“Is it easy to trade? ”  This is has to be on the top of  trading’s “frequently asked questions”.

My response is provided by my very first guest blogger – a 7-year old little girl.   I read about her guest post in a food blog that I follow and was so impressed with her writing, I asked if she could write about any financial matter about her trip.

Here it is.  I thought it was very profound.

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“What I Know About Finances”

After I guest blogged on Skip To Malou about my trip to California, I was invited to guest blog on High Heeled Traders about the financial angle of the trip. At my young age, what do I know about finances?

 FINANCES: All I know is paying bills, paying tuition fees, paying food, and paying bunches of other stuff. Every night, Dad reads his financial book.

 STOCKS: All I know is when stocks are up, it’s good and when stocks are low, it’s bad. My dad explained this to me when I was little.

 RETIREMENT: All I know is that there is a retirement fund. You put money away and it will earn interest  which will be your money when you retire.

 BANK: This is where you stash your money and deposit checks. When I go with my mom to the bank, my favorite parts are the friendly tellers and getting lollipops.

            Now about the trip, when I went to American Girl Place, three things happened all at once. My eyes widened, my heart pounded fast, and I felt happy all in the name of excitement. I knew I only earned a doll and five other things, but I still felt excited. The earning is the rule in my household. You earn whatever you get.

           Some people always think I get whatever I want because I am an only child. But I always say …. You earn whatever you get! THE END.

By: Abigail Calimaran

       (July 14, 2011)

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Thank you very much Abby!  I’d also like to thank her mom Tita Medy for her help and indulging my request and  Tita Malou of Nievera of Skip to Malou (my favorite foodie blogger!)

About the Author

About The Author - continued.

Abby’s Post – page1

Abby's post - page2

Abby's post - page3

Abby's post - page4

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Via Uno Shoes

I’ve long thought of writing about Oprah in my blogs.  About what she did for women, her generosity, about her love for shoes! (I just have  to sneak that in!)

The woman is just phenomenal, a role model for all of us.  She grew up in poverty and with her talent and empathy built a fortune from a TV show with passionate following across the globe. I dare say she doesn’t just have fans or admirers, there is a reverence that people give her.  Very rare indeed.

Garden Flowers - photo by Naoko Tanaka

I think once again, she shows why that is.  Today, the news is all over the world that she has taken top leadership in the new Oprah Winfrey Network.  She did not tell me her plans but I think prior to this, our girl has decided to take a step back and enjoy the simple pleasures of life, that probably most of us enjoy and take for granted:  gardening, cooking, spending time with loved ones.   You’d  think with all her money, power and people falling all over themselves to work for her, that she could enjoy a looooonggggggg rest! But no!

She’s back on the saddle.

She said she feels “called to do it”. 

I don’t know about you, but I crumbled reading that.  “Being called” is something that all of us must have experienced, and for some, yet to act on.  What are you called to do?

My friends, this trading thing, it’s nothing.  Really it’s nothing if it does not give you the value that you need.   I thought countless times, why am I in this trading business.  It’s hard to do, it’s easier to quit. I surely can earn money another way.  But, the value it gives me is the time for what I am called to do.   Time for sharing my knowledge with you.  Time to spend with my children. 

My nearly 7 years old daughter said the other day: she’s the boss of her brother (who’s 5), and he is the boss of the baby (turning 2), and baby is the boss of mom.  🙂

Truly, being with them, unrushed, fully focused on what they are doing are the most joyful time in my life.

And I’m grateful I have a trading business that lets me do my calling.

** With thanks to my friend Paul Perez, owner of advertising agency Grupo Sorbetero for the inspiration for the title.  They had an ad copy about shoes “there’s an Imelda in every one of us”.  No need to explain that!

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Last night, my nearly 5-yr old son told me  “You are angry, you have to say sorry to me”.

Hugggsss - photo by AJ Mallari

Wow, I marvelled, about several things at the same time.  One was that he can say that to me now?!   (God help me, what else is coming?  hahaha)… and  proud that he is emotionally sensitive and at the same time able to get over my “anger” and calmly state his request that I have to say sorry to him.  (In my defense (LOL), I’ve repeatedly, calmly, asked them to wash their hands for dinner and nobody moved.  I had to give them a  “lecture” 🙂 ).    So we said our “sorrys” and hugged.

This could just be the indicator that I am not ready to trade.   Being angry or not having a relaxed attitude is definitely not being in “Zero state” that is needed for trading.    There is a strong urge, for sure, for me to trade.  And on the other hand, there is something holding me back.  Now listen, this is one  of those subtle things you have to ask yourself before trading.   You ask yourself, am I ready or not?   Dr. Van  Tharp, explores this in detail in his brilliant workshop “Peak Performance 101” and I recommend this to all traders.  It just opened my eyes so wide to what I am missing.

Anyway, let me break down my readiness:

1. Trading – I’ve been scanning the market news and the wild swings of the market is settling down.  We’ve also reached the end of a quarter, so reports will be coming in, showing how we’ve done, and we probably did better than the last quarter. I’ve so far been attuned with the market so,  positively ready in this aspect

2. Lifestyle — this week we are getting back to normal / quiet routine, past weeks I’ve been so busy looking after the children by myself.   My daughter is also on school holiday so “easy breezy” at the moment.  Positive to preparation in this aspect.

3. Work — hmmm, this is probably the area which got busier than usual.  I have to learn a new system to support.  Not good for  readiness.

4. Writing – my editor just sent back the manuscript and while I haven’t done much to review, I think I’m frustrated with the problems I encountered with the versions of word processor (too pampered – what if  we are still in the typewriter era? LOL)

5. Physical – I’ve been going past my usual bedtime, had been catching up with my sisters and family overseas,  and still needing to probably catch up with sleep and get well-rested.  

So I’d better address those areas that affect my readiness,  better condition for trading hopefully next week.

Note to self :  No need to load up on chocolate for energy.  Ok just a little bit for sanity.

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I am not sure if it’s  the  big hair, shapely legs in high heeled boots or hour-glass figure  🙂  but people  seem to think I am WonderWoman  (hahaha).    I get a lot of people asking me how’s my trading going along?  Duhhhh.   If you recall back in May I posted that I’m stepping out of trading as the markets is getting choppy, and also I was powering through finishing the book.   With the wet and freezing winter here  Down Under,  the kids have also needed constant  care, so NO,  I have not been trading.   I have my retirement account I am monitoring but not entering any new trades.

This week, I am preparing to start trading actively again, with the book project winding down, the wild swings of the market slowly easing, this week is a BIG week. 

I need to remind myself to be careful though.   Last weekend, I saw my  family overseas via online video.  Both my parents, I am glad to report, look healthy but I can’t help noticing that they were sporting more grey hair than before.  They were so happy to see my kids and their antics.   I feel like going home to visit them again this year.  I feel more motivated to do more trades to make money for that trip.

So I thought I’d share with you Step 1 of  my Trading process, in preparing to trade : 

• Need to get motivated, but not too motivated.   hehehe  With this,  I need to be aware of  my motivations, and keep it at a helpful level, to get me up and prepare to trade but  not overdoing things.  
• Remind myself that with study and adequate preparation, I can do this! 
• Trust and center myself and with the grace of God, use all of what I’ve learned and learn more to improve myself.

Think planting season.  Before you put the seeds into the soil, the soil has to be dug up to a good depth, loosened up and ready for a fresh start.

Planting season - photo by Noel Abejero

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With the encouragement of my readers and friends, I have written a book  of the Trading lessons here, PLUS, my  complete Step by Step Trading Work Instructions,  which is now in the publishing process.   

• Avoid the frustration
• Save years of time and money in trial and error 
• Lets you focus on trading skills that only YOU can do! 

Yes, we are all “strong women” but girl, admit it, if help is available, you’d take it!  (I would!).  

Really.  You don’t have to do all the work!

Strong Woman, Laos - photo by AJ Mallari

I am very excited to offer you the  eBook version (better graphics) before it goes off on sale in Amazon and other fine bookstores worldwide!      Please Register here.

 I’d just like to request your feedback  so we can improve the content for all fellow “high heeled traders” and/or  let your friends know if you deem it worthy of your endorsement!   We will communicate with you once it’s ready in a month or so!

Thank you all very much!

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Know tricks in selecting pomelos? photo by foodie Skip to Malou

Be Selective

The first thing I have to admit upon rising from the ashes of my trading debut is that my funds for trading is small to start with and I just can’t keep adding to it if I am losing money. I’ve got growing children and for sure their needs are many and have to prepare for the future.  It is certainly not acceptable to lose all of it again.(Sounds so serious!:p)  Anyway, that’s what I tasked myself to do and moved forward.

That means, I need to make the most of the capital, and achieve the following:

• Protect my investment
• Income is produced
• Grow the investment

Remember PIG Investing? I’ve been attending seminars on wealth creation and did several businesses and real estate deals before and was able to boil down the lessons from them and my trading failure.  I found a way to fulfil all three by employing ideas that help us to last financially as discussed earlier —  Velocity of Money (aim to reuse / redeploy it), Infinity (aim to fish out your capital quickly and get a return from zero ) and Position Sizing (ensuring we are able to fund series of trades that will meet our goal).   These are best implemented using Options strategies on stocks I hold.

I only trade what fulfils the “5 Reasons to Trade” – most of them by 3 Options strategies:

• Writing Covered Call Option
• Buying Call
• Buying Put

Fresh Durian, yummy but expensive and forbidden in airlines as is! - photo by Hjh Tom

** There are advanced Buying strategies that can achieve “being wrong and still profitable” but they require another leg of transaction.  I’m not including it here to keep within our Position Sizing considerations.  You can read up on other Strategies  in the Options booklets from your exchange or the one  I recommended above.

We will discuss those 3 Options strategies with examples later.  The rest like Spreads, Straddles, Naked Options are “forbidden fruits”.

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Knowing the Risks … Make it Work for you, or Avoid it!

1.  Options are considered risky because at the most basic Buy-only strategies, the value of the Option goes down as you get closer to expiry. This is called “time decay”. 

What to do :

• Make it work for you,  time decay works against  buying strategies, you can do the Sell side of  Opening transaction – this is best when already owning the shares, which  is done with the Covered Call strategy. 

2.  Unlimited loss – While it is true that you have a sure profit, some “naked” Selling strategies carry unlimited loss.  Naked selling means Selling options without the shares like in Writing Calls or Naked Put Selling.

What to do :

• Avoid the strategies where your loss will be unlimited.
• I find that “Buy”strategies are easier and safer to use for Trading because you know how much you risk at the start and it is limited. Important rule is to Follow Position Sizing^TM when buying options.

3.  You can get stuck –remember “liquidity” is your ability to get in and out of the market easily?  You might want to get out to limit your loss or take your profit and no one wants to do the other side of the transaction.  

What to do :  Avoid stocks or Options  series with low volume, observe this over time by checking up on the number of Buyers / Sellers on the series or the Open Interest, check the Active Options list in your Exchange.   Select the stock whose Options market has high volume of transactions.  Exchanges usually have Market Makers (professional traders) that can fill trades, but it is safer to be in the highly liquidstock options series/markets.

4.  Expensive – Some Options strategies have high cost of transactions – Options fees are much higher already than straight buying and selling of shares and these are strategies that will involve simultaneous Buying and Selling or 2 legs of transactions – this will add to the transaction costs and may eat up your profits.

• What to do : Avoid these strategies until you have built up your account.Important rule is to Follow Position Sizing^TMwhen Buying options.

Durian Delights - photo by Hjh Tom

Again, this is like “exotic fruits”.  For sure  there are some that I don’t like or not too excited about.  Something  about the texture, or after-taste. Like the hairy “mabolo” or velvet apple, a cousin of the Japanese persimmon. So since, I don’t like them, I don’t eat them. I can live blissfully without them.  Similarly with Options, you can do your trading business without the riskier strategies. Just do the ones you are comfortable with that offer low-risk. Simple as that.

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3 Low-RiskOptions Strategies

OK we went through a list of criteria and risks and arrived at 3 Low-Risk Options strategies that make the cut. 

• Writing Covered Call Option
• Buy Call
• Buy Put

Writing Covered Call Option

We said earlier, a Taker buys a contract to have “the right to buy”. With this strategy, you are the Writer selling the contract – obligated to sell at the Strike Price —  and receives the premium. You have to own the shares to be able to do this strategy, or purchase the shares and immediately write a Call Option against it — a  buy and write strategy — which is a slight variation but has the same goal of protection.

If the Taker expects the price of the stock to go up, you, the Writer expect the price to go down, just up slightly or not moving much.  If you happen to be wrong in your view, say the stock surged, the worst that can happen is you have to sell your shares at the strike price.  

Using the earlier example, on Call Option

STO’s current price early June is 14.11. STODW8  14.61 Call option gives the Taker the right to Buy 100 STO shares for 14.61 each, on or before the expiry date of the option in August. Premium paid is 35 cents per share and Taker  buys 5 contracts of 100 shares, paying the Writer $175 (.35 per share x 5 contracts x 100 shares)

The writer may have bought STO at 14.00 before writing the Call Option,  with this strategy, she ensures a profit by selecting the Strike Price of 14.61 and receiving 35 cents per share.

If the writer is correct in her view and the share price went down or moved up but stayed below the Strike Price, she can buy back the contract and close out on her responsibilities to the contract.  She is free to write another contract on the same shares she is holding.

If you happen to be exercised and gave up your shares, you made $480 which is 6.8% of your capital. You can of course buy another lot of shares and re do the transaction. 

If NOT Exercised, you earn $175 on the transaction, you can do this every month so for a year ( 12 months) you would have earned 2100 or 30% of your 7000.  Even if you just make half of this amount, that’s 15%.

Let’s evaluate this :

 I personally like the Covered Call strategy and recommend to beginners because even if you are wrong,  the worst-case is that you have to give up your shares for further profit, you don’t lose money on the transaction choosing a series above the price you  bought your shares. For example, you bought  STO at $14, then only write Covered Call Option at $14.50  otherwise you will lose money.   A nifty conservative strategy is to use  a series that has only Time Value, it lets you Sell  Time  — you can only do this with selling options!  

It’s like one of those fruits you can eat ripe or unripe.  (Unripe fruits usually shaken to pulpy softness with salt or the more exotic accompaniments, fermented shrimp fry! (Malay version “belachan” or Filipino “bagoong alamang”)

Buy Call Option

What it is — This strategy allows the Buyer to have the “right to Buy” and a good strategy to use when expecting prices to go Up.  For this privilege, you pay a premium which is just a fraction of money (compared to owning shares) that will allow you to profit from a move Up in price.

When you are wrong –  say the stock price fell, the worst that can happen is you lose the premium you paid.  It’s important to observe your Position Sizing rule.

Using the earlier example on Call Option

STO’s current price in early June is 14.11.  You bought 5 contracts STODW8  14.61 Call option which gives you  the right to Buy 500 STO shares for 14.61 each, on or before the expiry date of the option in August. Premium paid is 35 cents per share and buying 5 contracts of 100 shares, pays premium of  $175 (.35 per share x 5 contracts x 100 shares)

If the price goes up as you expected, you can choose  2 options

• At expiry Buy  500 shares of STO at 14.61, paying $7,305 for the shares and  keeping in mind the additional .35 per share you paid or $175, for the strategy to be worthwhile, the price has to be higher than 14.96 (the Strike Price plus Premium Paid) as well as the fees you paid
• If you don’t want to exercise and merely profit from the move UP, sell the Option.  The new premium price will be dependent on the current price and how much time is left before expiry

If STO’s price does not go above 14.96 the Taker gets no benefit – Call Option is only profitable ABOVE the Breakeven Price (Strike Price plus the Premium paid). She can sell the Option with profit or loss before it expires –  or let it lapse. 

Use Out-of-the-Money Options that follow Position Sizingand will have 3R profit potential.

Buy Put Option

What it is — This strategy allows the Buyer to have the “right to Sell” and a good strategy to use when expecting prices to go Down.  You do not have to own any shares, when you want to exercise your right to sell, you can buy from the market at a lower price. (You lose money when you exercise your right above the Strike Price). For this privilege, you pay a premium which is just a fraction of money (compared to owning shares) that will allow you to profit from a move Down in price.

When you are wrong — say the stock price went Up, the worst that can happen is you lose the premium you paid.  It’s important to observe your Position Sizing rule.

Using the earlier example on Put Option

STO’s current price is 14.11.You bought 5 contracts of STODK8  14.14 Put option which gives you  the right to Sell 500 STO shares for 14.14 each, on or before the expiry date of the option in August. Premium paid is 50 cents per share and buying 5 contracts of 100 shares, you pay a premium of  $250 (.50 per share x 5 contracts x 100 shares)

If the price goes Down as you expected, you can choose  2 options

• At expiry Sell  500 shares of STO at 14.14, selling 7070 for the shares and  keeping in mind the additional .50 per share you paid or $175. For the strategy to be worthwhile, the price has to be lower than 13.64 which is the Strike Price less Premium Paid.  (We are not considering the fees you paid here but you must do so in real life) 
• If you don’t want to exercise and merely profit from the move Dow, close the transaction by selling the Option.  The new premium price will be dependent on the current price and how much time is left before expiry.

If STO’s price does not go below 14.14, the Taker gets no benefit – Put Option is only profitable BELOW the Breakeven Price (Strike Price less the Premium paid). She can sell the Option with profit or loss before it expires –  or let it lapse.

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There you have it.  Strategies to protect and grow your income.

Keep your options open often.

As you get used to it,  you might acquire the taste —  like hot and sour Asian flavors.

Hot and Sour Splash - photo by Stephanie T Igaya

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Ripe Philippine Mango

Mangoes, rambutan, durian, santol, mangosteen, papaya, lanzones, jackfruits, guava, star apples, duhat (black plum), sineguelas,  cashew,  camachile,  aratiles, tamarind– I am overdoing the examples 😛  just so excited! These are the tropical fruits of my childhood! Of all, MANGOES are my favourite, just the sight of them, green or ripe make my mouth water! 

You might have heard from most people, “Options are risky”.  I think, they are just like “exotic fruits”.  Something you are probably unfamiliar with, but when you get a taste and get to know it better, you will like them  🙂

Options Basics

I’ve mentioned Options in the earlier chapters,  we will discuss it here with greater detail.  We will talk about Options on stocks which can be traded by the public.  These are called Exchange Traded Options.

First I want to tell you, before trading Options, in Australia you are required to have read and understand the Australian Securities Exchange (ASX) Options documentation.  Your broker will even give you a copy to make sure you do this and you are to sign a declaration that you did and you have to get a witness to sign the document and send it back to them for their file (this is serious stuff!)    The booklet is written in a factual way and is fairly easy to understand.  One of the documents can be viewed in this link (always check the site for updated version):

http://www.asx.com.au/documents/resources/UnderstandingOptions.pdf

IMPORTANT  :  All the factual information you’d want about Options are provided by the Exchange.  Here I will give the basic details for your reference in our discussion of an example in the discussion of Trading Process.  Please refer to the official documents for other important information.

This is the ASX “official” definition of an Option: 

“An Option is a contract between two parties giving the taker (buyer) the right, but not the obligation, either to Buy or Sell  a parcel of shares at a specified price on or before a specified date”.

Clear as mud? 🙂   Let’s break it down.

Green Mangoes - photo by Janet de Asis

1.  It is a contract – an agreement, you don’t have to own any anything to enter into a contract

2.  There are 2 parties –think 2 people shaking hands – one has an interest and another has an interest and you both think you can get what you want when doing the contract. In this case, someone is Buying the contract that someone is Selling.

• The Buyer is called Taker – she takes up the contract
• The Seller is called the Writer -someone who should be  willing to satisfy the responsibilities of the contract, at all times.

3.  To buy a contract gives a “right” – but not the obligation, it’s probably where it gets its name  – it’s “Optional”. The Buyer don’t have to do something she does not want to do. (Like I have the “right to remain silent” – that I don’t use much!)   🙂

4.  The contract is tied to an asset – in the statement above it’s referring to shares. When you exercise your right, for example, the “right to buy”, you are now buying the asset, in this case, the shares at an agreed price, see No. 5

5.  The parties to the contract choose  the price they want to do the deal on, for example 12.50, it is called  Exercise Price or Strike Price. If the Taker wants to exercise her “right to buy”, she will do so at this price.

6.  The contract expires. You choose a contract with the expiration date you want. The transaction can be closed before or on the expiration date.  If the buyer doesn’t want to exercise her right, the contract will just “expire” and become worthless and the parties are freed from the contract.

  More info on Options…. (not mentioned in above definition)

 7.  There is a price to pay for this convenience.  For the Buyer to have this “right”, she pays a price   called the “premium”, to the Seller.  The Seller keeps this “premium”, at all times,  no matter what happens.  This is a sure income for the Seller,  for this, the seller is obligatedat all times to deliver what is required in the contract.   The premium is quoted per share and paid per contract. See No.8

8.  A contract covers 100 shares (European style is 1000)– this is also known as “contract size”.   The premium payable for the contract is  computed as follows :  Premium quoted per share – 15cents,  multiplied by  100 (shares covered by the contract), the total premium to be paid is $15 per contract.  Sometimes the contract size varies, but generally there are 100 shares in 1 contract.

9.  You identify the contract you want to trade on by the Options Series, which is the name given to the contract.  This is set by the exchange where you trade, and readily identify the

• Asset
• Strike Price
• Expiry Date
• Contract Size

The Premium is arrived at by the Buyer and Seller of the contract through their orders that get matched in the market.

For example :

STODW8  – When you transact on this series, the

• Asset    is STO (Santos – oil and gas company, symbol is STO)
• Strike Price is 14.61
• Expiry Date is 25 Aug 2011
• Contract Size is 100
• Premium is 35cents

Each Series is already designated their Option Type, see  No. 10

Each Series will have an indication of how many people have transactions open in that series, the term is “Open Interest” which will indicate how “liquid” it is, how busy, which is one of the things to look at in our low-risk opportunity summary in the Trading Process.

10.  There are 2 Types of Options contracts. 

• Call Options contract give the Taker the “right to Buy”
• Put Options contract give the Taker the “right to Sell”

Here’s a summary of rights and obligations for the 2 types of Options:

Example :

Thai Exotic Fruits - photo by Kriengsak Senaworaprasit

STO’s current price in early June is 14.11. STODW8  14.61 Call option gives the Taker the right to Buy 100 STO shares for 14.61 each,on or before the expiry date of the option in August. Premium paid is 35 cents per share and Taker  buys 5 contracts of 100 shares, paying the Writer $175 (.35 per share x 5 contracts x 100 shares)

If exercised, the writer of the option must sell 500 shares of STO at 14.61, receiving $7,305 for his shares and  keeping the additional $175 received as premium.

If STO’s price does not go above 14.61, the Writer keeps her shares and the $175 premium, while the Taker gets no benefit – Call Option is only profitable ABOVE the Strike Price. The option becomes worthless. She can sell the Option with profit or loss before it expires–  or let it lapse. 

Put Option

STO’s current price is 14.11. STODK8  14.14 Put option gives the Taker the right to Sell  100 STO shares for 14.14 each, on or before the expiry date of the option in August. Premium paid is 50 cents.

If exercised, the writer of the option mustBuy 500 shares at 14.14, paying  $ 7,070 less the  $175 received as premium.

Same as in Call Option, the Taker can sell the Option perhaps even with profit or loss before it expires or let it lapse. Put Option is only profitable to the buyer BELOW the Strike Price.

The Price to Pay

To have the “right” granted by the contract, premium is paid, which has 2 parts.

1.  Intrinsic Value – this is the difference between the market price of the underlying share  and the exercise price of the option.

For example, in the PUT Options above, STODK8  the market share price is 14.11, the Strike Price is 14.14, the difference of the two prices is 3 cents, this is the Intrinsic Value.

2.  Time Value – this is what remains of the Premium less the Intrinsic Value

In the same example STODK8  the premium is 50cents and the Intrinsic Value is 3 cents.  The time value is 47cents.

You will notice that for the Put Option example above, the Time Value is high, this is because the current price is below the Strike Price and the Series STODK8 expiry is still 2 months away.  It’s like saying the option is already profitable, hence it has a higher value, the term “in-the-money” applies in this situation.

On the other hand, for the Call Option example, the  current price 14.11 is below and still far from the  Strike Price  14.61, it has no Intrinsic Value and only have time value, the term “out of the money” applies.

There are mathematical computations on how Options are priced or “pricing models” and behaviour of prices or “delta”, in reality prices are simply determined by the Buyers and Sellers agreeing in the market.

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Why do it?

There is obviously a lot to consider, and for sure, there are risks to it.   Like the “exotic fruits” I was telling you about, there are risks to get them. Getting less-than-ripe or slightly bitter fruit, getting bitten by ants, getting scratched or falling from the tree(waaaaaaaaa!  J) .   Still,  we go in search of the ripe/good ones  because we know how delicious  (and healthy!) they are. It takes practice, perseverance and experience (also some height?) to get to  the fruits, so when we were kids, when all else fails, we’d usually ask an older person for help.  Well, I got my high heels on J,  I’m old enough and I’ve been trading Options from the beginning,  here are the fruits of my experience. 

Why should we consider Options in our overall investment?  A recent Bloomberg article reported a survey among investors that indicated Options are getting more popular, given the market featuring a lot of uncertainties,it’s become clear that it’s hard to get good results  by the traditional “buy and hold” strategies.  Investors are demanding better returns on their money and protection of the value of their assets.   We can look to Options strategies that provide ways to satisfy that demand and improve performance.

Thai Tropical Delights - photo by Kriengsak Senaworaprasit

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Have you had the feeling of seeing something  so successful, you thought, I should have invested in this?!    Most of the 500 million users of Facebook probably think that!  🙂

Chuck Whitman, owner of a trading firm in Chicago, formerly also a trader, wrote in the Introduction of “ Trade Your Way to Financial Freedom” – “The market you trade is far more important  than how you trade.”    If you are in a busy market, there will be more opportunities.    I am so convinced about this. I had a big paper-profit on a stock I had and ready to sell but there’s nobody to buy so I could close my  transaction. Eventually, I sold at the  below-value offer of one buyer.

So before getting into the details of how to trade, the trading process, let’s think about what you should trade.  Here’s a list of things to think about:

• Opportunity
• Lifestyle
• Capital

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Opportunity

1)      Liquidity / Busy Markets

I’ve mentioned above that with higher volume, busy markets have more opportunities. It’s also easier  to get profits out quickly and  not to discount profits.  (I think of it like a restaurant that is always busy because the food is sure to be good!   😛  )   It is important to trade only markets that are liquid – better if they are in the finance news sites or your Exchange’s Most Active lists regularly.

2)      Market Moves

a)      Up, Down, Sideways (Market Type) – can you profit when the market goes Up, Down or Sideways?  This is why Options are becoming more and more popular, it has strategies for all those market moves.  See the chapter “Keep Your Options Open”  later.

b)      Concept  – what you trade must also follow the Trading Concept that you are using (or Shopping strategies   we talked about at earlier chapter )   Examples are —  Oil that follow Seasonals, as well as Trends,  Bank stocks that have just been moving in range / follow Band Trading due to debt issues,  Gold that is also following a Trend due to demand for “safe assets” when market is swinging wildly.

c)      Volatility – this is the up and down move. This is important for the more active / short term trader.  For example, if you have a stock that only move 5 cents a day, that’s not suitable for day trading.  I once bought option on a stock that moved 10cents a day, it took me three months to complete the trade.  (Kind of like a bad hairdresser – not coming back!  🙂 ).

3)      Low-risk

a)      Low-Risk, High Reward – certainly risk is found all over the market, but can you trade with low-risk on the market and get a high reward?    I think this is very important as women and mothers, we don’t want to take big risks as we certainly  have so many things we’d rather spend money on, and as an extension of that, we want to grow our fund (because we have a lot of things to spend money on.) 🙂

b)      Can be wrong, still make money – I think this is another important criteria for women since we are “new” in this business and we don’t like big risk or lose money, it just helps to know that even with mistakes, we can employ strategies in a market can help us stay on the business, improve our skills and grow.

Lifestyle considerations

• Timeframe –  this is about your availability.  Will you be able to monitor your trade or be able to complete several trades a day – this is especially important for volatile markets like Forex.  The stockmarket is more accommodating to different timeframes.  Some stocks trade better than others.
• Interest / Access to information  —  this just makes your studying easier and gathering market knowledge more practical.  Watch out  for  the “active movers” in the evening TV news regularly. If you are a migrant or like to travel, you could use your knowledge about countries, economies,  aiding your study of markets and what to trade.   Women as household managers and avid shoppers could certainly tap into knowledge and interest to assess companies that you deal with or patronize like consumer, utilities companies or bank.  Remember : make money from people making money from you.
• Protection  – can you use it to protect yourself (hedge) against rising  prices?   Ever felt helpless with rising price of gas?  Or how fresh food prices has been jumping? Or interest repayments to your mortgage?  Can be avoided by trading markets or stocks that can protect or compensate you for these lifestyle costs that keep rising.

Japanese lunch - photo by Yumiko Takatsuki

Capital – How big is your capital?

• This is  important because the number of units you can trade will achieve profits  worth your effort and time.

For example, a share of Google is worth $528, if we have 5000, you can buy  9 shares. If you buy GE (General Electric) worth $ 19, with $ 5000, you can buy 263 shares.  In a month’s time Google moves by $10, GE moves 1.25.  

The following table shows how much money you can make with your capital:

In the above, the more suitable stock to trade is GE than Google. I’ll take $328 than the $90.

So think whether your month’s trading will pay you well for your time and effort.  Will you take this kind of pay when you work for somebody else?  😛

• Will you be able to satisfy all the financial responsibilities of trading ?

i)        Some trading markets need  you to take  physical delivery, like the commodities Gold and Oil.  So storage or warehouse should be part of your funding capability.

If you are interested in these commodities, but don’t have capital to trade the commodity itself,  you can trade stocks producing or somehow involved (like transport) of these commodities, ETF (Exchange Traded Funds) or Derivatives ( Options)

ii)      The margin requirements are also a consideration.  Margin is just a part of  the total sum of money to buy the asset, to secure the transaction. Some Options strategies also require margin.  While it is attractive that only a portion of funds  or margin is required to trade, the margin requirements change along with the value of the stock or asset  being traded, you need to have enough funds to tolerate such changes in value. 

• Will your capital be large enough to protect you?

i)        Dr. Tharp writes in his book “Trade Your Way to Financial Freedom”  that your capital is like a wall.  The bigger the wall, the better the protection.   This means your capital need to be large enough to withstand losses and allow you to keep trading.  Also,  I will share how I  trade  with protective strategy with a Covered Call and for that, you need to have enough funds to hold enough  shares before you can write the Options contract that will protect it.

Pink Wall, Laos - photo by AJ Mallari

Weighty questions

That was quite a long list of considerations, certainly, each person would give different importance when selecting market to trade.  Just to help you make a decision, score each one according to how much you think it is important to you, here’s an example

From the above,it looks like I have to emphasize looking for market that meets my Opportunity criteria, Low-Risk being number 1, followed closely by Market Moves, I want to have as many opportunities in different markets, then Capital and Liquidity  with equal importance.  

I’ve also provided an example indicating how Stocks and Forex could be evaluated against this criteria.  Where I’ve indicated “with Options”, you need to employ Options strategies on the stock to be able to satisfy that criteria (for example, to lower risk).   Still within Stocks, as mentioned, liquidity can be different.

 FOREX,  which trades 4 trillion dollars value per day, need to be traded with a big account (in the hundreds of thousands).  With $5,000 capital think of yourself as the small fish swimming in a vast ocean of much bigger fish – you will get eaten.  🙂

Not a secret (anymore) :  Market or stock to trade that satisfies all of the above criteria sets a good basis for low-risk trading.

Got A Secret, Nur'Aini (Indonesia) - photo by Andie Makkawaru

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Vietnamese Pho - photo by IvanHenares.com Travel Blog

In a restaurant, we try new dishes by looking around at what other people are eating 🙂  One of those discoveries is the Pho – a Vietnamese soup consisting of very thin slices of raw beef topping off oodles of rice noodles which is cooked by the steaming hot herb-flavoured soup.  It usually comes with a separate plate of bean sprouts, basil leaves and a slice of lemon.   We’d munch on the crunchy bean sprouts while waiting for the rest of the food and usually finish with the basil which leaves a fresh taste in the mouth.  (Not sure the lemon is needed in the soup but it would magically reappear in my kitchen for some other practical use).  🙂   This has been going on for some time when I came across an article that says there is a whole ritual with this separate plate of accompaniments.   Anyway, bottomline, for me, the Pho dish must have the beef, the soup and the noodles. It wouldn’t be a Pho without these 3.

My No-Fuss Trading System

In the same vein, I discovered that my trading performance went from Loser to Winner particularly with 3 Numbers which is the heart of my Trading System  — I put them together from the discussion in the brilliant book by Dr. Van Tharp “Trade Your Way to Financial Freedom”.

• First Number is “1”

This relates to the STOP – in Trading like in life, you need to set limits. Think Alcohol, speed limits, food intake.  I love the STOP because it lets you stay in control of your losses (controlling tendencies put to good use!).  🙂    In Trading,  this is the maximum amount you are willing to Risk.  Let’s call this our 1R (1 x Risk).  I find it best to relate this amount to how much Capital you have, for example Capital is $10,000 and 1% of 10,000 = $100.  This amount is not what you will use to trade, but is the amount you are willing to Risk.   

For example, buy  300 shares of $5 each = $1,500.   But you set the “maximum amount you are willing to risk” at  $100.  Calculate how much you can  afford to lose per share with your $100 Risk money ($100/300 = 33c per share).  So if the share price moves down in which you lose 33cents of the $5,  you limit your loss and left with $4.67 and close the trade so you only lose $100. (For simplicity we exclude broker’s fees)

You set your Stop at the amount that does not worry you if you lose it, but also allow you elbow room for the trade to move in your favour.  Once you set this limit, respect it.  In each and every trade.  Alright,,, too hard? How about making this a habit and for every 3 trades you close at your STOP, give yourself a special treat… (this usually works with the kids.)

I also use this for  my Position Sizing^{TM .}  Yes, most of the time I enter a trade with my maximum loss – which I can do with Options Buying strategies.

•  Second Number is “3”

This relates to ENTRY –only ever enter a trade if you can make 3 times your money. 

So in the example above, if your 1R is $100, ensure you trade only the opportunitythat will give you 3R or $300 profit.  That will make you more selective so you use your money for  trades that are profitable enough to cover your costs and reward you for your efforts and time. 

This is where women’s carefully honed judgement in Shopping is most beneficial.  In Shopping, we do need to look around a lot and take the time.  When we do, we are rewarded with a dress or shoe that is most flattering and able to wear a lot.   Any hurried purchase usually disappoints.  Same in Trading.  See that? Shopping skills can earn you money (for more shopping! Yeyyy!)

• Third Number is “4”

Exit at Angkor Wat Cambodia-by AJ Mallari

For taking profits or “Profit-taking EXITs”  it is best to use simple ideas which you then use together.

I use these 4 exits:

TIME  — estimate when you think the  position will be profitable, this could be in 3 days or 1 week or 1 month.  Otherwise, you could suddenly decide to be a “long-term investor” and stray from your Objective or possibly lose more money.

PSYCHOLOGICAL – when you’ve got a trade open but something in your mind muddles your thinking, take your profits.  This could be a relationship issue, moving house, new child or going on a holiday. And when on holiday, be on holiday. It pays to relax and have fun.  (Seems to be a problem with men butnot for women!)

TARGET – set a target at which you will close the trade and get profits. A target 3 times your initial Risk  or 3R  is recommended.

TIGHTEN – as market is moving in your favor, let the profits run but have a way to tighten your hold on your profit.For example your 1R = $100 if your trade has “floating profits” of $500 at the Highest point  but started slipping to $450 (or 10% off the High), take your profits at this point. You wouldn’t want to give away too much profit, this is valuable shopping money we are talking about!  🙂

Every Trader should have a set of Trading Rules to follow in every Trade.  They should fit your unique situation, especially the Risk you are willing to take (your 1R).  For discussion of other  Entries, Exits and Stops look up the website  www.highheeledtraders.com

Remember  my  3 main ingredients for a Winning Trade  –  “1R Stop, 3R Entry, 4 Exits”.

Rules rules!

Vietnam Streets - photo by Fr. Noi Azupardo

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