Daily Gains Letter

put option

The Best Insurance Policy for Speculative Trades

By for Daily Gains Letter | Mar 28, 2013

280313_DL_zulfiqarSometimes, 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 and when he can.” (Source: ThinkExist.com, last accessed March 26, 2013.)

Speculation isn’t easy, and not every investor should try it; but if an investor does go ahead and tries to speculate, then they must make sure their capital—as much capital as possible— is protected in case things turn against them.

Consider this scenario: say you bought 1,000 shares of pharmaceutical company XYZ Inc. for $10.00 each, hoping that the stock will go to $50.00 on the approval of the company’s drug by the government. Sadly, a few weeks later, you find that the drug was not approved, and the stock now trades at $5.00, 50% lower. Your loss on this trade is $5,000 (calculated using the starting value of $10,000 minus the current value of the stock).

To protect their losses, investors can use an option strategy called the “protective put.” In essence, a protective put is like buying … Read More

Use This Limited-Risk Strategy and Stop Losing Money Guessing Where the Market’s Headed

By for Daily Gains Letter | Mar 21, 2013

210313_DL_zulfiqarIn 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 this situation without risking a lot? You can consider using an option strategy called “straddle,” or “long straddle.”

In essence, when an investor uses the long straddle strategy, they purchase a call option and a put option for the same strike price and expiration date.

Consider the chart of Research In Motion Limited (NASDAQ/BBRY) and the scenario below. (Please note: the following information should not be construed as a specific buy recommendation; instead, it should be used as an example of the type of opportunity you should seek out.)

dl_0321_image002Chart courtesy of www.StockCharts.com

The company is going to report its corporate earnings on March 28. With its new products in the markets, there are some who believe Research in Motion (RIM) will provide excellent earnings. On the other hand, there are some who say the company doesn’t have much room to grow. As a result, investors are confused about … Read More