Stock Options Blog

What do you think I can do to improve my skills, both in options and stocks? What did you do exactly?

The short answer is KNOWLEDGE. We live in the "information age" and what you know is MORE IMPORTANT than WHO YOU KNOW. Therefore, find out (read, read, READ) how OTHER PEOPLE got successful at what you're trying to do and apply the same principles and you'll more than likely get the same results.

It's easy to say, "buy low and sell high" but hard to apply it. So patient is another thing... A characteristic that options don't normally have (unless you're investing in LEAPS, which are options with long term expiration dates like 2-3 years out).

So get learning. And NEVER invest unless you know what you're doing.

That's the main reason I had to dropout of university because I realized that I couldn't be a part time investor and a student at the same time... Yes, I spend hours everyday on the net (but I workout too... benching around 200 lbs now =)

Okay, for OPTIONS:

I've looked at the equity options market for over a year now and have come to TWO major conclusions:

1] The options WRITERS have a HUGE advantage over the option BUYERS... Time. And this causes 80%-90% of all written options to expire worthless. Most options players would agree. The trouble with writing options is that unless you're a hedge fund (who commonly network with OTHER hedge funds to carry out their mind boggling schemes) you'll have a hard time writing naked options. If you're approved for an options writing by your broker (I suggest you apply for an account with Ameritrade) they'll probablly only allow you to write covered calls (for starters) and then a few months later (after you've kept you account in good standing for a few months) they'll probablly approve you for writing "spreads". The SPREADS, my friend, are the best thing ever. However, the downside to options writing is that you'll never make the type of returns that options buyers (infrequently) make.

2] The second thing I've learned is what has really impacted my investment style... I read a statistic a long time ago (I think when I was 14) that 9 out of 10 business fail within the first 5 years and of those that survive 9 out of 10 of them fail in the 10 years following that. So it got me thinking, "hey, if the business world is packed full of clunckers then why not go against the crowd and bet the opposite direction.?" Hence, I am more BEARISH than BULLISH (9-to-1). And I use options leverage to allow the statisic to work itself out in my portfolio ;)

However, as you now know, options are HIGH RISK, but the true risk is only in what you DONT know. The bears on this board aren't saying "strong sell" for nothing you know - i.e., after careful research we (and most of us have been posting her since M. Diddy went to prison) conclude that this is an overbloated pig destined to fall.

There's this neat audiobook titled "Getting Started In Options" by Michael C. Thomsett available at Amazon.com, your local library, and that sh*t internet company Audible(dot)com (ticker: ADBL) ... Yes, I made a very nice return on the Audible puts back in February (check the old message posts) - around the same time I bought puts in MSO (the first time).

Next you need to learn the Black-Scholes options pricing model... Don't worry, you don't need to know the equation, but you need to be able to figure out the fair value of an option using it (the allows you to know if an option is undervalued or overvalued too). There's this cool software program (free) available at CBOE(dot)com... W~W.cboe.C~M/LearnCenter/Software.aspx

(change the "~" to "w" and "O" respectively).

That software will do all the calculations for you and you can find out the volatility as calculated by the CBOE in the DATA>HISTORICAL STOCK VOLATILITIES section of the website. Personally, I compare THEIR calculated volatilites with the market's "implied volatility" to see if theres a major difference. If not, I just stick with the implied volatility.

Btw, those daily options trading video clips you see on CBOE by Dr. J are really helpful at times. The man knows what he's talking about, and has been helpful in my investment endevours in the past, so keep up with him whenever you can.

STOCKS:

Now, to improve your stock selection you really need to think like the OWNER of a company - i.e., you need to think LONG TERM. For this, again, you need to digest a TON of INFO. Read and listen to books and audio programs (especially in your car).

I suggest you read the following books (all of them have audiobook versions on CD too):

"Buffettology"
"The New Buffettology"
"One Up On Wall Street" (first investing program I ever heard, love it!)
"Common Stocks and Uncommon Profits"
"Rich Dad's Prophecy"
"Rich Dad Poor Dad"
"Learn To Earn"
"Beating The Street"
"The Next Great Bubble Boom: 2005-2009"
"Security Analysis"
"The Intelligent Investor"
"The Warren Buffett Way"
"The Warrent Buffett Way - Second Edition"
"Buffett: The Making Of An American Capitalist"
"Warren Buffett Talks Business" (Video)
"Brian Tracy: 21 Success Secrets of Self-Made Millionaires" (This is an EXCELLENT program... Can't be stressed enough!)
"Brian Tracy: The Psychology of Achievement"
"Rich Dad's 'Who Took My Money'"

There's tons more programs, but get started here.


Next, try and keep up with the news on a daily basis. For example, if you're an oil investor/speculator in the commodities market on the NYMEX then you have to know if there's another hurricane around the corner, like Rita unfortunately. So you have to stay with the news to know what's happening otherwise the market will know more than you and your chances of beating it drop.

Again, the lesson here is KNOWLEDGE.

Second question: Is losing money in the beginning, starting out, typical? Did you lose money when you first started?

You BET! In fact, I've been in DEEP WATERS before. Believe you me, I started off by investing CASH ADVANCES on my credit cards which have a steep interest rate, but I figured that I could make a killing and the interest rates wouldn't be a problem because I'll keep making the minimum payments... Didn't work out that way, but thank God I learned soon enough and made back enough money to pay the credit card companies (p.s., MasterCard is going public and it is unbelievable that they have LESS revenues than GOOGLE!)

So, do your BEST NOT to use your credit cards unless you're sure you'll be able to pay them off if your strategy in the market fails.

With stocks I didn't lose all that much. In fact, at the end of 2003 I was sitting at roughly a 25% gain on my stocks. Then in February 2004 I made the dive into the options market. The first move I ever made was buy calls on a sh*t stock called PortalPlayer (PLAY) which sells SoCs to AAPL for their iPod - waiting to buy puts on it again during xmas ;) And I lost the entire premium on it because I had timed it wrong. I bought calls which were too close to expiration.

The message here is that DO NOT buy near expiration options unless you can live with losing 100% of the premium you paid. Because your timing could be off and it's really hard to time the market. Look back at the dotcom days in the late 90's... Analysts were pessimistic about stocks in 1996-97 after the huge rally had already begun citing that valuations had gotten ahead of themselves and the NASDAQ was destined to fall. It went up to like 5300 in the following 2 years at which point these same analysts had changed their perspectives completely and became bullish instead.

Warren Buffett sold out a very large chunk of Berkshire's holdings during this time, and surely enough the market tanked.

Buffett says, "its very easy to know WHAT will happen in the markets, but almost impossible to know WHEN it will happen".

Therefore, market-timing works sometimes and sometimes it doesn't.

Like with MSO, none of us bears can be certain that this pos will tank. After all, it rebounded from $20 to $34 in the past few weeks. But with stocks it becomes easier because no one can ever force you to sell (you can't be exercied) and there's no expiration.

Third Question: What do you think of day trading, as opposed to other kinds of trading? Swing trading? Options trading?

I am a believer of the so-called notorious art of "day trading"... With a twist... I don't believe in day trading to be what the media says it to be. Some of the Fools at The Motley Fool, for example, say that day trading is buying a stock at 9:30 AM and selling it for a tiny profit at 11 AM and repeating the process over an over the entire year. Now, what I know is that with investing it's VERY HARD to be right 365 times in a row. Therefore, I believe the correct form of "day trading" would be to buy or short a stock or options with the intent to sell or cover within a period of a few weeks to months.

Swing trading... I've honestly been trying to figure this one out for a few months now and all I can see is that it's a trading strategy based on chart patterns... Of which I am not a fan. Only 5% of your strategy should be based on charts in my opinion because 95% of the financial world is full of "fundamentalists"... Have you ever seen a Goldman Sachs analyst say, "we believe MSO is a pos, but the technicals suggest it should hit $50 next week"? Obviously not.

Options trading... I L-O-V-E OPTIONS!!! =] (Can't ya tell? ;) I'm actually looking to move into the futures market on the NYMEX and then trading currencies on the ForEx when my portfolio has a value in excess of $1.5 million ... Hopefully by the end of 2007.

Fourth Question: How did you get started doing this? At what point were you able to say, "Now, I can make money consistently doing this. I don't need a normal job?

My family ALWAYS...ALWAYS had money problems, since as far back as I can remember. Parents were ALWAYS fighting over money. So it really hit me when I was 17 that I have to make a lot of money. And now I'm seeing that there's FAMILIES of 4 in other parts of the world who could LIVE OFF the price of an iPod for an ENTIRE YEAR! So I really want to get helping too.

The point where I was able to say to myself, "[n]ow, I can make money consistently doing this. I don't need a normal job" was actually never. Not even now. It's true that I don't work a job, but there's never any guarantees. All I do is hope and pray because the Lord can taketh as easy as He giveth. But I am much more confident now than I was when I first started off in the markets 2 years ago. So never think that you've become "unstoppable". I guess you can figure on 2 years (less the time you've already been involved in the markets) as well to feel the same amount of confidence, but never grow complacent or the market will eat you alive.


Which brings me to my last and MOST IMPORTANT POINT... God.

Now, if you're an atheist, believe you me, you should NOT be in the markets to begin with. I mean, if you believe, for example, that the universe began as the result of mere CHANCE (i.e., that the universe had no creator) and that we are on the earth to just do absolutely nothing, but eat, sleep, make money, and party then how do you justify making money in the markets? The chances of the universe forming on its own are LESSER than winning a lottery tickect everyday of your life till you're dead. Btw, ever wonder where you go when you're dead? What does that tell you? You don't just "rot and decompose" like some people believe.

I've been learning about the "terrorist religion" - Islam - for about 2 years now and it has CHANGED me BIG TIME. (Right around since when I got started in the markets.) The west has a completely screwd idea of what Islam really is. Islam isN'T some dude named Osama who carries out deadly plots from a cave in the east, lol!

TRUST ME, God can do ANYTHING. People say that they'll never be brought back to life and that there's no "judgment day"... But it's only HARD to do something the first time. He exercises UNIVERSAL power EVERY SINGLE DAY. Nothing is hard for Him.

If you separate religion from your life then it is STILL very possible that you'll succeed in the markets because God says in the Qu'ran that he give the unbelievers ease in this world since they're going to hell afterwards anyway. And if you don't steal and don't swear and all the other bad stuff but yet you don't believe in God or Judgement Day then you'll STILL take up a MAJOR a*s-whooping in hell.

But you can't stop by just saying, "sure I believe in God". I mean even Warren Buffett and Bill Gates believe in God, but you have to WORSHIP Him. He says in the Qu'ran, "I only created man jinn to worship Me".

Checkout this Billionaire dude. He's religious...

www.usatoday.com/money/companies/management/2005-09-18-advice-monaghan_x.htm

Here are two links that will help clarify all the BS you hear about Islam on CNN:

www.HarunYahya.com --> this is an EXCELLENT site full of multimedia about Islam

http://www.ArbitragePlayer.com --> This is my OWN site =]