Isn't earning a good return on our money a very essential consideration? Yes I think most would agree. We want to build our retirement money-machine because we all know you need piles of the stuff and if we are going to enjoy retirement then we better have a GOOD PLAN!
CONSIDERATIONS
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Real Estate: You make your money when you buy!
Small Business: You make your money when you sell your money-making system.
Shares: You make your money when you can!
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My favourite game is playing the sharemarket and I will admit to you from the start it's not always money in your bank account - why? Simply because it's a game where the one who who knows the most makes the money.
If you want to join me then start your education now! Learn how, do the training and master your emotions you you will do well.
LOOKING BACK
It wasn't till I lost my advisor that I really learned about making money. Now I'm not saying sack your advisor - I would never say that! You have to make your own decisions.
An advisor can tap into situations that you would not be aware existed. You can also learn from them. Just be careful as to who gives you advice and make your own
decisions.
Don't trust anyone to make money for you. No one cares about your money the way you do. Advisors in most cases are just sales people who need to get clients so that they can pay their bills. At the best of times you do not rate that highly in their priorities.
If you lose or win, it's nothing to them - they hope they will still get to keep their jobs. It is easy to understand - make them a lot of money and they might let you know what is happening to your account, but this depends on who is more important than you today. We all want advice and we all ask the opinions of others, but don't become dependent on someone solving your problems - you are alone! Now live with it! The sooner you take full responsibility the better.
The people who make excellent returns are those that see trading as a business and realize that they will always be a pupil who needs to keep learning, be self-motivated and resilient, because losing at some stage is inevitable.
There are going to be more people that lose money than make money. I have had strings of losses, where position after position has had to be closed. Now you don't need that to happen too many times to wipe out your capital. This is the reason for keeping your positions small. You must decide how much time you will be willing to invest to learn how to make your fortune and keep it. The less time you're willing to
devote to learning, the less money you should put into the sharemarket.
The gambler will eventually give his winnings back to the house because they do not have a plan and trading rules which help them develop self-discipline. The most important quality to develop if you seriously wish to be successful in the sharemarket is self-discipline. Although this is easy to write in words I assure you that developing personal discipline is very hard and to carry out actions without involving emotion can be next to impossible. We are often ruled by emotion and
we hate to admit we have made a loss - thus, often we won't do what we should to rescue our remaining capital. This is how a little loss becomes a big loss over time.
Master yourself - your emotions will help you lose money. The more you think with your emotions and the more you make decisions with your emotions, the more you will lose.
NO ONE CAN PREDICT WHAT WILL HAPPEN IN THE MARKET!
If anyone can predict with any accuracy it won't be you and if you must predict what is going to happen, don't put any money on your bet. Next, if your broker could predict what was going to happen he/she would not be a broker - they would be living the life of Riley. If the money is coming out of the market then for god's sake take notice. This may be as close as you get to insider trading.
The stockmarket is like a sport. Everyone wants to see the great players and witness all the action, but not everyone is going to win the game. It is up to you to learn how to play the game. You need to learn the rules and learn the tactics and strategies to help you score more goals.
There are many different plays you can make in the market, but learning the less risky plays and those that reduce risk will make you more money.
Less risky to some......using options to make money
Examples might include:
1. Writing puts when the market is going up instead of buying the stock. If you're exercised then you can decide whether to buy the stock or act earlier to prevent the exercise by closing out your put position when the put price drops(buy the same put series and close it out).
2. Writing calls over your shares when it looks like the stock price is ready to fall.
3. Buy calls or puts depending on which way the market is going. Up market might indicate buying a call to cature the upside. A falling market may indicate buying a put to capture the rising value created by people buying protection.
The first strategy many people will see as too risky, but it really depends on your level of education in options, whether you can handle the risk and how much spare cash you have to meet your obligation if your puts are exercised. If the total cost of exercise is $50 000 and you have the money then in the case you do get exercised you will be able to buy the shares.
Get protection for your shares
Buy Puts
Let's say you protect your position by buying a put, then if the price drops you will cap your loss, or alternatively, you could sell the put/s, which may result in a profit and thus make up for any lost value in the share. Covering your position may be an on-going requirement. There will always be a price to pay - that's life!
Making money buying puts
Write Puts
If you write puts then you'll be obliged to buy the stock in the event you are exercised and so having sufficient cash is essential. You can also buy another series to cap your potential loss to the spread between the two series.
If you wrote $10.00 puts and bought $9.50 puts your loss would be partly covered by having that cover if the price drifted lower.
So we can make what looks risky, less risky, by knowing more about what is possible and then choosing our exit strategy. If I am exercised my contingency plan might be to write calls over my new shares and if I preferred, I could go back to put writing, by letting myself be exercised.
If I wanted to keep the shares then I would write calls that are further out of the money. I can even buy calls in a different series so that in the case the share price goes up I capture some of the increase, or I can cancel the contract by buying calls in the same series.
During May 2002 I used this same strategy with NCP. I wrote puts at $12.50. I watched the share go down to $9.68. I let myself be exercised and met my obligation by paying
$12.50/share - risky? You bet, because all the worst conditions for put writing came together in June 2002, the month I wrote puts.
It fell to $8.44. NCP makes up 10% of the Australian All Ordinary Index, so you could expect such an important stock will get serious attention. However at the time big media companies were not the flavour of the month - all the flavours had turned sour!
Following the purchase of the stock I wrote covered calls. There is nothing wrong with the strategy, but timing is your most important variable - thus a contigency plan is required. Keep in mind that 1 month in the market is a long time and 3 months is an eternity. Things can change very quickly from panic to ecstacy for no apparent reason. Someone always raises their hand with an explanation to satisfy the crowd - wouldn't we be disappointed if someone couldn't tell us. I think we'd probably get very worried!
Writing calls is a good idea when you think the stock price will fall. My contingency in the event I was exercised was to write calls and make up the difference I had lost - I didn't intend buying back the calls, as I felt there was little risk of losing the stock because the $10.50 level would remain out of the money.
The resulting action suggested that a better plan would have been to buy/write regularly - buy the calls back sheep(cheap) and write deer(expensive). Waiting first for the stock to peak then writing the call.
I could have closed out my contract by purchasing puts in the same series. I could have bought puts in another exercise price series to cap my loss. I chose a different way and regretted my choice. Holding the stock was not the easiest choice I could have made and in fact it held me back from making a lot more money.
Once I had the stock I had to protect it. If I then sold the protection I could have found the stock slipping further in value, so I kept the protection in place and missed the profit as the stock moved back up. So even though I inially lost by having been exercised I lost more by not being in a position to be more flexible. A further complication was my stock was purchased with a margin loan.
What should I have done?
I could have sold the protection , made a profit and then looked at buying the same protection cheaper. I could have done this at least 4 times in 4 months.
This brings us to the topic of increasing the flexibility of our thinking.
If you make money only in one direction you will reduce your trading results drastically. The market does not always go up! Sometimes it goes down or moves sideways.
We all need to be on the right side of the market. Believe me the alternative is no fun!
Happy Trading,
Joseph Sgro
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Copyright(C) Joseph Sgro 2003
Further this discussion by reading:
"10 Simple Rules to Make Serious Money in
the Sharemarket and Keep it!"
http://www.tutorhelp.com.au/sharemarket.html
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