Trade The Journey

Trade The Journey


Top of the Morning! The era of covered faces and seclusions is slowly ending as the United States steadily continuing its effort to vaccinate close to 70% of the population. People are traveling, spending, and returning to work.

How will the world emerge from the Coronavirus? Only time will tell. Inflation was the key mover of the market for the past couple of weeks, but it looks like the market is slowly accepting that it may be transitory. The Federal Reserves’ outlook continues to be that inflation is transitory and the economy has not yet reached its maximum capacity.

Some event in the future is constantly moving the market because the market looks ahead. I couldn’t understand why the market was moving higher as the economy remained hindered by the Coronavirus but now I understand. However, there are days, weeks, and months when markets are moving due to something happening right now or within the coming days, like earnings reports.

The main challenge for an investor and, to a lesser extent, a trader is to forecast how their company will perform in the future. Since you nor I can predict the future, this can be a tall task.

This is one of the main reasons why I favor options as viable investment choices. Long-term options are available to purchase, albeit more expensive.

Equity Options are excellent for trading.

Equity Options are contracts that allow you to use leverage without actually owning the underlying instrument or purchasing the underlying security. Equity option contracts are brought and sold in 100 shares increments.

When you sell options, you have an obligation to uphold your end of the contract, buying or selling the underlying security. The option buyer paid a premium for the right to exercise the contract.

I’m now reading “Option Volatility & Pricing” by Sheldon Natenberg. About halfway through and I am happy to report, that I understand the material. I would say that the key to understanding advanced options strategies is understanding how the basic call and put option works.

Every option strategy builds upon these two types of options.

My breakthrough came when I understood when to buy a call and when to sell a call-Vice versa for a put.

Buying a call means you are bullish. You believe the underlying instrument will rise. You determine a price at which you would like to buy the security, and when the security rises higher, you make money also known as intrinsic value. You paid a premium for the opportunity to do so.

Selling a call means you are neutral to bearish. You believe that the option will expire worthlessly, and you’ll get to keep the premium an option buyer paid. If the option is exercised, you will have to sell 100 shares to the call option buyer at the strike price.

Buying a put means you are bearish. You would like the opportunity to sell the underlying security for a price you determine if the securities price falls. You paid a premium for the chance to do so.

Selling a put means you are neutral to bullish. You believe the option will expire worthlessly, and you’ll keep the premium an option buyer paid. If the option is exercised, you will have to buy 100 shares from the put option buyer.

I’m glossing over the greeks like the delta, gamma, theta, rho, and vega. These numbers are helpful for risk management. I’m also leaving out parameters like intrinsic and extrinsic value.

The most challenging aspect of options for me wasn’t the greeks; it was understanding how the call and put options worked- put options especially.

I couldn’t grasp how put options worked. You buy a put option, but you sell the underlying security if you decide to exercise your option position?

Another benefit of options is assessing market sentiment. People have a bearish sentiment if they are looking to purchase put options and a bullish sentiment if they are looking to buy call options.

Options by their very nature are forward-looking, in that they are contracts to implement some future action. I look at option statistics for stocks I own or plan to own, and I use the put/call ratio for markets to assess the market’s sentiment.

Another reason I like options is because if you structure your strategy correctly, you can limit your risks and allow your profits to increase exponentially. What’s better than knowing your defined risks upon entering a position?

This post is by no means an instructional guide to trading and investing in options. This is just a brief reflection of how I view options.

As great as options are, they also pose some significant risks. Just as there are strategies to limit your risks and resulting profits, there are strategies to increase leverage, and in turn, exponentially increase your risks.

One skill that I feel is mandatory to have before considering options is pattern recognition. Chart patterns are pictures of psychology in action. Some traders use greeks to trade options exclusively; I prefer to use both.

Soon, I’ll be focusing most of my posts on Options trading.

Cash-Flow Management:

I would say that last week, most of my expenses were planned. Sometimes, I feel pressured to spend money to buy the latest clothes and designer shoes. Mostly everyone you see on Instagram and in real life advocates their affinity for the latest new fashion trend.

Only a few can keep up with the trend without hurting themselves financially. Most people borrow or spend the few extra dollars earned to maintain their status.

It’s a demanding lifestyle to maintain, and some are willing to do whatever it takes to uphold their image. When you walk in with regular clothes and shoes, no one can tell you are investing, trading, or starting a business. They can only judge you by what they see.

I say all that to say, saving money and being frugal goes against our society’s standards- Spend now, save later.

It helps to have a goal you are striving to achieve.

Grade: C
Reason: I spent a little more on take-out food than usual.

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