Stock Options Trading
Why Trade Stock Options? Income.
After several years of trading and looking at various trading
alternatives, I have decided that stock options trading
is what **I** should concentrate on for income generation.
Keep in mind that the following is just MY opinion and path.
You may agree or disagree.
I have decided against the various alternatives
for the following reasons:
Why Not Commodities/Futures Contracts Trading?
While the leverage with futures and commodities contract trading
is most attractive, that leverage is a double-edged sword.
Overnight surprises occur all too often, and can literally wipe
you out, especially if you have a small account.
Remember that stops (stop loss orders) are no guarantee of limiting
losses to amounts you feel you can handle.
When a stop is hit, that turns into a market order.
And that market order fill could be quite a distance from your stop.
If a price blows past your stop, big time, because of the leverage
you will lose, big time.
Furthermore, you need an already good-sized bankroll to play in that
arena, though there are plenty of "gurus" who will tell you that all
you need is a few thousand dollars to start.
That's true -- you need only a few thousand dollars to start --
TO LOSE.
Why Not Commodities/Futures Options Trading?
Frankly, I have not looked at this possibility in any detail. I do not know the similarities or differences of trading commodities future options as compared to stock options trading. It is simply a matter of time constraints that I have not done anything in this area.
Why Not FOREX Trading?
If you want leverage, this is the game for you.
And a real game it is.
Have your ducks in a row, and your passport and Brazilian visa handy.
While all markets are somewhat removed from reality, dependent
on government whims and the shenanigans of the bankers --
The Powers That Be (TPTB) -- this game is the epitome of trading in
unreality.
FOREX traders are entirely at the mercy of TPTB, given that the
so-called currencies traded are totally fiat -- having no connection
to reality whatsoever.
I just don't know how I would protect myself, trading in this arena,
from surprise announcements and overnight devaluations or reevaluations.
Maybe something with options?
Why Not Stock Trading?
There is a difference between investing and trading.
Let's be clear.
Trading is SPECULATION.
It is not "investing".
Investing is for the purpose of receiving dividends or for
participating in the growth of companies.
Because of our dysfunctional financial and taxing regimes,
starting from about 100 years ago, and accelerating
(in decline) for the last 50 years or so, investing
for dividends is of minor significance.
Most companies don't or can't pay dividends.
What is left for us is simply the hope of increasing stock prices,
whether justified by growth or not.
Capital gains.
That is a long-term process.
Years.
Five, ten, or more years.
If you are holding a stock for even a couple of years at most,
not to mention for a shorter time, even a much shorter time,
you are not an investor; you are a trader -- a speculator.
Don't try to flatter yourself, if you think that the term "investor"
provides more prestige than "speculator", by calling yourself an
"investor".
There are really very few investors any more, Warren Buffet and various
PTB and their trusts notwithstanding.
Now, as to speculation, speculating, trading in stocks, stock trading,
I consider the reward/risk ratio (risk-reward ratio) not nearly as
attractive as with stock options trading.
Plain and simple.
To make just $500.00 on a $20.00 stock moving 5% ($1.00), you need
500 shares, tying up $10,000.
And if it moves $1.00 against you, you are down $500.00 instead of
up $500.00.
Why Not Bonds -- Bond Trading?
Trading bonds profitably is beyond me and most traders. It requires extensive financial and economic knowledge and intensive and long hours of study. That's just so that you can talk the talk. Then it requires tremendous capital to profit from typical small moves and to withstand large moves in interest rates. But it mainly, and most importantly, requires a crystal ball or the connections that TPTB have that YOU do not have as to what specifically the Treasury and FED are going to do tomorrow.
What about Buy and Hold Instead of Trading?
Buy and hold (buy and hope) is an investment strategy, not a trading
strategy, and a poor one at that.
Dividends for income are no longer much of an incentive to buy and
hold.
Capital gains and the hope of being able to "cash in" on them years later
for perhaps retirement are increasingly elsusive.
I don't mean capital gains denoted in some fiat currency (such as the
US$ or Euro) but in actual purchasing power.
I mean an increase in the fiat numbers exceeding the Cost of Living
numbers increase.
Buy and hold is based on several problematic assumptions:
One is that there will be a growing economy where stock prices increase
in value along with company growth.
Another is that there will be a stable economy and stock market -- an
economy and market not manipulated by TPTB to create huge market swings.
The last questionable assumption is that, even given a growing economy
and a stable market, that your companies or industry will grow or even
remain profitable.
A growing economy is not a given.
Any or all of the following factors could prevent further growth,
not to mention crippling or even destroying what we have become used to:
One factor is the continuing out-of-control population growth and
the resulting drain on diminishing resources such as cheap energy, clean
water, arable cropland, and fishable seas.
The debate over "global warming" is just a deliberate diversion of
attention from the real problem that no one wants to acknowledge, like
a fart in an elevator, much less deal with.
If you are like most people, I have to call your attention to it in bold:
That problem is a rapidly increasing overpopulation.
The religious conservative/fundamentalist wackos -- Christians,
Orthodox Jews, Muslims and other wog religionists -- with their
"pop until you drop" philosophies and antipathy to sex education,
family planning, birth control, and abortion, are one group
contributing to the problem.
And, the "lefty loonies", along with their "ethnic" rabble-rousing
compadres are the other.
"Genocide! Discrimination!" are some of their rallying cries,
along with general guilt-tripping about the plight of the less-fortunate.
(We need to feed the starving children in [insert name of pest-hole here]
so that they can grow up to breed more starving children.)
Both groups further encourage increasing the problem by lobbying for
and supporting various government programs and interferences.
They love the income tax deductions for more spawn.
The liberals especially love "free" public schooling, aid to dependent
children, and workplace regulations catering to women in the workforce
with children.
Because of religious and cultural mindsets,
the overpopulation problem is insoluble.
That in itself is leading to economic deterioration.
Another negative factor is the continuing rapid deterioration of the
institutions necessary to sustain, much less grow, economies.
Our so-called business, government and political "leaders" are an
increasingly bad joke.
Demagogery, deception, and rampant greed.
Our so-called educational "leaders" have turned the populace
from a barely functional collection of marginally effective idiots into
a nation of total imbeciles.
They have possibly been assisted by government and industry deliberate or
inadvertent brain chemistry alterations through chemical and hormonal
environmental and food chemical residues.
I'm not forgetting religous "leaders"; they have always been a
bad joke (Christian, Jewish, Muslim, whatever), reinforcing humanity's
already sheep-like tendencies and stupidities.
A stable economy and stock market is not a given.
Economic and market cycles have become even more extreme since the
establishment of the U.S. Central Bank aka the Federal Reserve System,
along with the "income tax", in 1913.
The purported purpose of the Fed was to stabilize things.
In actuality, its purpose was to establish a more effective means
of economic manipulation for TPTB.
Remember, everyone's aim is to "buy low and sell high."
The FED enables TPTB to do that on a grand scale, concentrating
wealth increasingly into their hands.
The depression of the 1930s was their most successful coup.
They have had several important ones since.
We're likely in the beginning stages of another at this moment (2008
February).
Propaganda has it that if you buy and hold, you will come out OK
in the long run.
The problem with that conventional wisdom is that if you adjust
market returns, on average, over an average period of time,
the inflation adjusted growth is not there.
And, if your timing is wrong, getting in or out, that golden
retirement dream could become an excretory brown.
A difference of just one year, even a few months, from when you get in, or
start to get in, and when you have to get out, makes a
tremendous difference.
Maybe you'll hit the jackpot, maybe not.
That your companies (stocks) and industry sector will grow or even remain
profitable is not a given.
How do I count the ways?
Overseas competition and outsourcing.
Steel, electronics, automobiles...
Technological changes.
Just one recent example:
Polaroid (2008 February), because of digital cameras and picture
cell-phones, had already stopped production of cameras, and will soon
stop production of film for them.
At one time, Polaroid was huge; now it is dead.
All the above is just a long way of saying "buy and hold" is dead.
Core Position Trading, Including "AIM" as an Alternative to Buy and Hold
If you do want to accumulate a stock over a long period of time, there
is an alternative to leaving yourself to the mercies of buy and hold
(buy and hope).
It is a longer term trading strategy called Core Position Trading
(CPT).
Possibly the best known method is called
Automatic Investment Management (AIM),
created by Robert Lichello.
I use a variation of that for accumulation of various resource stocks.
And that's it; I am not into accumulating or buying and holding industrial,
consumer, or financial services related stocks (or ETFs) in general at all.
Core Position Trading - CPT/AIM.
More about Options Trading
As far as I am concerned, with very few exceptions, long-term investing,
especially with the buy and hold method (actually, that is the lack of a
method) is dead.
Deterioration of our institutions has forced us to become traders to
survive and thrive.
As I mentioned at the top of this page, the trading vehicle for me is
stock options.
One of the reasons I have created this site is to force myself to be
very specific in mastering the basics and selected methods of
generating consistent and substantial income trading stock options
As this site grows, there will be included detailed information on
and explanations of stock options trading methods that I have found
that have
demonstrated the best reward/risk ratios for consistent profits.
The first of these will likely be calendar spreads (aka horizontal spreads,
time-only spreads, or time-value spreads) and their analogy to covered calls.
Next, perhaps condors and butterflies or vertical and diagonal spreads.
Bookmark this site and check back every month or so.
In the meantime...
Stock Options - The Very Basics
Regards,
D. A. Bean
Core Position Trading™ for
Stocks and Exchange Traded Funds (ETFs)
A Core Position is defined as a core or basic position in a readily tradable item, including such things as precious metal (PM) bullion or coins, stocks, mutual funds, exchange traded funds (ETFs), etc. Whatever it is you are trading will here be called the "item".
A Core Position Account comprises a quantity of the item AND a cash reserve position. The cash reserve position enables purchases adding to the quantity of the item from time to time. Proceeds of the sales of some of the item, from time to time, are added to the cash reserve position. The cash reserve position enables purchases adding to the quantity of the item from time to time...
Core Position Trading™ (CPT) is defined as buying or selling, adding to or subtracting from, the core position of the item in such a manner as to, over time, increase both the amount of the item AND the cash in the account.
TOPICS & ARTICLES
Glossary
Core Position Trading
AIM Stock Buy & Sell Calculator
Technical Analysis
Stocks and ETFs
Stop, Limit, Stop Limit Orders
Stock Options
Options - The Very Basics
Options Premium Intrinsic & Time Value
IMPORTANT
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