Monday, July 5, 2010

Day Trading - The Risks and The Rewards

Day Trading - How To Make Money In The Markets Effectively

Many people would have heard of day trading. It's the process of trading the markets whereby one enters a trade and exits the trade position in a matter of minutes or hours. Day trading is considered to be a great way to make money in the markets and to generate cashflow or extra income for many people. Those who have had success in day trading have, in some cases, turned trading as their primary source of income, and thereby getting rid of their normal day jobs to work from home.

While day trading can be a very lucrative way to make money rather quickly, it can also be a very quick way to lose money, if you don't know what you're doing. Many people who start with day trading think it is just as easy as buying a stock and make some profits by selling it at a higher price. While this is right in terms of the outcome we want, it does not always work out that way, and the market can turn to the other direction so fast so soon without you knowing it.

The reason people day trade is to be able to take advantage of the quick short term movement of a stock and be out of it if the market goes in the other direction. That way, we can effectively use our money to profit from the short term moves and deploy or use our money elsewhere when the market goes in the other direction from what we think it should be. Day Trading does not involve applying the "Buy and Hold" strategy that most people investing in the stock market are familiar of.

Day trading involves studying the technical aspects of a particular stock or commodity, and identifying the direction of that particular stock or commodity in the short term. Knowing if the stock is going up or down in a particular period is the key to becoming successful at day trading.

Another important aspect of day trading is one's mindset. You have to be prepared to take your profits when they are present, or cut your losses before it gets too late. For many people starting out day trading, having a stop-loss in place is very important. Identifying the appropriate level to take a loss is quite arbitrary, and it all boils down to reading the charts and knowing where the support and resistance levels are for a particular stock or commodity. This is to ensure that you are not going to completely wipe out your trading account and at the same time, ensure yourself with a degree of success to buffer yourself from the market movements and take profits later on when the price moves to your direction.

Another factor that has to come to the picture with day trading is position sizing. You cannot simply throw every single cent of your money into one trade. Most traders follow a rule that you only risk 10% of your total account balance to one particular trade position. This is obviously because there is a chance that the trade will not go in your favour, and you want to be in the position to trade further down the track and benefit from future winning trades.

Day Trading does offer a lot of great opportunities to make money and profit, and many people who have developed the right discipline and mindset have become truly successful as traders. Many have achieved a lifestyle of their dreams with trading. They have all gone through losses and made profits, and it is all part of the day trading business. Just be aware, that there are risks in day trading, and accept those risks by managing your trades carefully in order to be successful.

Happy Trading!

Sunday, July 12, 2009

Covered Calls - A Great Cashflow Strategy

What Are Covered Calls

For options traders, covered calls are the easiest and by far the safest strategy when dealing with options contracts. Essentially, covered calls are call options that have a backing of an underlying stock or share. In other words, if you sold x number of call options for XYZ shares, you also own that many shares of XYZ to cover for the event that you may get exercised. This is a great strategy for income generation of shares or stocks that you own.

The Income Generating Strategy

Basically, if you bought shares of a company, your money is locked away to that investment and not earning any interests in the mean time until you sell it at a higher price. If you sold call options for these shares that you own, you will receive a premium which you get to keep regardless of whether you get exercised or not. Thus, if you understand how options work and also understand how the share price have moved over the past few months, you will be able to use this strategy to constantly generate extra income until such time that you are ready to sell your shares.

The options trading strategy I would recommend for covered calls would be to find a strike price that is above your share purchase price, and ensure that there is a less probability of that price being hit or exceeded by expiry date. Another area to look at is also the premium amount that the market offers for that particular call options contract. You have to ensure that the premium is good enough such that if in case you get exercised, you have also received a decent amount to cover for the loss of potential capital growth of your shares.

Covered calls are great for bullish shares or bullish markets. You would ideally like to sell your shares and get options at a higher strike price, therefore this is perfect when the market is more or less guaranteed to rise, with lesser risk to the downside.

If you want more in-depth information on covered calls and options trading, Planet Wealth offers great educational materials and support, and have the expertise to show you how to trade options. Planet Wealth's team of experts also trade options on their own, and would only recommend options trades for those that they will trade themselves. Thereby, you can feel at ease with their expertise. Check out Planet Wealth's website for more information.

Friday, May 8, 2009

Exercising the Option to Buy or Sell

What Options Can Do

Options trading on the stock market is an additional way to diversify your investment portfolio. This differs from trading options and futures on commodities.

Stock market options trading involves contracts which give an owner the opportunity to buy or sell a security at a fixed price either before, or on, the date the contract becomes due. Investors can either trade the security itself, or trade the option. Some investors choose to use options trading as a hedge against losses in other segments of their portfolios.

Let’s take a look at exercising the option to buy or sell a particular stock for which you have a contract. You have any time up until the contract’s expiration date to decide what you want to do. You can either take the stock or sell them at the price fixed on the contract no matter what their current value on the market might be.

Consider this example in options trading. There is a stock you have had your eye on and because of your research and analysis of historical trending reports, you believe the price of these stocks will rise. Should you be concerned that the price may not rise as you expected, you would probably wish to buy a call option that is close to the price on the current market.

Before that option expires, the stock price may increase quite a bit. In that instance, you would exercise the option to buy at the lower contract price.

Conversely a put option gives you the right to sell at a fixed price. You would buy a put option if your research indicated the stock price would likely fall.

Now your options trading choice is whether to keep the stock and its built-in gains, or sell it and take your profit. Of course, there will be fees due out of this profit which pay for the cost of the option itself, taxes, and brokerage commission.

Options trading is not as straightforward as you might believe. The beginning investor would do best to use a good deal of caution and the benefit of a mentor’s experience before attempting to profit from options trading. Mentors can help save you all the pain of making unnecessary losses, so I suggest you find one, and grab a book to learn from.

Tuesday, April 28, 2009

Options Trading: Hedging Against a Loss

One way that many investors use options trading is as a hedge against possible losses in stock price that might result from market fluctuations.

When you trade in options, you have three choices as to how to make a profit. You can buy or sell the stocks (pick an option that is most likely going to be exercised), trade the option itself, or use the option as a hedge. In this article, we will briefly examine how to use options trading as a hedge against loss.

Options trading can be considered much the same as an insurance policy. If you feel that a stock price is going to drop but are hesitant to sell in the current market, then you may opt to buy a put option when the price falls just below the current market value.

In options trading, a put option is one that gives the owner the opportunity to sell their stock shares at the agreed strike price. In this way, if the stock’s value decreases, the investor can exercise this option and sell his or her shares at a profit – the higher price. Another choice is to sell the put at a profit, which reduces the cost of acquiring the stock in the market.

Of course, if the price of the stock does not decrease, then the investor loses what he paid for the price of the put. There is still an option to sell the put option before the contract’s expiration date and recoup most of this cost, if desired. Or you could also put in a stop-loss order to your broker in order to prevent a loss. This is just another method of loss insurance.

While using options trading as a way to hedge against losses can be a great strategy for the experienced trader, it may not be the best choice for a novice investor. Take some time to get used to reading market conditions and improving your accuracy regarding rising and falling prices before relying on options trading as a portfolio insurance policy.

Learning to trade options is not difficult. I certainly had no prior knowledge of trading the markets until I stumble on Planet Wealth's ebooks, which have been a great resource for my learning. Make no mistake, options can be tricky to trade, but when armed with the knowledge, it can be one of the most powerful instruments you can use to make money in the markets without having to monitor it 24 by 7.

Another Sharemarket secret unveiled!

Wednesday, April 22, 2009

Straddles - A Neutral Options Trading Strategy

Previously, I have tackled directional options trading with Credit Spreads. Directional Trading means trading the markets or a specific stock with a specific view of it going up or down (bullish or bearish). This week, I'd like to focus on a different options trading strategy called Straddles.

A Straddle is a neutral or non-directional options trading strategy. In essence, neutral or non-directional options trading strategies are opted by options traders when he has no idea as to whether a particular stock would rise or fall. In such options trading strategy, the profit potential is assessed on the basis of speculative volatility of a particular stock price. There are 2 types of straddles: a Long Straddle and a Short Straddle. This post will cover the Long Straddle as an options trading strategy.

Long Straddle

A Long straddle is basically comprised of a Buy Call and Buy Put Options. The idea is you are buying a call and a put on same strike price. With this options trading strategy, if the market goes in one direction, one of the options will increase in value significantly, and the other will become worthless. For a long straddle to be effective, the price of a stock should either take a huge jump or go for a steep decline. This is very handy for times when the market is very volatile, and the volatility can enable you to earn unlimited amounts based on how much the stock price has risen or fallen.

Profits are calculated based on where the stock price is. If the stock price is above the strike price of the option, then the profit will be as follows:

Price of the stock - Strike Price of the Call option - Net Premium Paid

If the stock price is below the strike price of the option, then the profit will be as follows:

Strike Price of the Put Option -Price of the stock -Net Premium Paid

For example:
Company XYZ is trading at $40. You do a straddle by buying 10 call and 10 put options of $40. You paid $400 in premium.

If at expiry date the stock price is now at $50, then your profit is as follows:
($50 x 10 contracts) - ($40 x 10 contracts) - $400

If at expiry date the stock price is now at $30, then your profit will be:
($40 x 10 contracts) - ($30 x 10 contracts) - $400

If the stock price did not move at all by expiry date, you lose the premium you would have paid, and both options have now expired worthless.

If you would like to learn more about Straddles and options trading in general, I found that Planet Wealth provides very comprehensive information on stock and options trading, and the various strategies that you can use depending on the market situation.

On my next post, I will be covering short straddles. I hope you've enjoyed this post and learned something from it.

Another sharemarket secret unveiled!

Friday, April 17, 2009

Options Trading Terminologies

Basics on Options Trading

I'd like to get back to basics and explain what options trading is. Options Trading is basically the trading of options contracts that is exchanged between the buyer and the seller of an asset (in the case of the stock market, the stocks). That gives the buyer the right to either buy or sell a particular asset at an agreed date and at an agreed price. In return, the seller of the option receives a certain amount of payment as premium from the buyer. There are 2 types of options: A call option and a put option.

Call Option
Call Option gives the holder the right but not the obligation to buy the stock for an agreed price at an agreed time. If the call option is struck or exercised, the buyer of the call option is then able to purchase that particular stock for the agreed price, and the seller of the call option is then obliged to sell the stock at the agreed price.

Put Option
Put Option gives the holder the right but not the obligation to sell the stock for an agreed price at an agreed time. If the put option is struck or exercised, then the buyer of the option is obliged to sell the asset or stock. The seller of the put option, if exercised, is then obliged to buy the stock or asset.

What does "Exercise" mean?
Exercise means that the price of the stock has hit or exceeded the agreed price on the option on or before the specified agreed date. This means that the options contract has to be executed, and that is what "being exercised" mean.

Options Contract
Options are traded by contracts. A contract is comprised of:

• The quantity and the class of the assets (in the US, a contract is 100 shares , in Australia a contract is 1,000 shares)
• The exercise price at which the options trading happens;
• The expiry date
• The premium price that would be settled to the writer (or seller) of the contract, OR the premium to be paid to the taker (or buyer) of the contract.

Options trading follow different styles. The most common ones are:

• American options trading – In this options style, an option can be comfortably exercised on on any trading day on or before the expiration date.
• European options trading - In this options trading style, the options can only be exercised at the time of expiration only.

These are just the basics of options trading. More information is available with Planet Wealth and the e-books that they offer, which I find are just awesome with explaining the finer details of Options trading.

I hope this has been a beneficial post on Options Trading by Planet Wealth Systems!

Sunday, March 15, 2009

Fundamental Analysis vs Technical Analysis

Fundamental Analysis and Technical Analysis?

When you begin learning on how to invest in the stock market, or any financial instrument for that matter, the main question you will have in mind is, how do I know or analyse the market in order for me to make the right decisions? I definitely had these questions in my mind before I got to read the Planet Wealth books. This is where analysis methods come into the picture. But before you even say, "Whoa, this sounds too much for me!", let me just try and explain that essentially, there will only be 2 basic methods you need to learn to analyse a stock, and they are using Fundamental Analysis and Technical Analysis.

What is Fundamental Analysis
Fundamental Analysis is the method of analysing a particular stock or instrument based on current market conditions, market projections, and company performance data. Basically, fundamental analysis is using information that you hear in the news regarding a particular company, the industry that the company is in, the trends of that industry in terms of future growth potential and profitability, and also looking at the greater economic situation locally and globally. Based on the information that you have gathered, you can then determine that a particular stock has the potential to increase in value, or perhaps get into trouble and something that you would consider avoiding for now.

For example, company XYZ is in the gold mining industry, and there has been news that the gold prices are predicted to increase by 50% in the next year. Also, the company announced that it has record profits this year and it projects its profits to double in the next year. Based on these information, you can then say that fundamentally, this company is strong and have a great potential for its share prices to go up. Hence, you may decide to buy this stock or trade a bull put spread for this.

Generally, you would use Fundamental Analysis to get a long-term and short-term perspective or view of where you think the stock or share will go. However. this is more heavily used when deciding on entering a longer-term trade or investment/holding of a stock or share.

And Technical Analysis?

Technical Analysis is the method of using charts to analyse the performance of a share or stock. With technical analysis, you tend to draw lines on the charts to determine support and resistance levels of a stock as well as patterns and indicators. This may sound a mouthful, but basically, support is defined as the lowest price level (or bottom) that a stock generally tends to stay at a certain period of time. Resistance, on the other hand, is the highest price level (or top) that a stock or share generally tends to stay at a certain period in time. These 2 lines that you would draw on the chart would help you decide if you should go long or short on a stock, or in other words, if you're bearish or bullish the stock.

There are many more details and information on how you can do technical analysis, and that's why the live trading room at Planet Wealth have been very helpful in terms of my learning and understanding of these concepts. Planet Wealth provides a lot of guidance in terms of getting you started with learning the different charting methods and indicators and how you can use them to analyse a stock.

Generally though, technical analysis is heavily used for short-term trading, though it is still used for long term trading to work out what the long term price patterns are. If you are trading for the shorter term, you need to look more on the technical side rather than the fundamental side, as in the short term, the price action would perform closely more on the technical side.

In summary, we use both fundamental and technical analysis for trading. The only difference is the amount or the weight that you put into each method of analysis into factor when doing your trades. For short-term trades, more technical than fundamental, and for longer-term trades, more fundamental than technical.

Another Planet Wealth System - Sharemarket secret unveiled!