All About stocks
All About Stocks
I want to share with you a core secret of why the trading strategy you’ll learn here works so well...
It’s based on the underlying stock.
And when you need to find the right stock, there are only two ways to go about it…
Those two different ways of looking for a stock are fundamental analysis and technical analysis.
In other words from a “predicative” view or “reactive” view.
The guys doing fundamental analysis read tons of stuff. They read all the company press releases, stacks piled to the ceiling of Wall Street analyst’s reports (what a joke) from every brokerage firm on Wall Street.
Then they read the company’s quarterly earnings reports (what a lie).
Ever read one of these?
These company produced quarterly reports and annual reports are filled with jargon and accounting language that nobody can understand and some of which seems to be totally made up. Like the “synthetic lease” found in one of Krispy Kreme Donut’s quarterly reports.
The fundamental analysts read all this stuff and more, etcetera, etcetera, ad nauseum...
From all these piles of crap they come up with calculations and stock price valuations to determine if a stock’s price is overvalued or undervalued and from there they try to “predict” the stock’s price movement.
Fundamental Analysis Is A Total Waste Of Time!
There are two reasons fundamental analysis is a total waste of time.
#1. The reason is because you cannot rely upon any information you get from the company you are researching or from Wall Street analysts. Before I found success as a trader, I was trained as a stock broker on Wall Street so I’m telling you this as an insider –
Company Management’s Job Isn’t To Tell You The Truth….It’s To Get You To Like The Stock!
Same thing with Wall Street analysts, company management blows smoke up their skirt and the next thing you know the analyst’s brokerage firm is issuing a “strong buy” recommendation.
#2. Wall Street brokerage firms have already been busted for “conflict of interest” when it comes to recommending stocks. They would issue “buy recommendations” then talk amongst their peers and friends about what a piece of crap the company was.
Nobody On Wall Street Cares If YOU Make Money, They Only Care If THEY Make Money!
You cannot trust any information you get from a company or from Wall Street! Since you cannot trust any information from the company or Wall Street analysts, any time you spend on fundamental analysis is a complete and total waste of time.
Besides, all the relevant information is already built into a stock’s price.
And... that leads us away from fundamental analysis, into technical analysis. Technical analysis is “reactive.” And that’s what I like about it.
Understand something: I don’t try to predict anything. I simply react to a stock’s price movement. I like to ride trends in a stocks price. If the stocks price starts moving up, I react by buying it. It’s a reactive trading approach and it all starts with...
Stocks That Are Already Moving Up In Price!
Stick to this first rule and...
Everything You Do In The Stock Market Becomes 100% Easier!
Your biggest short cut stock picking success is getting the list of stocks already moving up in price because...
Once An Object Is In Motion... It Tends To Stay In Motion!
Therefore, one way to profit off that “object in motion” concept as it relates to the stock market is to start with a list of...
Stocks That Are Already Going Up In Price!
When you confine yourself to trading only and exclusively stocks that are moving up in price you will drastically swing the odds of a success in your favor.
With this strategy, we will be making conditional offers to buy stock at a price below the stock’s current price. When you make this conditional offer, you get paid instantly.
So, when you make a conditional offer to buy a stock below it’s current price… and it is trending higher in price, you get paid instantly and the odds of the options expiring worthless are very high.
This gives you a huge advantage.
Only make these special conditional offers on stocks that are trending higher.
All About Options
What I’m going to do here is give you an understanding of options.
First thing to understand is that an option is nothing more than the right, but not the obligation, to buy or sell a stock for a specified price on or before a specific date.
That’s all it is.
An option BUYER owns the RIGHT to buy or sell a stock at a fixed price until the option expires. An option buyer pays money to own those rights.
An option seller owns the OBLIGATION to buy or sell a stock at a fixed price until the option expires. An option seller receives money to take that obligation.
A Call option is the right to buy a stock at a specific price on or before a specific date.
A Put option is the right to sell a stock at a specific price on or before a specific date.
You can buy options and you can sell options.
You can also sell options you don’t own.
The trader that purchases an option, whether it is a Put or a Call, is the option "buyer."
The trader that originally sells the Put or Call is the option "seller." Each option contract is equal to 100 shares of the underlying stock.
There are basically two things you do with options, BUY or SELL them. When you buy an option, you are buying the “right” to buy or sell a stock, on or before a certain date, (called the expiration date), at a certain price, (called the strike price). When you sell (also known as “write”) an option you are selling the “obligation” to buy or deliver a stock, on or before a certain date, (called the expiration date) at a certain price, (called the strike price).
There are four parts to an option.
1. The TYPE - Put or Call.
2. The UNDERLYING STOCK
3. The EXPIRATION DATE
4. The STRIKE PRICE
1st Part Of An Option - Type: Puts and Calls
Calls - When investors anticipate a stock’s price will be rising, they would buy Calls. When they buy a Call, they are buying the right to “call” the stock away from someone at a fixed price, (the strike price) for a fixed amount of time, until the expiration date (which is always the third Friday of the expiration month).
How Does A Call Work? Let’s say ABCD is a stock trading at 87 per share on November 15 and an investor thinks it’s going to rise by year end. That investor could purchase the ABCD Dec 90 Calls for $5 per contract (each contract is equal to 100 shares). The investor that buys any ABCD Call option owns the right to call the stock from the market at 90 per share until the third week of December. In our example, December is the expiration month.
That means that on the third Friday of December this option will expire. All the ABCD options with a December expiration will expire on the third Friday of December. If ABCD does rise, the price of the option will also rise. The investor can control 100 shares of ABCD by owning 1 ABCD Call contract.
In this case, the investor could control 100 shares of ABCD at a fixed price (the strike price) of 90 per share for $550. (5.50 per contract x 100 per contract = $550). By comparison, 100 shares of ABCD would cost $8700. If the stock price of ABCD rises, the value of this option will also rise. If ABCD drops in value, this option contract will also drop in price. If ABCD shoots up to 110 per share, then this option will likely rise to around 20. Think about it, this investor owns the right to buy ABCD at 90 and it’s trading at 110.
He paid 500 bucks for the right to buy ABCD at 90 anytime he wants until the third week of December. He can sell that option anytime he wants between the time he bought it and the time it expires.
Once the third Friday of December rolls around, this option expires.
If ABCD starts dropping, then the value of this option will also drop. If ABCD drops to 83 then there won’t be much value in owning the right to buy ABCD at 90 when you could buy ABCD in the market at 83. This option will only be valuable if ABCD is trading over 90 come the third Friday of December. If ABCD is trading below 90 on the third Friday of December, then this option will expire worthless.
Think about it, who would want to pay someone for the right to buy ABCD at 90 when they could buy ABCD for less than 90? That’s a Call option.
Now let’s move on to “Put” options.
Puts - When investors or traders anticipate a stock’s price will be dropping, they would buy Puts. (But that’s not what this strategy is about.)
When they buy a Put, they are buying the right to “put” the stock to someone at a fixed price, (the strike price) for a fixed amount of time, until the expiration date (which is always the third Friday of the expiration month).
When an investor or trader thinks a stock price will be staying the same or rising, he would sell Puts and receive money for selling someone the right to “put” stock to him at the strike price until the options expires. This is what we will be doing.
How Does A Put Option Work?
Let’s say ABCD is trading at 87 per share on November 15 and an investor thinks it’s going to drop by year end.
That investor could purchase the ABCD Dec 90 Puts for 5 per contract (each contract is equal to 100 shares).
The investor that buys any ABCD Put option owns the right to “put” the stock to the market at 90 per share until the third week of December.
In our example, December is the expiration month. That means that on the third Friday of December this option will expire. All the ABCD options with a December expiration will expire on the third Friday of December.
If ABCD does drop, the price of the option will rise. The investor can control 100 shares of ABCD by owning 1 ABCD Put contract.
In this case, the investor could control 100 shares of ABCD at a fixed price (the strike price) of 90 per share for $500 (5 per contract x 100 per contract = $500).
If the stock price of ABCD drops, the value of this option will rise. If ABCD rises in value, this option contract will also drop in price.
Why Does The Value Of The Put Rise If The Stock Drops?
Because the value in owning the right to sell ABCD at 90 becomes more valuable as the stock drops below 90.
Imagine being able to sell a stock 23 points higher than it’s trading at. That’s what you would have if you owned the right to “put” ABCD at 90 if ABCD was trading at 67. If ABCD drops down to 67 per share, then this option will likely rise to around 20. Think about it, this investor owns the right to sell ABCD at 90 and it’s trading at 67. He paid 500 bucks for the right to sell ABCD at 90 anytime he wants until the third week of December. He can sell that option anytime he wants between the time he bought it and the time it expires. Once the third Friday of December rolls around, this option expires.
If ABCD starts rising, then the value of this Put option will drop. If ABCD rises to 110 then there won’t be much value in owning the right to sell ABCD at 90 when you could sell ABCD in the market at 110.
This option will only be valuable if ABCD is trading below 90 come the third Friday of December. If ABCD is trading above 90 on the third Friday of December, then this option will expire worthless. Think about it, who would want to pay someone for the right to sell ABCD at 90 when they could sell ABCD for more than 90?
Why Does The Value Of The Put Drop If The Stock Rises?
Because the value in owning the right to sell ABCD at 90 becomes less valuable as the stock rises above 90. Imagine owning the right to sell the stock at 90 when it rises to 100.
There is no value in owning the right to sell a stock at 90 if the same stock is trading in the market at any price over 90. As that stock rises over 90, the value in owning the right to sell at 90 declines.
OK, that’s the first part, Type: Puts or Calls
2nd Part Of An Option - The Underlying Stock
Every option has an underlying stock as it’s root. In our example above, ABCD is the underlying stock. The price fluctuation of the underlying stock will cause a fluctuation in the price of the option.
3rd Part Of An Option - The Expiration. Options are only traded until a fixed date called the expiration date. In our ABCD Dec 90 Put example, the owner of this Put can sell ABCD at 90 anytime he wants to until expiration which is the third Friday of December.
4th Part Of An Option - The Strike. The strike price is the price of our conditional offer.
Here are a few more things you need to know about options…
The premium is the price of an option contract, as quoted by the exchange it trades on. It’s the price that the buyer (holder) of the option pays to the option seller (writer) for the rights conveyed by the option contract.
We will be selling Put options to collect this premium.
In our ABCD example, the ABCD Dec. 90 Call contract is priced at 5. The premium is said to be 5, which is the same as the price.
Options are said to be in-the-money, at-the-money or out-of-the-money depending on where the stock price is relative to the option’s strike price.
“In-The-Money” - A Call is in-the-money when the price of the underlying stock is greater than the option's strike price.
A Put is in-the-money when the price of the underlying stock is lower than the option's strike price.
In our example, the ABCD Dec. 90 Call is in-the-money anytime ABCD stock is trading at any price higher than 90. The ABCD Dec 90 Put is in-the-money anytime ABCD is trading at any price below 90.
“At-The-Money” - An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. In our example, the ABCD Dec. 90 Call is “at-the-money” if ABCD is trading at 90 per share. The ABCD Dec. 90 Put is “at-the-money” if ABCD is trading at 90 per share.
“Out-Of-The-Money” - A Call option is out-of-the-money if the strike price is greater than the market price of the underlying stock. In our example, the ABCD Dec. 90 Call is out-of-the-money anytime ABCD is trading below 90.
A Put option is out-of-the-money if the strike price is less than the market price of the underlying stock.
In our example, the ABCD Dec. 90 Put is out-of-the-money anytime ABCD is trading above 90.
“Intrinsic Value Of An Option” - The intrinsic value of an option is the difference between an in-the-money option strike price and the current market price of a share of the underlying stock.
In our Call example, the ABCD Dec. 90 Call would have an intrinsic value of 4 if ABCD was trading at 94. The ABCD Dec. 90 Call holder owns the right to buy the stock at 90 and ABCD is trading at 94 so the ABCD Dec. 90 Call has an intrinsic value of 4. In our Put example, the ABCD Dec. 90 Put would have an intrinsic value of 4 if ABCD was trading at 86. The ABCD Dec. 90 Put holder would have the right to sell ABCD at 90 and ABCD is trading at 86, so this ABCD Dec. 90 Put would have an intrinsic value of 4.
“Time Value Of An Option” - Time value of an option is the portion of the premium that is attributable to the amount of time remaining until the expiration of the option contract and to the fact that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value.
Three Things That Effect The Price Of An Option
1. The price of the underlying stock relative to the strike price of the option. Options in-the-money are priced higher than options that are out-of-the-money.
2. The time remaining until expiration of the option. The longer the time left in an option, the more value it will retain. As options get closer to expiration, the time decay erodes their value. We let this price erosion factor work to our benefit when we spread Puts in the current month.
3. The volatility of the underlying stock, the higher the option’s premium will be.
If you want to re-read this section on what options are, go ahead and do that now.
Frequently Asked Questions
Q: I've sold a put and the stock drops to the strike price or below; Is the stock put to me automatically?
A: No. But get out of the trade before it hits your breakeven point.
Q: Under what conditions is the stock put to me?
A: If the options are in the money the stock will be assigned to you.
Q: Can the stock be put to me before expiration?
A: Yes if it is in the money.
Q: If I am put the stock, what happens if my account does not have enough cash to cover the purchase?
A: You would have done this on a cash basis which means you would be able to cover it or on a margin basis. Call your broker if you have questions.