The Bull Hunters Guide

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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Hello Fellow Bull Hunters,

Today I want to establish some of the reasons why we even choose to trade on the Stock Market. I would first like to share with you an opinion from one of my mentors, 21st Century Academy presenter Nik Halik, who if you have had the opportunity to see in a live seminar always asks the question Why does the Stock Market exist?

The answer is simple:
It’s to transfer wealth from the uneducated to the educated

Primarily, trading is a good way to produce a cashflow. When we trade the financial markets we create short term profits or that is our aim. I am not saying that every trade will produce profits, sometimes they will be donations. By donations I mean a loss. Using this terminology sounds better for our psychology. This is something that Jamie McIntyre taught me.

Bull Hunters, with any trading there are risks involved that need to be managed and you must be aware of what these risks are. This is the single biggest reason that keeps many of us away from the stockmarket. There is no point in having all your capital tied up in one trade. It is always a good idea to divide what money you have set aside for trading into equal parts so you may have a few trades, or no trades, going at the one time. This minimizes your risk and spreads the opportunity around.

For example, if you had a trading bank of $20,000 to start with, you could divide this into 10 parts of $2000 each. Therefore, only $2000 would be spent on each trade. Or if you want to be more conservative, divide it up into 20 parts of $1000 each.

When we minimize risk and maximize profits, we will make additional income and create wealth.

Jamie McIntyre is also a big believer in setting goals. It is always a good idea before you begin, to establish some goals and also write a list of what your expectations will be. Make a commitment to yourself to continue with your education and to set aside a time for trading everyday. Whether it be to do some backtesting of stocks, doing some paper trading, or educating yourself on technical analysis. Whatever it is that you choose to do, make the time count.

I look forward to your comments so that I know that you got it and tell me if this article was helpful for you. How are you going to use this information? Tell me what you are aiming for.

Angela Recchia
Graduate Support
Universal Wealth Creation © 2004 - 2007

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