An option is a derivative of a stock. This means it gets its value from the stock
it represents. You can buy weekly mini
options which represent 10 shares of a stock. Weekly options are options that
represent 100 shares of a stock. Both
the weekly mini and the weekly options come on the market Friday and can be
traded until the next Friday before the market closes. So these options have 7 days until expiration.
The monthly options come on
the market the 3rd Friday of the month and expire on the 3rd
Saturday of the month. (But remember the
stock market is not open on Saturdays, so you have to sell them on the 3rd
Friday of the month if you are not going to exercise the option). Exercising the option is when you have the
right but not the obligation to buy or sell 100 shares of stock, so if you do
not buy the 100 shares, you are not exercising the option, if you do buy the
100 shares you are exercising the option.
There are two types of options
contracts that a person can buy. The
contracts are called CALLS and PUTS. A
Call option is purchased by a person who is bullish on a stock. A Put option is purchased by a person who is
bearish on a stock. Buying a Call Option
gives the owner the right but not the obligation to buy 100 shares of the stock
at a certain Strike Price. The same is
true about the Put Option; it gives the owner the right but not the obligation
to sell 100 shares of the stock at a certain Strike Price.
The Strike Prices are set by the market. For stocks that are lower than $25, they have
a strike price every .50 Cents. For
stocks with a value greater than $25 and lower than $200, they have a strike
price every $2.50 For a stock that has a
value greater than $200, it has a strike price every $5. These are the strike prices that each
contract is set at for, both calls and puts.
This is how an options chart would look.
Let’s assume that Apples current price is $400 a share, and there are
weekly options, that expire at close of market on Friday.
CALLS STRIKE PRICE PUTS
Bid Ask
Bid Ask
$4.00
$4.10
$395
$3.80
$3.90
$3.90
$4.00
$400
$3.90
$4.00
$3.80
$3.90
$405
$4.00
$4.10
The Story
Let’s say that I won Publishers Clearing House and I have
check coming to me for $300,000, but I have to wait up to 30 days to get
it. I decide that day I want to invest this
money on a house. So the same day, I do
some serious research and I find a house that I want to buy. I visit with the seller and she tells me that
the house is worth $250,000 today, but the housing market is still weak, so we
are anticipating that the value of this is house could go down. I want this house because I am aware of some
information that she is not informed on.
I believe that the house this
land sets on has oil on it and if that is the case, I can make more money than
I spent on the property which is buying the house for a discount. I let her know that I am getting some money
and I would like to come back in 30 days the buy the house and I asks if she
can hold the house for me. She declines
the offer and says she just can’t take the house off the market to wait on me.
I then ask, if I pay her a premium of 1%
of the value of the house ($2,500) would she hold the house for me, and she
says yes, but the $2,500 is only to hold the house, I will still have to pay
the $250,000 for the house if I want it , no later than 30 days from
today. So she writes the contract, (because
she thinks the value of the house is going down and I will not return and she
will get the keep the $2.500) I buy the contract because I think the value of
the house if going up. So she gets
$2,500 to put the house on hold.
The contract states that I have the right, but not
the obligation to buy this house at $250,000…
It also states that whatever the
value of the house is everyday my premium will be adjusted to reflect 1% of
that value. (So if the housing market finds out it could be oil on this land,
it will adjust my premium to reflect 1% of the value of the house) It also states, that every day I will lose
some premium to time decay. Which is
$2,500 divided by 30 days which equals $833 a day. I will lose $83.33 a day until I buy the house. So If I come back tomorrow and the house is
worth the same value it was when I bought the contract, I will tell her I do
not want the house and she will give me back all my money except for the $83.33
I lost to time decay.
The next day, word has leaked on the housing market
that this land could possibly be rich in oil.
Everyone wants this house now, but the seller cannot sell to anyone else
because we have a contract. The value of
the house is now worth $750,000. This
means my contract premium that I paid the seller is now worth $7,500 already
making me a profit of $5,000. Now, I
have a choice to either cash in my option and tell the seller I do not want it,
this would be not exercising the option and I make $5,000 profit. Or I can keep
the contract active to make more money.
Even though the house is worth $750,000 now, I will only have to pay
$250,000 for it. So if publishers clearing house calls me and says
sir, we have your winnings ready early, I could just get the check and give the
seller her $250,000 and now put the house back up for sale and sell it for
$750,000 making a profit of $500,000. This
would be known as exercising the option.
So you can see in this example we made the most money by exercising the
option, but a lot of the times in real life, you make more money on the
premium, this would be buying calls and puts which is what I do.
But, that’s not the whole story. I left something out on purpose so it would
not confuse you. Remember the next day
when we came back and the house was worth $750,000? The market has 5 sisters working for it. Their names are Delta, Gamma, Theta, Vega and
Rho. These sisters are very important
because they decided how much money we made when the value goes up or
down on our contract.
Gamma
gave money to Delta, every time the value of the house went up $1.00.
Delta gave me the money
she got from Gamma and her money every time the house went up $1.00.
Theta took money from
me every day; this was the $83.33 we lost on the premium.
Vega, she controls the
demand of the contract. The more risk involved in the contract the more premium
is added to the price.
All of this is under the assumption I wanted the
value of the house to go up. It is the
total opposite for the seller of the house who thought the value of going
down.
This is a very basic look at options, it may sound
more complicated than it really is so do not let that scare you from learning
more about options. If I can do ,
anybody can. Please leave feedback.
In the video below, I explain why Wall Street uses the terms Bulls & Bears. I also go through the first couple of things I look at on a chart.
I will talk about Trends. I look for 3 trends and all have to agree with each other.
Trend of price which includes the examples below....
Bullish Trend - A high, higher low and higher high in price.
OR Bearish Tread - A low, lower high and lower low in price.
I also look for the Long Term Trend indicator using a lagging 50 (SMA) simple moving average and
a Short Term Trend indicator using 15 (EMA) exponential moving average. 50 SMA is the main trend to watch once price shows a bullish or bearish trend. The 15 EMA puts you on alert to what the 50 SMA will likely do next. We increase our chances of making money when all 3 indicators agree and are pointing in the same direction (either up or down). Feedback is welcomed.
Candle Sticks were invented in the 17th Century by a Japanese rice broker. It gives you more information than the line chart that most retail traders use when trading. Line Charts only give a person the Last Price of a security in the time frame used. Candle Stick Charts give the Open Price, Close Price, Lowest Price and Highest Price of the security in the time frame used. Click on the link below and watch the video that explains the basics of the Candle Stick Chart. Please leave feedback.
Who Am I?
My name is Larry Warren. I'm a Professional Trader and Chief Executive Officer of Warren Capital, Limited Liability Company (LLC). In college, I majored in Financial Forensics from Colorado Tech University. Most importantly, I am doing what I love to do. I organized my trading business to trade my own capital in the markets and I am very serious about what I do. The first thing I learned in trading was, if I wanted to be like the professionals, I had to think like the professionals think. I have made some serious money in the markets, and I am here to show you how I did it. Last year, I made a 68K trading part-time and that was only in a period of months. My biggest win in a day was 18.5K and that only took 22 minutes. It all started with a loss of 6.5K, after I had made 9K on 3 trades. That loss was my motivation to get smarter, and it paid off big time. I say this not to boast, but to show you the possibilities of the marketplace. In my mind, I have not accomplished anything yet, I have bigger goals.
Most people are hesitant to get involved in investing because of fear. Some people compare investing to gambling. In my own opinion, the difference between a gambler and an investor is that an investor has a plan. A Plan is a system that he or she will execute every time the opportunity arises. When a gambler goes to the casino, he or she is only relying on luck. You're better off staying at home and investing than going to the casino. If you think the stock market is corrupted (which it is) the casino has to be one of the most corrupted opportunities in existence. I know what you are thinking; people win at the casinos all the time. People do win, but it is only by chance. Trading with a plan in the stock markets puts the odds in your favor. The people who trade in the stock market without a plan are just like to the people who go to the casinos. The most important tool to have when investing is a trading plan.
I will give you The Good, The Bad & The Ugly. There are a lot of things that goes on in the markets, that no-one is willing to tell a new trader. Some people just want everything to be easy and in trading, nothing is easy! If you want to succeed as a trader, you have to put in some work, or you can let someone else do the work for you. It's my opinion that, anything that comes easy will not last. You can't expect to gain anything without first having risk involved. In my blogs, I will give you the trade secrets I have learned through my experiences. If you enter these markets without the proper knowledge, one thing is certain, you will feel pain! My goal is to ease your pain. Learn from my mistakes and things I have picked up along the way. The topics I will cover in this blog are to get you focused on what it takes. We will then in future blogs start on the ground floor and work our way up with the skills that are necessary to succeed in the markets. If you have any questions about anything in the blogs please ask or add to the conversation by leaving a comment. This blog is intended to give you the truth about what happens every day. If you are still around after that, we can start with some valuable lessons. I will give it to you straight, no chaser. Please understand! I'm a shepherd.
Who Are You?
The market are the Wolf; the amateurs are the Sheep; and the professionals are the Shepherds. The wolf needs the sheep and the shepherd in order for everything to work
properly. If there was no one
throwing blind money in the market, (which is what the sheep do very
well) The Wolf would not be able to eat.
And don't be misinformed; some shepherds use the wolf the play games
with the sheep. You can get emails or watch certain television shows
and get
stock advice. The Sheep always say, okay I'm ready to buy because this person or this article said so. The
question that the Shepherd asks is why is this person telling me this?
Let's face a
fact that I know to be very true. Nobody gives you anything
for nothing. (At-least not anything with real value) Why would someone
who you do not know or have any affiliation with, give you a stock tip? The truth is that
person has his/her own angle. For instance, let's say that Apple computers last stock price is $430.00. Goldman Sachs (a big bank), issues a press release saying it thinks Apple computers is going to $800.00 and they recommend that it is a good stock to buy. You must ask yourself, why are they telling me this. Let's face it; they are only worried about their money. Why are they trying to help me out? The truth is, they already bought it and they need everybody else to get excited about this stock so they will have someone to sell it to. They bought the stock a long time ago when the price was going down and everybody was getting scared, and sold it. This is true with sub-penny stocks, penny
stocks and stocks of major companies. No-one is your friend in the
markets. The
Wolves know it; the Shepherds know it and the Sheep have no clue to
whats really going on. The sheep think they are playing the same game
as the
wolf and the shepherd, but they are not. This is not illegal; so you just have to stop believing everything you hear!
When most people
find that I trade. The first question they ask me is, "How much money
can I make"? Or, how much money do I need to start with? The truth is, there is no right or wrong answer to those questions, and it all depends on you. What are you comfortable risking in the market? What are your goals? I understand that is the way we have been programed and
influenced. We want to know what the reward is before we understand the
risk. This is the way the Sheep think. Well, the sheep don't really think.
They just follow one another down a path to the water hole and eventually get slaughtered by the
wolf on the way. The Shepherd on the other hand would rather discuss the Risk. We will discuss Risk later in the blog.
The Cold Truth is
The market hates you! The market is not your friend! The market is that pretty person that you met in church. You know, pretty like an angel and smell like roses. They might tell you they love you. And eventually let their true colors shine. That person was nothing less than the devil himself. People will tell you to buy this stock or that stock, only so they can get their money out of it and you are left holding the bag with nothing of value. The reason is it is an "equal sum" market. "Equal Sum" means, the money you make has to come from another person. Can you live with that? You're taking someone's hard earned money possibility their last cent and calling it yours. If you can live with that, are you willing to accept the fact, that at times you will be the person losing some money? If you answered, "No" to any of these questions, you might as well leave this blog now. This is not for you!
Floor technicians at the New York Stock Exchange.
Professional Traders are not afraid to lose money, because they know that the odds are on their side. A professional trader may take 10 trades, lose 9 and that 1 winner will take care of the losses and make a profit. This is possible, because we want to lose small amounts only. 90% of the people in the markets loose money. The 10% that make money are wrong 50-60% of the time and they still make a living, a very good one at that. That is the way professionals think. The stock market is designed to take your money as soon as you make a trade.
I hear people talk all the time about which stock they just bought. I always follow up with, what price did you buy at? They may say $23. I then ask what price is that? They look at me like I'm crazy (which is not clinically proven yet). I just end the conversation and go about my business. But, the truth is one (1) stock has three (3) prices. This is not secret, people just don't think about it. Look At any stock and find it has 3 prices which are the Last Price, Ask Price and Bid Price. Most of us are conditioned to only be concerned with the Last Price. This is the first game that is played with you after you buy or sell a stock. The last price is the price that they show all over T.V. and talk about on the radio. Professionals want to know what are the Bid Price and the Ask Price. Professionals want to know where can I buy and sell it! This is where the Brokers (The middlemen) come into the picture. Whatever broker you use to trade with (Scott Trade, Fidelity, E-Trade and many more) are the middlemen. These are known by professionals as Retail Brokers. When you execute a trade, you are not trading on the New York Stock Exchange if you use a Retail Broker. You are trading with your Broker who bought the stock from the New York Stock Exchange. Your Broker is also making money from you for executing that trade. If you use E-Trade they have someone at the Stock exchange who is buying shares of stock for E-Trade. So when you use E-Trade to make a trade, they have the stock you want. And they are selling it to you at a different price than they paid for it, making them a profit. Imagine how many times this happens in a day. They are making serious money. I will show you how to cut the middle man completely out of the picture and get your stocks from the Stock Exchange Trading Floor with a Direct Access Broker. We will discuss this more in detail in a future blog.
Remember, I told you that some professionals use the markets to get your money. Most people refer to them as the "Big Money". This is because these professionals have Billions of dollars to throw in the markets each day. These professionals are, Institutional Trading Firms, Banks, Hedge Funds, Mutual Funds and just flat out rich people. They have enough money to influence the markets and make a stock go up and down at their will. They will always make money, nothing you and I can do about that. The secret is knowing when they are buying and selling a stock, so you can do it too. Picture you and 5 of your friends in a tug-o-war battle with a sumo wrestler. He is bigger, more powerful and has a better strategy than all of you combined. He can move the rope easier than you all can. Now picture you all buying a stock and he selling a stock. Which way do you think the price will go? That's right, it's going down. So why not go where all the momentum is. If he is buying, I want to buy. If he is selling, I want to sell. I can show you how to identify the big money and how to make money when they do.
Psychology This topic can be broken down into multiple pieces. We will keep it basic and deal with psychology of self and psychology of numbers. Before you make a trade, you should look in the mirror and talk to yourself. Forget what everybody thinks, its nothing wrong with talking to yourself! If this is something that you want to do, you must be serious. You must also have the courage to think outside the box. You must ask the unanswered question. You must find the next question to ask by connecting the dots. You must seek information and you must confirm that information. You must be a forward thinker even though, you can only connect the dots looking backwards.
You must identify your tolerance for pain in the market. We all have different levels to what we can take. When I first started trading, if I lost $300 I was hurt! Now, I could care less. I take my lost and get into another trade because the odds are in my favor. (It's all about the odds). You have to find out what your tolerance for pain is so that you do not get emotional in your trades. I would advise that you read books on this subject. If you want to trade like the professionals do, you must think like the professionals do. And we don't care if we lose money, because we know the odds are in our favor!
I had to learn that we all have different expectations and perceptions. This may seem like common sense to some and it is. But sometimes we forget. This alone, is what's wrong with the world we live in. Some of us think that everything should be the way we see it, not considering the perceptions that others have on the same issues. If we all stopped doing whatever we are doing right now and pointed up. We would not all be pointing up in the same spot. My up is different from your up. My down is different from you down. My left direction is different from your left direction and so on. This is because we are not all in the same position. I am where I am and you are wherever you are. The stock market is the same way. This is why, there is no best stock to buy, no best software to use, no best trading system, no best books to buy. We all have a different perception that is only relative to where we are. I might think a stock is worth buying at $5.00 and somebody else might think it's worth selling at $5.00. So, the truth is, we are both right.
Psychology is one of the most important pieces you must get right before you start trading. When you get emotional in your trades you will act on emotion and that will kill you. I remember when I was deployed to Iraq the first time, as young sergeant in one of the toughest Airborne Units the United States Army ever put together. (1st Bn 503rd Inf.) It was tough; I was losing some of my closest friends, never to see them alive again. Watching friends get hurt. Getting shot at daily. I had to watch young soldiers die. The only way I was able to make it, was to say, the only thing that matters is what's going on right now! Not thinking about what just happened. Not worry bout what my family was doing. Not worrying about what my girlfriend was doing. Not worrying about things you can't change. I didn't even shed a tear about the whole experience until I came home. I had to program myself so I could make it. And you have to be the same way in the markets. You can't control the markets buy staring at the computer screen, or crossing your fingers. The market is going to do whatever it's going to do. People think when they're losing money, that stressing about it is going to change things. It's not! There is nothing you can do to change the way that stock in going to move. You might as well, go watch Oprah. This is why you must define how much you are willing to loose in a trade before you get in. And once you make that trade, you must have an I don't care attitude about it. The amount you wan to risk needs to be an amount that you are comfortable with. That way, when you lose (and you will) you're not bent over the computer crying or looking for the highest bridge to jump off from. There is no special amount of money you can use to start with; it all depends on your goals and risk tolerance. You just have to be ready for whatever the markets gives you. There is not one thing that will make you money 100% of the time. And if anybody tells you any different, tell them I said, "B.S."! There are warning signs you can watch for that can will put you on alert for what could happen, but there is no guarantee that it will at all. Again, you just have to be ready. Being in the market is like asking a girl out on a date. She will go whenever she is ready. She will spend the night whenever she is ready. You just better be ready whenever she is!
The psychology of numbers is a very deep topic that will touch on. When you go to the grocery store, casino, hospital etc... The colors that you see are not just random colors. Colors and numbers and smells have an influence on the brain. I know for a fact that Special Forces Units uses this to influence their work across the world. Colors, pictures, numbers and smells all have a way to influence you without you even knowing what is really going on. I will go no further in detail about this with the exception to numbers. If people buy a stock at $3.50 they are more likely to sell at $4.00. Big fat round numbers is where most people sell stocks. Any whole, half or quarter dollar number is where most people buy or sell. Most professionals will set their stocks to sell right before these numbers because they know how you are thinking. When you go to the store and a price is marked $19.99 it's not because they really want to give you a discount, it's because it seems better to the eye than $20.00. You may think this is a joke, but this is serious. Companies send people to training just to learn these how to organize colors and numbers to get you to spend money. From the way numbers flash up on your computer screen, to the colors that are on your trading software. The people of Wall Street spend millions on influencing the sheep every day. From news articles, to rumor articles and just flat out lies. In order to beat the man at His game, you must understand His game, because it is His...
Risk
Earlier, I mentioned that most people want to know about the reward first and never consider the risk. It is the way we have been conditioned. For instance, most of us use the restroom and then go and wash our hands. If you really want to consider risk, you would wash your hands first and then use the restroom and then wash your hands again afterwards. Yet we have been conditioned to think a certain way. And most people do the same when investing. Professional traders already know what they are risking before they enter a trade. While rookies enter a trade and then try to figure out much they want to lose only when they start losing. Risk in my opinion is one of the most important parts of the plan. The reason is the price of a stock does not just go straight up or down. It ebbs and flows in a waving motion. That waving motion is what makes people get emotional in a trade. People may buy a stock at $4.00 and it goes up to $5.50 and then comes down to $3.85 and you get scared and sell. After you sell, the stock goes up to $6.35 and now you're mad at yourself because you lost money. You have to understand how stocks move in order to determine your risk! I will show you how to determine and keep the same risk on every trade, so that you can stay in the game for a long time and increase your net worth. Remember, nothing is 100%. If I make 10 trades and lose 9 and win 1 that is a good day. However, I have won 60% of my trades to date. The objective is to loose small amounts and let
the winners take care of everything else. Your focus should be on looking for the next trade setup. I know I keep repeating certain things, that's because they are crucial to your success!
Discipline You must have discipline in order to make it in the markets. You must have a ruled based approach to entering a stock trade. The question you must ask yourself is why am I buying this stock at this price? When will I get out of this trade if it turns against me? And you must do this on every trade, every time, no exceptions.I have some rules of my own. I will not chase a trade; I don't care if a stock goes up $20. I will not rush, I will wait for the stock to come down in price and buy it cheaper. You have to understand, that there is nothing wrong with loosing small amounts of money. That is the normal experience for a trader. Buying more stock when you are already loosing is another thing I will not do. If you enter a trade and the trade turns against you, why throw more money in it? I would rather get out and live to trade another day. I had to learn this! I will never buy more stock when I am winning. You actually hurt yourself more when you do this because you increase your cost average. So now the stock has to move twice as fast to make money. Some people do both, it is not how I have been successful. You must have a plan of attack and you must stick to the plan. Below, I will list some questions most people overlook before they start to invest.
Am I able to trade in the stock market?
Am I ready to trade in the stock market?
What will I trade in the stock market?
What kind of trader do I want to be?
Is my psychology right?
Who am I?
Am I too emotional?
What is my goal?
How much am I willing to risk in the stock market?
How much am I willing to risk on each trade.
What is my trading plan?
Do I need to learn how to trade?
How do I buy stocks at discount prices?
How do I trade some else money in the market?
How long will I stay in a trade?
What is a stock?
What is an option?
What are capital gain taxes?
How do I reduce my capital gain tax?
How can I get a tax breaks?
When will I sell a stock?
How many trades do I want to make in a week or day?
Do I accept free or paid stock picking advice?
At what point will I give up in trading if it does not work out?
These are just a couple questions that a person must look in the mirror and answer before they make the first transaction. Millionaires are made and destroyed every day. Never try to be the rabbit, slow and steady wins the race. With the proper money management and risk calculations this is very doable even though we know the game is corrupt. I hope you enjoyed this blog, there's a lot more to come, but they're some very, very important things we touched on here. If you want to touch on another topic or need clarification, please let me know I will happily respond to all questions.
