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best efforts in preparing this course. The authors make no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the contents of this course. They disclaim any warranties (expressed or implied), merchantability, or fitness for any particular purpose. The authors shall in no event be held liable for any loss or other damages, including but not limited to special, incidental, consequential, or other damages. This manual contains information protected under International Federal Copyright laws and Treaties. Any unauthorized reprint or use of this material is strictly prohibited. We actively search for copyright infringement and you will be prosecuted. Copyright protected, 2013
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Table of Contents:
PART ONE: GETTING STARTED
Foreword ........................................................................5 Introduction ....................................................................5 Have the Company Pay for Everything ...........................6 Patience is a Virtue .........................................................6 Your First Step ................................................................7 What you need to get Started ........................................8 Managing Your Portfolio is Managing Your Business .....9 Psychological Expectations .............................................10 Setting Goals ...................................................................11 The Value of Your Education ..........................................12
INTRODUCTION
Todays markets are so different to what they used to be only a decade ago. The days of buy and hold are over and the days of buy and hedge are among us. Thanks to the internet revolution and the easy access to powerful trading software much of the playing field between Wall Street and Main Street has been leveled out. You dont need to be on the floor of an exchange to make a high number of transactions anymore; all you need is a computer. Yes, some might argue that the gap between Wall Street and Main Street will always be huge, but I do believe we have come a long way. I truly believe the stock market is the best and easiest way to get started investing. Unlike investing your money into a property or business venture, in the stock market you dont need a building, you dont need employees, you dont need any people skills, you pretty much dont need anything but your computer and an internet connection. You also dont need as much startup capital as you would if you were to invest in most business and real estate ventures. You also have an abundance of up to date information right at your fingertips. You might be hesitant to put your money into the market after what all your friends have told you its risky you cant make money Ive only heard horror stories thats only for the guys on Wall Street and I dont blame your friends. They have only spoken to people who have never had a set strategy or 5
the right mindset to approach the market. If you enter with this mindset of course youre never going to make any money! Ruben in the movie Oceans Eleven said it best:
PATIENCE IS A VIRTUE
Just like Rome wasnt built in a day, neither was your investment knowledge. It takes serious patience, perseverance, discipline, courage, disappointment, and hopefully some fun along the way. With every piece of information that you take in you become one step closer to being successful and being in control of your finances. I urge you to please stick with it and dont give up when road blocks present themselves. You will make mistakes and you will have failed investments, you need to be able to accept this fact and how you handle this and how much you can learn from these mistakes will determine how successful you become. Let me tell you how painful my start was. When I got started I had absolutely no idea what I was doing. I thought I knew how to analyze companies and understand how the markets work but I was sailing into storm with a paddle boat. I was a sucker for emails promising their recommendation is the next Google or Apple. My first 7 months I CONSISTENTLY made bad decisions which led to constant losses! I was extremely frustrated because I had spent so much time reading and absorbing information that I felt like it was impossible to ever 6
succeed in the market. Imagine making constant losses for 7 months STRAIGHT.its a very scary thought to most people and looking back Im surprised I stuck through it. I remember very vividly one point where I was convinced that I was done and I was about to give up. I had lost a lot of money the week before and was set on making it back with a trade I put on Microsoft. I had placed an options trade on MSFT and it turned against me. I told myself that I was done because I couldnt handle the frustration and disappointment from working hard and getting no reward from it. I eventually got over the fact that I had lost so much money and decided to continue trying. After 7 months I had my first meaningful profitable trade on Citi bank. Few moments in my life I remember that I was that happy. Seeing a large profit in my account felt amazing. Looking back on that trade it was the dumbest thing I could have ever done and I got EXTREMELY lucky. I basically put all my chips on red and spun the roulette wheel. At the time it seemed like a good idea but now that I know more I realized it was a terrible idea. For the next 8 months I was making some profitable trades but for the most part I was throwing darts at a newspaper trying to pick stocks. It wasnt until about a year and a half that I had developed a strategy to where I ACTUALLY understood what on earth was going on. I finally managed to allocate my portfolio into different types of profitable investments in order to make consistent income. My goal is to teach you my strategy so that you can avoid all the frustration and disappointment I endured. My dad always told me that a smart man learns from other peoples mistakes and an idiot learns from his own. Its your chance to be the smart man/woman and learn from my mistakes.
own will cost $4 a week? Look for these sorts of areas where you feel you spend too much and try reducing it. The next step is to calculate your liquid net worth. By liquid net worth I mean cash. There is no point of you calculating your total net worth to see how much money you can actually invest. Youre not going to sell your car to buy stock are you? Look at how much cash you have and ask yourself how much are you willing to invest? Take a moment to identify how much money goes into your savings each month. Think about future expenses you may have. Only you will know how much you can actually afford to invest based on your financial situation and your personality. This exercise is simply to help you take control of your finances and figure out how much you are able to invest. Once you have your number you can move onto the next step.educating yourself on how to grow your money.
In addition you can download a good free trading platform online called Meta Trader. To conclude NO you dont need to spend hundreds or thousands of dollars on trading software. It all comes free from your broker.
PSYCHOLOGICAL EXPECTATIONS
When it comes to putting up money in the hopes of making money there is a HUGE psychological aspect that needs to be understood. At some point you are going to make money and at some point you are going to lose money. You might think that making money is something anyone can handle. Well there is a lot more to it than you might think. Making money by not working for it is a concept a lot of people will never understand. If you have never made any money except from a paycheck this might apply to you. Seeing money coming in from means other than a paycheck could require some getting used to. Having large gains in your portfolio could change your investment behavior. You could become arrogant and start making stupid decisions that will lose you money. On the other hand we have losses. This is what stops most people in their tracksthe fear of losing. Being scared of putting your hard earned money into something that could potentially lose you money is a scary thought to most people, but if you ever hope to have some sort of financial security then you HAVE to take that first step. Being able to handle your losses and still make rational decisions is a SKILL that you need to develop. The only way to develop this is by having a plan where your day to day losses dont affect you. Having the ability to handle losses is a vital asset when it comes to managing your portfolio. I will show you some ways to help you handle your losses with a clear mind and not an emotional one. For example.. A friend of mine runs a successful home business and was explaining to me what he does. He told me that the line of work he is in is very competitive and requires a decent amount of capital to get started. He asked me if I would like to look into doing the same thing as him and I said sure. He told me that when starting out its almost a sure bet that I would lose money until I got the hang of things. What I said next is important because to be able to say this takes experience: Thats okay; I already know how it feels to lose money What Im saying is that I already know how it feels to experience losing money and so I became less and less fearful of the idea. I realized that I have a set strategy that works and I stick to my strategy, so day to day losses dont mean anything to me because over the long term I will be in the green. The same works for every business venture.your plan is what reduces your fear of losing. If you have a good plan and stick to your plan you will end up in the green. Always remember:
Money is expendable
There will always be more to be made on another day from another opportunity.
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SETTING GOALS
One thing you need to do for yourself is to set some goals. Things that you want to achieve in your finances. Perhaps personal milestones you would like to reach. I am NOT talking about profit goals. I do not want you to set any goals at this point in time as to how much money you would like to make. The goals Im talking about are your learning goals. For example; You could set a goal to spend 1 hour a week learning a new options strategy. You could set a goal to spend 30 minutes a week researching and keeping up to date with the companies in your portfolio. You could set a goal to speak with someone who is knowledgeable about the markets once a week. Hopefully you get my point here. Set goals that are not profit related, just education related. Give yourself the desire to learn more. The more you know the more confidence you will have when it comes time to send your orders. Goal setting is a very important part of being successful in the markets. It also gives you something to think about and something to do. When you have some free time and youre not sure what to do with it, just look at your goals and start working on the ones you havent achieved. Your task before you read further is to set 3 EDUCATIONAL goals for yourself. They should be weekly goals (short term) similar to the ones I listed above. They should be specific and hopefully have a number in there, for instance read 3 articles a week in the WSJ. Start small and build on that, dont bite off more than you can chew. And most importantly.WRITE YOUR GOALS ON PAPER!!!! I said in the previous paragraph about how important goal setting is and the sad part is that about 70% of people reading this wont write their goals down. Nothing I can do about that, but I strongly encourage you to do so.
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over his head. He had been in college for 4 and a half years with tens of thousands of dollars in student loans waiting to be paid when he graduates and he hadnt made ANY money from what he was studying. Change your perspective about the value of your FINANCIAL education. Sacrifice your time to INCREASE your knowledge. Your financial knowledge is what is eventually going to set you financially free.
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What is an option?
An option is what we call a derivative instrument or derivative for short. Its a derivative because it derives its price from another underlying security, eg; a stock price. The options we deal with are going to be exclusively options on stocks. There are index options, options on futures and a whole lot more that we dont need to know for the strategy we are going to use. The definition of an option is: The right but not the obligation to buy or sell an underlying security at a predetermined price on a predetermined date If there is a blank stare on your face right now, just keep reading. Im going to explain options and then give you examples to tie it all together. There are two types of options: Call options and Put options. You buy a call option when you think the underlying stock is going to increase and you buy a put when you think the underlying stock is going to decrease. 14
A call option gives the buyer the right but not the obligation to BUY an underlying security at a predetermined price on a predetermined date. A Put option gives the buyer the right but not the obligation to SELL an underlying security at a predetermined price on a predetermined date. There are four market participants in the options market: 1) 2) 3) 4) A buyer of a call A seller* of a call A buyer of a put A seller* of a put
*The correct terminology for seller of an option is actually writer but most people just use the word seller. There is a distinct difference in the role that buyers and writers (sellers) of options have in the market place. A buyer of an option has the right but not the obligation to buy or sell the security, however the writer (seller) has the OBLIGATION to buy or sell the security to the buyer should they exercise their right. When options were first introduced the creators thought that maybe people would be too scared to trade options because what if the writer doesnt deliver on their promise? They then created a clearing house that steps in between buyers and sellers in order to guarantee that options promises are made!
allows you to exercise your right to buy or sell ON the expiration date. American options tend to have a higher price tag because of the fact that you can exercise at any time.
2) Strike price
The further ITM the option strike price is; the higher the premium will be. This part of the options price is called the intrinsic value
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4) Implied volatility
This is the most important part of options pricing that we need to consider and I will spend some time explaining this. The other 3 pricing factors are givens; meaning it makes sense to have an option be more expensive if it has more time to expiration, or it makes sense for the option to be more expensive if its further ITM. The concept of implied volatility or IV is important to understand for our strategy. Implied volatility is displayed as a percentage. (More on that later) Ever heard in the sport of boxing or mixed martial arts the term Pound for Pound as in He is the best pound for pound fighter in the world What this means is that the fighter in question is technically the best in the world, however if he is put in the ring with someone in a higher weight class he might not win because he is at a size disadvantage. If you take the size factor out of the equation then he is the best fighter in the world. Pound for pound he is the best. Well implied volatility is our pound for pound comparison to options pricing. If you take a $500 stock and a $20 stock, you will expect that the options premiums on the $500 stock should be much higher, right? You would be correct. Think of the $500 stock as a stock in the heavy weight division and the $20 stock as a lightweight. Now lets take away the weight class or the stock price, which one is better now? Which one has the more expensive options premium? This is where IV comes into play. The higher the IV on a stock; the higher the options premium (On a relative basis or pound for pound basis). . Lets look at an example The $500 stock has January options that have an average IV of 35% The $20 stock has January options that have an average IV of 105% Lets look at ATM options premiums. The $500 stock has an ATM premium of $7, whereas the $20 stock has an ATM premium of $2. On a dollar for dollar basis it is evident that the $500 stock has a higher options premium, however, on an implied volatility or pound for pound basis the $20 stock has more expensive options. Keep this concept of IV in mind; once we get to the strategy part it will become very important.
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The options highlighted in red represent options that have weekly expirations. The above image shows all the options currently available for the underlying stock. If you click the drop down arrow on a specific month or week it will open all the options available for that month/week. It looks like this.
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You should be able to identify a few things. Calls are displayed on the left and puts displayed on the right with the strike price down the middle. I have set up my options chain in a unique way to display the information most relevant to my strategy. I have in my options chain displayed the following information on both the call and put side: 1) 2) 3) 4) 5) 6) 7) 8) 9) Implied Volatility Delta Theta Net Change Percentage Change Volume Open Interest Bid Price Ask Price
All this information is in some way or another necessary for the strategy that we are going use.
Call options
Assume the company Headphones Inc. (TICKER: HEAI) is currently trading at a price of $61.10. You expect the price to go up over the next 3 months and so you decide to buy a call option. You decide you want an ITM call option with a strike price of $60 and expiration 3 months out. Lets assume its January, so you buy an option with a March expiration. The premium for this particular option is $2.10. Now 19
remember that each option contract represents 100 shares, so this particular option will cost you $2.10x100=$210. Your investment is $210 and this is the maximum amount that you can lose. March comes along and the price is at $65. You can exercise the option meaning you can purchase the shares at $60 and then sell them in the open market for $65. It would look something like this: Exercise the option: You now own 100 shares of HEAI at a price of $60 or $6000 worth of stock. You can sell these 100 shares at a price of $65 or $6500, meaning your profit on exercise is $500. Your total profit is this value minus the premium paid for the option: Profit: $500 less Premium: $210 =$290. Your total profit on this investment is $290. You dont have to exercise the option; you can sell it back into the market. Using the same example above, lets say the option premium at the time of expiration is $3.00. You can sell the option for a profit. Since you paid $2.10 or $210 you can sell it for $3.00 or $300, this will give you a profit of $90. Most options traders dont exercise their options; they simply sell them back into the market. I almost always sell my options back into the market place. Sticking with the example above, lets say March comes along and the price of HEAI is $58 meaning its below your strike price. You obviously wouldnt exercise your option because that would mean youre buying the stock at $60 when you could be buying it at $58 in the open market. Heres what happens when your options are below the strike price at the day of expiration. You could let the option expire worthless meaning you do nothing and you lose your initial investment of $2.10 or $210. You could sell back the option on the day of expiration assuming it still has some value. If its trading at $0.30 you could sell it and get $30 for it ($0.30x100)
Put options
The buying of put options works much the same way as call options do, the main difference is in the exercising of the option. Im not going to get into as much detail as the previous example since the dynamics work the same. The difference with put options is that it gives you the right to sell an underlying security at a specific price instead of buy. The other difference is that ITM put options have strike prices ABOVE the underlying stock instead of below like call options. Lets look at the same example from above. Headphones Inc. (TICKER: HEAI) is currently trading at a price of $61.10. You expect the price to go DOWN over the next 3 months and so you decide to buy a PUT option. You decide you want an ITM put option with a strike price of $63 and expiration 3 months out. (Notice the strike price is ABOVE the underlying stock price) Lets assume its January, so you buy an option with a March expiration. The premium for this particular option is $3.00. Each options contract represents 100 shares, so this particular option will cost you $3.00x100=$300. Your investment is $300 and this is the maximum amount that you can lose. 20
March comes along and the price is at $57. Since this particular put option is expiring ITM, you have the option of exercising it or selling it back into the market place. Im going to show you how the exercise of put options is different to that of call options. A put option gives you the right to SELL an underlying stock instead of BUY. In order to exercise this option you would first BUY the stock which is now $57 and then you would exercise your right to SELL this particular stock at $63 which is the strike price of your put option. Your profit on the trade looks like this (100x$57=$5700)(The purchase of your stock) (100x$63=$6300)(The sale of your stock) (100x$3.00=$300)(The options premium) Final profit=$6300-$5700-$300=$300 Just like with a call option you can always sell the option back into the market place if you dont want to exercise it or if you dont have the money to exercise it.
The Greeks
Some of you might have heard of The Greeks being used on options. Greeks are basically the instruments used by options traders to understand the movement and pricing of options. There are a couple of Greeks used for understanding options such as Delta, Gamma, Theta, Rho, Vega, and there are also secondary Greeks which few people know about. Option Greeks can be a complex topic and explaining these in detail is beyond the scope of this course. The only two that we are going to focus on and that will be the most relevant to our strategy are Delta and Theta. Simply put Delta is the speed of the option. It is a measure of how closely the option price tracks the underlying securitys price. Theta is the measure of how quickly the option premium decays over time. Remember we said that options have time value built into the premium. Theta measures how quickly this time value erodes over time. These two are important measures that we need to understand for the strategy we use. Examples follow..
Delta
You can view the delta of an option from your trading platform. It is listed as a number under the delta heading. Delta also happens to be a measure of risk, which we will get into once we delve into our portfolio strategy. Lets look at the following example; You have a stock that is trading at $50. The $55 call option is $3.00 and the option has a delta of 0.5. What this means is that for every one dollar change in the underlying security, the corresponding option 21
will change 50 cents. So the next day that same $50 stock is now worth $49, the option will be worth $2.50 (Other things held constant). Also if that same stock is trading at $51 the next day, the option will be worth $3.50. This is how closely the option traces the underlying stocks price. (This example assumes all other things held constant). Lets look at another example: The same $50 stock but now the call option has a strike price of $25 which is a deep in the money option. The premium for this particular option is $17 and the delta of the option is 1.00. 1.00 is the highest delta an option can have. What this means is that for a one dollar move in the underlying stock; the option price also moves one dollar. So if our stock opens the next day at $49, the option will be worth $16 since the stock moved one dollar, the option moved one dollar. This is not too difficult to understand I dont think, and delta is an important part to understand for risk management. We use it quite a bit in analyzing a key part of our strategy.
Theta
Theta is a measure of how much time value the option loses every day. It is sometimes called theta decay or time decay. I usually say time decay or just decay when referring to theta. Theta is displayed as a number just like delta in the form of a decimal. Basically you will just look at theta and it will tell you how much the option premium loses as each day goes by. For instance a theta of 0.03 means the option loses 3 cents a day. A theta of 0.5 means the option loses 50 cents a day in time decay. Lets follow the same example from the delta explanation. We have our $50 stock with a $55 call priced at $3.00. The option has a theta of 0.05 meaning it loses 5 cents a day no matter what direction the stock moves. Tomorrow morning the markets open and this same stock opens at the same price of $50 meaning it didnt move up or down, it remained perfectly flat. The corresponding option will now be worth $2.95 since it lost 5 cents of time value. Theta is just one of those concepts we have to grasp in order to better understand our trading strategy. Like I said there are more of these Greeks involved but to keep things simple and relevant to what we need to know for our strategy the only two we need to understand are delta and theta.
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MARGIN
Margin in its simplest form is money that is borrowed from your broker to purchase securities. Margin gives you the ability to leverage your money into more buying power. Before I go any further I want to point out that margin trading has many benefits but also carries a high degree of risk and you should understand these risks before you consider using margin. Think about this.you want to purchase a rare and expensive baseball card and sell it for a profit. You are $500 short on the purchase price so your friend offers to cover the $500 that you dont have. Once you sell the card you pay your friend back and keep the profit. The same works with trading.you have enough money to buy 95 shares of a company, but you really need to buy 100 in order to make your strategy successful. Instead of not being able to do this strategy all together you are able to borrow the additional money from your broker in order to buy the additional 5 shares. The amount of margin or borrowed money you are given varies from broker to broker and also varies based on your account. Usually but not always you will be given a 100% margin allowance, meaning for every dollar you have in your account you receive an additional dollar from your broker, eg; if you deposit $2000 in your account and its eligible for margin trading then you will have $4000 to buy stock with. Having the ability to use margin on your account requires you to make your account eligible for margin trading. This is similar to approving your account for options, you simply have to fill out a form provided by your broker and after a few days of them reviewing it you should be all set. Before considering using margin I would strongly recommend you read the margin handbook provided to you by your broker. It will outline exactly what you can and cant do. It will explain in detail the risk involved in using margin and how to avoid a margin call. It also specifies the margin allowance as set by the Financial Industry Regulatory Authority (FINRA). Margin allowance means how much margin you can use on a specific stock, this varies depending on the price of the stock and is outlined in your margin handbook. A margin call is issued when you dont have enough money in your account to cover the margin requirement set by your broker, and this can lead to a forced sale of your positions without your consent. This can be avoided if you monitor your account and not over leverage your account. I would recommend that you approve your account for margin trading. If youre worried or dont understand the concept speak to your broker or read over the handbook. You could always do some more research yourself. If you dont feel comfortable with the idea of using your brokers money to make trades then you dont have to. Even if your account is eligible for margin trading it doesnt mean that you actually have to use it.
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DAY TRADING
Im not going to spend too much time on day trading but I do want to give you an introduction to what it is. This has become a hot topic these days and Ive seen quite a few expensive info products pop up making ridiculous claims about how you can quit your day job and become a successful day trader. My advice is that you DONT quit your job and start day trading. Day trading takes not only discipline but a special kind of discipline. To a degree you have to trade like a robot in order to be successful. If you have the slightest bit of emotion as a day trader you are most likely going to fail. Remember how I said in the stock market you dont have any competition, well in day trading it works a little bit differently. You will be competing against high frequency trading (HFT) super computers that use the most complex algorithms known to man in order to spot trends before humans do. These computers are supposedly responsible for over 70% of the volume traded on the futures markets. With all that being said there are plenty of day traders out there who are very successful and make a lot of money trading only a few hours a day from the comfort of their home. It is most definitely possible to make money day trading but I just dont recommend anyone start here. If you are interested in the subject you can shoot me an email and I will point you in the right direction and help you get started. Also before you buy any ridiculously overpriced software PLEASE contact me first. Most likely I will tell you its a waste of money and your brokers trading platform is better but no pain in looking. I personally know a very successful day trader who trades 2 hours in the morning 5 days a week and consistently makes a couple thousand dollars a day doing so. He has a live trading room every morning where you can actually watch him trade. I have sat in a couple of his live rooms and made some money following his trades. If this is something that interests you; go to my contact page on my website and send me an email with the subject live trend trading and I will set you up so that you can sit in one of his live trading sessions. You will be able to watch a successful trader make money and follow his trades.
thought back to the day when I used to think it was okay for someone to hand over their money to a financial expert and I buried my face in shame because later I realized that this is unacceptable. After years of research and practice I realized that its not difficult to manage your own portfolio if you have a plan. The whole point of you reading this is to learn how to manage your own money, right? Well, I have consolidated what you need to know into this instructional series and given you step by step guides on how to successfully manage your own portfolio so that you never have to give your money and trust over to someone else! Here are my thoughts on financial experts: Their main priority unfortunately is themselves. Unlike doctors, financial advisers DO NOT owe you a fiduciary duty, and therefore they DO NOT have to act in your best interests. A doctor cant tell you that you need a hip replacement if in fact you dont need one. Financial advisers have no such obligation. They care about their own wellbeing before yours. They could put you into investments that are NOT in your best interest in order for them to receive higher commissions. They could also trade frequently in order to run up your transaction costs. In addition your money means something to you; to them your money is just a number. For example: If you are a truck driver and give $5000 over to your financial expert to manage on your behalf; that $5000 to him/her is nothing more than a number. It doesnt really mean all that much to them, you will be put in the same category as everyone else. To you that $5000 represents long haul trips between different states, hard work, time away from home, time away from your family, etc See the difference? You care about your money more than anyone else does and so you should be prepared to take care of it better than anyone else will. The other problem with financial advisers is that you have to remember you are an individual and you have UNIQUE financial needs. You will be put into a generic investment strategy that is given to people your age and risk tolerance. Your exact needs wont be met because only you can fully understand and meet your financial needs! I would like to tell you a story about advisers, specifically my college academic adviser. This made me finally realize why you need to look out for yourself and not hand over your trust to someone else. During my time in college I almost always managed my own class schedule. I got the required class curriculum and I scheduled classes based on what I knew I needed and what would fit my schedule the best. As I entered my junior year and became an upper-class man I was required to go see my accounting adviser. This was not a choice I had to see him in order to schedule. I came in with the schedule I needed and told him this is what I was going to be taking. He looked at my schedule and told me he wants me to change it. I was confused but listened to what he had to say. He changed my classes around and told me I had to be in specific classes for certain reasons. I thought to 25
myself; well he is an academic adviser so he has to know what he is doing and if he recommends something then it has to be right. Against my better judgment I scheduled the classes he recommended. It turns out that he put me into the generic first semester junior classes that he puts everyone into. I was signed up for classes that I didnt need and that were terrible for my schedule. It took me a while to get everything back to the way I initially knew was best for me. So you see I had done my due diligence on what would be best for MY needs. I went to an adviser who managed to change my mind because I saw him as someone who knew more than I did. Yes he knows much more than I do about classes and all that but he does not know what is best for MY specific needs. Financial experts are no different. They have probably been educated in prestigious universities and hold professional certifications, and yes they know a lot more than you do, BUT they dont know more than you about your OWN personal needs and goals. This is why I strongly recommend you manage your own money, and this is why I have dedicated my time to helping you do just that. .which finally brings us to the most important part of this book; how do YOU invest your own money???
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The pyramid is what I have created to show you what I believe is necessary for successful investing. I will explain each part in detail. The strategy part will take the longest as its what most of you got this book for. I will outline in detail the strategies I have been using to make consistent profits. I will also show you some snapshots of my account to see that the stuff Im showing you actually works. On that note lets jump into the first layer of the pyramid.
STRATEGY:
Notice that this is at the base of the pyramid. I put it there because at the base or foundation of your journey to successful investing you need some sort of strategy, some plan that you are going to use consistently to make money. The key to a successful strategy is one that is consistent, meaning that it will stand the test of time. It doesnt have to work all the time in fact if you find a strategy that works all the time please send it my way! The way I manage my portfolio is in a 3 tiered layer that can be adjusted based on your desired level of risk. You can invest heavier in one section than another depending on how much risk youre willing to take on. Here are the three segments I divide my portfolio into and Im going to explain each in great detail
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The Three Level Strategy: 1) Trading stocks (Hedged Positions) 2) Speculative stocks 3) Investment stocks -Value investments -High yielding dividend stocks Trading stocks
I just chose this name for this segment because I didnt know what else to call it. This part of my portfolio includes stocks that are usually terrible companies for investments, but are great for trading and making a steady income! What I mean by terrible companies is that they dont generally offer any value, they have poor financial statements and their product or services ability to generate profit might be questionable. Now you might be thinking why on earth would you be interested in a company that I just said is terrible. Understand this; just because a stock might look like a bad investment from one perspective does NOT mean that you cant make money from it. So why am I interested in these companies that I use for trading purposes? One simple reason: their options have a high implied volatility! Remember we spoke about implied volatility when it comes to options pricing in a previous chapter? If you missed the part on implied volatility I strongly recommend you go back and read it. The strategy behind this is to find a company that has options with high implied volatility. We then buy the companys stock in lots of 100 shares and simultaneously write (sell) a call against the stock. This particular strategy is called a Covered Call and is probably the most basic of options strategies. There are a large number of investors/traders who use this strategy but they use it on stocks that have low implied volatility and thus they generate a small premium. This is not what we want; we want a stock with high implied volatility that can generate us consistent income every month or every week. Im going to show you the dynamics of how this simple strategy works and then give you examples, and then prove that this in fact does work on a consistent basis by showing you some of my gains over the last year.
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March Markets open after February options expire and you cover your position again Write: 1 call contract for $3.00 with a $53 strike price Date of expiration: Stock is now trading at $55, meaning the option that you wrote is now ITM and the buyer can exercise their right to buy the stock from you at a price of $53. When this happens you will get assigned which means the stock you own will get called away. The next Monday when the markets open you will no longer own these 100 shares as they have been bought from you at a price of $53 You still keep the premium on the option as profit which for the March option would be $300 ($3.00x100). You still keep the profit on the stock from where you bought it until the exercise price. Since you bought it at $50 and it got called away at $53, you have a realized profit on the long position of $300 [($53x100)-($50x100)] What you dont get is the profit ABOVE the strike price. You dont keep the profit of $200 [($55x100)($53x100)] since the buyer of the option exercised their right to purchase the stock from you at a price of $53 instead of $55 in the open market. In conclusion your total profit on this investment is: January options: $300 February options: $350 March options:$300 Stock profit: $300 Total profit: $1250 Pretty simple is it not? This is a strategy that we use for generating INCOME. Notice how every month we are receiving the options premium as a REALIZED profit. You can use this strategy indefinitely; continuously writing calls and receiving income every month. One thing you have to learn if youre going to use options is the risk profile of your options strategies. The risk profile shows you what your max gain and max loss is as well as your break-even point. A risk profile is easiest to understand when drawn on a graph and you can generate a risk profile very easily on your Think or Swim platform. Its one of the options under the analyze tab.
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Here is an example of what a risk profile looks like for a long position and a covered call position. The stock example I am using is a stock that is currently trading at $34.06, but for ease of this example we will say $34. For a basic long position your max loss is the amount of money you invest in the stock. Lets assume for this $34 stock that we purchase 100 shares which brings our total investment to $3400. Our max loss is the $3400 if the stock goes to $0 that is. Our max gain is infinite; the stock can increase indefinitely. Our breakeven point is the price we paid for the stock which is $34. If the stock stays at $34 we have not made a profit or a loss. Here is what that will all look like in a graph.
The white line represents all the information I just mentioned in a graphic representation. A covered call strategy has a completely different risk profile. We are going to be using the same example above with our $34 stock. In addition to purchasing the stock we are going to write a $36 call. The call is currently trading at $1.30 so one contract will earn us $130 if it expires worthless Take a look below at how a covered call position looks and then I will explain in the following paragraph. Pay attention to the RED line and not the white line in the graph
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First thing you should notice is that at one point the red line becomes flat. This represent where your profit is capped which means you cant make any more money on this position beyond a certain price. This price is the strike price of the option you wrote. The reason you cant make any more money above the strike price is because anything above this price and your stock will get called away. Notice also from the graph that your breakeven price is LOWER than the price you paid for the stock. Instead of the breakeven price being $34 as it would on a regular long position; the breakeven price is now $32.70. (Stock price: $34 Options premium: $1.30 = $32.70) If the stock falls to this price you will be at the breakeven point. The one disadvantage of this strategy is that your profit is capped to the strike price of the call option you write. The advantages are that your breakeven price is reduced thus reducing your risk and it gives you the ability of generating income every month. Its a very popular strategy and is sustainable. Hopefully now you understand how to set this strategy up. Buy long 100 shares of stock Write 1 call contract If you recall earlier I mentioned that I use this strategy on stocks that have high implied volatility on their options. You can use it on any stock though, I just advocate high IV because it makes the writing of calls really worth it. Lets look at this strategy from a couple of angles; specifically which calls we should write and how it affects our risk. In the above example I showed you how to write a covered call using an OTM option. What if you wrote an ATM or ITM option? Whether you write ITM, ATM, OTM options it will affect your level risk and the potential for reward. The higher the reward the likely the higher the risk. Simply put the further OTM the option is the higher the risk and the higher the reward. The risk is higher because the further OTM you go the less option premium you will receive, thus your breakeven point will be higher. The closer to the money you go or ATM the lower your reward will be since your strike price is lower, but your risk will be reduced since you will receive more options premium and thus lower your breakeven price.
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Like I said I ALWAYS use limit orders and it has made me hundreds of extra dollars than if I had placed market orders. So remember to always use limit orders when the bid/ask spread is wide and over time it will add up to make a big difference!
Theta
Remember how we learned about theta in part one? The reason theta is important to this strategy is because theta decay or time decay is beneficial for this strategy. The more time goes by the more the option loses value for the buyer and thus more money in your pocket. I like to add to my positions when I know there will be a 3 day weekend. If the markets are closed on a Monday for holidays that means you have 3 days worth of theta decay on your position.
Delta
Remember how we also learned about delta? Delta is important to understand from a risk perspective. When you purchase 100 shares of stock your delta is effectively 100. Since you purchased 100 shares your risk is 100 delta. What 100 delta means is that for every $1 move in the stock price you will make or lose roughly $100. Lets say that you write a call and the call option you write has a delta of 0.3. Since one options contract represents 100 shares of stock your delta will be negative 30 (0.3x100). It is negative 30 because you SOLD (wrote) a contract. The NET delta position on this particular strategy in this case is 70 (100 stock delta 30 options delta) This is the measure of your risk for this particular trade. Notice how writing options reduces your delta (risk)! Options that are deep ITM meaning the strike price for the call is far below the current trading price tend to have very high deltas. Generally speaking the further ITM an option is the higher the delta, the further OTM an option is the lower the delta. 34
If you are a very conservative investor you could write deep ITM call options that have a delta of 1.0. This would mean your delta on your long position would be 100 (From the 100 shares you buy) and negative 100 from the options contract (1.00x100) Your NET delta position would be 0 (100-100). This means in theory that your risk is 0. This particular scenario is called a delta neutral position or a delta hedge. Since this particular option has a delta of 1.00 it means that for every dollar change in the stock the corresponding option moves $1.00. With an option that carries a 1.0 delta, the corresponding theta is 0 meaning it theoretically doesnt lose any value as time passes by. If you think about it since there is theoretically no risk involved in this position, there isnt any reward either, right? Since the option tracks the stock dollar for dollar there is no way you can make any money! This is not true; there is always money to be made! Only in theory are you not able to make money from this position but in reality you are. The only time I would ever use a delta neutral strategy on a covered call play is if I anticipate the stock to fall quite a bit in price over the next month. Here is an example XYZ Company is trading at $50. While looking for a delta neutral strategy I decide to buy the stock at $50 and write a $25 call for $23.00. (Notice how expensive this option isits because its deep ITM) I create a delta hedged position because Im not sure where the stock will go over the next month and I would like to use a conservative strategy since its my first time trading this company. At this point if this stock goes up I cant make any money since the delta of the option is 1.00. If the stock goes up all I will lose is the commission paid to open the transaction and the commission for having the option assigned to me. On the downside the stock will have to fall $23 from its current price of $50 in order for me to breakeven. The reason you are able to make money from delta neutral strategies is because you have the ability to buy back your options position when/if the delta changes. Delta is not a set number; it changes as the price of the stock changes. Lets assume using our above example that the $50 stock we purchased falls to $43 on the day of expiration. Your $23 option that you previously wrote is now only worth $15. You can buy back the position for $15 and have a NET realized profit of ($23-$15=$8) or $800. Remember also that you have a net unrealized loss on the stock of $700 ($50-$43). Youve bought back your options position for a realized gain of $800 and youre sitting on a $700 unrealized loss from you stock. What do you do now when the opening bell rings on Monday morning?
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You have a couple of options here. You could hold the stock and let it bounce back up if you have done your due diligence and believe it will, or you could write another options contract and earn some income from the premium. In this case you can decide what type of call option you want. Are you going to write an ITM ATM or OTM contract? It depends on the amount of risk you are willing to take on. You can write a $50 call which is the price you paid for the stock or you could write a call closer to the money at the current price lets say $45 or $47. Again it all comes down to your risk tolerance; there is no right or wrong answer here. To summarize the risk; Covering your positions with ITM calls contains the least amount of risk and has the lowest potential reward ATM calls contain more risk that ITM calls, but less than OTM calls. OTM calls contain the most risk and have the most potential reward. The further you go OTM the more risk it contains and the more your potential reward. I almost always write calls that are OTM, not necessarily far OTM but I like to leave some room for upside stock potential. Not because I have a high tolerance for risk but because I like to give my strategies room to make me money. Rarely will I write an ATM call. You will notice sometimes that writing OTM calls are a waste of your time because they are worth so little that it doesnt make sense to do it, in this case look for ITM and ATM calls. If this is the case it usually means the IV on the options is too low for a covered call play, and in this case I look for opportunities elsewhere. There you have itthe first strategy that I use to make money on a consistent basis. This is no secret strategy its very simple to use once you get the hang of it. Thanks to recent developments on the Think or Swim platform you are able to automate this strategy. You are now able to roll your strategy into the next month once your options expire. I dont use this feature because I like to keep full control over whats happening with my trades. If you would like to automate this process the option is there. To prove to you that this strategy works, here is my gains summary from trading just ONE contract on ONE company:
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You might be thinking how do you find these companies? In my eBook Calculating Value I show you how to screen for these stocks. If you havent already bought Calculating Value, I suggest you do so.
Speculative stocks
Speculative investments are ones that may or may not be huge hits. Generally these are companies that have been severely beaten down in price. Perhaps they are developing something very new in their industry that could cause the stock to double in price. Its a high risk investment with the possibility of high reward. When it comes to speculative plays you only use a SMALL portion of your total portfolio (Less than 5%). The purpose of these plays is to use a small amount of money that if you were to lose it; it wouldnt damage your portfolio, but if it were to go your way you would hit it pretty big. A lot of times speculative plays will be penny stocks or stocks that trade below $10 a share. The best way to find speculative stocks is to listen to the news. A lot of times they are being talked about because they are developing something big or perhaps some hedge fund manager put the stock on his/her radar. There is no set way of finding these stocks other than to keep your eyes open. If you are reading this then Im hoping you are a member of my website and so you will be receiving these speculative stocks from time to time if I spot anything worthwhile you will know about it.
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When we look at these speculative companies, we are not necessarily concerned with the company itself (fundamentals, financial statements, etc.) we are more concerned with the stock and its ability to increase in price. We are concerned with the qualitative factors rather than the quantitative factors. I have made double digit returns from companies that are awful on paper. It really doesnt matter in this case and when we are looking for speculation we dont necessarily have to focus on the company itself. The market drives the price and you have to understand that what the market perceives is MUCH more important than actual reality. Let me give you an example of how my latest speculative play turned out. By just reading and listening to the news and what people are saying you will start to see opportunities galore in stocks that have huge potential. My most recent speculative play was Sprint (TICKER: S) and here is how I discovered this diamond in the rough. When it was trading around $5 (Summer 2011) I was following it but not by any means looking to enter a position. At the time Sprint didnt have the iPhone; only AT&T and Verizon had it. Out of nowhere after an earnings report sprint skyrocketed from about $5 to $5.70 and then fell even faster all the way to $2.50. This is when I put the company on my radar. I thought they provided a good service and had the potential of increasing from this low $2.50 level. I said I was going to wait until they officially have the iPhone available and then I would consider entering a position. Once they made the iPhone available on their service the price was still around this level. I thought now was the time to enter into a company that was very beaten down in price and in my mind provided a good service. I entered at a price of around $2.30 and then a second batch at around $2.60. It went back above $5 in no time. Breaking the $5 mark was also a big deal because most hedge funds cant invest in stocks that are below $5. Once it broke the $5 mark institutional investors were able to consider entering a long position.
Like I said I dont have a set way that I look for speculative plays; I dont have a screener that searches for certain criteria. You just have to keep your eyes open and listen to what is going on in the markets. Another reminder is that these are speculative plays and so we DONT bet the house or your childrens college fund on them. You put in a smaller portion of your portfolio. Finding these is something that does take some experience so dont be frustrated if youre not an expert right off the bat.
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Investment stocks
This particular part of the portfolio comes in two different segments. The first is value investing and the second is dividend yield investing. Value Investing Im sure most of you have heard the term value investing. Value investing is the practice of finding stocks that are undervalued or finding their fair price. This practice has been around for a long time. If youve heard of Benjamin Graham also known as the Emperor of Wall Street he was said to be the first person to use value investing principles to find stocks at their fair price. In 1934 Benjamin Graham and David Dodd published a book called Security Analysis which identified sound investment principles that should lead to building a successful portfolio. Benjamin Graham was also a professor at Columbia University and one of his students happened to be Warren Buffet. Mr. Buffet was also the only student to have ever received an A in his class. He was mentored by Benjamin Graham and later became famous for his ability to spot undervalued companies. The practice of value investing is used by hedge fund managers and any serious investor managing a large portfolio. The ability to calculate a companys fair value is a vital skill that every investor should possess. Its also not as hard as you might think. This topic of value investing is what most people are interested in learning which is why I have created an entirely separate eBook covering this topic more in depth. No matter what your goals or risk tolerance you should have the ability to find undervalued companies and add them to your portfolio. If you are either in retirement or approaching retirement it is especially important for you to be able to spot undervalued companies. To actually calculate a companys fair value is a step by step process that I have outlined in my Calculating Value eBook. I have developed this knowledge from my years of studying finance. Its an in depth process that I take you through on how to calculate what a companys fair price is based on its earnings and current economic conditions. If you are serious about managing your portfolio effectively then I recommend you get it. Click here for your instant download-Calculating Value Dividend Yield Investing As you might imagine this part of your portfolio should comprise of high paying dividend stocks. You might be thinking how this is different to value investing because value investments generally pay decent dividends. The difference between having these stocks is that they have to pay VERY high dividends. When I say very high I mean that the absolute minimum has to be an 8% dividend. For the most part I only consider stocks that pay double digit dividends. You might also be thinking that there is 39
absolutely no way that a company can sustain a double digit dividend. A fair thought but these companies are most definitely out there and a very large portion of my portfolio is invested in one of these companies. In Calculating Value I show you how to find these companies and how and why they are able to sustain double digit dividends.
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investments. From here the next step would be to start looking for the companies that will meet your needs. As you might know I dont provide stock picks on my website, I only provide education which in my opinion is much more important. It goes back to that story of if you give a man a fish you feed him for a day but if you teach him how to fish you feed him forever. Thats my philosophy; I want to teach you how to fish for yourself instead of handing out stock picks. I know there are many newsletters out there providing stock picks promising triple digit gains and a number of them are actually pretty good. The problem is that they dont know YOUR personal financial situation and risk tolerance. My goal is instead to teach you how to manage your own money because you know what is best for yourself. What happens if that person picking stocks for you decides to discontinue their newsletter? If I stop updating my site you will still have the knowledge that I have left you with and you will still be able to continue investing.
IMPLEMENTATION
The base of the pyramid is the strategy because you need a strong foundation to start on. The next step as you might imagine is the implementation of this strategy. Good investors and bad investors, good traders and bad traders, they all have the same strategy. Yes you read that right they have the same strategy! So how on earth are they different then? The only difference is that good investors and traders ACTUALLY stick to their strategy! Sounds easy enough doesnt it? How hard can it be to stick to a strategy that works? You will realize as you read further specifically into the part where I talk about emotion why it isnt as easy as you might think. The bottom line is that there is literally no point of you having a strategy that works if you are not going to use it. Never underestimate the power of DOING. You learn the most when you are doing something and getting hands on experience. You have to be willing to implement what you learn otherwise it is, for the most part, worthless. If youre a beginner and a little scared or if youre an intermediate investor and youre skeptical you can always test things out before you actually put any real money down. You can paper trade something until you get comfortable enough to trade it with real money. On the Think or Swim platform there is also an option called on demand where you can set the platform to a specific date and then fast forward to see what would have happened if you did what you did. There is no rush to get started. Start when you feel comfortable, if you feel you need to paper trade first then by all means go ahead and paper trade. The stock market is not going out of business so dont feel like you have to rush into things.
MINDSET
The correct mindset in certain situations is all thats needed for successful decision making. Correct mindset would also solve a lot of todays problems. Truly speaking the mindset that you approach something with will determine the outcome. Most people believe that to be a successful investor or 41
trader you need a certain strategy. This is in fact far from the truth; what you need is a certain mindset. What good is a strategy if you don't have the mindset to implement it? One place that a change of mindset would be welcomed is in Washington. I truly believe that this unfathomable amount of debt that the US is in right now could be solved with a change of mindset. Im not saying it would solve every problem but I do think it would at least help. This mindset that bigger is better has gotten the country into a difficult situation. It is the mindset of keeping up with the Jones The government is no different to how individuals think, but instead of the Jones; they try keep up with other countries. If the Jones buy a new Ford F-150 truck then I have to get a Ford F-250 the next day even though it will ruin my finances. I just have to keep up with them though right? This is the mindset that we need to get rid of. The mindset that borrowing money indefinitely and pushing problems into the future is okay. You hear Washington talking about increasing taxes.well lets think of the government as an individual.. As an individual if you have a job; you receive a paycheck. To the government their paycheck is taxes. If you work for a company they are the ones that provide your paycheck. The governments company is the taxpayer; the taxpayer pays their salary and funds their projects. Your payments each month are your expenses. Government spending is their expenses. Your credit card debt, mortgage and auto loans are your debt. The amount of money the US owes to whoever they owe money to is considered their debt. Almost everyone at some point says: If only I made more money it would solve my problems Unfortunately the people that say this have been saying it for the last 8 pay raises they have received. Why? Because every time their pay increases their expenses SURELY follow. The government is the same: if taxes were higher it would solve our debt problems Unfortunately its no different to an individuals way of thinking; with increased income, expenses surely follow. Recently and FINALLY legitimate budget talks were under way to actually increase taxes AND cut spending. Perhaps we have the new mindset we need in order to slowly tackle the debt.. And I mean SLOWLY. Anyways you get the idea now. Mindset is an important aspect when approaching your investments. The mindset that you approach your investments with will eventually dictate your success. A negative and emotional mindset will eventually result in negative returns along with decisions based on emotional responses and not logical thoughts. A clear and positive mindset will have a positive effect on your overall returns and will lead you to make clear and concise decisions. I have a routine in the mornings that I go through in order to put me in the best state of mind possible in order for me to make clear decisions. A lot of traders go through a routine before the opening bell to get into their zone. I usually follow a morning routine so that I feel comfortable before I sit in front of the 42
computer. I then close my eyes and take deep breaths about 5 minutes before the opening bell and finally I inhale a specific smell. I do this because smell provides the best memory and I once I smell a specific scent it puts me into my IPS (Ideal Performance State). Im not saying that every time you have to make a decision that you should go through an entire routine to put you into your zone but I am saying that approaching decisions with the correct mindset is important. Find your own IPS where you feel as if you make the best and rational decisions. You might have heard the term trader phycology its a topic that pops up a lot on trading forums and for good reason. Clearly the physiological aspect of handling and managing money is an important factor but people dont take the time to develop their mindset. Heres what I suggest you do to develop your mindset into a rational decision making machine; The first thing I recommend you do is to think about a time when your thoughts are the clearest. Think about when it was you made the best decisions or came up with the best ideas. Honestly for me this comes when I go to bed and think the least. All of a sudden I get a rush of great solutions to my problems. What I do is keep a note pad next to my bed so I can write down all my ideas and solutions to my problems. Think about a time, or place, or situation when you think clearest. Once you have this go ahead and write it down. From here on out you should make it a point that all your big decisions should be made during this time. Some decisions will have to be made earlier and you wont have time to put yourself into your IPS. If this is the case make sure you are thinking CLEARLY before you do anything you will regret. If you cant find your IPS I suggest you start carrying around a journal. In this journal you should write how you feel throughout the day, during specific times, or after you eat certain foods. I was in a doctors office once and my dad asked what he should do to help him sleep better. The doctor said the easiest way is to take sleeping pills. My dad said he doesnt want to take pills to help him sleep. The doctor said okay then drink a warm cup of milk before bed and eat some turkey, those are natural muscle relaxants. He then thought about it and said he doesnt really like that solution because it doesnt sound like it would work. The doctor then said for him to take a journal and put it next to his bed and every time a thought pops into his head to write it down and stop thinking about it, because the more you think about it the more your mind starts to race. If you write something down then you can forget about it and think about it in the morning. My dad then said that he doesnt think that would help him at all. The doctor then said, Well you see my problem here; everyone wants a solution, and when I give them a solution they dont want to take the necessary actions to help themselves I actually started to keep a journal next to my bed and write down my thoughts. It was somewhat life changing actually. I felt so much more relaxed at night not having to try and remember all my ideas at night so that I dont forget them in the morning.
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So here is your task.start carrying around your journal and write down your thoughts. Write down how you feel during different times of the day and during specific situations in order to find your ideal performance state. Remember the phycology behind investing is one of the most important things to your success! Im going to guess that about 1% of you will actually do the above exercise. If youre serious about your financial future make sure that youre part of that 1%.
YOU
The final element of the pyramid is YOU. It is at the top of the pyramid because it is the most important element to your success. If you have read this far I will say that youre ahead of the people who are on social media right now spying on their friends. Everything that I will attempt to teach you and everything that you teach yourself will all come down to who YOU are! More specifically is that YOU willing to put things into action??? You have to go out now and APPLY what you have learned or all this knowledge is useless. Here is where you can really learn something about yourself. Youre here now so a part of you is dedicated enough to commit through an entire eBook. That tells me youre serious about bettering your financial future, but how serious is the more important question? Did you write down your goals at the beginning? Are you going to carry a journal around to find the time you make the best decisions? Are you going to commit to creating an Ideal Performance State for yourself? Are you ACTUALLY going to implement these strategies? You can feel as excited as you want after reading all this but if you dont put it into action then its really all for nothing.
Think differently
Something I found to be quite interesting was a certain trait that can be found in just about every rich person. Their number one priority is who THEY are. They are not too concerned with what they know or what they are doing, their main concern is their character, ie; who they are. It doesnt matter to them what they currently know because they know their character will allow them to learn everything they need to know about whatever it is they are doing. Something interesting about rich people is that most of them can make money doing just about anything. Have you ever noticed how a CEO of a top fortune 500 company goes from one industry to another and is STILL successful? A CEO can go from being the head of a tech company to being the head of a retail company. How is it that they can go from one company to another completely different company and still be able to run it successfully? Its because business is the same across all industries; they are able to be successful not because they know anything about the business but because they possess the traits of rich people. The same goes for making money in any form or fashion; it does not necessarily matter what you are doing, it matters who you are and if you are able to make that which you are doing successful. 44
Henry Ford was asked what if he lost everything, and he replied that he would have it all back in about 5 years. Why? Because of who he is!
Here is a good example to show you just how different rich people think and how they use money to their advantage. This is a hypothetical example here but it will definitely drive the point home. A rich person and an average middle class person both want to buy a car that costs $20,000. They both have enough saved up to buy the car outright. The middle class person decides to buy the car outright for $20,000 cash. The rich person decides to invest the money and have it generate the $400 per month required to finance the car over time. The middle class person now has a liability on their hands having to pay for insurance, and a decrease in their liquid net worth. The rich person also has less liquid net worth because they bought an asset, and has higher monthly payments since its financed. They also have debt on their account now since the car is financed, but there is an additional $400 monthly income from the investment that will make the monthly payments. At the end of the day they both own the same car BUT their financial situation is different. The middle class person has a liability (car) that requires insurance payments every month. The rich person has an asset that pays for the car. See the difference?
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owner instead of the employee or the consumer. Once you start to do this often you will form a habit of thinking like a rich person and you will start developing the character you need in order to be successful.
Here is an example of how thinking outside the box can be beneficial for you in business and investing When Apple came out with the iPhone 5 they made them with a different input plug than previous models. Everyone was upset that they couldnt use their new phone with older iPhone 4 products. Apple decided to make adapters for the new phones to be compatible with previous Apple devices. Instead of being upset like the rest of the crowd I decided I was going to try make some money from this opportunity. I found suppliers from China who were developing these adapters and decided to start selling them on Amazon and EBay. Here is an example that pertains more to what we are here to learn When Hewlett-Packard decided to challenge the Apple iPad with their own tablet; the HP Touchpad, it got me thinking. I read about the Touchpad and decided to go check it out at Best Buy. Not to buy the product but just to see how it might impact HPs business. Since the price for the 16GB TouchPad was the same as the iPad my first thought was that it had to be just as good as the iPad in order to compete. After playing around a little bit I couldnt see that it was any better than the iPad which got me thinking why anyone would want to consider this product when its not any better than the industry leader and priced the same. From here my next thought was that it runs a new operating system HP Web OS which was actually pretty cool, but the problem with it is that it doesnt support many apps like the android and IOS systems do. My conclusion was that the product didnt have much hope unless it was priced lower than the iPad. HP needed to try and be a low cost leader instead of trying to compete on a differentiation strategy. Sure enough a few months later HP decided to stop production of their touch pads and had a fire sale where they sold them for $150 for the 16GB and $99 for the 8GB. I decided to actually buy one at this price because I thought you couldnt pass up an opportunity like this. I also made some money from buying puts on HP. See how thinking outside the box can be beneficial to your investing? In conclusion your financial success will not be determined necessarily by what you know but by who you are. Are you willing to take the first step? Are you willing to think outside the box? Are you going to give up after the first bump in the road? You know the right answer to all these questions, it just depends on if you will implement those right answers. Your task for this section is to train yourself to think differently from the crowd. That is all
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been thinking about. Rather stick to what you know and paper trade your new strategy until you are in a slightly better position.
5) Emotion will always be your worst enemy. If you have a plan; dont let emotion change it for you.
You have all heard about this thing called emotion and how it ruins portfolios. The classic thoughts of My stock cant go any lower, Im not going to sell because it will come back up, This time its different Those are emotions talking and not your brain. When you feel like emotions are taking over take a step back from your computer and think to yourself Is this really the best thing for my portfolio or am I basing this decision off my emotions? Investing with emotions changes the plan you set when you were thinking with your head.
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Putting it together
Here is a short story on my experience to show you how some of these come together: I was in a losing position but really needed to not be in this losing position. (Perfect opportunity for emotions to take overand they did) I tried to make back the money I lost on this stock using the same strategy by putting even more money into the position. All my indicators told me that the stock was in a strong downtrend and was going to continue, yet my emotional self said no way its going back up. What ended up happening is I had put so much of my portfolio into this position that it almost wiped out an entire years worth of gains in less than 4 weeks. Every morning I would wake up and see another huge percentage drop on my position. I couldnt sleep and I kept having the worst nightmares. One night while I was lying in my bed during the time when I make the best decisions I had the solution pop into my head. I wrote it down so that I dont forget it the next morning. This solution was very simple actually and it was to cut my loss and move on. See I was too scared and emotional to cut a loss because I was afraid the stock would bounce right back up. When I woke up and as soon as the trading bell sounded I closed my position and let me tell you it was the most important lesson I have learned. Yes I did take a big loss but I have never felt better because finally I removed all the stress that this bad investment decision was putting on me. I had somewhat of a revelation that day because I realized that wasting your time and worrying about losing positions is only going to affect you negatively. While I was hoping for a stock to go back up I was missing other opportunities. I cut my losses and moved on. This was early in my career and I havent repeated this mistake. The mistake most people make is that instead of cutting their losses short and letting their winners run they cut their winners short and let their losers run. The psychology behind this is easy to understand In a winning position the thoughts are: This has made me some money and cant go any higher so Im going to sell In a losing position: This cant go any lower so let me hold on until it comes back up Sound familiar? I would like to mention that some of the most dangerous words you can put in your head This cant go any lower Let me tell you that until a stock reaches $0 it CAN go lower. Right before the financial crisis of 2008 Bank of America (BAC) was trading above $50. It then proceeded to drop to the low $30s. From 50
there it went to the low $20s which is when you start to think that it cant go any lower. It fell another 50% to below $10. From there it fell another 50% to below $5. Just when you think it cant go any lower it fell to $3.14 in March, 2009. Dont ruin your portfolio by believing something just CANT go any lower. If youre in a losing position cut your loss and move on.
Conclusion
That concludes everything I have for you folks. I want to leave you with one more thought. At this point the next thing for you to do is to start looking for investments and begin implementing this strategy I have shown you, or at least some part of it. The key word you need to understand is START! Its time to take action and improve your financial position. Before you make any excuses about why now is not the best time for you to start I will tell you that now IS the absolute best time to get started. There will NEVER be a perfect situation for you to start, so go ahead and start NOW! During a real estate webinar I attended the gentlemen presenting the webinar left us with this message: After this you have what it takes to get started even at the most basic of levels. If you are still scared of investing or have any fear, wellthats understandable, but you still need to get started, and for those of you who dont plan on doing anything THEN STAY BROKE!!!! If you missed that last part what I said was STAY BROKE!!!!!! A very blunt message, but a VERY true message. Only by DOING can you actually make a change. For those of you who wrote down your goals, opened an online brokerage account, approved your account for options trading, plan on finding your Ideal Performance State and who are ACTUALLY serious about improving their lives for the better then I suggest you get the next book in my series where I show you how to find trades and investments to add to your portfolio. Ive spent a ton of my time putting everything together to help you find profitable investments. If you havent already done so, go ahead and download Calculating Value today. It is truly unique and I doubt you will find anything like it anywhere else. Be patient and persistent my friends and the profits will come.
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If you havent already done so, go ahead and download Calculating Value today. It is truly unique and I doubt you will find anything like it anywhere else.
Calculating Value presents a 10-step process to qualitatively and quantitatively value the fair price of a company using various numbers and information available to investors. It will give you a broader understanding of the process of choosing investments, as well as an explanation on how to read and analyze earnings reports and company news. It presents a unique way of valuing companies with similar pricing models used by some professional investors. Finally, Calculating Value will show you how to develop entry and exit strategies based on the analysis that you will learn throughout the book As an added bonus, it contains details on how to implement one of the 3-part strategies outlined in this book.
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RISK DISCLAIMER
U.S. Government Required Disclaimer Commodity Futures Trading, Commission Futures and Options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results
CFTC RULE 4.41 REQUIRED DISCLAIMERHYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE UNDER-OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN ATTAINABLE WITH COMMODITY AND OPTIONS TRADING CAN WORK FOR YOU AS WELL AS AGAINST YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. GOVERNMENT REGULATIONS REQUIRE DISCLOSURE OF THE FACT THAT WHILE THESE METHODS MAY HAVE WORKED IN THE PAST, PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. WHILE THERE IS A POTENTIAL FOR PROFITS THERE IS ALSO A POTENTIAL FOR LOSS. A LOSS INCURRED WITH TRADING FUTURES CONTRACTS CAN BE SIGNIFICANT. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION SINCE ALL SPECULATIVE TRADING IS INHERENTLY RISKY AND SHOULD ONLY BE UNTERTAKEN BY INDIVIDUALS WITH ADEQUATE RISK CAPITAL.
The risk of loss trading commodities, options or futures can be substantial and involves a high degree of risk. You can lose money in excess of your margin deposits. You should only use risk capital for trading. The use or placement of any stop-loss or stop-limit orders may not limit your losses and you could lose more than your intended amount of risk. Any trades, systems, methodologies or patterns discussed within the website or any of the product materials is for illustrative and informational purposes only and are not to be construed as specific advisory recommendations. This material and any opinions are for educational purposes only. We are not responsible for any trades that you may take or any losses that you may incur. Any trades that you may take are strictly taken at your own risk. There are no certainties or guarantees in trading. Please consult with your own investment advisor, accountant, attorney, broker, or financial professional to determine the suitability of trading futures, commodities or options. All information we provide to you either written, on our website, in our books, interviews, videos or other interactive media is from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Readers and subscribers using this information are solely responsible for their actions and invest at their own risk. You assume full responsibility and full liability for any trades or trading risks and fully accept the liability of those actions and outcomes. We disclaim all liability for any losses or profits that you may incur as a result of your decision to trade. 53