll buy some of these stocks and then sell out to the November expiration date call options, creating a covered call situation. These prices were as of about 12:30 PM, October 17th 2011. Later, as we move through these blogs, I'll bundle a group of stocks and use $20,000 as our cash invested. If you only have $2,000 then you start there. Even $300 extra per month can make a big difference.
Here we go: Bank of America (BAC, the ticker symbol) was $6.05 to buy. The Nov. $6 calls were going for 58 X 59 cents. Stop. We say that as 58 by 59 cents. The first number is the bid and the second number is the ask. Together, they are the bid and ask. If you wanted to buy the stock option at the asking or market price you would buy it for 59 cents.
ANOTHER DAY
I have to jump in here to tell you what just happened. Everything above was written yesterday. It's now the next day, Tuesday, Oct. 18th. We just had a class and divided the students up into 5 groups of 2 each. Each group started with $20,000 of "paper" money. I wanted them to go for the gusto. Me gusta le gusto! (A little Espanol and French awkwardly mixed together). Take the $20,000 on margin, making it $40,000 in buying-power and see how much they can make selling November options against these stock positions.
Here are the prices, as of the close today.
BAC $6.64 $6 c = .88 X .92
S (Sprint) $2.88 $3 c = ..26 X .27
RENN $5.65 $6 c = .45 X .50
EK (Eastman Kodak) $1.31 $1.50 c = .26 X .30
MU (Micron Technology) $5.77 $6 c = .42 X .44
FAS $12.83 $13 c = $1.46 X $1.50 (WOW)
YHOO $15.47 $16 c = $1.10 X $1.15
Okay, here's how it works. I'll give you an example and then challenge you to do some deals on paper. That's one of the great things about writing covered calls, you can paper trade, and you can measure you cash returns before you ever use real money. "Perfect Practice Makes Perfect."
Let's say you buy 2,000 shares of EK. 2,000 times $1.31 is $2,620. Now you sell 20 option contracts of the November $1.50 calls, giving someone the right to buy 2,000 shares of your stock at $1.50. Each contract represents 100 shares. They're going for 26 cents. 2,000 times .26 is $520. This is money you get into your account in one day. That's a nice cash income based on your $2,620, or $1,310 on margin.
The formula is simple: #1 Buy stock, as many shares as you like. Try to always buy in 100 share lots as the options are 100 shares for one contract. #2 Sell Option. Choose a strike price you like. With this one you could have sold the $1 calls for .46, and taken in $920 (.46 X 2,000=$920). But then you would have to give back the .31 cents if you got called out at $1. That would be $610 from the $920. This is okay, but I like selling slightly out-of-the money options. This means the strike price above the stock price.
Now you do one. Pick a stock. Multiply by the number of shares. Divide by two, for the margin amount. Yes, margin is risky, but this was a group of wild and crazy guys, young and daring, so why not be a little risky and risque. Now sell the options and the cash will be in your account tomorrow. Do you like it?
Here's what they came up with. One group used the whole $40,000 and made $4,450 and a little more if they got called out.
The next group made $4,750, but $4,450 if called out of one of the stocks they used. Two other groups were about the same. The last group, a couple of guys from Hawaii made $7,277. Hint: they bought 15,200 shares of EK and sold 152 contracts of the $1.50 calls for .26 each. They bought 3,500 shares of RENN and sold the $5 call, taking in a lot of money, but might have the need to give some back if called out. They're counting on doing a buy-back as time goes on. More on the buy-back in a future blog. Do the math yourself. You will soon have one of those AHAAA moments. These numbers and the buy-back create an awesome power strategy.
Look once more at their results. I'll ask the question again: Does this pique your interest? Does making over $4,000 a month on $20,000 get your attention? What if you only have $4,000 to invest, how does $800 a month extra sound?
These are real numbers. Check them out yourself. Can this strategy lift you out of the doldrums?
In the next few days I'll write about 1) the downside of a stock we choose to use for writing a covered call. More specifically, what we can do if the stock goes down in value; 2) Finding the right kind of stock; 3) Double-Dipping and extra monthly cash flow; 4) and other enhanced techniques for safety and generating even more income. It will be fun. Just because I listed all of this, please feel free to keep sending your questions.
I'm going to give several examples of stocks we looked at today. We'll buy some of these stocks and then sell out to the November expiration date call options, creating a covered call situation. These prices were as of about 12:30 PM, October 17th 2011. Later, as we move through these blogs, I'll bundle a group of stocks and use $20,000 as our cash invested. If you only have $2,000 then you start there. Even $300 extra per month can make a big difference.
Here we go: Bank of America (BAC, the ticker symbol) was $6.05 to buy. The Nov. $6 calls were going for 58 X 59 cents. Stop. We say that as 58 by 59 cents. The first number is the bid and the second number is the ask. Together, they are the bid and ask. If you wanted to buy the stock option at the asking or market price you would buy it for 59 cents.
ANOTHER DAY
I have to jump in here to tell you what just happened. Everything above was written yesterday. It's now the next day, Tuesday, Oct. 18th. We just had a class and divided the students up into 5 groups of 2 each. Each group started with $20,000 of "paper" money. I wanted them to go for the gusto. Me gusta le gusto! (A little Espanol and French awkwardly mixed together). Take the $20,000 on margin, making it $40,000 in buying-power and see how much they can make selling November options against these stock positions.
Here are the prices, as of the close today.
BAC $6.64 $6 c = .88 X .92
S (Sprint) $2.88 $3 c = ..26 X .27
RENN $5.65 $6 c = .45 X .50
EK (Eastman Kodak) $1.31 $1.50 c = .26 X .30
MU (Micron Technology) $5.77 $6 c = .42 X .44
FAS $12.83 $13 c = $1.46 X $1.50 (WOW)
YHOO $15.47 $16 c = $1.10 X $1.15
Okay, here's how it works. I'll give you an example and then challenge you to do some deals on paper. That's one of the great things about writing covered calls, you can paper trade, and you can measure you cash returns before you ever use real money. "Perfect Practice Makes Perfect."
Let's say you buy 2,000 shares of EK. 2,000 times $1.31 is $2,620. Now you sell 20 option contracts of the November $1.50 calls, giving someone the right to buy 2,000 shares of your stock at $1.50. Each contract represents 100 shares. They're going for 26 cents. 2,000 times .26 is $520. This is money you get into your account in one day. That's a nice cash income based on your $2,620, or $1,310 on margin.
The formula is simple: #1 Buy stock, as many shares as you like. Try to always buy in 100 share lots as the options are 100 shares for one contract. #2 Sell Option. Choose a strike price you like. With this one you could have sold the $1 calls for .46, and taken in $920 (.46 X 2,000=$920). But then you would have to give back the .31 cents if you got called out at $1. That would be $610 from the $920. This is okay, but I like selling slightly out-of-the money options. This means the strike price above the stock price.
Now you do one. Pick a stock. Multiply by the number of shares. Divide by two, for the margin amount. Yes, margin is risky, but this was a group of wild and crazy guys, young and daring, so why not be a little risky and risque. Now sell the options and the cash will be in your account tomorrow. Do you like it?
Here's what they came up with. One group used the whole $40,000 and made $4,450 and a little more if they got called out.
The next group made $4,750, but $4,450 if called out of one of the stocks they used. Two other groups were about the same. The last group, a couple of guys from Hawaii made $7,277. Hint: they bought 15,200 shares of EK and sold 152 contracts of the $1.50 calls for .26 each. They bought 3,500 shares of RENN and sold the $5 call, taking in a lot of money, but might have the need to give some back if called out. They're counting on doing a buy-back as time goes on. More on the buy-back in a future blog. Do the math yourself. You will soon have one of those AHAAA moments. These numbers and the buy-back create an awesome power strategy.
Look once more at their results. I'll ask the question again: Does this pique your interest? Does making over $4,000 a month on $20,000 get your attention? What if you only have $4,000 to invest, how does $800 a month extra sound?
These are real numbers. Check them out yourself. Can this strategy lift you out of the doldrums?
MOLLY AND THE LIMIT ORDER
Let me take a moment and explain the difference between a limit order and a market order. I will give you the punch line first. If you are new to trading you should avoid market orders, especially in a fast moving market. And even more so, if you need to watch every penny. There are times for market orders, but very few.
A market order tells your broker or online service to go buy a stock or option no matter the current price. You will get the "next best fill."
A limit order is just what it says. You limit the price. You place your order for the stock or option at a set price, to buy or sell. If the security does not hit that price, you will not get filled.
Your broker has a fiduciary responsibility, and his computer will act this way, to get you the best possible price, even if it is a little different than your limit price, but it always has to be different in your favor. Say you're trying to buy a stock for $6.60. It's currently at $7. It would take a 40 cent down draft to get hit. Now, in a fast moving market, it moves quickly to $6.40. If you did not get filled at $6.50 which is normally the case, as computers are so fast today, you will get filled at $6.40---the next best fill. It is assumed that if you want the stock at $6.60, you'll love it at $6.40. If you had in a market order, you probably would have gotten filled at around $7. If the stock is moving slow it probably doesn't matter the type of order. You can watch and jump in at a price you like.
This is the same with buying options and/or selling options, as in covered call writing. I was writing to one student and she chased an option with limit orders. The Dow was moving fast and she wanted the $114 calls, she tried to get them at $1.30, it moved. Then she tried to get them at $1.50, and it moved through that price and she missed it again. She really wanted them. There is the exception to the above rule. If you really, really want them, change it to a market order. Make sure you're on the same page as your broker. "Get them!!!" Means a market order. You don't care if you pay $1.30 or $1.50---you just want them. Why? In that fast moving period, the option went up $1.00 or so, and she could have gotten out already with near a double.
Oh well, live and learn. There will be more trades tomorrow. Hang in there Molly. We all love you.
Wade
A market order tells your broker or online service to go buy a stock or option no matter the current price. You will get the "next best fill."
A limit order is just what it says. You limit the price. You place your order for the stock or option at a set price, to buy or sell. If the security does not hit that price, you will not get filled.
Your broker has a fiduciary responsibility, and his computer will act this way, to get you the best possible price, even if it is a little different than your limit price, but it always has to be different in your favor. Say you're trying to buy a stock for $6.60. It's currently at $7. It would take a 40 cent down draft to get hit. Now, in a fast moving market, it moves quickly to $6.40. If you did not get filled at $6.50 which is normally the case, as computers are so fast today, you will get filled at $6.40---the next best fill. It is assumed that if you want the stock at $6.60, you'll love it at $6.40. If you had in a market order, you probably would have gotten filled at around $7. If the stock is moving slow it probably doesn't matter the type of order. You can watch and jump in at a price you like.
This is the same with buying options and/or selling options, as in covered call writing. I was writing to one student and she chased an option with limit orders. The Dow was moving fast and she wanted the $114 calls, she tried to get them at $1.30, it moved. Then she tried to get them at $1.50, and it moved through that price and she missed it again. She really wanted them. There is the exception to the above rule. If you really, really want them, change it to a market order. Make sure you're on the same page as your broker. "Get them!!!" Means a market order. You don't care if you pay $1.30 or $1.50---you just want them. Why? In that fast moving period, the option went up $1.00 or so, and she could have gotten out already with near a double.
Oh well, live and learn. There will be more trades tomorrow. Hang in there Molly. We all love you.
Wade
Sunday, October 16, 2011
CASH FLOW and TWO-STEPPING YOUR MONEY
I want to share an idea with you about a different way of thinking about wealth---from enhancing your assets, generating excess income, all the way down to paying bills. Maybe you've heard this before---two-stepping your wealth. This means using money, cash, assets, or whatever, to solve your financial needs, but in a two step process. Here's a scenario:
Gloria has trememdous needs for money. She's behind on everything, and some of the creditors are getting forceful. But help is around the corner. She is getting a gift from Aunt Emily of $10,000. That's enough to make a big dent in her obligations, and definitely will keep the wolf away from the door. However, it's not quite enough to pay off everything. She thinks and thinks. It's better to pay some now, even though she can't pay it all. That's the way most people think. Soon the money will be all gone, and that's it. It's gone. She will feel good for a few weeks.
Let me share another way of thinking: using assets, and the cash it can produce to get out of this problem. It's what I call "cash-to-asset-to-cash." I like it because it lets you grow out of your problems. And on the other side of the next couple of weeks, Gloria won't be left with receipts and still a lot of problems. Grow. Do More. Be More. In short, put your money to work for you.
I love writing covered calls. It gets assets producing income. You can make cash dollars of about 10% to 20% per month. Yes, per month, and maybe more as you get more skilled. I won't explain the whole process here, as I've written much elsewhere, especially in my book, STOCK MARKET MONEY MACHINE. Plus I load up these blogs with real deals that Gloria can copy. With $10,000 you can buy $20,000 worth of stock. It's called margin investing. The broker puts up the other half and uses the stock as collateral. Gloria doesn't like margin, so she'll use it sparingly.
She buys 1,000 shares of FAS (An Exchange Traded Fund in the financial sector). The options are nice. She pays out the whole $10,000 as the stock is $9.80 now. That's $9,800, plus she'll have commissions. Now she sells the November $10 call options, giving someone the right to buy her stock at $10, or $10,000. Those options were $1.85 to sell. She has 1,000 shares so she can sell 1,000 options, taking in $1,850. These are real numbers, though a few days old as of this writing. She now takes out the $1,850---all of it or part of it---and pays the urgent bills. This transaction took about 3 or 4 minutes---and it all happened on the day she received the $10,000 and put it into her account. The option money---that great amount of $1,850---hit her account the next day. She can pick up a check, have it wired to her account, whatever. It's her money to spend.
The other bills? Well the $1,850 went along way to paying the emergencies. In fact she has enough to take her husband and the kids to a nice night out. My advice: Don't spend the principal, spend the profits. She has 20% of her bills paid and she has an asset, this time FAS, still in to account, ready to go to work next month. We do this with several stocks of which many are household names.
Now what happens? Without explaining the buy-back and all the other great "covered call" strategies, suffice it to say, she waits until the third Friday of November. She either sells the stock at $10 (gets called out) or not. Either way she gets to keep the $1,850 and she has the stock in her account or the $10,000. She does it again. This month, for December and Christmas, she takes in only $1,600 for selling the option. She pays off another $1,200 in bills and lives to fight another day. At this rate, all of her bills will be paid by April. AND SHE WILL STILL HAVE THE $10,000 (maybe more) IN HER ACCOUNT GENERATING MORE MONTHLY INCOME.
Grow out of your problems. Spend the profits, not the principle. Get assets producing income. Why don't more people do this? (1) They do not know what is available. This may be the first and only time they have heard of writing covered calls. (2) They only think of traditional bank accounts. Take $10,000 and put it in the bank at 3% and you get $300 for a whole year, NOT $1,850 or so every month. (3) No matter how safe and good this strategy, many people feel inadequate when it comes to financial things. That is why I blog, trying to help. (4) They have already mentally spent the money before they ever get it. They don't think of using the money to produce immediate, large and consistent profits. (5) The clamor for action is "NOW" and they grab at straws, not realizing the straws are temporary. They don't think ahead to permanent solutions.
Here's your problem, my dear readers. If you don't do something like this the money will be gone. It will not be available to work for you on a continuous basis. It is a wise person who realizes a need for an extra source of cash flow. Imagine what retired people can do with an extra $1,650 coming in every month. Imagine a young married couple, taking all their wedding money gifts and putting it to work this way. It's a way to put financial problems in your rear-view mirror.
John Wooden said: "Discipline yourselves and others won't have to." Many people lack the discipline to two-step their money, and their lack of knowledge and discipline exacts a very high price. Think of the life changing strategy that makes money for you so you won't have to keep working and stressing. "If you think education is expensive, try ignorance." ~~Derek Bok
Is there anything here that piques your interest? Yes, you'll have to learn, but you are just three to four hours from understanding the basics. There is help available. I spend a lot of time helping people get through the learning curve. Also, I do not get anything out of what you do therefore I can teach in an unbiased way. You learn, you earn.
You'll also soon realize that there are power-strategies to help you make even more. A quick example: If you had purchased 2,000 shares of the preceding stock, you would have done so with the same $10,000, now some on margin. You could have sold double the amount, generating $3,700 on your $10,000. Okay, does this get you interested to learn more? A little more risk, a substantially greater reward. And you do all of this in your pajamas and taking care of the kids.
Opportunities come and go. We all need education that gives more than it costs. Many people however hang on to their past so tightly that their arms tire and they fail to grasp these new opportunities. This is your time for your own economic stimulus program, your own economic recovery. Please don't judge this process by your knowledge level now. Judge it by us and what we can teach you. "When the student is ready, the teacher appears." We're ready, are you?
Henry Ford said: "If you think money is your hope for independence you will never have it. The only real hope that a man or woman will have in this world, is an abundance of knowledge, experience and abilities." To me, these traslate into skills, and we're here to help develop yours. Our success is not determined by what we put into people, but by what they get out of what we teach.
Copyright 2011 Epicenter, Inc. All Rights Reserved.
Gloria has trememdous needs for money. She's behind on everything, and some of the creditors are getting forceful. But help is around the corner. She is getting a gift from Aunt Emily of $10,000. That's enough to make a big dent in her obligations, and definitely will keep the wolf away from the door. However, it's not quite enough to pay off everything. She thinks and thinks. It's better to pay some now, even though she can't pay it all. That's the way most people think. Soon the money will be all gone, and that's it. It's gone. She will feel good for a few weeks.
Let me share another way of thinking: using assets, and the cash it can produce to get out of this problem. It's what I call "cash-to-asset-to-cash." I like it because it lets you grow out of your problems. And on the other side of the next couple of weeks, Gloria won't be left with receipts and still a lot of problems. Grow. Do More. Be More. In short, put your money to work for you.
I love writing covered calls. It gets assets producing income. You can make cash dollars of about 10% to 20% per month. Yes, per month, and maybe more as you get more skilled. I won't explain the whole process here, as I've written much elsewhere, especially in my book, STOCK MARKET MONEY MACHINE. Plus I load up these blogs with real deals that Gloria can copy. With $10,000 you can buy $20,000 worth of stock. It's called margin investing. The broker puts up the other half and uses the stock as collateral. Gloria doesn't like margin, so she'll use it sparingly.
She buys 1,000 shares of FAS (An Exchange Traded Fund in the financial sector). The options are nice. She pays out the whole $10,000 as the stock is $9.80 now. That's $9,800, plus she'll have commissions. Now she sells the November $10 call options, giving someone the right to buy her stock at $10, or $10,000. Those options were $1.85 to sell. She has 1,000 shares so she can sell 1,000 options, taking in $1,850. These are real numbers, though a few days old as of this writing. She now takes out the $1,850---all of it or part of it---and pays the urgent bills. This transaction took about 3 or 4 minutes---and it all happened on the day she received the $10,000 and put it into her account. The option money---that great amount of $1,850---hit her account the next day. She can pick up a check, have it wired to her account, whatever. It's her money to spend.
The other bills? Well the $1,850 went along way to paying the emergencies. In fact she has enough to take her husband and the kids to a nice night out. My advice: Don't spend the principal, spend the profits. She has 20% of her bills paid and she has an asset, this time FAS, still in to account, ready to go to work next month. We do this with several stocks of which many are household names.
Now what happens? Without explaining the buy-back and all the other great "covered call" strategies, suffice it to say, she waits until the third Friday of November. She either sells the stock at $10 (gets called out) or not. Either way she gets to keep the $1,850 and she has the stock in her account or the $10,000. She does it again. This month, for December and Christmas, she takes in only $1,600 for selling the option. She pays off another $1,200 in bills and lives to fight another day. At this rate, all of her bills will be paid by April. AND SHE WILL STILL HAVE THE $10,000 (maybe more) IN HER ACCOUNT GENERATING MORE MONTHLY INCOME.
Grow out of your problems. Spend the profits, not the principle. Get assets producing income. Why don't more people do this? (1) They do not know what is available. This may be the first and only time they have heard of writing covered calls. (2) They only think of traditional bank accounts. Take $10,000 and put it in the bank at 3% and you get $300 for a whole year, NOT $1,850 or so every month. (3) No matter how safe and good this strategy, many people feel inadequate when it comes to financial things. That is why I blog, trying to help. (4) They have already mentally spent the money before they ever get it. They don't think of using the money to produce immediate, large and consistent profits. (5) The clamor for action is "NOW" and they grab at straws, not realizing the straws are temporary. They don't think ahead to permanent solutions.
Here's your problem, my dear readers. If you don't do something like this the money will be gone. It will not be available to work for you on a continuous basis. It is a wise person who realizes a need for an extra source of cash flow. Imagine what retired people can do with an extra $1,650 coming in every month. Imagine a young married couple, taking all their wedding money gifts and putting it to work this way. It's a way to put financial problems in your rear-view mirror.
John Wooden said: "Discipline yourselves and others won't have to." Many people lack the discipline to two-step their money, and their lack of knowledge and discipline exacts a very high price. Think of the life changing strategy that makes money for you so you won't have to keep working and stressing. "If you think education is expensive, try ignorance." ~~Derek Bok
Is there anything here that piques your interest? Yes, you'll have to learn, but you are just three to four hours from understanding the basics. There is help available. I spend a lot of time helping people get through the learning curve. Also, I do not get anything out of what you do therefore I can teach in an unbiased way. You learn, you earn.
You'll also soon realize that there are power-strategies to help you make even more. A quick example: If you had purchased 2,000 shares of the preceding stock, you would have done so with the same $10,000, now some on margin. You could have sold double the amount, generating $3,700 on your $10,000. Okay, does this get you interested to learn more? A little more risk, a substantially greater reward. And you do all of this in your pajamas and taking care of the kids.
Opportunities come and go. We all need education that gives more than it costs. Many people however hang on to their past so tightly that their arms tire and they fail to grasp these new opportunities. This is your time for your own economic stimulus program, your own economic recovery. Please don't judge this process by your knowledge level now. Judge it by us and what we can teach you. "When the student is ready, the teacher appears." We're ready, are you?
Henry Ford said: "If you think money is your hope for independence you will never have it. The only real hope that a man or woman will have in this world, is an abundance of knowledge, experience and abilities." To me, these traslate into skills, and we're here to help develop yours. Our success is not determined by what we put into people, but by what they get out of what we teach.
Copyright 2011 Epicenter, Inc. All Rights Reserved.
Friday, October 14, 2011
STOCK MARKET MOVEMENT
Yesterday, Thursday, when the market took a brief respite, my calculations told me that it would go up today. It is now officially earnings season. It's a new period---what I call a green-light period. Now, the news could be bad, but there are so many American companies making so much money. It looks good, but remember it's not always the actual numbers, but the commentary about the numbers.
The adage is powerful that says: "A stock price today is based on the anticipation of future earnings." So, what some companies do is say things like: "We're doing well. We beat our estimates, but the next quarter (year) looks tough. Competition is up and expansion uncertain." Focus on the commentary.
Now, for next week? I think up, but I really don't have a feel yet. It will be up based on the earnings season, but any bad news, even international, could drive it down.
I'll get some closing prices later and comment on covered call possibilities at that time. The question is to do or not to do October Strike prices, or move out to November. My rule of thumb is to take what is on the table before you. November will be there after next Friday.
Happy Investing.
Wade
The adage is powerful that says: "A stock price today is based on the anticipation of future earnings." So, what some companies do is say things like: "We're doing well. We beat our estimates, but the next quarter (year) looks tough. Competition is up and expansion uncertain." Focus on the commentary.
Now, for next week? I think up, but I really don't have a feel yet. It will be up based on the earnings season, but any bad news, even international, could drive it down.
I'll get some closing prices later and comment on covered call possibilities at that time. The question is to do or not to do October Strike prices, or move out to November. My rule of thumb is to take what is on the table before you. November will be there after next Friday.
Happy Investing.
Wade
Wednesday, October 12, 2011
STOCK TRADE UPDATE
I like these trades on the Dow---using ticker symbol DIA. I haven't heard from Molly in the past few days. I heard she was traveling. However, I thought I'd weigh in on a few potential exit strategies.
Reminder: Molly played straight options on the whole market---at least the Dow. She bought call options on the DIA---and ETF, or Exchange Traded Fund. This ETF is a stock with $1 incremental strike prices. The stock trades at 1/100 of the Dow, plus a few pennies. For example, if the DOW is going for 11,240, DIA stock will be at $112.42. You can buy puts or calls; you can do spreads; and you can own the stock and write covered calls.
Simply put, it's a way to trade the whole Dow, which again, I think is the most widely followed Index in the world. I also think the whole market is in a rolling pattern. Why? Because it's range-bound. It has pretty solid support on the downside and pretty stable resistance on the top-side.
Reminder: Molly played straight options on the whole market---at least the Dow. She bought call options on the DIA---and ETF, or Exchange Traded Fund. This ETF is a stock with $1 incremental strike prices. The stock trades at 1/100 of the Dow, plus a few pennies. For example, if the DOW is going for 11,240, DIA stock will be at $112.42. You can buy puts or calls; you can do spreads; and you can own the stock and write covered calls.
Simply put, it's a way to trade the whole Dow, which again, I think is the most widely followed Index in the world. I also think the whole market is in a rolling pattern. Why? Because it's range-bound. It has pretty solid support on the downside and pretty stable resistance on the top-side.
OPTIONS AND CASH FLOW
Obviously options are not for everyone. It's almost an art rather than a "set-in-stone" technique.
Molly has exited her trade. Reminder: She bought 5 contracts of the DIA 112 calls for October. This strike price represents the Dow (DJIA) at 11,200. She paid $2.57, or $1,285. She had in an order to sell them at $5. She bought the DIA $114 calls for $$1.70. Again five contracts totaling $850. Her order to sell was at $3.40.
The market went up and down, time was going away. Monday was a good day, the Dow going up 330 points. Yesterday it was flat, arguing all day with being up then down. Her options were up. Today she canceled her GTC order and just sold them.
I thought that if the Dow went up another 200 points or so, that would be the time to get out, if I were doing the trade. She looked at it around 12:30 PM, just before the market closed, and changed the order to sell to a market order. She got out at $4.30 on the $112s and $2.77 on the $114s. Not a double, but pretty good for ten days.
Here's the math: Costs equal $2,135 (S1,285 for the $112s and $850 for the $114s).
Sell Price equals $3,535 ($2,150 for the 112s and $1,385 for the $114s).
Profit equals $1,400---minus a few commissions.
Way to go Molly. Congratulations!!!!
Wade
Molly has exited her trade. Reminder: She bought 5 contracts of the DIA 112 calls for October. This strike price represents the Dow (DJIA) at 11,200. She paid $2.57, or $1,285. She had in an order to sell them at $5. She bought the DIA $114 calls for $$1.70. Again five contracts totaling $850. Her order to sell was at $3.40.
The market went up and down, time was going away. Monday was a good day, the Dow going up 330 points. Yesterday it was flat, arguing all day with being up then down. Her options were up. Today she canceled her GTC order and just sold them.
I thought that if the Dow went up another 200 points or so, that would be the time to get out, if I were doing the trade. She looked at it around 12:30 PM, just before the market closed, and changed the order to sell to a market order. She got out at $4.30 on the $112s and $2.77 on the $114s. Not a double, but pretty good for ten days.
Here's the math: Costs equal $2,135 (S1,285 for the $112s and $850 for the $114s).
Sell Price equals $3,535 ($2,150 for the 112s and $1,385 for the $114s).
Profit equals $1,400---minus a few commissions.
Way to go Molly. Congratulations!!!!
Wade
Friday, October 7, 2011
CASH FLOWING THE STOCK MARKET
I have a few prices for you to look at. It's funny. People still come up to me and say, "Do people really come up to you?" Just joking for my family. That's an old Emo Phillips joke, I think. No, they ask for a hot stock tip. I say, "No, but I'll give you a hot stock strategy." And today's strategy is simply this---GET YOUR MONEY TO WORK FOR YOU. Get a group of assets that produce monthly income for you, so you can quit your job and spend more time with the grandkids, or travel and visit family.
In the stock market I'm talking about three good strategies for developing monthly income. One, Rolling Stocks. Two, Writing Covered Calls. Three, Bull Put Spreads. I like straight options and I would make that number four, but so few people make consistent money with call and put options. Look at some of Molly's trades in previous blogs.
So, the solid strategy, one that is the workhorse strategy for so many is Writing Covered Calls. Here are a few examples:
1) Bank of America (BAC). Earlier today (10/5) the stock was going for $5.52. You could buy 1,000 shares and wait. I like this as I think this is a good support level. However, if you want income, cash in your account, consider selling the November $6 calls for 52 cents. You would take in $520 cash now, and make another $480 if you get called out at $6. This is a six week trade.
2) RENN, RenRen, China's new facebook type company is going for $4.96. I think it's a bargain at this price. Check out the fundamentals yourself. Again, 1,000 shares would cost $4,960, or about $2,500 on margin. The $5 calls for October are 35 cents to sell. You would take in $350 cash now, and agree to sell it at $5, making a little more if you actually sell it. Either way, you get to keep the $350. Not bad for 2 1/2 weeks. This trade expires on October 21st. You can buy back this option later and sell out to October at that time. Oh, the November $5 calls are 60 cents now. That's $600 cash now.
3) American Airlines (AMR). The stock is $2.46. It's been beat up lately, and it has sold off, but at this price a lot of analysts are now recommending it. Don't just buy it , but do some research. The stock would cost $2,460 and the October $2.50 calls are 25 X 28 cents. That's $280 you'd take in and 4 more cents if you actually sell the stock. The November $2.50 calls are 41 cents to sell, or $410.
4) FAS, has been on a dip, along with the other stocks. It was at $9.62 to buy the stock. That's $9,620, or about $4,800 on margin. the October $9 calls are $1.61, or $1,610 cash. You'd have to give back $620 if you got called out. You'd still make about $1,000. The October $10 calls are going for $1.07 to sell. That's $1,070 cash now, and another $480 if you get called out. Look at the November calls. The $9s are $2.25, or $2,250 cash in. The $10 calls are going for $1.97, or $1,970 and you still make the extra $480 if you got called out. Two positions like this and the average American family can retire.
I've been following and trading Micron Technology (MU) and Advanced Micro Devices (AMD) for years. They seem to form a rolling pattern, though not perfect. Almost always they are a good candidate for covered call writing. Why? I'm glad you asked. For a stock to be a good candidate it needs to be solid, meaning making a profit and have some fluctuation, but not wild gyrations.
I also look for the 6% to 8% return, without margin. 10% and more is nice, but sometimes a really high option premium signals a volatile stock in the extreme. Pharmaceuticals are a case in point, especially when they are coming up on a new medicine approval. What I mean by 6% to 8% is this: Say a stock is around $7. The one month out options at a $7 strike are going for 50 to 70 cents, or 6% to 10% of the stock price. Think of this simply. If you buy or already own a stock at $7, and you sell an option against your position for 60 cents, you'd take in $600, if you owned 1,000 shares and sold 10 contracts.
This is a good cash return. Someone is willing to give you $600 cash right now---cash you can use for anything you like, including buying more stock---to tie up your position for a few weeks to a month. This is stock as an asset that you use to generate monthly income. If you think your stock may move up to $9 or more, you shouldn't encumber your position with a covered call. By selling the option we have reversed the process of traditional option trading. We have not purchased the right to buy the stock at a certain price, we have obligated ourselves to sell the stock at a certain price. We are covered in this obligation because we actually own the stock.
Let's look at a real example: MU. The stock closed at $4.96 today (10/6). If we purchased 1,000 shares we would spend $4,960, or about $2,500 if we used margin. Now we sell the October $5 call options, obligating ourselves to deliver the stock at $5 on or before the third Friday of the month, the 21st. The options are 43 X 45 cents. The 43 is the bid, the 45 is the ask. We sell at the bid, for these examples, though in real life we can try to get more with a limit order, say 52 cents. But again, in this format we have to use static numbers. Back to the 43 cents. That's $430 cash now that someone is will to give us to tie up our stock, and potentially buy it at $5, on or before the 21st. What could you do with an extra $430 now? If we sell this stock we'll make an extra 4 cents, or $40---almost enough to pay commissions. If we do not sell the stock we get to keep the stock to generate income another day, as in tomorrow; and we get to keep the $430 for our trouble, which was no trouble at all.
What if $2,500 generated $400 plus per month? Oh, and if you had $5,000 and lived a little on the wild side (read that margin), your $5,000 would have purchased 2,000 shares, and you would take in $860. Again, the business I like to find myself in is helping people live a better life. Call it retirement. Call it passive income. Call it freedom.
FYI. The $5 calls for November are 63 cents to sell, or $630. Rule of thumb: Take the money in the current month. The next month will be there . . . well, next month. Pretty cool huh? And we did this without double dipping---doing a second or third trade within one month, using the incredible buy-back.
FAS, RENN, EK, AMR also look good. Remember the way to get good at these strategies is to practice trade, and then practice trade some more.
Wade
In the stock market I'm talking about three good strategies for developing monthly income. One, Rolling Stocks. Two, Writing Covered Calls. Three, Bull Put Spreads. I like straight options and I would make that number four, but so few people make consistent money with call and put options. Look at some of Molly's trades in previous blogs.
So, the solid strategy, one that is the workhorse strategy for so many is Writing Covered Calls. Here are a few examples:
1) Bank of America (BAC). Earlier today (10/5) the stock was going for $5.52. You could buy 1,000 shares and wait. I like this as I think this is a good support level. However, if you want income, cash in your account, consider selling the November $6 calls for 52 cents. You would take in $520 cash now, and make another $480 if you get called out at $6. This is a six week trade.
2) RENN, RenRen, China's new facebook type company is going for $4.96. I think it's a bargain at this price. Check out the fundamentals yourself. Again, 1,000 shares would cost $4,960, or about $2,500 on margin. The $5 calls for October are 35 cents to sell. You would take in $350 cash now, and agree to sell it at $5, making a little more if you actually sell it. Either way, you get to keep the $350. Not bad for 2 1/2 weeks. This trade expires on October 21st. You can buy back this option later and sell out to October at that time. Oh, the November $5 calls are 60 cents now. That's $600 cash now.
3) American Airlines (AMR). The stock is $2.46. It's been beat up lately, and it has sold off, but at this price a lot of analysts are now recommending it. Don't just buy it , but do some research. The stock would cost $2,460 and the October $2.50 calls are 25 X 28 cents. That's $280 you'd take in and 4 more cents if you actually sell the stock. The November $2.50 calls are 41 cents to sell, or $410.
4) FAS, has been on a dip, along with the other stocks. It was at $9.62 to buy the stock. That's $9,620, or about $4,800 on margin. the October $9 calls are $1.61, or $1,610 cash. You'd have to give back $620 if you got called out. You'd still make about $1,000. The October $10 calls are going for $1.07 to sell. That's $1,070 cash now, and another $480 if you get called out. Look at the November calls. The $9s are $2.25, or $2,250 cash in. The $10 calls are going for $1.97, or $1,970 and you still make the extra $480 if you got called out. Two positions like this and the average American family can retire.
I've been following and trading Micron Technology (MU) and Advanced Micro Devices (AMD) for years. They seem to form a rolling pattern, though not perfect. Almost always they are a good candidate for covered call writing. Why? I'm glad you asked. For a stock to be a good candidate it needs to be solid, meaning making a profit and have some fluctuation, but not wild gyrations.
I also look for the 6% to 8% return, without margin. 10% and more is nice, but sometimes a really high option premium signals a volatile stock in the extreme. Pharmaceuticals are a case in point, especially when they are coming up on a new medicine approval. What I mean by 6% to 8% is this: Say a stock is around $7. The one month out options at a $7 strike are going for 50 to 70 cents, or 6% to 10% of the stock price. Think of this simply. If you buy or already own a stock at $7, and you sell an option against your position for 60 cents, you'd take in $600, if you owned 1,000 shares and sold 10 contracts.
This is a good cash return. Someone is willing to give you $600 cash right now---cash you can use for anything you like, including buying more stock---to tie up your position for a few weeks to a month. This is stock as an asset that you use to generate monthly income. If you think your stock may move up to $9 or more, you shouldn't encumber your position with a covered call. By selling the option we have reversed the process of traditional option trading. We have not purchased the right to buy the stock at a certain price, we have obligated ourselves to sell the stock at a certain price. We are covered in this obligation because we actually own the stock.
Let's look at a real example: MU. The stock closed at $4.96 today (10/6). If we purchased 1,000 shares we would spend $4,960, or about $2,500 if we used margin. Now we sell the October $5 call options, obligating ourselves to deliver the stock at $5 on or before the third Friday of the month, the 21st. The options are 43 X 45 cents. The 43 is the bid, the 45 is the ask. We sell at the bid, for these examples, though in real life we can try to get more with a limit order, say 52 cents. But again, in this format we have to use static numbers. Back to the 43 cents. That's $430 cash now that someone is will to give us to tie up our stock, and potentially buy it at $5, on or before the 21st. What could you do with an extra $430 now? If we sell this stock we'll make an extra 4 cents, or $40---almost enough to pay commissions. If we do not sell the stock we get to keep the stock to generate income another day, as in tomorrow; and we get to keep the $430 for our trouble, which was no trouble at all.
What if $2,500 generated $400 plus per month? Oh, and if you had $5,000 and lived a little on the wild side (read that margin), your $5,000 would have purchased 2,000 shares, and you would take in $860. Again, the business I like to find myself in is helping people live a better life. Call it retirement. Call it passive income. Call it freedom.
FYI. The $5 calls for November are 63 cents to sell, or $630. Rule of thumb: Take the money in the current month. The next month will be there . . . well, next month. Pretty cool huh? And we did this without double dipping---doing a second or third trade within one month, using the incredible buy-back.
FAS, RENN, EK, AMR also look good. Remember the way to get good at these strategies is to practice trade, and then practice trade some more.
Wade
Tuesday, October 4, 2011
The DOW Trade
THE DOW TRADE
Well, so far this DIA trade did not work today. I'm sure everyone wishes that they would have got in today, not Friday.
But, not to worry----yet. There is still time left. In fact, this trade might recover by tomorrow.
I still think the market has tremendous support at 10,600. I just wish it would quit testing it so often.
Stay tuned . . .
Wade
Well, so far this DIA trade did not work today. I'm sure everyone wishes that they would have got in today, not Friday.
But, not to worry----yet. There is still time left. In fact, this trade might recover by tomorrow.
I still think the market has tremendous support at 10,600. I just wish it would quit testing it so often.
Stay tuned . . .
Wade
Money and Politics
MONEY AND POLITICS.
When the newspapers and the radio shows are full of information on government intervention, you need to sit back and really consider the intent of the people in charge.
Ralph R. Reiland in the IBD said: "Bottom line, Obama is saying we'll get more jobs by way of less oil, less gas, fewer jets, fewer home sales and lower levels of charitable giving."
And then one of my favorite financial experts (one I'd make Secretary of the Treasury), Lawrence Kudlow intimated that the President won't tell us the details of his tax and spend plan . . . "but one things for sure: This new Buffett tax is a penalty on investment, risk-taking and job creation." It was good to see this week that Mr. Buffett disassociated himself from this new "Buffett" rule. Maybe there's hope for him yet.
Mr. Ludlow went on to state what seems obvious to any right thinking person: " . . . the evidence is absolutely clear that a lower capital-gains tax produces huge gains in revenues. Raising the capital-gains tax lowers revenues." I've written extensively on this in one of my "PATRIOT ESSAYS." We live in dynamic ways. Nothing is static. There is always the aspect of unintended consequences. People adjust, adapt and improvise---always looking out for their own best interest. Wouldn't it be wise to have a government that realizes that and figures out a way to get out of the way to let people's best interests direct their efforts to bettering the whole society? I have a lot more on this topic. Later.
And last comment from Mr. Kudlow. He was writing about how Mr. Reagan was so overwhelmingly re-elected. "Why? Because low tax rates reignited the economic growth and job creation."
I add once again, We need broad-based, permanent tax cuts and to shrink the size of government. We don't need temporary, targeted tax manipulations and more government spending.
Your comments please.
Wade
When the newspapers and the radio shows are full of information on government intervention, you need to sit back and really consider the intent of the people in charge.
Ralph R. Reiland in the IBD said: "Bottom line, Obama is saying we'll get more jobs by way of less oil, less gas, fewer jets, fewer home sales and lower levels of charitable giving."
And then one of my favorite financial experts (one I'd make Secretary of the Treasury), Lawrence Kudlow intimated that the President won't tell us the details of his tax and spend plan . . . "but one things for sure: This new Buffett tax is a penalty on investment, risk-taking and job creation." It was good to see this week that Mr. Buffett disassociated himself from this new "Buffett" rule. Maybe there's hope for him yet.
Mr. Ludlow went on to state what seems obvious to any right thinking person: " . . . the evidence is absolutely clear that a lower capital-gains tax produces huge gains in revenues. Raising the capital-gains tax lowers revenues." I've written extensively on this in one of my "PATRIOT ESSAYS." We live in dynamic ways. Nothing is static. There is always the aspect of unintended consequences. People adjust, adapt and improvise---always looking out for their own best interest. Wouldn't it be wise to have a government that realizes that and figures out a way to get out of the way to let people's best interests direct their efforts to bettering the whole society? I have a lot more on this topic. Later.
And last comment from Mr. Kudlow. He was writing about how Mr. Reagan was so overwhelmingly re-elected. "Why? Because low tax rates reignited the economic growth and job creation."
I add once again, We need broad-based, permanent tax cuts and to shrink the size of government. We don't need temporary, targeted tax manipulations and more government spending.
Your comments please.
Wade
Saturday, October 1, 2011
Business and Politics
Everyday I read and hear about more business leaders coming down on the government for too many regulations, too much red tape, and the threat of more odious regulations and taxes. This uncertainty has driven many to the side-lines. Business does not function in confusion and doubt.
One problem that is an offspring of this overbearing government is that businesses are making decisions, not based on solid business, marketing and accounting functions, but on politics. It's hard to imagine that every decision to grow and expand, develop new products or sources of revenues, and even decisions of pensions and 401Ks has business leaders turning their heads to Washington D.C. !
It's all backwards. It should not be this way. All of us need a stable environment, steady tax rates, low or no government intrusion. Business would flourish.
In short we need to "GROW OUT OF OUR PROBLEMS." If the current administration would do what I listed above, this would happen. We'd bring down our deficits and our debt with an expanding economy. We'd bring down unemployment with growth opportunities. New companies would start. Businesses would expand and grow. It would be a dream America again.
"Government is not the answer, it is the problem." Where is Ronald Reagan when you need him?
One problem that is an offspring of this overbearing government is that businesses are making decisions, not based on solid business, marketing and accounting functions, but on politics. It's hard to imagine that every decision to grow and expand, develop new products or sources of revenues, and even decisions of pensions and 401Ks has business leaders turning their heads to Washington D.C. !
It's all backwards. It should not be this way. All of us need a stable environment, steady tax rates, low or no government intrusion. Business would flourish.
In short we need to "GROW OUT OF OUR PROBLEMS." If the current administration would do what I listed above, this would happen. We'd bring down our deficits and our debt with an expanding economy. We'd bring down unemployment with growth opportunities. New companies would start. Businesses would expand and grow. It would be a dream America again.
"Government is not the answer, it is the problem." Where is Ronald Reagan when you need him?
OCTOBER'S MARKET
Hello my fellow friends.
Well the Dow is acting not so funny. In fact, the VIX, or the Volatility Index says there will be several days of movements, say, up 100 or so, then down 100 or so.
Here is my current thinking. This week was negative. I think some money wants to get into the market in advance of October. Yes, October has historically been an erratic month, but usually on the upside---as long as the news is good. There will be plenty of good news in the form of earnings, but also a lot of commentary and hedging on each companies' future.
It will give us a lot of movement. So here is a good practice/paper trade. I offer this here in the learning context to see the movement of the Dow and the options. Here's why:
1) As stated above, it's October. It feels like it wants to move up.
2) Thursday was Rosh Hashanah. Many people were on the sidelines on Thursday and Friday.
3) The Greek Tragedy might be ameliorated.
4) It's October. Oops, I already said that. Note that there are three weeks to the main option's expiration date.
So Molly jumped back in. I don't know if these are real or practice trades. What I do know is these prices are real. And beating the Autumnal Dog to death---it's October.
She bought the DIA (yes, that's the ticker symbol of an ETF trust that owns all of the Dow 30 stocks, and mirrors the Dow at 1/100). Options are in $1 increments. She bought 5 contracts or the DIAs $112 call options for $2.57, and 5 contracts of the DIA $114 call options for $1.69. Molly then put in orders to sell the $112s at $5, and the $114s at $3.40. This represents a double of the money.
Back-Up. One reason I like this trade is this: Even though this is designed to be a 2 to 3 day trade---not counting the weekend---if it doesn't work, she can get out and cut her losses or wait. It's October, with many days to go. I'll put in my projection. I think the Dow will go to around $11,600, maybe push up to $11,800. It's not a prediction, but a projection. We all do the best we can. But think about the potential. If you owned the right to buy a stock at $112 and the stock went to $118, the option would have to be at least worth $6, plus a little more if there is time left to expiration. Six dollars is in the money---above the strike price. Her $2.57, or $1,285 for the five contracts (each contract represents 100 shares), could turn into nothing if it goes down, but if it goes up to the $118 range, she would make $5 or $6 times 500. I think it was smart for her not to get too greedy and sell these for $5. That would be $2,500 is she gets filled, and that represents a net of $1,215. She'll make more on the $114 if the Dow goes up.
Back to our test. Watch the Dow on Monday and Tuesday. Ascertain how accurate our 50 cent rule of thumb is. If the Dow goes up 100 points, the option goes up 50 cents. The Dow would have to go up 400 to 500 points to make this kind of money. There is no guarantee We'll watch and learn. She can always change the order, sell it at a lesser profit, and get back in on the next dip. Too much fun.
And one last thing, this is all done with a back-up of more time in October for it to work out. Yes, it was designed as a two to three day trade for cash flow purposes, but it's nice to have some time if the trade doesn't work out right away.
Keep reading wadecook.blogspot.com and invite your friends.
More later, Wade
Well the Dow is acting not so funny. In fact, the VIX, or the Volatility Index says there will be several days of movements, say, up 100 or so, then down 100 or so.
Here is my current thinking. This week was negative. I think some money wants to get into the market in advance of October. Yes, October has historically been an erratic month, but usually on the upside---as long as the news is good. There will be plenty of good news in the form of earnings, but also a lot of commentary and hedging on each companies' future.
It will give us a lot of movement. So here is a good practice/paper trade. I offer this here in the learning context to see the movement of the Dow and the options. Here's why:
1) As stated above, it's October. It feels like it wants to move up.
2) Thursday was Rosh Hashanah. Many people were on the sidelines on Thursday and Friday.
3) The Greek Tragedy might be ameliorated.
4) It's October. Oops, I already said that. Note that there are three weeks to the main option's expiration date.
So Molly jumped back in. I don't know if these are real or practice trades. What I do know is these prices are real. And beating the Autumnal Dog to death---it's October.
She bought the DIA (yes, that's the ticker symbol of an ETF trust that owns all of the Dow 30 stocks, and mirrors the Dow at 1/100). Options are in $1 increments. She bought 5 contracts or the DIAs $112 call options for $2.57, and 5 contracts of the DIA $114 call options for $1.69. Molly then put in orders to sell the $112s at $5, and the $114s at $3.40. This represents a double of the money.
Back-Up. One reason I like this trade is this: Even though this is designed to be a 2 to 3 day trade---not counting the weekend---if it doesn't work, she can get out and cut her losses or wait. It's October, with many days to go. I'll put in my projection. I think the Dow will go to around $11,600, maybe push up to $11,800. It's not a prediction, but a projection. We all do the best we can. But think about the potential. If you owned the right to buy a stock at $112 and the stock went to $118, the option would have to be at least worth $6, plus a little more if there is time left to expiration. Six dollars is in the money---above the strike price. Her $2.57, or $1,285 for the five contracts (each contract represents 100 shares), could turn into nothing if it goes down, but if it goes up to the $118 range, she would make $5 or $6 times 500. I think it was smart for her not to get too greedy and sell these for $5. That would be $2,500 is she gets filled, and that represents a net of $1,215. She'll make more on the $114 if the Dow goes up.
Back to our test. Watch the Dow on Monday and Tuesday. Ascertain how accurate our 50 cent rule of thumb is. If the Dow goes up 100 points, the option goes up 50 cents. The Dow would have to go up 400 to 500 points to make this kind of money. There is no guarantee We'll watch and learn. She can always change the order, sell it at a lesser profit, and get back in on the next dip. Too much fun.
And one last thing, this is all done with a back-up of more time in October for it to work out. Yes, it was designed as a two to three day trade for cash flow purposes, but it's nice to have some time if the trade doesn't work out right away.
Keep reading wadecook.blogspot.com and invite your friends.
More later, Wade
MOLLY'S MONEY
A good trade in the market.
There is a lot I'd like to write but time is short. Molly made $2,390 in three days, based on $2,610. That should add up to $5,000. Here's what she did. I helped on the sidelines as I do not do trades from here.
The Dow had sold off. It was way down. It bounced off of $10,600. The Dow Jones Industrial Average is the most widely watched index in the world. Yes, there are bigger groupings of stocks, like the S&P 500, the Fortune 500, even the New York Composite and the Nasdaq Composite. So why the Dow? For me, it's simple, the numbers are everywhere. Every time I walk by a TV, there it is. When anyone generically says the market is up or down, they are talking about the DJIA. Don't confuse this with Dow Chemical, ticker DOW.
You can trade the index, or the DJX. I think a good alternative is to trade the DIA. That's a ticker symbol for an ETF, a trust that has the 30 Dow Components in it. It trades like a stock. If the Dow is at $10,680 the DIA will be 1/100 of that, or $106.80, plus a little more change.
Okay, Molly ascertained that the Dow was at a low. September is almost over, one of the worst months historically of all the months. October is coming up, usually an up month, but definitely a green-light month. It's a news reporting month---meaning a lot of earnings info to be released. Molly bought the call options on the DIAs at the $110 strike price. Buying calls she's hoping the Dow rises. It did. She paid $2.61, so 10 contracts cost $2,610. The next two days the market rallied. Remember my test question? For years there has been a ratio, though not perfect, of this: If you have a call close to the money---say $110 when the Dow is around $11,000---then as the Dow moves up or down the option will move about 50 cents. It sure seemed to hold this week on this trade. I checked several times and it was very close. This means if you paid $2.00 for the option and the Dow goes up 100 points (not just in a day but even in a few days) your option will go up 50 cents. That would be $500 if you owned 10 contracts (or the right to buy 1,000 shares). $2,000 to $2,500 in an hour or two or a day or two. Oh, and don't forget if the Dow goes down 100 points you lose the 50 cents.
Again, Molly thought after two really bad days that the Dow looked like it wanted to move up. One group of people say to stay away, another group says that a lot of money will move back into the market in advance of the October earnings season. I'm in this latter camp. One more quick thought on October. Even if this trade doesn't work this week, it still has time to work. October expiration date, the 21st is still 3-1/2 weeks away.
She was going to go for a triple, but in just two days the market went up nicely and she got out at $5.00. On the 10 contracts, that is $5,000, netting her $2,390 ($5,000 - $2,610 [cost] = $2,390). Not a bad two-three days work. Oh, and when she did the market went down quite a bit and she would have not made any profits until the next rise. I'll comment on this strategy later.
Congratulations Molly. Way to Go. Impressive, you Sky Walker.
UPCOMING: More comments on Business and Politics and Molly is in another DIA trade. It's just so exciting.
There is a lot I'd like to write but time is short. Molly made $2,390 in three days, based on $2,610. That should add up to $5,000. Here's what she did. I helped on the sidelines as I do not do trades from here.
The Dow had sold off. It was way down. It bounced off of $10,600. The Dow Jones Industrial Average is the most widely watched index in the world. Yes, there are bigger groupings of stocks, like the S&P 500, the Fortune 500, even the New York Composite and the Nasdaq Composite. So why the Dow? For me, it's simple, the numbers are everywhere. Every time I walk by a TV, there it is. When anyone generically says the market is up or down, they are talking about the DJIA. Don't confuse this with Dow Chemical, ticker DOW.
You can trade the index, or the DJX. I think a good alternative is to trade the DIA. That's a ticker symbol for an ETF, a trust that has the 30 Dow Components in it. It trades like a stock. If the Dow is at $10,680 the DIA will be 1/100 of that, or $106.80, plus a little more change.
Okay, Molly ascertained that the Dow was at a low. September is almost over, one of the worst months historically of all the months. October is coming up, usually an up month, but definitely a green-light month. It's a news reporting month---meaning a lot of earnings info to be released. Molly bought the call options on the DIAs at the $110 strike price. Buying calls she's hoping the Dow rises. It did. She paid $2.61, so 10 contracts cost $2,610. The next two days the market rallied. Remember my test question? For years there has been a ratio, though not perfect, of this: If you have a call close to the money---say $110 when the Dow is around $11,000---then as the Dow moves up or down the option will move about 50 cents. It sure seemed to hold this week on this trade. I checked several times and it was very close. This means if you paid $2.00 for the option and the Dow goes up 100 points (not just in a day but even in a few days) your option will go up 50 cents. That would be $500 if you owned 10 contracts (or the right to buy 1,000 shares). $2,000 to $2,500 in an hour or two or a day or two. Oh, and don't forget if the Dow goes down 100 points you lose the 50 cents.
Again, Molly thought after two really bad days that the Dow looked like it wanted to move up. One group of people say to stay away, another group says that a lot of money will move back into the market in advance of the October earnings season. I'm in this latter camp. One more quick thought on October. Even if this trade doesn't work this week, it still has time to work. October expiration date, the 21st is still 3-1/2 weeks away.
She was going to go for a triple, but in just two days the market went up nicely and she got out at $5.00. On the 10 contracts, that is $5,000, netting her $2,390 ($5,000 - $2,610 [cost] = $2,390). Not a bad two-three days work. Oh, and when she did the market went down quite a bit and she would have not made any profits until the next rise. I'll comment on this strategy later.
Congratulations Molly. Way to Go. Impressive, you Sky Walker.
UPCOMING: More comments on Business and Politics and Molly is in another DIA trade. It's just so exciting.
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