Stock Market

Kia Ora,

When most people think of investing they think of the stock market. To profit in the basic stock market you need to buy low then sell high. Most people buy high & sell low & you actually see this when you play the game of cash flow.

But the stock market is more than just basic stocks. In fact it is always launching new ideas to trade on so to keep expanding the economy. Many of those derivatives are created out of nothing.

You have as an example Shares, ETF's, Options & then short selling.

You can trade as Warren Buffet does where you buy after analysis on value & soundness of the company(note he never bought shares in the dot.com bubble as the companies had no intrinsic (real) value & were not sound. He also didn't understand them) or to just aim for cash flow or for capital gains (where price goes up & you cash in to make a profit).

There is a saying in all trading that "the trend is your friend". Even in a down market there are always good trades which are trending up.

If you think the market is going to go down then you can short the market, that is bet on it going down, but especially if you trade naked (don't have some type of insurance such as actually owning the shares or have an option trade covering it)then you could be in real trouble.

Options can be used both to just trade & bring in cash flow, or as insurance for something you are invested in going the other way even for a short period.

At present Options or the insurance are getting expensive as one of the main factors used in options to determine the price is the volatility. Right now the VOX or options volatility measure has gone very high over the last few days. Even though a current trade I have has gone against me over last three days, its price has stayed the same or gone up as the volatility has gone up.

So if you are going to buy options right now you use strategies that lessen your exposure.

I talk about Option trading because it is the one I understand the best.

It can be a cheaper way into the market, but it can be very dangerous. For example as I have said right now volatility is high & you see a good trade for a call option (that is an option that makes you money when the stock goes up). So you buy that call & in fact the pattern looks so good & your other indicators all are in line including the trend, you put a large amount of your account in the trade.

Everything keeps going up but the volatility falls. Everything is going right but you loose most if not all your money. Why" It is called volatility crush. As the volatility falls, so does the price paid for the option.

So you hang in there in the hope it will come back.

Now this is where options get tricky. They loose most of their value in the last month of trading (unlike a share an option is time based & that also is part of what the price paid is). Many people get in the last month because the charts show it is a good trade & because the time value has being eroded it costs less.

So they buy or you hold on hoping it comes back. If it has gone wrong for me I will be trying to sell or hope it goes to zero.

Why? Because if on expiry date the trade still has that intrinsic (real) value in it then you will be assigned. That is you then have to buy those shares at the full price. Now when you buy one option you actually buy a contract which uin the US is 100 shares or in Aussie 1000 shares give or take a few.

So if that share is worth $50 & you have 5 contracts then that is not 5 times 50, but 500 times 50 you need to pay within I think it is three days.

People go but how because when you buy an option you have the right but not the obligation to buy. That changed when you got assigned & that is in the contract when you sign onto a brokerage account.

So, the point is like any investing if you know the rules it isn't as risky as people think.

Even then you must only invest that which you are prepared to loose.

One thing I have found with options trading I have learnt a lot & still get information that the average person is not privy too. Or the 'rubbish' that my old mate Fish was on about on facebook.

Does it always mean I am right or get to take advantage of that information. Hell no. wish I could, but it gives me something to focus on & move forward too.