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!

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!

Credit Spreads - unveiling the myth

What is a Credit Spread?

Credit Spreads are a great way to make money in the market without having to own any shares. I'm assuming for this post that the reader already has some understanding of what options are. If you want to get an idea of what they are, I have briefly discuss them on my first post. This strategy is offered by Planet Wealth and is a staple of their trading strategies.

Credit Spreads use 2 legs of options in a strategy wherein you sell an option to make money from the premium, and you also buy an option as a protection in case things don't turn out to be what you expect, and then pay an insurance fee for it. In this strategy, the premium you receive is always much greater than the insurance fee that you paid for, and the net amount is called the credit. Also, with this strategy, generally there is a difference or a spread between the strike price of your buy option and your sell option. Hence, it is called credit spreads.

There are 2 types of credit spreads:

• Bull Put Spread
• Bear Call Spread

Bull Put Spread

A Bull Put Spread is used when you have a bullish view of a particular stock. This strategy generally involves buying a Put at a lower strike price than the strike price of your Sell Put. For example:

You buy a Put of XYZ Corp at the strike price of $10.00 for March 09 for a fee of 10cents
You sell a Put of XYZ Corp at the strike price of $10.50 for March 09 for a premium of 25 cents

You then have a net of 15cents. If you stay on the trade, and the share price of XYZ Corp stays above $10.50, then you get to keep the 15 cents premium! Obviously, all these comes in lots of 1,000 per contract, so imagine if you had 20 contracts of these! That would be a potential profit of $3,000 out of a $10,000 risk! That is a good return on investment!

Bear Call Spread

A Bear Call Spread is the opposite of the Bull Put Spread in that this strategy is used if you have a bearish view of a particular stock or share. This involves buy a call at a higher strike price than the sell call for this share.

For example:
You buy Call option of XYZ Corp at the strike price of $15.00 for March 09 for a fee of 8cents
You sell Call option of XYZ Corp at the strike price of $14.50 for March 09 for a premium of 20cents

The result is a credit of 12 cents. If you stay on the trade, and the share price of XYZ Corp stays below $14.50, then you get to keep the 12 cents premium!

Obviously these are just examples, and you need to look at your charts and take a view on where the direction is for a specific share.

There is definitely more information on the e-books offered by Planet Wealth, and if you're serious with making money using this strategy, get your copy NOW! I can only say that it's been the best $99 investment I've made, and on my first month, I've already recovered it from my successful trade!

I hope this has been another beneficial post, and one that would encourage you to take the next step, if you haven't already done so.

Another sharemarket secret unveiled!

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!