Month: July 2015

The Risks and Rewards of the Covered Call Strategy

I like to show investors not only how to make money in the markets, but also how to use leverage to maximize their return on investment (ROI). Often it requires embracing new methods.

Here, I discuss a profitable weapon to add to your investing arsenal: the covered call. I compare the pros and cons of this strategy and when it’s the most appropriate.

I elaborate on all of these points, in my embedded “training video” below. Next issue of Power Profit Trades, I will provide a specific example of a covered call opportunity for you to act on.

The covered call can potentially generate extra income over and above the conventional buy-and-hold tactic – but only under the right circumstances. Let’s get started.

With this strategy, you own stock and you’re selling the right to buy your stock at a specific price on or before a specific expiration date.

To execute a covered call, you first have to own stock or buy stock. Your stock may or may not be bought. To give someone the right to buy your stock, you sell a call option. A call option is a contract that gives the buyer of it the right to buy stock at a certain price (strike price) on or before a certain date (expiration).

One options contract is the right to 100 shares of stock. For you to undertake a covered call strategy in your account on a stock you own, you must hold at least 100 shares of it. If you have 158 shares of stock you can only initiate one contract, because there are no contracts for 58 shares or .58 of a contract.

The term “covered” means you “own” the stock. When you sell the call option you must wait until someone in the marketplace exercises their right (the option) to buy your stock at the strike price or expiration.

“Called out” of your stock is the term for when your stock is bought away from you.

This would happen if the stock went high enough above the strike price that someone deems it better to execute the purchase of your stock at that lower strike price, versus the current market value of the stock.

Example: You sold a 50 Call against your 100 shares of stock and the stock goes to $57. Someone may think it is a better value for them to exercise their right and buy your stock at $50 instead of $57 per share, even if they paid $2 for the option right to do so. The $52 cost ($2 for the option + $50 for the stock = $52) versus market price of $57 still gives them a profit.

If you aren’t called out and expiration comes and goes, you get to KEEP the premium for which you sold the call option. In the above example, you would keep the $2 times 1 contract or 100 shares, equaling a profit to your account of $200.

The great thing about this is you get to keep that money, plus you get to keep your stock. You can look at the next month or further out and decide if you want to put your stock up for sale again and get paid to do it … again!

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How to Profit on a Stock that Goes Down in Price

For some investors, it seems counterintuitive that you can make money on a stock that goes down in price. Those folks most likely haven’t heard about options trading or if they have, never pursued it to the point of understanding.

To illustrate my point, I will show you a Put trade, specifically a Buy Put (or long Put) trade on SunEdison (NYSE:SUNE). It was a Money Calendar Sell candidate that turned out well for us. This sort of trade is particularly relevant right now, as world markets post consistent declines.

I also explain this trade in greater detail in my training video below.

First, let’s look at the latest bearish signals for SUNE as depicted in the Money Calendar:

You buy Puts when you anticipate a stock will go down in price. When you buy a Put option, you have bought the RIGHT to “Put” or sell the stock to the marketplace at a specific price (the strike price) any time before or on expiration.

Example: XYZ stock is trading at $40 and you buy a $40 Put option for $2 (this is on a one contract basis, so the cost would be $200 for the option).

Next the stock goes down to $35. You have the right to “Put” or sell the stock to the marketplace at $40 when the stock is at $35. To do that, you would have to buy the stock at $35 and then exercise your right and sell the stock at $40, resulting in a $5 gain. This gain would be offset by the cost of the option price of $2, so you would gain $3 per share.

But we do not buy options to exercise our right on the stock.

When the stock is at $35, it would result in the option being considered “In the Money” or having “Intrinsic Value.” Think of it this way: The stock is at $35 and the $40 Put means it could result in a $5 gain on the stock transaction – it’s a “built in” profit potential of $5.

That $5 will be reflected into the price of the option, because options are comprised of two components that go into their price: Intrinsic Value and Time Value.

If the option you paid $2 for is now at LEAST $5 (not including any time value to make the math/illustration easier), you have a $3 gain on the option trade. Making $3 on a $2 investment is a great return!

Here is the action I previously showed for opening the SUNE trade:

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Plucking Ripe Profits from Apple

It’s a time-tested aphorism:  An Apple a day keeps the doctor away.  This week, we saw how properly timed options strategies came to fruition with Apple Inc. (NASDAQ:AAPL).

Can AAPL shares in your portfolio keep your account in good financial health?  I answer with a resounding “yes,” as would many investors who are happy with the way their AAPL shares have performed over the long haul.

But what about AAPL options?

Options traders also have benefited from this innovative high-tech stalwart.  Some have even made it a habit of trading AAPL daily (perhaps the saying should be changed to: “an AAPL trade a day…”).  After all, staying poised to trade support and resistance and other short-term technical patterns or signals is in their best interest.

Let’s be clear: I’m not here to make a day trader out of you.  Even for advanced traders, day trading requires considerable skill and nerve to pay off over the long haul.

That said, I want to show you the highly profitable outcome of a Money Calendar AAPL trade that I recommended on July 9.

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The Loophole Trade and Priceline: A Potent Combination

Loophole trades are well suited for the market volatility we’ve been experiencing these past few weeks, as financial and geopolitical uncertainties generate anxiety among investors.

In the previous issue of Power Profit Trades, I explained why Implied Volatility (IV) is a strong incentive for options traders to consider a loophole trade.

This issue, I focus on another compelling reason for the loophole trade: reduced cost and risk.  I also recommend a specific loophole trade and explain its details in a training video embedded below.

When teaching my students, I run scenarios with them simulating a $25,000 account of which no more than 2% of the $25,000 is risked in any one trade.  The math works out so that no more than $500 is risked on any one trade.  In this scenario, $500 risk translates into a $5.00 option.  One contract = the right to buy or sell 100 shares of stock, which means a $5.00 option equates to $500.

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The Power of the Loophole Trade

My goal is to not only make you a wealthier investor, but a wiser one as well.  That’s why in Power Profit Trades, I will occasionally run an article of explanatory information – think of it as a basic education that will hold you in good stead not just today or this week but throughout your investing life.

This issue, I examine in granular detail a moneymaking tool called the loophole trade. Next issue of Power Profit Trades, I’ll recommend a specific loophole trade that’s coming up on my radar screen.

First, any discussion of the loophole trade must involve volatility.  Over the past few weeks, as the Greek crisis unfolds and the Chinese stock market plummets, we’ve witnessed wild intraday swings in the market.  One day it is down a couple of hundred points closing at or near its lows of the day; the next day it rallies back that 200 points or more, closing at or near its highs for the day.  It’s enough for a trader to get whiplash.

This market volatility can also cause a great deal of volatility in the pricing of options.  For traders looking to buy calls or puts, this makes it challenging in obtaining profits, if for no other reason options are more expensive than usual due to this volatility.

So how does one avoid this volatility?  One choice is to simply not trade and wait until the markets settle down – but that’s not acceptable to me.  My mission is to make you money, regardless of market conditions.  I want to play in the game, not sit on the bench.

What’s another choice?  Consider the loophole trade.  Below, I drill down and comprehensibly discuss why certain market conditions would compel me to recommend one.  Remember: through familiarity that’s gained by the proper application of financial knowledge, you can overcome fear of volatility and risk.  I want you to confidently embrace the power of the loophole trade.

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Qualcomm: The Virtue of Patience

There’s an old expression in the U.S. Army: soldiers are often forced to “hurry up and wait.”

That’s what it’s like much of the time for those trading the loophole trade, or spread trades (debit or credit).  You put on the spread trade and to realize maximum profit or get paid your money on this trade, you have to wait until expiration of the option contracts.

That’s what we’re now facing with our Qualcomm, Inc. (NASDAQ:QCOM) trade – and I want you to make money from this situation.

First watch my video, which shows you exactly what to do. I also flesh out this advice, in the body of this issue below.

 


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How to Avoid Failure as a Trader: Throw Out the “Hopium”

From the Eurozone’s Greek crisis to the dizzying plunge of the Chinese stock market to Puerto Rico’s own ticking debt bomb, global investors are now grappling with two of their worst enemies: greed and fear.

The legendary investor Warren Buffett perhaps put it best: “You want to be greedy when others are fearful, and fearful when others are greedy.”

The herd mentality is hard to resist. Many investors behave like lemmings and march right off a cliff. They succumb to the “group think” of the media, friends, the internet, colleagues, family – everyone telling them what stock or investment to buy, everyone ready with brilliant advice.

But what I’m going to tell you right now is why that mentality is totally wrong

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Going for the WYNN!

For non-traders, a lot of the time conversation is just that. Conversation.

For me, conversations lead to thinking, “How do I capitalize on this information?” or “Is there potential for a winning trade based on this discussion?”

I had a conversation with some neighbor friends of mine who recently got back from a trip to Las Vegas.

My friends pointed out that “Millennials” were there, but they were not gambling. In addition, the consensus was that activity was slow across the board for all age groups.

Armed with this “inside” first-hand knowledge, I did what comes naturally: find an opportunity to double my money.

What I found was a first-class WYNNer…

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The Power of Options Plays Out in Three Days

Normally I highlight trades that should take about 30 days to find us a double.

I don’t usually – in fact, I rarely – write about trades expecting them to work faster than that 30-day horizon. However, when a trade works as quickly as the one I’m going to talk about does, I don’t want to ignore it, nor pass up on taking the money, even if it’s not at the “double” I’m normally waiting for.

And by quick I mean three trade days quick! I didn’t anticipate this trade happening so quickly, though I figured it would have to at least happen a bit quicker than normal.

This one worked in one-tenth the usual time.

So instead of waiting, I went for it, trusting in the tools I use to find these moneymaking opportunities.

There’s lesson in all of this, and it’s all about what a 70% gain can teach us about my investment methods… and our ability to generate some serious financial returns.

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