Options as a Strategic Investment » Wealth http://optionsasastrategicinvestment.net Option Trading as your main investment strategy Sat, 31 Jul 2010 21:50:46 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Rules for Investing- How To Build a Portfolio of Safe, Secure Investments http://optionsasastrategicinvestment.net/rules-for-investing-how-to-build-a-portfolio-of-safe-secure-investments http://optionsasastrategicinvestment.net/rules-for-investing-how-to-build-a-portfolio-of-safe-secure-investments#comments Sat, 23 Jan 2010 23:20:30 +0000 admin http://optionsasastrategicinvestment.net/rules-for-investing-how-to-build-a-portfolio-of-safe-secure-investments In order to invest wisely, you need to have a suitable investment plan that will ensure the appropriate amount of growth for you. Your investments will also need to be safe and easy to manage.
Developing an Investment Plan:
The first step in developing an investment plan is to identify what type of an investor you are. Investor types are often determined by their stages in life. Here is a guide:
- Single person under 40 years old. Focus: Long-term investments, medium to high risk. Emphasis: capital gain, compound growth.
- Two-income married couple, no children, aged 20 to 40 years. Focus: Long-term investments, medium to high risk. Emphasis: capital gain, compound growth.
- One-income family, young children, aged 20 to 40 years. Focus: Long-term investments, low to medium risk. Emphasis: compound growth.
- Single person, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
- Married couple with adolescent or independent children, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
- All investors, aged 60 and over. Focus: Short to medium-term investments, low risk. Emphasis: Income.
The following are examples of investment portfolio mixes for the various types of investors.
Low Risk Investments:
Low risk investments are predominately cash, fixed interest and superannuation. This has the lowest risk of all investments but has also the lowest return – in today’s market, approximately 3% to 6% per annum. Fixed interest includes cash, cash management trusts and bonds. They return approximately 5% to 10% per annum, sometimes as high as 15% if you invest in global bonds in good markets.
Superannuation returns and risk profiles vary from institution to institution, however the best and safest usually return on average 10% per annum.
Medium Risk Investments:
Medium risk investments include property and non-speculative shares. Diversified funds, which invest in a range of asset groups, are also considered to have medium risk profiles. Average returns from these types of investments will range from 8% to 15% per annum.
I also like to include the broad spectrum of mutual funds, to be discussed later, in the range of medium risk investments. Some can return up to 25% and more depending on the fund type and managers.
High Risk Investments:
High risk investments include all speculative shares, futures and any other type of investment that is purely speculative by nature. Because with these types of investments we are betting on whether the price will go up, or sometimes down, I often classify this as a form of gambling. Accordingly, the returns are unlimited but so is the ability to lose the total money invested.
The basic rule for investing in highly speculative stock is to build in ’sell-out’ thresholds, three up and three down. For example, if you buy a stock at $20.00 per share, your sell-out thresholds might be:
Sell out threshold 3 $30.00
Sell out threshold 2 $25.00
Sell out threshold 1 $22.50
Buy $20.00
Sell out threshold 1 $17.50
Sell-out threshold 2 $15.00
Sell-out threshold 3 $10.00
Each time your stock reaches one of the threshold levels, you sell a third of your stock.
If the stock starts to rise, you sell a third at $22.50 and then another third at $25.00 and so forth. If the stock starts to fall, you also sell a third at $17.50, then another third at $15.00 and the final third at $10.00. In this way, you will never lose all your money, however you have also put a cap on the total profit you will make on the investment. This I have found to be the best and safest method for investing in speculative shares. In 1987, my husband and I were saved from the severe losses of the Wall Street crash because we were well and truly out of the market by taking our profits beforehand. Like all systems, this strategy will only work as long as you obey the rules and do not get too greedy.
Mutual Funds:
Mutual Funds are a selection of investments that are professionally managed by a financial institution or organization. These institutions have a wide range of specialists, researchers and advisor’s who devote their time to ensuring that the fund invests in the best companies and assets.
As well as the advantage of having experts manage your investments, managed funds also give you the ability to invest in a wide range of shares, property or fixed interest markets, either locally or internationally, for as small an outlay as $1,000. In the latter case, they also require a savings plan where you agree to deposit additional capital of a minimum $100.00 per month.
Because managed funds cover the whole spectrum of investment risk profiles, you can easily cover your preferred investment portfolio, as described above, by investing in several different funds.
Putting Together Your Investment Program:
After you have identified your investment type, you need to either seek a good financial advisor or devote your own time in researching investment options.
Shares have traditionally outperformed other asset groups over time. However, share markets can widely fluctuate in the short term, so any entry into the market should always be done with a long-term view of up to 10 years. Even the best managed share funds can fall if the stock market crashes or enters a severe downward cycle. As long as you ensure that you are with a reputable fund with good managers and are willing to ride the waves, your investment will do well in the long-term. If you are in the short-term, low risk category then your investments should be in the safer, more stable areas with lower returns.
Rules for Investing:
Investing may seem daunting for a lot of people. Maybe you have tried it once and failed, or maybe you are simply frightened of losing your money.
To avoid losing any capital, you simply need to be aware of the main pitfalls and always avoid them. The simple, reliable rules for investing are:
1. Have a plan. Always ensure that you or your financial advisor draws up an appropriate investment strategy for you that incorporates your risk profile, timeframes and financial goals. As foolish as it seems, many people plunge headfirst into investing without thoroughly working through these fundamental issues.
2. Don’t put all your eggs in one basket. Obvious advice, but many people fail to follow it. Many people think that they are on the right financial track by paying off the mortgage on their family home and then buying another property for investment purposes. Think about it! You have put all of your financial eggs in one asset basket – property. What happens if the property market collapses? Despite common thinking that this is a safe way to invest, the outcome is very risky. You have invested all of your well-earned money into only one area.
3. Build in appropriate timeframes. There is an old saying, “When the tea lady starts to invest in the stock market, it’s time to get out.” What this means is, when the share market is so high that everyone starts to clamber on board, it has probably reached its peak. There are two ways of successful investment timing. The first is to always pick the low-end of the market to buy and the high-end of the market to sell. This is extremely hard to do. Even the best-informed experts have trouble. The second way is to choose good investments and stay with them over the long-term (say 10 years or more) and ride the waves of the market. For safe, easy investing, choose the second method. Do not buy into the top-end of the market and sell once it starts to fall. You will definitely lose money this way.
4. Avoid high-risk investments. These include risky business ventures, highly speculative stock, tax avoidance schemes or too-good-to-be-true propositions that promise unusually high returns.
5. Avoid borrowing for your investments. Although some financial advisors advocate ‘gearing your investments’, this can be fraught with danger. Gearing means to borrow. If borrowing for investments takes you over your 40% fixed costs margin, you will be cutting it too fine, particularly if you lose your current income level.
6. Stay with the traditional and known. The best and surest investments are fixed interest, property and shares. Although all asset classes will fluctuate over time.
Work out the optimum mix for your investment profile, have a safe plan to work with and you can’t go wrong.

]]> http://optionsasastrategicinvestment.net/rules-for-investing-how-to-build-a-portfolio-of-safe-secure-investments/feed 0 Creating Cashflow: Using Covered Call Strategy To Pay You Cash http://optionsasastrategicinvestment.net/creating-cashflow-using-covered-call-strategy-to-pay-you-cash http://optionsasastrategicinvestment.net/creating-cashflow-using-covered-call-strategy-to-pay-you-cash#comments Sun, 27 Dec 2009 23:28:14 +0000 admin http://optionsasastrategicinvestment.net/creating-cashflow-using-covered-call-strategy-to-pay-you-cash I’ll assume in this article that you already have the basic understanding of stocks and options. If not then it would be worthwhile to read about these investments first. The covered call strategy brings together stocks and options to form a third strategy…a cash flow strategy. The covered call strategy has a number of benefits that makes it an essential element of your wealth creation arsenal, namely it’s:
* Simple and quick to implement
* Easy to understand and track
* Produces fantastic cash returns on your capital
* Helps protect your portfolio from market fluctuations
* Fairly conservative…i.e. it’s not a high risk strategy
* A fairly hands-off investment once made which frees your time to concentrate on other things
So what type of returns should you expect from the covered call strategy? Well let’s examine the strategy and example first because this strategy has a range of possible returns. But before we rush out and implement this strategy I would like to highlight to you that the covered call strategy should only be used by those that already invest or intend to invest in stocks. Investors should not buy stocks simply to implement this strategy for one simple reason…there are better strategies available to you. That is not to say that the covered call strategy does not work for in this context…it does…it is just to say there are better strategies available. However, if you have a stock portfolio or intend to then the covered call strategy is a fantastic way of generating excellent extra income and at the same time lowering your investment risk.
Most investors simply purchase funds (whether actively managed or passive index trackers) and take a totally hands-off approach. Some more adventurous ones invest directly in stocks also in the hope that over time they’ll be able to enjoy watching their stocks rise in value. Their returns, also referred to as their payoff, is shown by a 45% line on a payoff diagram.
Informed investors…wealth creators…apply a different strategy.
The covered call strategy generates extra income by selling call options on stocks you own. You can think of it like renting your shares, much like you would rent out an investment property. Unsophisticated “investors” buy stocks and don’t rent them out. Would you buy and investment property just for it’s capital return and not rent it to someone to generate an income for you? Of course not…well the same applies to stocks.
When I say the word “options”, which are derivatives, many people instantly think risk. If you find yourself thinking these types of thoughts you don’t know options, and derivatives in general, well enough and you need to. Any investment is risky if you don’t know what you’re doing. As a former professional derivatives trader I know that derivatives need not be feared, but they must be respected. You need to thoroughly understand what you’re investing in if you ever hope to be wealthy. Ignorance is not bliss!
Selling, also known as writing, calls on stocks is not risky. It’s a conservative investment strategy. In fact, it is much less risky than just investing in stocks by themselves.
The mechanics of the covered call:
The covered call trade is a combination trade whereby you own a certain amount of stock and you sell call options of the same value. As the seller of the call options you receive a cashflow (the premium) from the buyer. You are effectively selling to the call option buyer the upside benefit of the stocks above the option strike price. You’ve agreed to sell your stock for a specific price by the option’s expiration date. They in turn pay you the premium for that benefit.
You are still exposed to the possibility of the stock price falls, but this is reduced by the premium income from the sold call, which is why it’s a more conservative strategy that owning just straight stocks.
Your potential income is also limited, as you cannot earn more than the capital increase in your stocks up to the call option strike plus the income from the sold calls. Above the option strike the buyer will exercise their option and you will have to sell them your stocks at the option strike price.
Covered call example:
Let’s say you purchased 1,000 XYX stocks for $50 each, totalling $50,000 in May and you sold 10 June $55 call options for $2.50 each, which expire 4 weeks from now. If XYZ stock goes above $55 to say $60 by the June expiry date you will be “exercised” and have to sell your stock to the option buyer for $55, which will be below the new June market price of $60.
Your compensation for this is the $2.50 premium on each call. Now the 2.50 call is actually $250 because the option in this example represents 100 shares. In the UK and Europe the multiple is usually 1,000, while the US is usually 100. Since, you’ve sold 10 options your total premium is $2,500, representing a 5% return on your $50,000 investment over 4 weeks (which is an amazing 89% annualized return!).
If the stock price falls below $50 your stock losses will be partially compensated by the extra $2.50 income from your sold options. This is why it’s a more conservative strategy than just holding pure stocks. If the stock remains at $55 you will receive your $2.50 and no capital gain returns on your stocks. Anywhere between $50, where you bought XYZ stock, and $55 where the option strike is, you will receive the same $2.50 and an increasing capital return on your stocks.
The maximum return you can hope for is always where your option is exercised. At $55 and above you will receive $2.50 in option premium and $5 in capital appreciation on your stocks. This is a total of $7.50 in 4 weeks, or 15% (which is a truly amazing 515% compound annualized return!).
Covered call variables:
The key variables are how long in the future do you sell you options, and what strike should you sell?
The further you look into the future the higher the sale price for an option. For example, in our XYX call option example the June $55 call was selling for $2.50. The July $55 call would be selling for slightly more than this, say $3.50. However, what tends to happen is that as you look further into the future the increases become smaller and smaller, so the August $55 call might only be only $4.00. So to get the maximum daily benefit from selling a call you should sell calls nearer to expiry, say up to maximum of 60 days. You can calculate and compare alternatives at the same strike by looking at the “per day” income. So in the case of our $2.50 option it would be paying us $0.09 per day ($2.50/(4*7), which is much higher than the $3.50 option return of $0.06 per day ($3.50/8*7).
The choice of strike is a more difficult question and depends largely on your view of the future movement of the stock. The higher the option strike you sell the lower the premium you will be paid, but the benefit is the less likely it will be exercised so you could earn more if the stock price increases. So where the $55 call was selling for $2.50 the $60 call might be selling for $1.00. If the price of the XYZ stock rises to say $60 you would earn $7.50 in the case of the $55 calls ($5+$2.50) and $11 in the case of the $60 calls ($10+$1).
The downside of the higher strike calls is that you loose more and more of your protection as you move to higher and higher strikes. For example, if the price of XYX dropped from $50 today to $47.50 at expiry, in 4 weeks you would have broken even on the $55 call as your $2.50 loss on the stock would be fully offset by the $2.50 option premium you’ve earned. However, in the case of the $60 call you would lose $1.50.
A good rule of thumb balance of downside protection and upside gain is to sell slightly out-of-the-money calls like the $55 call.
Another good rule of thumb is the strategy of buying your calls back if you can purchase them for 25% or less of the original sale price because the stock has fallen in price, and then reselling new calls for the original price. For example, say the price of XYZ stock falls from $50 to $45 and you can buy the $55 calls back for $0.50 and resell the $50 calls for $2.50. You have effectively increased your option return by $2.00 to a total of $4.50 almost entirely offsetting the $5 (i.e. 10%) fall in the stock price.
Covered calls for your wealth journey:
One of your key aims on your wealth journey is to generate a passive or portfolio income that will exceed your expenses. When you’ve achieved this you are no longer dependent on your job for an income and you can concentrate on building you wealth rather than working for someone else. You may not have a wealthy lifestyle but you are self-sufficient.
The wealthy sell calls on their existing portfolio, but those on the wealth journey may not have that luxury. In their case they may actually buy stocks so they can sell options to generate fantastic incomes returns. However, as I stated at the beginning the covered call strategy may not be the best option strategy to implement if you do not have an existing portfolio. That is not because it does not work, but because there are simply better strategies. However, let’s examine it anyway in this context.
Let’s say you’re able to accumulate $100,000 in cash perhaps from your investments or your home. Your $100,000 cash would allow you to buy $100,000 worth of stocks and sell the equivalent value of calls. If they generated a 5% monthly return for you, like our example, that’s $5,000 per month or $60,000 per year. This is before any capital appreciation or compounding is taken into account on your stocks. Those who want to take the wealth journey need to use strategies like this to give them the cashflow they need to live and invest, which provides you with the freedom to concentrate on finding more income producing opportunities.

]]> http://optionsasastrategicinvestment.net/creating-cashflow-using-covered-call-strategy-to-pay-you-cash/feed 0 Real Estate Investing Business Plan http://optionsasastrategicinvestment.net/real-estate-investing-business-plan http://optionsasastrategicinvestment.net/real-estate-investing-business-plan#comments Wed, 23 Dec 2009 12:24:31 +0000 admin http://optionsasastrategicinvestment.net/real-estate-investing-business-plan Real estate investment business is basically a profit oriented venture but only if it is done skillfully. There is thus a need for proper real estate investment business plan. This plan actually includes ways of setting, marketing, developing, and running the business. Therefore, the growth of the business and the financial success depends largely on a strategic real estate investing business plan. However, the first real estate investing business plan focuses on creating a powerful team of agents. It is the real estate agents who not only help by lending good credit ratings, money, expertise, and professionalism but also provide information about mortgage rates. Mortgage and contracts generally add to the profit.The next real estate investing business plan includes deciding over the property that is to be bought. It is of basic importance that one should have a clear idea about the property. The property may be a ‘fixer’ to be transformed into a new one for the new buyer. The idea behind this is to increase the value of the property, which will again add to the profit. This is a kind of business quite popular among the investors. One of the key aspects of a real estate investing business plan is to ensure that there are multiple possibilities of properties and investment choices. This is because the selection should be based on the rating point given to the properties. This will enable the investor to choose a property that promises great income potential. Real estate investing business plan is not just a simple deal. But it is a business that needs proper marketing, which will helps more people in finding and discover new opportunities. Therefore, the real estate investing business plan also includes ways and means of promoting the business. For this, an online real estate investing business plan is the best option. This may be achieved by blogs, feeder sites, newsletters, and even through search engines. However, if the real estate investing business plan is done with a professional attitude, it is bound to be successful.

]]> http://optionsasastrategicinvestment.net/real-estate-investing-business-plan/feed 0 Real Estate And Property Investment Strategies – Grow Your Equity And Wealth http://optionsasastrategicinvestment.net/real-estate-and-property-investment-strategies-grow-your-equity-and-wealth http://optionsasastrategicinvestment.net/real-estate-and-property-investment-strategies-grow-your-equity-and-wealth#comments Fri, 18 Dec 2009 23:31:18 +0000 admin http://optionsasastrategicinvestment.net/real-estate-and-property-investment-strategies-grow-your-equity-and-wealth The first step to building wealth through real estate investing is to buy your own home. Instead of making rent payments that pay off someone else’s property, it makes more sense to make mortgage payments to pay off your own.
This way you not only are not only investing your payments in a property, you are able to take advantage of capital gains.
As you increase equity in your home, you will be able to use it to help you purchase other properties.
After purchasing your own home, the next most common step in real estate property investing is to buy a rental property. If you buy well and get a good rental return with minimal outgoings you will not only take advantage of capital gains but the rent you receive will go along way to paying your mortgage.
As you gain equity in your property and pay down your mortgage, you will be in a position to purchase yet another property and repeat the process.
You need to be careful to minimize the risk by buying properties at below their market value, preferably when market prices have dropped.
This is because real estate prices increase over time and if you are prepared to hold onto property, you will always make money in the long term.
Unless you are wealthy, you will need to take out a mortgage to buy real estate property. A mortgage loan uses property as security for a loan on the property.
A mortgage allows you to purchase real estate with a down payment and repayment terms so that you do not have to pay the full value of the property immediately.
If you default on the payments, foreclosure requires a judicial proceeding which provides the borrower with some protection.
Real estate has historically offered investors far better returns than most other investment options.
With most banks prepared to finance ninety percent of the value of property values, you only require a deposit of ten percent and the ability to make the monthly payments to repay the loan.
Therefore, if you buy conservatively you place yourself in an ideal position to make excellent profits. In fact, real estate has traditionally returned substantially more than average stock market investments over time.
As well as building long term wealth, property investment can offer tax advantages under certain circumstances.
Get advice from your accountant as to whether your circumstances would allow you to claim tax benefits.
Another advantage of real estate investing over stock market investing is that the prices are flexible. With real estate you can make an offer that is lower (sometimes substantially so) than the asking price.
Stock market prices are set and do not allow you any room to move. As a result, you can sometimes get excellent property buys when the seller needs to sell quickly and is prepared to accept your offer.
All in all, investing in real estate is a wise choice that offers excellent long term returns and sometimes even substantial short term gains.
You can begin small with a ten percent deposit on an affordable property and gradually accumulate investments in your property portfolio.
Real estate investment is generally a safe pathway to personal wealth and retirement funding as long as you behave conservatively and wisely.

]]> http://optionsasastrategicinvestment.net/real-estate-and-property-investment-strategies-grow-your-equity-and-wealth/feed 0 Renting Shares – Is it Possible to Rent Out Stocks? http://optionsasastrategicinvestment.net/renting-shares-is-it-possible-to-rent-out-stocks http://optionsasastrategicinvestment.net/renting-shares-is-it-possible-to-rent-out-stocks#comments Tue, 08 Dec 2009 11:27:34 +0000 admin http://optionsasastrategicinvestment.net/renting-shares-is-it-possible-to-rent-out-stocks Renting shares is fast becoming one of the most talked about Stock Market Investment strategies. More and more investors are looking at creating income from their shares and capital growth from property. But what is share renting? Is it legal and can anybody do it? Let’s have a look at the basic concept of renting shares and see if this investment strategy is something that everybody should have a look at.
Renting out shares is very similar to leasing out your property for rent. The basic share renting strategy is as follows.Step 1/ Buy a parcel of shares. If you are in Australia you will need to buy in lots of 1000 whereas in the US you can buy in lots of 100.Step 2/ Sell a one month call option, one strike price out of the money.Step 3/ Enjoy yourself for the month e.g. Go to the beach, watch the footy etc.Step 4/ This will depend on where the share price is at the end of the month. Read below for more details on renting shares.
Now if this doesn’t make much sense I will now try to explain it in some more detail.
The reason why you need to buy your shares in groups of 100 (1000 in Australia) relates to step 2. Call options are sold in lots of 100 shares e.g. If you buy 1 call option you are actually buying a call option for 100 shares.What is a call option?
A call option gives the buyer the right but not the obligation to buy a set number of shares, on or before a set date, at a predetermined price.
For example Lets say the stock ABC was trading at $100 and somebody bought a call option at $105 that lasted for one month. This would give them the right to buy ABC at $105 no matter what the actual price of ABC was at anytime during the next month. In order to get this right, the person buying the call will need to pay the seller a premium.
This is where we come in.
People that rent out their shares get paid by the people who buy call options. So let’s say we buy 100 ABC shares at $100. The next thing we would do is sell a covered call (it is called covered because we actually own the shares) at $105. We always want to sell a call option that is out of the money (above the actual price of the share). Why because that way if we are forced to sell our shares we will at least be forced to take a profit. For selling a one month call at $105 we are likely to receive about 3-6% of the shares price. So in this case let’s assume that we receive $5 per share.
I’m sure you don’t need any help with step 3 but you might be wondering why we can simply forget about our shares rather than monitoring them each day. The answer is simply because we aren’t too concerned whether they share price goes up or down. Why? Well lets now have a look at what would happen should the share price go up, down or sideways.
Share price goes up above $105 to $108.
We will be forced to sell our shares for $105 despite their actual price being $108. This sounds like a very bad out come but if you have a closer look it is actually a great outcome. We bought our shares for $100, sold them for $105 and also got paid $5 for the month. Therefore we actually made a $10 profit whereas if we had of just bought the shares instead of renting them out we would have only made $8.
Share price goes sideways and remains at $100.
We will get to keep our shares because no one is going to pay $105 for shares that could be bought for $100 on the open market. So in this case we have made a profit of $5 whereas if we hadn’t rented our shares we wouldn’t have made one cent.
Share price goes down to $95
Once again we will keep our shares. Had we not rented out our shares we would have lost $5 but because we received the $5 premium we actually don’t loose a cent.
So as you can see renting shares is actually quite a safe wealth creation strategy. Effectively what you are doing is trading of your potential to make a massive gain in one month for a regular monthly income. Which one is better? Well if you average out your percentage returns from share renting over the year you may be surprised at how effective it can be. Share renting returns generally fluctuate from 20-80% per annum. With a modest average of about 40% – better than bank interest I’m sure you will agree.

]]> http://optionsasastrategicinvestment.net/renting-shares-is-it-possible-to-rent-out-stocks/feed 0 Need Only Be Good At One Thing! http://optionsasastrategicinvestment.net/need-only-be-good-at-one-thing http://optionsasastrategicinvestment.net/need-only-be-good-at-one-thing#comments Tue, 08 Dec 2009 00:24:28 +0000 admin http://optionsasastrategicinvestment.net/need-only-be-good-at-one-thing When I want to invest to accumulate wealth, I will diversify my investments so as reduce my risks. For example, if I were to invest in the shares of one company, I would face the risk of losing everything if the company went bust. But if I were to invest equally in the shares of 100 companies, my risk would be reduced to the loss of 1 percent of my investments if one of the companies went bust. In other words, I will not put all my eggs into one basket.
Invest to accumulate wealth is different from creating wealth to become rich. If I want to create wealth to become rich, then I should be focusing on just one thing. I should not be diversifying my resources to various ways of getting rich. If I try to be good at everything, I will never be able to truly master any one of them because I am too stretched out. There are many ways to become rich. Personally, I classified them into a few categories.
Firstly, the dishonest way of becoming rich. This involves crimes such as cheating, robbing, stealing and so on. There are two distinct disadvantages to become rich in this way. The first disadvantage is that the laws may catch up with me anytime. The other disadvantage is that my partners in crimes may cheat on me any time. In the end, I would lose everything that I have made.
Secondly, the easy way of becoming rich. Basically, I do not create wealth right from scratch. Instead, I receive the wealth almost instantly. For examples, I could marry someone for the sake of wealth. I could inherit wealth from someone. I could strike a lottery and so on. The first disadvantage is that chance is very slim for such a thing to happen. The second disadvantage is that I would likely to lose most of them over a period of time because I had not master how to manage great wealth properly.
Lastly, creating wealth right from scratch. This requires a lot of hard works. There is likely to be numerous setbacks along the way. Also, I would face the constant struggle to give up. For examples, I could try to become rich by trading options. After making a few bad trades and loss some money, I might just give up. But if I persisted and learned from my mistakes to become an exceptionally trader, then I could start to teach people to trade. My knowledge of trading becomes my wealth. In other words, I create wealth from my knowledge.
Basically, I have tried a lot of things in the last category. I have tried option trading. I have tried to write a book. I have tried shares trading. I have tried to invest in a real estate. I have tried internet marketing. I have tried network marketing. But I am never good at anyone of them because I lack of focus. Also, I want to become rich instantly. Whenever I found a new way that promise that I could get rich quickly, I become really excited. I would change my focus to the newly found way of becoming rich. In the end, I am nowhere near my goal of becoming rich.
Even though the idea of multiple streams of income is very enticing, I feel that the way to create wealth to become rich is to focus on one thing at a time. After reading so many books and attending seminars on wealth creations including Rich Dad’s Series, I have concluded that I should make it rich by being good at one thing first. Then, I can subsequently branch up to create other sources of income. My mistake is that I have tried to branch up to create other sources of income before I have succeeded to be good at any one of them.
My conclusion is further enhanced when I have learned from successful people that great wealth is only created when I focus on one thing and be really good at it. To be really good at the one thing, I must really love doing it. If I love what I do, I will excel in it. It is no longer work but play for me. Since I am very good at it, I definitely can create wealth out of my knowledge.
For example, if I am very good at options trading. I can trade options for a living. I can also teach people to trade options for a living. Because I am good at it, I can charge a premium for the courses. If I love playing golf and I am good at it, I can play golf for a living. I can also teach people to play golf.
Invest to accumulate wealth required different strategy from creating wealth. I have learned to adopt different strategy for different purpose.
* DISCLAIMER *
The author only provides the material and information as a layperson’s views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.
All the materials, information and procedure in this book are only the author’s personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.
The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.
The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.

]]> http://optionsasastrategicinvestment.net/need-only-be-good-at-one-thing/feed 0 The Mindset of Wealth: Thinking Like a Winner http://optionsasastrategicinvestment.net/the-mindset-of-wealth-thinking-like-a-winner http://optionsasastrategicinvestment.net/the-mindset-of-wealth-thinking-like-a-winner#comments Mon, 30 Nov 2009 23:37:26 +0000 admin http://optionsasastrategicinvestment.net/the-mindset-of-wealth-thinking-like-a-winner In today’s world of day-trading, mega-corporations, and high powered investment firms, it’s easy to get discouraged when looking at your retirement plans. You can get lost in the notion of being a small fish in a very large ocean of investment options. It’s at this precise point that it becomes crucial for you to adjust your paradigm, or way of thinking, in order to meet the challenges you’re presented with head on. Think of this mental re-conditioning as a way to trim your sails in the face of today’s financial storms.

To begin with, in order to be truly successful, or in other words to emulate the behaviors of truly successful people, there are a few key principles you must understand and apply to your daily practices.

The first and most important of these principles is that your life is and will be EXACTLY what you make of it. It sounds over-simplified, I know, but hear me out. The world functions down to the smallest atom on certain unchangeable natural laws. What goes up must come down, objects in motion tend to stay in motion, and so forth. But the most profound of these laws is that of cause and effect, a principle which simply states that a process must be initiated in order to carry itself out to completion. A similar concept which springs forth from cause and effect, and the core of what we’re talking about here, is called the law of attraction, or manifestation, or any other name it has been called by. It is simply the force which carries an idea from its initial intent to its final result. What this means to you and I is that whatever intent or attitude we place into being has the full potential to be made manifest, like a message sent out to the universal order that will, in fact be answered in one manner or another. So getting back to the simple, what we think is what we will become, simply because we have started its creation by thinking of it.

Given this reality, it becomes paramount to discipline our ways of thinking toward the positive and productive. The mind is like a muscle, and flexing it can be difficult at first, but given some time and excercise, positive thought can become second nature. Meditation, or simply making a daily ritual of affirming your goals to yourself can be excellent starting points on this evolution. There are, of course, more advanced steps, however those are bridges you will want to cross when you get to them. My seven step program, referred to at the bottom of this article covers those advanced techniques in detail. Now that we’ve established the need to affirm your principles of action and personal goals, let’s take a look at some of the most important of those principles.

1. Abundance is a Function of Natural Law:

Inherent in nature’s laws of cause and effect lies the universal truth that abundance is always present in our world, needing only to be claimed by those willing to initiate their own cause, within the boundaries of time tested methods.

2. Net Worth Begins With Self Worth:

In any free market transaction, true value must be demonstrated in order to attain rewards. Therefore, one must create superior worth and directly associate that worth with every action he or she takes. Because all people will inevitably act to their own benefit first and foremost, you must respond in kind by elevating your own value to a level of superior market worth.

3. With Freedom Comes Responsibility:

Having personal freedom means, above all, that you are given a choice of whether to act as master of your own destiny, or be acted upon haphazardly by those who are looking out for their own best interests. In order to be truly prosperous, however, one must be willing to live by true principles. For some it goes without saying, but one of these can easily be summed up by the Golden Rule. Positive goals can never be accomplished with any lasting result through harm or deceit. But the most profound implication of this pillar is that YOU DO have the ability to live abundantly whenever you so choose.

4. Intent Manifests as Reality:

In This principlehas been referred to by various scholars and luminaries by such names as “The Law of Attraction,” “The Principle of Manifest Intent,” and even “The Power of Prayer.” It is simply the act of making your will known to the universe, and contributing the necessary effort to bring that will about. Because this principle is so far reaching and powerful, it becomes paramount to discipline one’s thoughts toward the positive.

5. You are Your Own Best Asset:

The fundamental difference between the mindset of a CONSUMER, once termed ’sucker’ by famous American entrepreneur P.T. Barnum, and that of a CREATOR is that a consumer believes material possessions to be the only source of value. Whereas, a creator views human life as the only true source of value. Thus consumers primarily drain the marketplace, while creators primarily add to it.

6. Your Life Has Profound Impact:

Reaching even beyond the infinite value of your own life, you can gain boundless significance, simply by remembering those whose lives you deeply desire to change for the better. Your loved ones, children, friends, and colleagues will all benefit tremendously from the positive actions YOU take. As Thomas Jefferson once so eloquently penned, “All men [and women] are created equal.” Realizing this wisdom, it becomes imperative to achieve your duly endowed potential by creating value for yourself and others.

7. Money is Granted Value by Transactions:

Because the amount of money you make is always directly proportionate to the value that you bring to the table, your value is legitimized by profit. If sufficient value is not present, no transaction can possibly be performed. This principle serves to protect and benefit both parties.

8. Success is the New Normal

As Rupert Murdoch, one of America’s greatest moguls has said, “The world is changing fast.” No longer is it normal for prosperity to remain exclusive to the select few of society’s elite. One need only watch the evening news to see fast acting and energetic individuals making leaps and bounds every day toward leveling the playing field of American business.

9. The Path of the Herd is NOT Always the Correct Path:

The fact that all of the other dogs are barking up a given tree does not make that tree the right one. Enough said?

10. Ownership Equals Freedom:

True freedom is only possible through independence. As long as one must rely upon an outside source for survival, he or she is not truly free. As Alexander Hamilton said, “Power over a man’s subsistence amounts to power of his will.”

To view more information on these and other key concepts to wealth creation, including a full 7 step wealth training program, visit http://www.groundinstone.com

]]> http://optionsasastrategicinvestment.net/the-mindset-of-wealth-thinking-like-a-winner/feed 0 Selling Options… Is It Really One Of The Best Ways To Wealth? http://optionsasastrategicinvestment.net/selling-options-is-it-really-one-of-the-best-ways-to-wealth http://optionsasastrategicinvestment.net/selling-options-is-it-really-one-of-the-best-ways-to-wealth#comments Sun, 29 Nov 2009 01:20:38 +0000 admin http://optionsasastrategicinvestment.net/selling-options-is-it-really-one-of-the-best-ways-to-wealth Warren Buffet has become something of a modern day financial icon. A beacon to the success that can be achieved in the free markets. He has just been officially named as the richest man in the world, worth a staggering $62 billion. His company, Berkshire Hathaway, has beaten the S&P 500 index by 14.65% over the past 30 years. His investment strategy has been closely examined yet few follow his incredibly successful investment style and as a result miss these stellar returns. Why? Because his investment style is boring. What I mean is long term in nature and rather inactive. It’s steady as she goes. It’s not a fast paced, action packed ride to riches. It’s a slow consistent walk to wealth.
So what does all this have to do with option selling? I’m glad you asked. While Warren Buffet does not sell options to generate his wealth, the concept of option selling is also slow and on the whole rather boring. It is not fast paced nor will it result in a fortune being amassed overnight. But sure as the sun sets at night and rises in the morning it will provide the educated and patient investor with fantastic returns and wealth.
Selling options mean selling either calls or puts (or both). If you recall the definition of an option is a contract which conveys to its holder the right, but not the obligation, to buy (calls) or sell (puts) shares of the underlying security at a specified price on or before a given date. This right is granted by the seller of the option. So it is the option seller who has the obligations because they have sold the rights to the option buyer.
The option seller receives the option premium in return for giving the right to the option buyer. The option premium represents the entire income the option seller can hope to achieve, while his losses are theoretically unlimited. The option buyer on the other hand can only lose the option premium while his return is theoretically unlimited. So why would anyone sell options? Why doesn’t everyone just buy options if they have limited loss and unlimited profit potential. The main reason is probability!
Options are very much like a raffle ticket. When you buy a raffle ticket it costs you very little and the vast majority of times you don’t win anything. You simply say to yourself that it’s cost you only a few dollars and if you were the lucky winner you’d have won big. But why do raffles exist? They don’t exist with the winner in mind. They are not altruistic games designed to give more than they take…oh no, quite the opposite. They are designed to offer the raffle holders a nice return on their raffle.
They know that the cost of paying the winner is less than the income they earn. The same rules apply to options. Investors who understand options know that over time that the loses they have to pay to option buyers will be less than the income they earn from the premiums the buyers pay. Studies suggest that between 75% and 80% of options held to expiration expire worthless. This means that option sellers win 75% to 80% of the time!
In addition to probability there are other reasons in that make selling options incredibly attractive as a wealth creation strategy. They include:
* Excellent returns
* Set and forget
* Inbuilt safety factor
* Consistent income
* Win in all market conditions
* Less risk
* Time is on your side
Let’s quickly look at each of these in turn…
Excellent returns:
Selling options can provide a knowledgeable and experienced investor amazing returns…returns like 30% to 50% per annum. One of the best ways to look to understand this is to look at a simple example. Gold in February 2008 had just broken $900 an ounce and all the news was majorly bullish for gold. It had already seen a spectacular rise over the past few years but market conditions meant there was every chance it would continue to rise…but most importantly it was not about to fall…at least not beyond a natural pull back.
Someone was willing to buy the 01 June 08 $525 put options for $0.10. I guess they figured “what the hell it’s only 10 cents per option…it’s worth a punt.” Fantastic! I knew that each option I sold represented $10 (100*$0.10) in income and the initial margin was $34 per option. Gold would have to fall by a whopping $400 an ounce in a little over 3 months to be exercised. Now I’d probably have better luck winning the lottery than being exercised on these options (and odds on winning the lottery in the UK are about 14 million to one!).
Now $10 may not sound like much but we need to look at this in terms of return on capital invested. If you can generate $10 on $34 worth of capital invested you are returning nearly 30% over 3 months, which is nearly a 250% compound return per annum. I’ll take those odds and that return!
Set and forget:
While I never suggest that you ever invest in anything and totally ignore it from then on, selling options is about as close to this as it gets. When you sell an option you target options that have very low chances of ever being exercised. How? You look for way out-of-the-money options and you apply sound fundamentals. For example, the Dow at the end of Feb 2008 was 12,700 and all the news was incredibly bearish for the markets. Inflation was at record levels, the dollar was in free fall, house prices were plummeting, consumer sentiment was falling, retail sales were stalling, credit markets were frozen, profit warnings were occurring daily and so on.
I was totally comfortable that the Dow was likely to fall, but what I couldn’t predict was when and by how much and whether it might go up slightly before it went down. What I was certain was that it was not about to trend upwards. Selling futures, CFDs, spread bets etc requires excellent timing. You might be correct on the overall direction, but without deep pockets you could get stopped out first before the market moves your way. The solution? Sell deep out-of-the-money Dow calls. I sold 15 May 13,500 call options for $140 premium. That means that the Dow would have to rally above 13,640 before I would start to lose money. That is not far from its all time high! At writing the Dow is at 12,200 and my calls are now valued at $17 giving me $123 profit per option. I don’t have to watch my calls minute by minute, hour by hour, day by day. I’m totally comfortable that they will expire worthless and I will earn $140 per option.
Inbuilt safety factor:
One of the biggest problems with using stocks, futures, CFDs, spread betting and other financial products that have a linear type return (i.e. their value moves up and down at the same rate).This means that you need to have excellent timing and deep pockets to use them effectively. While I love the adrenalin that these products give me they do not have the type of safety factors that help me to sleep well at night.
How many times have you bought a stock, futures contract etc on the expectation that its price will rise and sure as night follows day the price immediately starts to fall. Soon you find yourself stopped out only to see its price turn around again and rally just as you originally predicted. Essentially these products give you only a small margin of error. If you have more money to play with you can afford to place wider stops, but the fact still remains…you need to time your entry and exist points fairly accurately.
We all know that markets do not move from point A to point B in a straight line…they zig zag their way there…sometimes with quite violent corrections. The more volatile the market the more difficult using linear products becomes, because your likelihood of being stopped out increases. Options give you that margin of error that means you don’t need to worry about timing to anywhere near the same degree.
Option sellers have a much higher degree of staying power. They can withstand the zig zagging of the markets much better. For example, if a market is in an uptrend you can sell an out-of-the-money put at a level that gives you a very large level of comfort that the price will never fall to a level where your option will be exercised. Timing the market is much less important.
Consistent income:
Those that sell options can enjoy a regular income month after month. It will not provide you with a 1,000 percent return in a year, but with education, practice and good option selection you can enjoy 30 percent to 50 percent annual returns. But there is a lot to be said for receiving excellent, regular and fairly stress free income. Everyday your options are getting closer to expiry and time decay is eating away at their value. Every month you can receive income from your options expiring.
Win in all market conditions:
It is said that markets go up, down and sideways. In actual fact they go up a little, up a lot, down a little, down a lot and sideways. With linear products you can only win with one third of the movements. For example, if you are bullish, then you will loose if markets go down or sideways (or at least not gain anything). However, if you sell a deep out-of-the-money put option to take advantage of your bullish view then you will win with four out five market movements. In other words you will win if the market goes down a little (it will not hit your put’s strike price), stays flat, goes up a little or goes up a lot. You will only loose if the market falls sharply.
Less risk:
When most uneducated investors think about options their first reaction tends to be “that sounds risky”. In actual fact options are a lot less risky than trading stocks, futures, CFDs etc. The key reasons why options are less risky are:
* Inbuilt safety factor – options have an inbuilt level of safety because you can sell out-of-the-money options that are very unlikely to be exercised.
* Most expire worthless – we know 75% to 80% of options expire worthless.
* Insulation from market movements – Option prices do not move one for one with the underlying price. In other words if the price of the underlying goes up one point your out-of-the-money option price will only change by a fraction of this, say 0.25 points. This means that if the market moves against you your option price, and thus losses, will not increase anywhere near as much.
* Less likelihood of being stopped out – by selling out-of-the-money options only on extreme market movements will stop you out.
Time is on your side:
Those that buy options need the price to move beyond the option strike price (plus the option premium) before expiry if they are to make money. From the moment they buy an option time is working against them…it is a race that the price can move enough before their time runs out. For the option seller it is exactly the opposite. From the moment they sell their option they have been paid and the option’s time is working for them. Every day the option’s worth becomes a little less to the option buyer and a little more to the option seller. The option seller does not have the pressure that time will run out…the option buyer always wants more time, while the option seller happily watches time run out.
I hope you’ll agree that option selling is a powerful method of generating low pressured, consistent and extraordinary returns. Novices steer clear of options. Those that are uneducated buy options outright. Experts sell options. Writing options is not for everyone…in fact it is only for experts. Don’t be put off by that…become an expert…anyone can. Then you can receive the rewards that are just waiting for you.

]]> http://optionsasastrategicinvestment.net/selling-options-is-it-really-one-of-the-best-ways-to-wealth/feed 0 How Do You Sell Options To Generate Amazing Returns? http://optionsasastrategicinvestment.net/how-do-you-sell-options-to-generate-amazing-returns http://optionsasastrategicinvestment.net/how-do-you-sell-options-to-generate-amazing-returns#comments Sat, 28 Nov 2009 11:31:32 +0000 admin http://optionsasastrategicinvestment.net/how-do-you-sell-options-to-generate-amazing-returns In this article we will look at how to effectively implement this strategy to increase your wealth. But before we do it’s important to recognize that this strategy offers you the benefit of cash returns and easy access to your capital. Why are these things so important?
Cash returns:
Let’s look at cash returns first. The best way is probably to use a comparison to another investment alternative such as property. Too many investments don’t offer you good cash returns (only good capital returns), but your ability to generate cash is essential to achieving the freedom you need to pursue attractive wealth creation opportunities. In the UK at the moment the average rental property will generate approximately 5% return. Let’s say you need $50,000 to live each year and you have managed to accumulate $100,000 in savings.
If you decide to buy a $200,000 property and you invest your $100,000 and borrow the balance at 5% you would generate a positive $5,000 net cash return every year (assuming no other property related costs such as management fees, repairs, etc). In essence you’d have to by 10 properties to generate the $50,000 annual cash you’d need to survive. That could take a long time and in the mean time you’re spending your productive hours working for someone else to earn a paycheck to live off…and missing loads of opportunities. I love property as an investment and own numerous rental properties but it is not a great method of generating cash flow…well not without a great deal of work!
Selling options on the other hand can pay you a cash flow in the terms of a premium every month or two. It’s a regular cash flow that you can use to help you quit your job and spend your time building your own wealth rather than your employers. Using effective options strategies that generate between 30% and 50% returns per year would earn you $30,000 to $50,000 per year off your $100,000 savings in a regular monthly income. This would give you incredible freedom and independence to spend your productive hours working for you not an employer. This is the importance of cash flow.
Access to capital:
The second key thing to remember is that options allow you quick access to your cash. Property in contrast takes many months and large costs to realize your cash investment. Your option investments require you to place initial margin with your broker to cover the risk of potential losses, but since your options expire every month or two you receive your initial margin cash back each time. Also it is really easy to buy or sell your options back at anytime at a very small cost (commission) to gain immediate access to your cash if you need it. This is often one of the main benefits cited by Wall Street to investing in stocks.
So now that you know two crucial reasons why options are vital to your wealth creation arsenal it is time to examine option selling strategies…
Option selling:
I like to use an example as a way of illustrating the strategy of selling options as a means to generate brilliant returns. I’ll assume you are familiar with selling calls and puts and that you know your returns are limited to the option premium you receive and that your losses are theoretically unlimited. Though I will elaborate on what this really means as we work through the example.
On the 28th March 2008 gold was trading at $932 an ounce. The June 1 $700 put was bid $0.90 which means that each option is trading at $90 (i.e. 100*$0.90). Now at this stage it helps to actually have a view on the instrument you are trading. In the case of gold I have been extremely bullish for a long time due to a number of factors including the high U.S. inflation rate, collapsing U.S. dollar, poor current account, falling interest rates, huge government and private sector debt etc which all indicates that investors will move their money to a “safe” investment…gold! Now the point here is that I don’t know when gold will rally nor do I know that it will rally really at all…what I’m confident on is that it won’t fall very far. This means I can sell put options confident that fundamentals mean that the price of gold should not fall from current levels…and even if it does it’s not going to fall to $700 an ounce by 1st June.
Each gold option is worth $93,320 (i.e. $932*100) so selling one option and earning $90 in two months might not sound like much but we need to look at it from a few different angles. A $90 return over two months on $93,320 is an annual 0.6% return which quite frankly is rubbish, but this is not the way to really look at this investment. The notional (face value) of the option really doesn’t matter. Why? Well because that is not what you are paying for the option. You are not really buying $93,320 worth of gold (or even $70,000 worth at the strike price), but rather a way out-of-the-money put which requires you to only pay a small initial margin.
The initial margin on one gold $700 option is about $900 which means that over a two month period I would be able to generate a $90 return on a $900 investment. Viewed this way my return would be 60% per year (i.e. 10% every 2 months)! Now that’s an amazing return…so does this mean I should rush out and sell 100 puts and generate a $9,000 cash flow over the next two months? Well not unless you were worth millions I wouldn’t recommend it. Why? Because the unforeseen can happen. Selling 100 $700 put options means that for every dollar the price of gold falls below $700 you would lose $10,000 (i.e. 100 options * $100). So if the price fell to $650 you would lose $500,000. Ouch. So what do you do?
You strike a balance. You never expose yourself beyond what your can afford to lose in an individual trade and you manage your risks via stops. Taking the $100,000 cash worth example what would happen if you sold 5 options. Well you could earn $450 in two months (i.e.5*$90) equating to $2,700 per year in income. Your initial margin to the broker would be $4,500 (i.e. 5*$90) still giving you a 60% annual return. Your risk is now $500 per dollar below $700, which is a fully manageable exposure on your $100,000 capital given the extremely unlikely possibility of gold falling that far.
The second way of managing your exposure is through stops and the KISS method is always the best method. Easy to understand and easy to implement. The two best methods I know of are:
1. to stop out when your option doubles in value against you (or triples for the more adventurous). This method is simple and effective for the more risk adverse investor. I’ve found that it’s not always the best when you are selling way out of the money options as you can be stopped out but still never really be at risk of your options being exercised, thus forcing you to take losses unnecessarily. But it is the safest route.
2. to stop out when the price of the underlying reaches your strike price. In our example your stop would be at $700. The problem with this method is that your losses would be much higher than the first method but obviously the likelihood of your stop being breached are much lower.
The strategy I usually use is to find many of these attractive deals and never expose myself too much to one trade (a lesson I’ve learned the hard way!), which will ensure you will sleep peacefully at night…just as I do! So if you take the above scenario how many trades should you place at any one time? Well you need to find a balance between putting your capital to work (i.e. your $100,00) which is used it as initial margin on trades and saving enough of it such that you can meet margin calls if positions go against you in the short term, so you are not forced to close positions or make margin calls. Again applying the KISS method is easiest and the simplest way is to put no more than 50% of your capital as margin at any one point in time. Any more than this could lead to unnecessary stress of margin calls if positions go wrong and means your positions are too large.
Taking our gold example and replicating it to other trades we could place $50,000 as initial margin which would generate a $30,000 annual return ($90*$50,000/$900*6) or a 30% annual return. I now enjoy a fantastic regular income on my cash capital through options investments and non-stressfully earn a comfortable 30% to 50% annual return on my cash capital.
The final word on gold…
Was I right about the price direction of gold? Yes and no. The price of gold (at the time of writing) has actually fallen to $882 (it has been as low as $850) so my expectation that gold would rally from $932 proved slightly wrong (or at least premature!), but was i really wrong? Well the price of my options have fallen over the past month and a half from the $0.90 I sold them to be worth virtually nothing. So even though the price of gold has actually fallen I’ve made money…wrong and still right! Options are truly an effective wealth tool.

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