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Archive for the ‘Spread The Wealth’ Category

Warren Buffet has become something of a modern day financial icon. A beacon to the success that can be achieved in the free markets. He has just been officially named as the richest man in the world, worth a staggering $62 billion. His company, Berkshire Hathaway, has beaten the S&P 500 index by 14.65% over the past 30 years. His investment strategy has been closely examined yet few follow his incredibly successful investment style and as a result miss these stellar returns. Why? Because his investment style is boring. What I mean is long term in nature and rather inactive. It’s steady as she goes. It’s not a fast paced, action packed ride to riches. It’s a slow consistent walk to wealth.

So what does all this have to do with option selling? I’m glad you asked. While Warren Buffet does not sell options to generate his wealth, the concept of option selling is also slow and on the whole rather boring. It is not fast paced nor will it result in a fortune being amassed overnight. But sure as the sun sets at night and rises in the morning it will provide the educated and patient investor with fantastic returns and wealth.

Selling options mean selling either calls or puts (or both). If you recall the definition of an option is a contract which conveys to its holder the right, but not the obligation, to buy (calls) or sell (puts) shares of the underlying security at a specified price on or before a given date. This right is granted by the seller of the option. So it is the option seller who has the obligations because they have sold the rights to the option buyer.

The option seller receives the option premium in return for giving the right to the option buyer. The option premium represents the entire income the option seller can hope to achieve, while his losses are theoretically unlimited. The option buyer on the other hand can only lose the option premium while his return is theoretically unlimited. So why would anyone sell options? Why doesn’t everyone just buy options if they have limited loss and unlimited profit potential. The main reason is probability!

Options are very much like a raffle ticket. When you buy a raffle ticket it costs you very little and the vast majority of times you don’t win anything. You simply say to yourself that it’s cost you only a few dollars and if you were the lucky winner you’d have won big. But why do raffles exist? They don’t exist with the winner in mind. They are not altruistic games designed to give more than they take…oh no, quite the opposite. They are designed to offer the raffle holders a nice return on their raffle.

They know that the cost of paying the winner is less than the income they earn. The same rules apply to options. Investors who understand options know that over time that the loses they have to pay to option buyers will be less than the income they earn from the premiums the buyers pay. Studies suggest that between 75% and 80% of options held to expiration expire worthless. This means that option sellers win 75% to 80% of the time!

In addition to probability there are other reasons in that make selling options incredibly attractive as a wealth creation strategy. They include:

* Excellent returns

* Set and forget

* Inbuilt safety factor

* Consistent income

* Win in all market conditions

* Less risk

* Time is on your side

Let’s quickly look at each of these in turn…

Excellent returns:

Selling options can provide a knowledgeable and experienced investor amazing returns…returns like 30% to 50% per annum. One of the best ways to look to understand this is to look at a simple example. Gold in February 2008 had just broken $900 an ounce and all the news was majorly bullish for gold. It had already seen a spectacular rise over the past few years but market conditions meant there was every chance it would continue to rise…but most importantly it was not about to fall…at least not beyond a natural pull back.

Someone was willing to buy the 01 June 08 $525 put options for $0.10. I guess they figured “what the hell it’s only 10 cents per option…it’s worth a punt.” Fantastic! I knew that each option I sold represented $10 (100*$0.10) in income and the initial margin was $34 per option. Gold would have to fall by a whopping $400 an ounce in a little over 3 months to be exercised. Now I’d probably have better luck winning the lottery than being exercised on these options (and odds on winning the lottery in the UK are about 14 million to one!).

Now $10 may not sound like much but we need to look at this in terms of return on capital invested. If you can generate $10 on $34 worth of capital invested you are returning nearly 30% over 3 months, which is nearly a 250% compound return per annum. I’ll take those odds and that return!

Set and forget:

While I never suggest that you ever invest in anything and totally ignore it from then on, selling options is about as close to this as it gets. When you sell an option you target options that have very low chances of ever being exercised. How? You look for way out-of-the-money options and you apply sound fundamentals. For example, the Dow at the end of Feb 2008 was 12,700 and all the news was incredibly bearish for the markets. Inflation was at record levels, the dollar was in free fall, house prices were plummeting, consumer sentiment was falling, retail sales were stalling, credit markets were frozen, profit warnings were occurring daily and so on.

I was totally comfortable that the Dow was likely to fall, but what I couldn’t predict was when and by how much and whether it might go up slightly before it went down. What I was certain was that it was not about to trend upwards. Selling futures, CFDs, spread bets etc requires excellent timing. You might be correct on the overall direction, but without deep pockets you could get stopped out first before the market moves your way. The solution? Sell deep out-of-the-money Dow calls. I sold 15 May 13,500 call options for $140 premium. That means that the Dow would have to rally above 13,640 before I would start to lose money. That is not far from its all time high! At writing the Dow is at 12,200 and my calls are now valued at $17 giving me $123 profit per option. I don’t have to watch my calls minute by minute, hour by hour, day by day. I’m totally comfortable that they will expire worthless and I will earn $140 per option.

Inbuilt safety factor:

One of the biggest problems with using stocks, futures, CFDs, spread betting and other financial products that have a linear type return (i.e. their value moves up and down at the same rate).This means that you need to have excellent timing and deep pockets to use them effectively. While I love the adrenalin that these products give me they do not have the type of safety factors that help me to sleep well at night.

How many times have you bought a stock, futures contract etc on the expectation that its price will rise and sure as night follows day the price immediately starts to fall. Soon you find yourself stopped out only to see its price turn around again and rally just as you originally predicted. Essentially these products give you only a small margin of error. If you have more money to play with you can afford to place wider stops, but the fact still remains…you need to time your entry and exist points fairly accurately.

We all know that markets do not move from point A to point B in a straight line…they zig zag their way there…sometimes with quite violent corrections. The more volatile the market the more difficult using linear products becomes, because your likelihood of being stopped out increases. Options give you that margin of error that means you don’t need to worry about timing to anywhere near the same degree.

Option sellers have a much higher degree of staying power. They can withstand the zig zagging of the markets much better. For example, if a market is in an uptrend you can sell an out-of-the-money put at a level that gives you a very large level of comfort that the price will never fall to a level where your option will be exercised. Timing the market is much less important.

Consistent income:

Those that sell options can enjoy a regular income month after month. It will not provide you with a 1,000 percent return in a year, but with education, practice and good option selection you can enjoy 30 percent to 50 percent annual returns. But there is a lot to be said for receiving excellent, regular and fairly stress free income. Everyday your options are getting closer to expiry and time decay is eating away at their value. Every month you can receive income from your options expiring.

Win in all market conditions:

It is said that markets go up, down and sideways. In actual fact they go up a little, up a lot, down a little, down a lot and sideways. With linear products you can only win with one third of the movements. For example, if you are bullish, then you will loose if markets go down or sideways (or at least not gain anything). However, if you sell a deep out-of-the-money put option to take advantage of your bullish view then you will win with four out five market movements. In other words you will win if the market goes down a little (it will not hit your put’s strike price), stays flat, goes up a little or goes up a lot. You will only loose if the market falls sharply.

Less risk:

When most uneducated investors think about options their first reaction tends to be “that sounds risky”. In actual fact options are a lot less risky than trading stocks, futures, CFDs etc. The key reasons why options are less risky are:

* Inbuilt safety factor – options have an inbuilt level of safety because you can sell out-of-the-money options that are very unlikely to be exercised.

* Most expire worthless – we know 75% to 80% of options expire worthless.

* Insulation from market movements – Option prices do not move one for one with the underlying price. In other words if the price of the underlying goes up one point your out-of-the-money option price will only change by a fraction of this, say 0.25 points. This means that if the market moves against you your option price, and thus losses, will not increase anywhere near as much.

* Less likelihood of being stopped out – by selling out-of-the-money options only on extreme market movements will stop you out.

Time is on your side:

Those that buy options need the price to move beyond the option strike price (plus the option premium) before expiry if they are to make money. From the moment they buy an option time is working against them…it is a race that the price can move enough before their time runs out. For the option seller it is exactly the opposite. From the moment they sell their option they have been paid and the option’s time is working for them. Every day the option’s worth becomes a little less to the option buyer and a little more to the option seller. The option seller does not have the pressure that time will run out…the option buyer always wants more time, while the option seller happily watches time run out.

I hope you’ll agree that option selling is a powerful method of generating low pressured, consistent and extraordinary returns. Novices steer clear of options. Those that are uneducated buy options outright. Experts sell options. Writing options is not for everyone…in fact it is only for experts. Don’t be put off by that…become an expert…anyone can. Then you can receive the rewards that are just waiting for you.

We all want more in life. More lifestyle, more health, more satisfaction. More Money! But for some of us the road to wealth is something that seems to have a whole heap of sharp corners in it. The road definitely isn’t straight and at times can be disheartening. This article is based on my personal experiences with money and how I, and those who taught me, go about creating wealth.

First of all money is simple. So many people make the mistake of believing that money is complex and that you need a degree in economics to succeed. Money is so simple that I have been able to teach my 6 year old nephews the principles to money which will set you up for life. When we look at money we need to see it as tool to lifestyle. Do not think that you need to spend hours analysing stocks or market information to earn money. With some simple maths and a creative mind you can quite simply setup a passive income which will serve you well.

Before I get started on one of the best strategies I know, I have one more thing to say about money concepts. Banks teach us from an early age that the only way to be wealthy is to study hard, get a degree, get a good job, and work long hard hours 6 days a week. Then they say you should save save save until you can afford that dream home or whatever it is you want to buy. Let me tell you that the banks are pulling the wool over your eyes. Banks know how to invest. They know where and what to invest in. Whilst banks are returning us an interest of say 10% per annum (which seems quite good to most) they are out there investing your money and making return well in excess of 100% per annum. So….Long story short. Don’t let yourself be in the mindset that you must work hard and save to create wealth. Spending someone else’s money (the banks) is a great way to get started. You just need to find one of the investments that the banks use.

Anyway, but now to the good stuff. I want to tell you about a great method of creating wealth. Ultimate wealth if you may so call it. The Internet is a sea of wealth. There are endless opportunities for wealth creation on the Internet. From typing ads, taking surveys, to even typing articles such as this one. Money is out there to be earned. You just need someone to point you in the right direction.

One of the first methods of Internet income I came across was ad typing. I used ad typing to begin to generate this passive income. The good thing about it was it wasn’t continuous work, which was required. It was a once off thing. After setting up an account to be paid to I started typing ads into well known classified websites. I put those ads on ‘auto renew’ so the ads are there forever. Every time someone read my ad and clicked on the link in my ad, I was paid by the company that I was advertising for. How good is this. The more ads I typed the more passive income I would see each morning. I couldn’t help but get excited seeing this money growing every night. You too can do this. A simple 1-hour of ad typing will generate approximately $50 per day. Thats 1 hour that you never need to do again…..for 1 hours work you can have $50 per day extra to your income. Imagine if you put in 100 Hours!

Surveys are a popular method of creating income as well. Again another simple way of making quick cash. When big time companies want to know ‘the peoples’ opinion about their product they pay people to take surveys. This allows them to better their product and keep customers happy. It also pays you a nice little lump sum. This won’t provide you with a regular income, but it will pay you quick amounts of cash.

And then of course there is article writing. Articles just like this one your reading now can be used to generate income. You don’t need to be an expert on a subject. You just need to have an opinion and a desire to spread the word to those around you. The more readers you have on an article the more income you make. It is that simple.

These three quick strategies that I have mentioned are all fantastic ways of generating a passive income. They can all be done from the comfort of your own home. They are not time consuming and they all provide you with a great source of passive income. You decide how long you work for, how much income you want. It’s all at your fingertips.

Now your probably asking how do I get started. At the bottom of this page I have provided you with a few web addresses to go to that will kick-start your Internet income and will give you all the tools to generating some cash. I hope you have enjoyed reading this article. All the best. And God Bless.

Ryan

For an comprehensive list of money making products, including all of fthe methods mentioned above vist:

http://www.mysmartinvest.com

Enjoy making that money.

Cya

Gold may be at its lowest point for 2008 and other metals may be on the way down too but what were the five key influences on their meteoric price rise?

Over the past five years the price of precious metals has more than doubled. The surge has been attributed to a combination of the following:

1)Depreciation of the US dollar. The World Gold Council provides evidence supporting the view of an inverse relationship between the price of gold and the US dollar. Over the past five years, from 28 February 2003 to 29 February 2008, the US Dollar Index fell 26.1% while the price of precious metals soared.

2)Inflation. Rising oil prices increase inflationary pressures. During periods of rising inflation, the price of precious metals trends upward. Studies conducted by the World Gold Council support the view that gold is a long-term hedge against inflation.

3)An increase in global wealth. The rise in global income, particularly from emerging market economies such as China and India, has contributed to increased demand for precious metals for manufacturing and jewellery.

4)Exchange Traded Funds (ETFs). The introduction of ETFs stimulated demand for precious metals. ETFs initially began as a bundle of equities tracking the performance of indices and were traded on a stock exchange in the form of shares. By 2004, ETFs moved into the precious metal sector and by early 2007 nearly 22 million ounces of gold were held in ETF accounts. By 2006, 18% of the world’s investment demand for physical gold came through ETFs.

5)Geopolitical tensions and uncertainty. Global political tensions generally trigger a short-term speculative rise in the value of precious metals. A good example is the 1979 Iranian Revolution. In the run up to the crisis, the price of gold rallied from $226 in December 1978 to $512 in December 1979, a 126.5% rise in one year. During the same period, silver surged 267.6%, from $5.93 to $21.79. The recent uncertainty generated from the credit crunch and the deterioration in the housing market has instilled fear and contributed to a similar surge.

The price of gold is currently on the way back down. However if you are looking at spread betting on gold or any other metal it is interesting to note the recent comment from Anthony Grech, Analyst, IG Index, “despite gold receiving most of the media attention, it has not been the best performing precious metal over the past five years. Platinum and palladium outperformed the precious metals sector over the past year. During this period, platinum and palladium surged 72.6% and 60.9%, respectively while gold rose 45.5%. A five year view, from February 2003 to 29 February 2008, reveals that silver was by far the best performing precious metal, up 330.8%. Platinum placed second with a 215.7% rise, followed by gold’s 178.4% increase”.

Financial spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.