In this episode, Mirriam MacWilliams, Chief Trainer/Wealth Mentor, shares with you her insights on Options Trading.
Video 5 – Options Trading
The beauty about options is that I truly use options, as a supplement. Instead of buying the stock, I am going to buy the option. So that if I look at the numbers behind the company, I look at the fundamentals.
If they look at the technicals, if everything looks good to me, I simply substitute buying the stock by using the option. And all I need to do is to get a 10 percent movement to the stock, from my point of entry, and my option has the power to increase a 100 percent.
What is happening now is that I am participating in expensive stocks. I can participate in 50 dollar stocks, 60 dollar, a hundred dollar stock, and I pay a fraction of the cost of the stock. I pay 3, or 4, or 5 dollars to control the shares.
Well, if I am looking for stocks that is 3 dollars, or 4 dollars, to go to 6 dollars, what’s the strength in that? Well, the strength is that I have leveraged my capital. For example I am controlling a thousand shares. And the option that was 3 dollars, now goes to 6 dollars. If I control a thousand shares, I now have three thousand dollars.
What risks should you consider before going into options trading?[/text_block]
The key is that we need to understand what the risks are. And once we understand what the risks are, we now can either minimise the risk, or we can eliminate the risk completely. It is not like that risks associated with options are going to take you by surprise. You understand, that there is a certain time period, that the option has to move, that there is certain volatility factor associated with this option. And once you understand these key idiosyncrasies associated with option trading, they can be extremely in your ability to very rapidly grow your investment account.
When should you enter options trading?
You should enter when you have been able to paper trade your way to success. The goal is to first start with no capital, virtual trade your account, so that you understand the strategy, how to place an order on line, and you understand how options work.
See what happens when you buy an option for 3 dollars and 50 cents, and in a two-week period, it goes to 6 and 7 dollars. Experience that first, without live capital. When you have done so with live capital, you are a fine candidate to being able to use options as a tool to further leverage your investments.
Are they superior than margin trading?[/text_block]
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This is not where I want people who start out to be. So in the event that they do participate in an option trade, the worst case scenario is that maybe they invested a 1,000 dollars, and if the trade went against them, they did not understand the risks, they did not place a stop loss, that is all they can potentially lose.
However, when you trade on margin, you can lose more than you had invested in your capital. And there are also some complex options strategies, as well, that may sound like they yield very high returns, but always look at the risks.
The term “double-edged sword” often pops up during options trading. What does that mean?
A double-edged sword means that it’s going to cut both ways.
Don’t jump in just because you see a 10 percent move on the stock can yield a 100 percent return on your investment capital within a relatively short period of time. You have to realise the potential loss in a trade.
For example, if I buy that option for 4 dollars, I may have that option go to 8 dollars. But what is my potential loss? I advise beginners to be prepared to lose, or have trades where they lose 22 percent or less, maybe 20 percent. So now they have positioned themselves to gain between 80 and a 100 percent, but their loss potential is now 20 percent or lower.
You now have to be accurate only 50 percent of the time. And when you make money, you make a lot of it, and when you lose, you lose a small portion of it.
What are some of the concepts you should keep in mind when investing overseas?
Again, to have a high probability of success in the investing world, the key is to be able to stack the probability of success in your favour. And for me, as an active investor, I am looking to have access to information about a company.
I have a certain ease of being able to generate information – for stocks that are traded in the US – through free websites. I am able to get certain details, about a company, based on the charts that I may extract from the markets sometimes for free, from the internet. So, have the ability to have access about that company, in order to make an educated decision about the strength or weakness of that company.[/text_block]
Be comfortable with the expectation of a 20 percent loss and be comfortable with the expectation of a 100 percent gain.[/text_block]