Options were created to minimize an investor’s risk exposure; and help protect a portfolio from market fluctuations. At the same time options are considered to be high yield investments because they can help investors increase their returns.
An option is a contract that gives an investor the right to buy or sell an underlying security at a specific price on a certain date.
A “Put Option” is a contract (not obligation) to sell (short) a security at a certain price at a certain date. By contrast, a “Call Option” is a contract (not obligation) to buy (long) a security at a certain price at a certain date.
Put options can beneficial for investors if they believe the price of a security is going to decrease. As the price of the security nears the agreed upon price, investors can unload the security and take immediate profits.
The U.S. economy has been showing some positive growth that has helped to propel the stock market higher, but be careful: there appears to be some cracks forming in the global economy to which the U.S. economy will not be immune. Japan reported that its economy fell back into a recession after contracting an annualized 1.6% in the third quarter, representing the second straight quarter of contraction. Part of the blame will squarely lie with Prime Minister Abe and his controversial decision to raise the country’s sales tax from five percent to eight percent in April. I consider the decision to raise the sales tax wrong, as it largely impacts the middle cla ... Read More
The much-anticipated debut of Chinese Internet powerhouse Alibaba Group Holding Limited (NYSE/BABA) has arrived and gone. Even if you missed out on getting your hands on China-based Alibaba at its pre-initial public offering (IPO) price, you could still have purchased the stock at $82.81 on October 15 and made more than a 30% gain in two weeks. The stock traded at a record on Wednesday, as excitement continues to hold and gain traction in the U.S. stock market. With the gain and a market cap in excess of $265 billion, Alibaba is now bigger than Facebook, Inc. (NASDAQ/FB), but about $100 billion ... Read More
As far as investment and trading opportunities go, gold is currently the stock market’s poor cousin. No one really craves the yellow ore at this time. The reality is that unless you are looking for jewelry, there’s really no reason to buy the metal right now. Back in September, when I last discussed the prospects for this precious metal, I wrote that “in the absence of further turmoil in Ukraine, gold prices could deteriorate to below $1,200, possibly even $1,180.” The precious metal did bounce to the $1,225 level recently on concerns surrounding ISIS and the economic situations in both Europe and China. Since then, it has also collapsed to below $1, ... Read More
As many of my long-time readers may already know, I have been bullish on China and Chinese stocks for some time. However, I’m now thinking that there could be some growth issues forming in the shadows—but that doesn’t mean there isn’t an opportunity to profit. We have been seeing some obvious signs surfacing that suggest China’s economy is stalling, but we really don’t know the true underlying gross domestic product (GDP) growth rate in the Chinese economy. According to the National Bureau of Statistics, China’s GDP grew at an annualized 7.3% in the third quarter, the slowest growth in five years and down from ... Read More
October has provided the usual bouts of anxiety that have characterized the month in past years. I warned that we could see volatility and so far, this has been the case. From small-cap stocks to world-class blue-chip companies, we are seeing some selling capitulation emerge in the stock market. All of the major key stock indices are below their respective 50-day and 200-day moving averages (MAs). As I said in a recent commentary, the chart risk is high. Bearish investor sentiment continues to grip the stock market. We saw 354 new lows on the NYSE on Friday, followed by 308 new lo ... Read More
If you are a bit anxious toward the stock market, I don’t blame you. In fact, I have been through this type of scenario on numerous occasions, including the meltdowns in 1987, 2000, and 2008. The key is to not panic and immediately run for the exits; emotion in trading never works. This is also not the time to get too comfortable in the stock market. It’s clear the stock market risk has intensified across the board after the sell-off on Tuesday that saw the DOW close lower for the ninth time over the last 12 sessions and fall below its 50-day moving average (MA). The index is now only ano ... Read More
This past week, as many of my readers may recall, I discussed the slowing that’s occurring in the global economy as demonstrated by consumer spending at both McDonalds Corporation (NYSE/MCD) and Wal-Mart Stores Inc. (NYSE/WMT). Now, my concerns have just picked up following Wednesday’s retail sales reading. The core reading excluding automotive and food sales grew a mere 0.1% in July, according to the U.S. Department of Commerce, which was below the 0.3% estimate and the weakest reading since way back in January, when Old Man Winter was blamed for everything. But with the winter excuses over, it still appears consumers are hesitant on wanting to spend. Not only is consumer spending on everyday items dryin ... Read More
When I’m looking at the screens each day, I notice there’s some selling capitulation occurring that makes me think back to 2000, when the technology stocks imploded. Now, while I doubt we are seeing a repeat of 14 years ago, you have to wonder about the mad dash to the exits for many of the high-momentum technology stocks along with small-cap stocks. The small-caps are under threat, with the Russell 2000 down nearly eight percent in 2014 so far and close to five percent in April alone. Watch as the index is just above its 200-day moving average (MA).
The fiscal cliff has dominated the news, but we also have the eurozone risk, national debt, job creation, weak revenue and earnings growth, and China. Given all of the uncertainties, there is ample risk in stocks, and you need a good investment strategy. Now, you can buy into new positions and assume the risk, but a much safer investment strategy alternative is to play either upside via call options. In this way, you can take advantage of any upward move in the equities market but, at the same time, manage the maximum risk you have via this option investment strategy. Let’s say you feel the economic renewal will continue to drive auto sales, but you also are a bit worried about a possible economic downfall if Eu ... Read More
Sometimes, investors try to look for stocks to score a “home run”—speculate on them to double, triple, or even increase 10-fold in prices. Unfortunately, in hindsight, they forget the amount of risk they are taking. At the very core, speculation is about taking higher risk in the hope that the gains will be exponential. As I have been saying in these pages, the goal of investing is to grow savings over time by minimizing risk—to focus on long-term growth over short-term gains. When a person speculates, he or she leaves their portfolio vulnerable to a significant drawdown. Mark Twain said it best: “There are two times in a man’s life when he should not speculate: when he can’t afford it a ... Read More
In anticipation of a major announcement, investors sometimes just buy or sell a stock that could see a significant move in price in either direction—upward or downward—based on the news. These investors end up losing their money if the stock goes against their intuition. For example, they assume earnings of a company to be good, but the firm ends up showing negative earnings growth, coupled with other horrific news. With this said, earnings are not the only event which can cause stock prices to soar in either direction. Other significant events, such as a CEO stepping down, an investors meeting day, or a product launch, can cause huge swings in a stock’s price as well. How can you make money in ... Read More