Category: Business/Investing

A rarely heard of investment strategy; The Collar

 

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Many people own or trade stocks.  Investors use fundamental analysis to choose a stock to purchase in hopes that it will go up in value.  Some purchase a stock for the income it may provide via dividends.  Traders purchase or sell stocks based on technical analysis buying and selling often on movement or volatility in the stock price.  These are all very basic and your 401K and IRA’s do the same thing depending on which one you chose your broker to invest in.

 

Photo from this matter.com

 

     A more advanced and even more conservative stragety however is to “write a covered call”.  This means to sell a contract on the stock that you already own.  This will produce an income even if the stock price stays the same, or even goes down in value that month.  It also helps to hedge, or offset the downside numbers in your account if the stock price does go down that month because although your stock went down in value by say 2%, you may have received 1% in income from selling the covered call.  

     This is how it works;  lets say you own 100 shares of xyz stock.  You bought it a while ago at $50/ share.  The price is now $60/ share.  Instead of selling the stock to actually realize a profit, because it may continue to go up in price as the years or months go on, you choose to write a covered call.  This means that you sell a contract to a person, they pay you an agreed upon price to purchase the stock at any time they choose in the next month (or longer if you wish, for a higher premium of course).  So you bought the stock at $50, its already at $60, and you sell a contract to sell it to someone at $65.  For this they premium they pay you for that privilege (contract) may be $.25.  These are all multiplied by 100 so you would recieve $25 income to agree to sell your stock to them at $65 in the next month.  

     So, if the price does reach $65 or higher the buyer of your contract will “exercise” or buy it from you at the agreed upon price of $65.  That means you made a profit of $15/per share plus $25 for the agreement (options contract).  Pretty good deal right.  You locked in a price to sell it at a profit and got money (income) to do it.  If the price never reaches $65 then you keep your stock and the $25 and do it again month after month.  And the great part is that if your stock keeps climbint every month, you simply move your agreed upon selling price up, guaranteeing you more profit and still get the income.   

     An example would be, you did exactly the above for this month.  Your xyz stock price did go up, but it only went up to $62.50.  This means the purchaser of your contract will certainly not buy yours at $65 when they can buy it on the open market at $62.50  So you keep his money, and the contract expires on the third friday of every month.  Now that your stock price has moved up, this month you sell the contract for the same price ($25), but this time you agree to sell your stock at $67.50 instead of $65!  Sound pretty good eh?  It is.  Its a smart and more conservative way to own a stock rather than to just buy it and hold it.  

     Now we get to the more advanced move.  We create what is called a Collar.  This means we own the stock, sell the covered call as above, but instead of pocketing the $25 premium for the contract we put it to work opening another position (opportunity) for us.  We already own the stock, the $25 was free, so we take that money and we buy a call option.  This means that if the stock price goes up, we not only sell our stock at a profit, but we also sell our options contract at an option, and we bought this option with the money we sold the contract to sell for.  So lets look at what happens.

     If the stock price goes up, but doesnt reach $67.50 then we keep your stock, and we sell our call option that we bought at a profit, and it was paid for by the selling of the other option contract.  

     If the price of our stock doesnt change, we keep our stock, and both options contracts expire costing us nothing.

     If the stock price rises above $67.50/ share;  We sell our stock at a nice profit, and we also sell our call option we purchased at a profit as well, getting to profits off of one stock position.

     If the stock falls in price this month;  we keep our stock, and both of our options contracts expire without any money plus or minus.

 

graph from http://collars.optionetics.com/collars.aspx

 

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Forex Trading; “dollar cost averaging”

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Forex has many benefits over other investment vehicles.  Trades in Forex have their own set of rules.  By combining certain strategies used and modified in other securities they can be optimized for trading in the Forex market.  One thing that commonly is used and taught in securities trading is the concept of dollar cost averaging.  This is when you buy a security such as a stock, it goes down in price instead of up as you expected and you buy more to lower you overall cost per share.  An example would be: you buy 100 shares of xyz corp at $10 per share.  The price then drops to $9 per share and you buy another 100 shares.  By doing this you now average $9.5 per share.  If you bought at $10 per share and the price dropped to $5 and you bought another $100 your average cost would be $7.50 per share.  So the stock would only have to go back up to $7.50 for you to break even.  Even though you bout half of your stock at $10.  Anything now over $7.50 and you are in profit.  This is dollar cost averaging.

     This tactic is often used when purchasing many stocks and other investment vehicles.  Although this can be a great strategy for stocks, it doesnt work as well when used in Forex trading.  The reason that it can be a good strategy for stocks is because people use this when they plan on a buy and hold.  This is an important concept to make it work.  BUY;  normally when purchasing stocks they are bought and paid for.  You won’t get a margin call if the stock goes down if you pay for the stock.  HOLD;  normally the stock is purchased with the intent to keep them long term and hold them for either dividend payments and/or appreciation.

     Because Forex is completely differnt than stocks neither of these apply, and here is why.  When you enter a “buy” or “sell” position in Forex you dont really buy it.  You dont really “own” the currency that you “bought”.  You actually entered a trade comparing two currencies, betting on whether one currency will increase or decline in value vs. the other currency.  These are called “Pairs” or “Currency Pairs”.  This is a huge distinction because not actually owning a currency, but meerly owning a position leaves you open to actual losses.  This is what I mean;  if you purchased a stock or an actual currency say Google stock or the British Pound, then you will still have those and never owe money.  You already bought it and own it.  But in Forex trading you dont actually own a currency, you own a position “a bet or wager” on a pair of currrencies.  

     Lets say you bout British Pounds while traveling and held on to them.  It will never be worth $0 and you certainly couldnt owe anyone for having physical bills in your wallet or Pounds in your bank account.  The percieved value of that Pound may go up and down compared to other currencies in the world, but you still have the money, and you cant owe on it.  When trading currency pairs you can actually lose Everything, meaning the value of your position “investment” can be absolutely Worthless.  Even worse, you can actually lose money by owning it, ending up with a loss and a debit from your account.  If you deposited British pounds into your bank or brokerage account your balance would never go down.  If you bought “or sold” a currency pair with British pounds in your account you can actually owe the brokerage money!  If the pair you own against the Pound goes down, it will show a negative amount on your home screen.  

     The idea of holding a currency pair is not how it is done.  You enter a trade or position in a currency pair to unload as fast as it will move up or down.  We enter Forex trades for short term movements and gains.  For this reason the holding strategy doesnt work with Forex.  We buy and sell as fast as we possibly can.

     For these two reasons dollar cost averaging does not work with trading Forex pairs/positions.  Most of the time, as a general rule, the markets move in normal cycles.  There are swings of ups and downs and that is completely healthy and normal.  “Market corrections” “bubbles”, these all happen.  Its part of the industry.  So imagine you purchased Netflix shares at $25/share.  You bought 100 shares (for easy math purposes).  Your average cost is $25/share.  Then 2 months later they miss a projection and lose a contract and the stock plunges down to $15/share.  At this time if the fundamentals of the company and your opinion of its health and growth have not changed then you found the perfect opportunity to buy more “on sale”.  Great buy because you know its just a normal swing in the cycle and you got a great deal on another 100 shares.  Now your cost per share is $20!  Now when it goes back up to $25 you are already at 20% profit!

     However, if you bought a currency pair in the Forex market and the same movement happens, it could cause a Catastrphic chain of events!  If you are heavily leveraged (which most people are and do in Forex) you could lose your entire account from this one position owned.  This is why;  Lets say you built your $100 to $600 in your account.  Very nice job.  You enter a position in a Pair and it goes the wrong direction.  You think it will come back up (and it probably will), however time works against you in Forex.  If it falls too low before it comes up you lose it all.  Your position goes down and you will see a negative amount on your screen.  That negative number will keep increasing and you watch your margin shrink on screen.

 

 

 This may be only 1 of 12 trades or postions that you are in right now, but that one will bring the Entire house down.  When your negative number gets to a certain percentage the brokerage house will Automatically trigger a sale at that huge lose!  Yes.  And it get worse.  Now your other positions cannot sustain the low margin level because you just lost a huge portion of what was in your account.

 

This will cause Another auto trading trigger by your broker to sell off the next highest losing position in your account!  Giving you Another huge percentage lose.

 

Then it happens again!

 

And again!

 

Until Every position is sold at a loss.  Dollar cost averaging is Not the only way to trigger this chain of events in Forex, but it is the one that most fall victim to.

 

 

These are screenshots of this actually happening to a trader.  Eventually, (within hours) his entire account was sold off at a loss by his broker.  This investor managed to build $100 ito almost $1,000 in just over a month!  Then, in just a matter of hours he watched it ALL leave his account!

 

 

Once this chain of events happens there is little or Nothing you can do to stop it except make an Immediate deposit into the account to cover the negative margin level until the Pair turns the other direction!

 

As you can see, the free margin is in the negative, which means that you cannot make Any more trades.  If you had free margin left you could possibly make a quick profitable trade to increase the margin ration to stop an auto sale.  But as you see here, dollar cost averaging kills that option.

 

The currency Pair kept dropping in value and when the Free Margin level became a higher dollar amount than the Equity, the auto sales triggered!  One by one, in a matter of minutes now the investor lost his Entire account balance!

 

Lets look at why most fall into this trap.  As you see in the screen shots below that this investor did many trades on the Peso Pair.  It was running up and down and he was catching the waves of volatility.  

 

 

He had money both when it went up and down.  Goes up he keeps making money.

 

 

He made money when it went down.

 

 

He kept making money when it went down, believing it would always go back up before the margin threshold was hit.

 

 

So still believing that it would again come back up, he tried to dollar cost average (greed in Forex) and make extra money on the way back up.  However it did not turn upwards in time and his account was Completely emptied by auto trades triggered, forced on him by the brokerage house.

     In just a few minutes he watched weeks of work building his $100 into almost $1,000 shrink to $.59 in his account.

 

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A Wealth of Ignorance

A Wealth of Ignorance;  Why the rich get richer

 

 

“Ignorance is Not bliss, in finances ignorance causes poverty!”  Tony Robbins

 

There isnt a one of us out here that haven’t received money advice from a friend, co-worker, book, boss, etc.  The amount information or misinformation thrown at us about money is astonishing!  

     One of the top 3 peices of advice I have received in my life came while I was in Malaysia.  I was there with a good friend of mine, a self made Millionaire.  We were driving in his car through the capital of Kuala Lumpur on the way to a business meeting near KLCC (the Twin Towers).  I was young and excited to be around him and his colleagues.  In an attempt to participate in his circle I told him about a great business idea an aquantence of mine had, it was a Million dollar idea!  As I was giving him the overview, he stopped me in mid-sentence.  He interrupted and asked me a question; “how much money does your friend make” he asked.  I replied that he made over $150,000 a year.  He then looked at me and said, if your friend knew how to make a Million dollars, he would be a Millionaire.  He then went on to explain to me about advice and mentors.  He told me that if I wanted to make $150K/year that my friend could certainly tell me how to do that, but he doesnt know how to make a Million dollars a year.  He then cautioned me about taking advice from people who have not done it already, and people who are not where you want to be.  He advised me to seek out counsil and advice from educated, experienced, and proven men.  

     This conversation drastically changed my life forever.  From that point onward I saught out advice from those who have already accomplished what I am trying to do.  Talk about a shortcut.  A surefire way to the top as fast as you can go.   Learn from the mistakes of others, and follow the proven formulas for success in whatever category of your life that is.  Of course this is not to say that common people in our lives have nothing to offer.  They may indeed have some great ideas; however actual implimentation of those ideas into monetary success are two different things.

     I have said this for years:  “Wall Street University is the most expensive education that you can buy”.  

The sheer percentage of people who lose money in the markets is astounding!  Your odds of actually making a profit trading securities to any mesure of real useable equity growth is extremely low.  By this I am saying that most people will lose money trading securities.  Those who do manage to make money do not make an amount that could make them a living or provide for a secure future.  There ARE people who make money in investments as a living.  They are very few in comparison.  If you wish to enter the world of investments and securities, do not waste your money paying Wall Street University tuition, learn from those who actually make enough money to produce the same results you are looking for.  

     Much of the “investment” and advice we get on money is stemmed from our Great Depression.  People still dont trust banks, how many times have you heard saying such as “rich people are greedy” “save your money” “the rich keep getting richer and we just get poorer” “start a savings” and the plethora of other sayings that we have heard from childhood?  These sayings are all stated by people in our lives that really dont have money.  “Money is the root of all evil”.  “money cant buy happiness”.

     The world is full of accomplishers.  People who have realized their goals and dreams.  Those who have found the path to success.  We Do Not need to reinvent the wheel.  Invention is wonderful and that is how progress is made.  But most of us are not at that point in our lives.  We are not going to change the world with our innovative ideas until we have gotten our lives and fincances to a point where we can actually impliment those ideas and make them reality.  

     Focus on gaining wealth first.  Do this by following the patterns and practices of those who have gone before you and found the way.  If a trader isnt making money in real time, dont follow his advice.  If an investor isn’t performing at the top of his game dont mimic him.  

     “it takes money to make money”.  How many times have we heard that.  I have another write up on this, but sufice it to say for now that that is what poor people say.  The truth is investing is about making your money work.  The majority of people in this world work for their money.  Sell their time for an hourly rate.  The wealthy make their money work for them.  And they do that through proper investments and strategies.

     Follow me on Instagram @droneprecisionstrategies for real time trading and money making.  Watch it happen live!  You can trade and make money with me HERE.

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Meeting with Business and Investment power houses!

J.T. Fox and I in Chicago

 

India’s elite, business meeting in Chennai India.

Dr. Adam Alwardi and I, signing books.  Not only is he an MD, he is also the owner of a successful Real Estate company.

 

Neil Strauss and I in Las Vegas, teaching an advanced class to “the Society”

 

 

Business battle uniform

 

 

 

 

 

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