School Of Hard Stocks

Improve your life through investment

schoolofhardstocks — Mon, 20 Aug 2007 19:55:01 +0000

We all have the american dream. You know the one about financial security, health, wealth, and happiness. It’s a nice dream, but let’s not dream anymore. Let’s take action. Confuscious once said that a journey of a thousand miles begins with the first step. I can’t tell where your journey should but I will tell you that you cannot reach it without taking that first step:

1. Create a list of goals, make this list very simple outlining the basics.

2. Create a budget and try not to exceed it. Begin generating a system of regular deposits into a savings account.

3. Write down a list of interests or ideas, these will come in handy later.

Once you have these 3 items done. You’ve done it, you’ve taken the first step. The hardest step. The next steps will be hard but you should enjoy this journey to financial freedom.

Of course it doesn’t stop there. Let us do some homework. What investment consistently beats Bonds, Real Estate, Commodities, etc. Finished? Great, you guessed it, securities! Common stock has beaten almost every other type of investment on average over any 10 year period.

With the investment ideas found in this blog and many others, I want you to get in the game! I believe that the stock market is the key wealth in America. Use it!

What is an stock option?

schoolofhardstocks — Mon, 20 Aug 2007 15:48:32 +0000

An options contract is purchased to secure certain rights on a particular investment. In the common stock regime, an option guarantees the investor the ability the open a position in common stock (or index share) at a specific strike price for a limited amount of time. Depending on the strike price and the duration of the contract, the price of the premium could vary dramatically. The premium is just the price we pay for this right. There could be dozens of strike prices for a particular stock and many expiration dates for each strike making it very complex to figure out which we should purchase. Usually these contracts are sold in bundles of 100, meaning each contract represents 100 shares of common stock.

Imagine if we could secure purchase of the stock RIMM before it doubled to $188 with an options contract. With a option would be guaranteed to be able to purchase RIMM at a later date for a specific price. Say we thought that RIMM is too cheap at $100 and we believe it goes to $200, we could purchase a “call” with a strike price of say $160. When the market price reaches $200, we would be guaranteed the ability to purchase those shares at $160 no matter what (as long as the expiration date hasn’t passed)! Not only that, but if we do not have the funds to cover such a purchase it’s ok because we can “exercise” the contract at market, meaning that we could buy at the strike price ($160) and immediately sell at market ($200), netting us a nice gain of $40. Recall that each contract bundles 100 shares, so this gain must be at least $4000. At $4000/ contract, one can see how profitable this kind of investment could be.

We all know what the next question should be: how much is this premium. Well to give you the short answer it could range from 0.05 to 40.00 per share (meaning the premium would be 5 to 4000). 40 is not the cap either, I have seen many options go for much more. So please make sure that the gain you hope to see in the stock will be worth the price of the premium before you purchase your options contract.

So what is Subprime anyway?

schoolofhardstocks — Mon, 20 Aug 2007 15:14:20 +0000

Also known as B-paper, subprime lending is the practice of lending money to those who normally do not qualify because of low credit scores. As a result there are high interest rates associated with these types of loans.

That’s great, but as an investor/trader, what does it matter? Well considering that this area of lending has collapsed and it accounted for nearly 1/5 of the entire lending market since the year 2004, we can see how this can play a significant role in the stock market.

So what’s happening post subprime? The entire stock market, as measured by the NASDAQ, NYSE, and the DOW, has been beaten up. Most stocks have taken a loss, the mortgage related stocks especially. A lot of put buying has happened driving the common stock prices down on the financials sector and mortgage banks.

What to do now? My advice: buy mineral and nuclear energy calls for the month of September. As the market begins to hash out value, stocks will fluctuate greatly, since minerals stocks are essentially the same companies and the credit crunch has had a small boost in the market, we could see rallies in this area after falling several points this month.

Trading Ideas: RIO, FCX, AA in the money calls

Who’s my favorite Wall Street guy?

schoolofhardstocks — Mon, 20 Aug 2007 08:13:16 +0000

Like most Americans, I watch entirely too much TV. So let’s get rich while watching the tube. This brings me to CNBC’s Mad Money hosted by Jim Crammer. My favorite wall street pundit. Watch the show, trust me. I know I know, he isn’t the best, he doesn’t know it all, and you should not rely exclusively on one man to do your picks for you. What you should take away from the show, is just tools necessary to evaluate certain stocks. Please don’t buy anything you observe in the lightning round. That would be disastrous.

In close Jim will give you clues about why certain sectors could become bulls or bears, we can exploit these clues to make specific moves in the options market utilizing both puts and calls.

Never short options!

schoolofhardstocks — Mon, 20 Aug 2007 07:40:48 +0000

I should point out that we will never short puts or calls. This is a huge mistake. By purchasing puts and calls we limit the amount we can lose, however the amount we could gain is infinite. Shorting puts and calls limits how much we gain, and makes our potential loss infinite. It is easy to see that all “out of the money” options eventually reduce to a price of 0.05, however it would be hard to find a buyer of such an option. We must remember that in trading options you must always have another trader to close the deal.

Recall that many hedge funds have made millions shorting the S&P500 put options over the last 4 years, until the credit crunch of this month. A lot of these funds have since been disbanded and many have withdrawn their accounts. Let’s learn from this event. Their is no free lunch on wall street. All we can do is our homework, diversify, and apply appropriate risk management.

The Second Buy, not so exciting..

schoolofhardstocks — Mon, 20 Aug 2007 07:10:00 +0000

I purchased some puts on symbol cfc: Country Wide Financial. I didn’t count on Ben to come to the rescue of Credit as we know it. Oh well, I suffered my first loss in the options environment. But it was a well played investment. After the downfall of Subprime the largest mortgage companies have suffered significant losses. Shares in these companies have fallen sharply. So after the company fires nearly 70,000 employees and loses most of it’s mortgage lending business, it was a pretty safe bet to buy some “in the money” puts on symbol CFC. Fortunately I had bought calls in Apple, symbol: aapl. Please if you are going to trade options diversify. Diversification saved my portfolio today, lesson learned.

My first option buy!

schoolofhardstocks — Mon, 20 Aug 2007 07:09:47 +0000

On Friday I bought apple $115 options for $2/contract and closed the position soon afterward at $7. I had an instinctive feeling that the stock had gotten beaten up too much the day before (along with most publicly traded stocks). The stock had lost more than $7 dollars on Thursday, however the stock rallied on Friday and closed over $122.

Options trading is risky business!

schoolofhardstocks — Mon, 20 Aug 2007 07:09:26 +0000

Options trading is one of the most risky investments one can make. You could potentially lose all of your initial investment in a single day and believe that happens every day. I’m not new to the stock market but I am new to the options market. By tracking my movements on this blog I’ll keep myself honest. Who knows maybe you’re reading the next Warren Buffet’s blog!

In my system I will buy in the money puts and calls in various sectors and industries. I will attempt to make money on both the bears and the bulls. Using this method we will diversify and try to make the most of the market.

The goal of this project: To prove that an MBA is not required to beat the big mutual funds, investing your money yourself will yield the best results.

Tools: Charting, Analyst Estimates, Earnings, Technical Analysis, Fundamental Analysis, and of course good old fashioned common sense.