The Bull Hunters Guide

Hello fellow Bullhunters

This post will be the final excerpt from The Bullhunters Guide to the US Stock Market so I would like to hear your thoughts and what you have learned from this experience. I know for myself that it has been very helpful in understanding the stock market in a bit more depth. Although the ebook is a summary of the goings on of how the stock market works and how a share is valued, this tool is useful for the newbies starting out in the stock market and wanting to develop a trading system that will work for them. So let’s look at Intrinsic Value and Time Value and how that factors in to trading options…


Intrinsic Value and Time Value

Options are valued based on intrinsic value and time value. Intrinsic value is the positive difference between the stock’s current price and the option’s strike price. Since the strike price in the above example (previous post - Trading Options) is higher than the underlying stock, the options have no intrinsic value (intrinsic value cannot be negative). Therefore all $0.10 of the option’s value is time value.

As options get nearer to expiration, their time value erodes. Its like making a bet that you will run a marathon in the next 365 days. By day 100, it is less likely you will do so, but not entirely impossible. By day 364, the odds are you are not going to do it. The same is true of stock options, so as the expiration draws nearer, investors are willing to pay less and less for the time value.

But imagine Microsoft hit $35 a share on December 26. Now the $32.50 calls would have $2.50 of intrinsic value plus some time value. Instead of exercising your options - which would require you to buy 3,500 shares of stock - you could simply sell your option to a market for $250-plus per contract.


Options Go the Other Way Too

In addition to calls, there are also puts. Puts give you the right to sell a stock at a specified price within a specified period of time. This way, you can make money when a stock goes down, without taking on the risk of shorting.

For a real mindbender, you can short a put contract. This means you are selling the right to sell a stock at a certain price within a certain period of time. Confused yet? Don’t worry. In this book, I only want to cover the basics of the stock market. We can talk about derivatives in more detail in another book. Stay posted.

More Bullhunter on the Way

So there it is. The Bullhunters Guide to the US Stock Market first installment. While boring at first glance, following the financial markets can be the most entertaining hobby in the world. Once you understand the basics and begin to dig in, it is like following a sport that has no off-season.

I wouldn’t mind some feedback just to know how you are traveling and how you are getting along with the stock market and whether you are trading. How have we helped you with this blog and the ebook download. The reason I ask is because in order to give you what you want specifically, I need to know what it is.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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Hello fellow Bullhunters

Well I am getting my head around all of this and we are nearing the end of The Bullhunters Guide to the US Stock Market which I know you have all downloaded by now. This resource will help you in your endeavour to comprehend what the stock market is about. Today we discuss some more about Options Trading and the reasons why some traders buy calls. So here is the excerpt…


Options Trading

On the other side of things are people who buy options. Someone buys calls because they believe a stock is going to go up. Imagine you were convinced that Microsoft stock was going to have a $5 per share gain by Christmas, but you only had $3,500 to invest. At $28.37 per share you could only buy 123 shares. If the stock went up to $33.37 as you expect, you would only make $635 in profit. Instead, you could leverage your money by buying calls.

You go online and discover that there are several expiration dates for Microsoft options - October, November, January, April. There are even options for January and April of the following year, but thats too far in the future for your Christmas strategy. You decide to look at the January and April calls.

You see that the strike prices are available starting at a low of $15 and going to a high of $37.50. Since Microsoft’s stock price is $28.37, any strike price under that would be considered in-the-money and any strike price higher than that would be out-of-the-money. The Options Clearing Corporation determines what strike prices are available for each stocks trading volume and current price.

You think that Microsoft is going to go up at least $5 to $33.37 so you look at the strike prices near that level. You see that January $32.50 calls are selling for $0.10 ($10 per contract) and April $32.50 calls are selling for $0.30. With your $3,500 you could either buy 350 January contracts or 116 April contracts. Obviously the April contracts cost more because there is greater chance that Microsoft (or any stock) will go up (or down) the longer the duration of the contract.

You decide to go with 350 January contracts. This gives you the power to control 35,000 shares of Microsoft - nearly $100,000 worth - for only $3,500. If the stock fails to reach $32.50, your contracts will expire worthless and you will have lost your whole investment. If it reaches $32.60 or more, you are guaranteed to break even. But the good news is that you don’t need to exercise your option (which would require upwards of $99,000) - you can simply sell it.


Trading for Cashflow

As you can see from this summary of buying calls, it can be a great way for you to produce a monthly cashflow with this trading strategy. It’s all about leveraging your money to make it work for you. So you could choose to make the small profit if the stocks go up or you can mulitply it to give you an even bigger return by buying calls.

This strategy is more advanced and to attempt it you need to be at least comfortable with writing covered calls and have your trading system and emotional intelligence in place to be able to deal with the outcomes of your trades. It is not for a beginner and you can build up to this slowly and gain confidence with every step you take in educating yourself.

Some of the graduates of the Jamie McIntyre homestudy have been very successful in learning how to rent shares (in Jamie speak) and have progressed to this strategy by learning how to cover themselves if things don’t go their way and the market happens to drop. Education for Life is the what Jamie teaches in learning how to become financially free and setting your own goals on how to achieve this.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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I am going straight into another excerpt from The Bullhunters Guide to the US Stock Market today discussing the renting shares or more commonly known as the Covered Calls strategy.


Covered Calls - Renting Shares

Say your Grandma left you 10,000 shares of Microsoft. You held it for a few years and the stock basically did nothing. Microsoft doesn’t pay a very good dividend so you consider selling some of the stock to get some cash. But instead your broker recommends that you write covered calls. You say… What…

By writing a call you are selling an option on your stock. An option gives its owner the right, but not the obligation, to take action. In the case of calls, it gives the holder of an option contract the right to buy 100 shares of Microsoft at $30.00 per share any time between now and November.

Just as with stocks, you don’t really sell an option contract directly to another investor, but instead to a market or specialist. He then sells the contracts to individual investors who want them. Of course there is a spread between the bid and ask of an options contract as well.

Keeping with the Microsoft example, you could sell the contract mentioned above with a strike price of $30, expiration in November for $0.05 a share. Since each contract is for 100 shares, this would equal $5. That’s not a lot of money so you decide to sell 100 contracts, which covers all $10,000 of your shares (100 contracts*100 shares each). In this case you get $500 no matter what. Microsoft’s current stock price is $28.37 but if it reaches $30 or more, your contracts will probably be exercised. This means that you will be obligated to sell all 10,000 shares for $30 each - even if they reach $35, $50 or $100 per share. If instead the stock stays around $28.37, goes down or goes up but not to $30, the options you sold will go unexercised. In this case, you will keep the $500 and all of your shares.

When you write calls for which you own the underlying stock, they are said to be covered calls. In this example you owned 10,000 shares of Microsoft so you could write 100 covered call contracts. If the contracts were exercised, you had the stock to sell.

A more aggressive (and very dangerous) strategy is writing naked calls which is when you sell contracts for the stocks that you don’t have. If the contracts get exercised, it’s up to you to go out in the open market and buy the stock.


Trading for Cashflow

In the above excerpt, remember that Sean wrote the eBook last year so the prices and months that he mentions is because of this reason. This is only a brief summary of the renting shares strategy and it is a great one to use when you are trading for cashflow. Remember that with any new strategy that you take on , it is wise to paper trade for a minimum of three months until you get the hang of how it all works.

Many of you requested that Sean put some real live renting share trades in his next eBook as you are eager to learn the strategy. This Sharelord® strategy will be discussed in more detail in the next installment to the Bullhunters Guide. I trust that the articles here are of use for you in your endeavour to master the US stock market.

To Your Success

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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5.45am Tuesday morning, I jumped in the 4WD with my 2 sons and drove to Streaky bay in South Australia.  We made it as far as Caiguna on the Nullarbor Plain, approx 1300km down the road.  Another 1000km was left to drive the next day.  Last time I made this trek was 12 months ago and I have quite fond memories of my stock market experience at the time. It was the best dollar return I’ve had for less than 1 week trading with options.

Let me share it with you…

It was May 2006 and I was driving to SA for the first leg of the “I Fired My Boss” 2006 tour.  When leaving Bunbury, I located 4 high probability trades to place.  They where bought calls on NCM, BHP, NWS and a 4th one I cannot recall.  All trades where placed on the ASX, australian stock market and to a total value of circa $9,000.

I placed the trades, jumped in the car and proceeded to drive across one of the longest road streches in the world.  When I reached a place called Madura Pass, I called my broker (Angus Knight) and asked where the market was at.  The response was “up 100 points” or something to that effect.  At this point my interpretation of the charts, over the phone, didn’t require me to take any action. 

Action would mean:

Taking a trading profit, or..

Making a donation to the market (taking a trading loss)

Imagine the onlookers faces as my wife, Cherie and I did an Irish jig with the kids on the middle of the Nullarbor.  At this stage we had made approx $5,000 and all we had been doing was drive across our beatiful country.   Imagine the carefree attitude I had when filling the fueltank at 1.85 per litre:

Cool! Petrol is expensive.  That means my shares have gone up!

The next day we arrived at Streaky Bay. It was Friday afternoon. The market was closing in 1 hour and I hopped on a computer to check the market again.  My trades had gone up from $9000 to $24,000 in only a few days.  I applied a fast bout of Technical Analysis and determined that now was a good time to cash in some trading profits.  $15,000 profit in a handful of days: Thank you for coming!

This years cashflow trades for the trip?

Well.  Besides my longer term trades, I’m doing no options trading right now.  No renting shares. No writing puts. Last year I was chasing a dollar and cashflow. This time, I didn’t even think about placing any trades as I was pre occupied with other stuff.  However, I can tell you this much: 

As much as it was a fantastic experience and a real good story to tell, making $15,000 in less than a week, it is an even better experience not needing the money and not even caring about placing trades for a quick profit. 

For those of you that know me, you know how well my websites are going.  Even though I make more out of the stockmarket than I ever did in a JOB, the internet puts it all to shame.  It’s a great life and I’m loving every moment of it. It’s where my passion is.

Now, in the tradition of Jamie McIntyre of 21st Century Academy, I’m modelling his attitude of having one week off every 4 weeks. I started with this trip to SA.  Some time away will help me further develop my Emotional Intelligence and some wealth strategies.  Imagine how many MP3’s you can listen to in a 46 hour driving round trip of the Nullarbor Plain?

The kids didn’t have to put up with Financial Intelligence tapes.  They watched DVD’s all the way and I didn’t get one:  Are We There Yet?

Until next time, I wish you Universal Success

Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 - 2007

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