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

Social Bookmarks:

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

Social Bookmarks: