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!

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!

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!

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!

Live Trading Room - a great way to learn trading

This week, I'd like to share with you the value of being in a live trading room. I started out with no knowledge of trading, and very minimal knowledge on the financial markets. Through the e-books I purchased from Planet Wealth, I gained knowledge on the different strategies that can be applied in the market and what they mean. This is great, and very much needed to start off in the marketplace, but how then do I apply these? When will be the correct time to get into the market, and what specifically do I need to look out for?

This is where the live trading room comes in handy with Planet Wealth. Planet Wealth offers this service to help people learn to trade from the experts. Planet Wealth teamed up with John Howell, a successful professional trader and co-author of the best-selling book "Secrets of StockMarket Traders Exposed". He offers his knowledge in a way that any person on the street with no trading background will be able to understand and learn. From my experience, he has been very thorough and very accommodating to even the most basic questions. To him, there is no such thing as a dumb question, and he caters for all levels of understanding of the sharemarket. It certainly helped me get kickstarted with trading and gave me the confidence that what I'm doing is right, as this guy is a successful trader. He has the results to prove this, and that's what makes it so real and assuring for me.

I find that the services offered by Planet Wealth is very comprehensive, and I have been making profit in the past 2 months while the markets have gone down (yes, that's right, and I'm totally not bluffing!) When I tell my friends about what I've been doing with Planet Wealth, they all get puzzled how I can make money in this current financial crash. I tell them that I don't just buy shares and hold and pray for the best. I use a certain strategy that is effective for the current bearish market, and that I mentioned on my first post is the use of Bear Call Spreads.

If you are still scratching your head and don't know how to make money in this current market, I thoroughly encourage you to check out Planet Wealth and check out their e-books first, and if you are still excited to trade and make money, check out their live trading room.

To your many trading successes!

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.