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!

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!

The Importance of Risk Management

Risk Management - what is it and why do we need to consider it? Risk Management is the ability to handle or manage the risk that you are exposed to in a particular trade. Risk Management is important in trading in order to protect your money or your capital because no one exactly knows for certain what the market will do once you are in a trade. We can only try and tell based on certain analysis and trends what we think will happen to a particular stock, but no one out there (not even the market makers) is certain that a stock will go to the direction that you would trade as or told to trade. Thus, it is only fair that we need to look after our cash and make sure that if things don't go on our favour, we will not have lost everything in our trading account.

Risk Management also involves identifying how much you are willing to risk for a particular trade. For example, if you have $10,000 in your bank account, you might only want to risk 20% of this amount at a time. Thus, when you trade, you may only get into a trading position that will only let you lose a maximum of $2,000. In other words, you are comfortable enough to lose this amount, should the trade go against you.

Another aspect of risk management involves looking at a risk-reward ratio for a particular trade. This basically means that you look at how much you are risking in proportion to the reward or potential profit that you will make out of a trade. For example, if a trade is only able to generate $1,000 in profit, and you are risking $10,000, this may not necessarily be a good risk-reward ratio as compared to a trade with $1,000 potential profit and a risk of $4,000.

Prudent risk management is part and parcel of trading, whether it be stocks, options, futures contracts or indices. When I trade using Planet Wealth's recommendations, I always work out how much I'm willing to put into the trade. I never put all of my money into one trade, and before I enter on a trade, I also think if I'm prepared to lose x amount of dollars, should it go against me. More importantly, I also look at the risk-reward ratio that is not less than 20%, and this means that my trades will only let me risk less for more profit.

One good thing about the range of strategies that Planet Wealth offers is the various levels of risk that each strategy entails. This helps their clients decide if it meets their risk management criteria, and if they are also feasible for certain market conditions. This is especially crucial for times like what are experiencing now, where the market is very volatile and tends to go on a downward trend. Planet Wealth has strategies to cater for a downward trend, and also ensures that the level of risk is minimised as much as possible.

In summary, risk management is a very important factor for trading in order to protect your money and allow you to profit in the markets in the long term. Whether you trade stocks/shares, options, futures contracts, currencies or indices, make sure that this is at the top of your list.

Another sharemarket secret unveiled. To the many trading successes.

"Share Renting" strategy - a great income earner for Bull Markets

What is "Share Renting"?

Share Renting is a term coined by Jamie McIntyre of 21st Century Academy to simplify an options strategy that can be used to generate extra income when you hold physical stocks or shares. Share renting is being used to form an analogy with owning a property and renting it out to a tenant, and making an income from rental. This is one of the strategies that are being taught in more depth by Planet Wealth. Basically, the strategy is this:

1.) Own the physical shares or stocks. If you're investing in the Australian market, you must hold at least 1,000 shares (or multiples of 1,000). In the US markets, you can go for at least 100 shares (or multiples of 100). This is so you can apply the options strategy on top of the stock or share that you purchased.

2.) Sell a Call Option - When selling a call option, you get a premium or "rental income" for agreeing to sell your stock at a certain date for a specified price. Choosing an option to sell will depend on the price level that you purchased the shares, and the expectations/views/predictions that you or the market have on the particular stock or share at a certain date.

The trick is, you should choose a call option at a higher price and with a price that you think it will not reach or hit at the expiry date. Each option has an expiry date, and you also need to look into this to work out if your view is for within the month or within the next 2 months, etc. This is one of the factors that will determine how much income you will make out of the premium.

For example:

You purchased 1,000 shares of Company XYZ @ $2.00
You foresee that this stock, based on existing market conditions, and based on previous movements, will not go up to $2.50 in the next month.

The $2.50 Call Options strike price for next month is paying 15 cents premium.
You can sell 1 call options contract for Company XYZ and earn $150.

If Company XYZ doesn't reach $2.50 at the expiry date, then you get to keep your shares, and you also get to keep the $150 premium! If you continue to have a bullish view of the stock or share in the long run, you might want to keep it. Hence, the strategy is to find a strike price that is more likely not to be hit or reached.

If it does hit the $2.50 strike price, then you would have to sell the shares for $2.50, which then means that you still made money on the stock or share ($500 in this instance, plus the $150 premium). Either way, you win!

Not a bad strategy for a Bull Market! You can still do this on a bear market, but you have to be bullish on the stock that you own and not make a loss on it if the call options are exercised.

I've learned all of this in more detail through Planet Wealth, and more details are on their e-book, so check them out! I hope you've learned another options strategy today.

Another Sharemarket Secret unveiled! Til the next post!

Options Trading on a Bear Market

Welcome to the first-ever post of Sharemarket Secrets!

Admittedly, times are tough at the moment when it comes to the stock market (or share market, as it is called here in Australia). However, you can still make money in the market if you know the right strategy to use and trade the market. I'd like to share with you one strategy that I've been doing recently which have generated me a 30% return in 10 days. I didn't have a lot of money to invest, but this strategy is not high-risk (i.e., as with other investment strategies, there is a risk, but it is limited and capped, and it can also be reduced if it's starting to go against your way).

I use Options to trade the markets and generate this kind of return. Now, OPTIONS?? Well, most people in the know would have their eyes wide open and look at you with absolute horror and turn away. BUT, it's not what you think it is. A lot of people use Options to make money in the market, however, they do not know how to apply them properly. They get into these options strategies without any protection, hence, they get into a lot of trouble in the marketplace!

For those of you who are not familiar with Options, it is an instrument traded in the marketplace which enables a buyer of the option the right to buy or sell a stock or share at a specified price (called strike price) and at a specific date (called expiry date). If you want to learn more about Options, you can look into getting this e-book offered by Planet Wealth, which I'm currently using: http://tinyurl.com/pwlifestyle


For those who know Options, there is a strategy called Bear Call Spread. It's a strategy wherein you sell or write a Call Option at a strike price where you foresee the stock or share would not reach at a certain point in time, and then to protect you from the possibility of the Call option being exercised, you then buy or take Call Options at a slightly higher strike price (preferrably the next higher strike price) from the level you sold the call Option. The difference between the premium you receive from the Sell Call Option and the amount that you paid for the Buy Call option is called a Credit. The Credit is what you make at the end of the trade if it all goes well. For example:

A company XYZ is currently trading $2.00, but with the current trend in the market, it is foreseen to further drop another 20%. Also, you notice that technically, the stock or share has been hitting a resistance level of $2.30.

You can then sell a Call Option for $2.50, and receive a premium of say 70cents. You then buy a Call Option to protect yourself in case the price doesn't go down to below $2.50 before expiry date. You buy, say, a Call Option at $2.75 for 20 cents.

So, 70 cents - 20 cents = 50 cents, which is the credit or the amount you receive from the trade. If you did 5 contracts of this (in Australia, a contract is 1,000 units), that would be 5,000 x 50 cents, giving you a profit of $2,500!

The maximum risk on the other hand (if this does not go to you way) is $2.75 - $2.50 = 25 cents x 5,000 (for the 5 contracts) = $1,250.

If you do this once a month, it's like getting 30-50% return on your money each month! And this is each month, not per annum! Better than having it sitting in the bank with only 5% per annum return (if you're lucky after tax!) .

You should check out the Planet Wealth e-books, as they are a great tool for learning various Options strategies in the marketplace. It's all a matter of applying the correct strategy at the right time and situation of the market and stock.

One Sharemarket Secret unveiled!