First I want to state that I have been “investing” in the stock market for over 20 years. I only tell you that because I want to convey to you I am no “smarter” now than I was when I started. I’m “dumber” now and thank God I am.
The stock market is a very complex thing with debt to equity ratios, capital appreciation, dividend analysis, market cap etc. Thankfully the dumber I got the less I needed to know about such things. If I ever need to know any of these, I have a program, Vector Vest, which will do the work in an instant.
Simplification of the Stock Market
I have a car. My Wife asks me to go to the grocery store to buy some bread. I walk out to the garage and unconsciously my mind does a check list; are the tires aired up? When did I last fill up with gas? Are there any oil spots under the vehicle? I get in, turn the key, and back out soon to return with a loaf of bread. Mission accomplished.
Or I could go out and check the air in all the tires, Google catalytic converters and electronic ignitions, study the workings of both to gain a total understanding of their functionality completely. In the meantime my wife walked to the store and got the bread she needed.
The latter is the approach most people take to investing in the market. In the meantime the market has passed them by with many profit opportunities. There are multiple such opportunities in both bull and bear markets. Yes, even when the market is going down or not moving at all.
From my experience, people tend to overthink investing in the stock market. Any stock is only going to do 1 of 3 things on any given day; go up, go down or very seldom stay the same. Finding the reason and analyzing those reasons can be an extremely arduous and time consuming job.
Quite frankly that is way above my pay grade and I want nothing to do with it other than take note. To me it is much simpler to define a trend, spot a divergence from that trend and act on it for profit in short term (weekly).
What Are Options?
My wife and I find a house we really like. We approach the seller for details and he tells us he will sell it for $200,000. We agree on the price but there are several reasons we can’t close right now. We need to shore up our financing, need to sell our present home etc. We get the seller to give us an option to buy. He agrees. Here are the terms:
- We have the right but not the obligation to buy the house (call option)
- We have that right for 6 months (term or duration of the option)
- We agree to pay $200,000 for the house if we exercise the option (strike price of the option)
- We give seller $500.00 for the option (option premium)
The Possible Outcomes Are:
- A porn shop moves in next door in month 3 of our option, so we do not want the house. We forfeit the $500.00 premium and look for another house.
- A gusher oil well is hit nearby and property values skyrocket. We exercise the option at $200,000 and immediately see the value of our new home rise to $350,000.
- We don’t like the smell of crude oil so we sell our option that still has 2 months of term left on it to a speculator for $3,000.00.
This is the very same concept in the stock options market. It is very simple and potentially easy to understand but made to appear complicated.
- XYZ stock is in an uptrend. The stock is selling for $200 per share with projections to hit $250 in the next 6 months. I would like to participate in that growth.
- I have $10,000 in my account so I can buy 50 shares.
- The stock does hit $250 and my 50 shares are now worth $12,500, a profit of $2,500 or a 25% return on investment in less than 6 months. Not bad.
- Using options
- With the same $10,000, I could buy 1000 shares (100 contracts) of options expiring in 6 months.
- The stock does hit $250 and my 100 contracts (1000 shares) are now worth at least $60,000, a profit of $50,000 or a 500% return on investment in less than 6 months. Leverage, that’s the power of options.
Using weekly options
More and more companies are seeing the value of options and the liquidity they provide. With the increased interest of the public trading in options, many companies have initiated weekly trades rather than the traditional monthly expiration dates.
The use of weekly options has revolutionized my trading. In future lessons I will go into more detail of how to utilize weekly options trading for weekly income.
This system is so simple and time efficient a single mom or dad can implement it into their hectic schedules. A disabled or home-bound person can be productive while laid up. A busy professional can utilize this while going about their daily routine and a retired individual can supplement their income without missing a putt.