Go back and read Part 2

A Nightmare in the Marketplace: The Bid-Ask Fiasco (and why you should be concerned) – Part 3

In plain vanilla language: Remember that option that we could buy for $130 and have to sell it for $120? Imagine a situation where you could buy the option for $130, and have to sell it for $30? Ridiculous! This is what happens when there is a lot of volatility in the marketplace – bid-ask spreads go completely bonkers.

This is exactly what happened in my OIH trade – because the spreads were incredibly large, I actually lost money on the trade, despite the fact that the stock went in the correct direction.

The following is an advanced topic, if you do not want a headache for thinking too hard, perhaps skip this paragraph:

A stock option price is based on two main value components: intrinsic and extrinsic value. Intrinsic value is simple: it’s the price of the stock. Extrinsic value factors volatility in the marketplace and time decay of the option (remember, options expire after a certain time period – the more time you give before it expires, the more money you have to pay for the option).

I had bought the 120 Put and sold the 115 Put, both options were out-of-the-money so the option premium was entirely extrinsic value (time decay and volatility). Time decay to expiration is fairly linear (until the final month when it really starts to accelerate). For the people who want to research more about time decay, Google search “theta” – the official Greek symbol used to define time decay in the stock option world.

So what causes option prices to explode when there is chaos in the marketplace? That, my friend, is volatility. When volatility increases, stock option prices increase as well (and vice versa).

But it is a double-edged sword, because even though increasing volatility can increase the price of an option, volatility causes marketplace inefficiencies (such as large bid-ask spreads).

As we can see below, volatility spiked on October 06, 2008 when compared to the few days before it:

Option traders like to watch the volatility indices fairly closely because unlike stocks where all you really have to worry about is price movement, option traders have to watch volatility movement as well.

But don’t worry, this report is not to talk about advanced stock option pricing … however, we do get into some very basic stock option concepts later on.

Go back and read Part 1

A Nightmare in the Marketplace: The Bid-Ask Fiasco (and why you should be concerned) – Part 2

So here I was, on October 06, 2008, eating my delicious turkey and ham sandwich suited for a King. And that was exactly how I felt, because from the time I entered the position just 4 days earlier, the OIH had tumbled dramatically to well below $110 (intraday – little did I know that after I would exit, the stock would climb up above $115).

As soon as I got back to my desk after lunch, I closed my position since if the stock resumed to drop, I would face the risk of being assigned by someone – even though this risk was small considering the option would expire in over a year – but times were crazy and people do silly things.

When I logged into my trading account, what I saw still dumbfounds me even to this day: rather than posting profits, my trade was actually posting losses.

How was this even possible?

It was because the extremely wide bid-ask spreads. As an aside, for most investors who trade highly liquid stocks, like Blue Chips, bid-ask is not a big deal – you can usually get a penny-wide bid-ask spread. For example if the Nasdaq tracking ETF, the QQQQ’s were trading at 44.10, a penny-wide bid-ask spread would be something like 44.09/44.10.

With options, it’s a much different story. Even with Blue Chip stocks, options with dime-wide bid-ask spreads are very common. By the way, a dime-wide spread would be something like 1.20/1.30 per contract, meaning, I could buy at $130 and sell it for $120 – and lose $10 if I bought it by mistake and had to sell it immediately after to reserve the mistake (who has done that? My hand is in the air…)

However, during high volatile trading days, like any typical day during a Bear Market, volatility explodes and your bid-ask spread, which used to be dime-wide spread, can be much larger, like a dollar-wide spread!

Continue reading, Part 3

A Nightmare in the Marketplace: The Bid-Ask Fiasco (and why you should be concerned) – Part 1

This is the story of a day in the life of a stock option trader, back when I was a pure stock option trader. Don’t worry if you do not know the terminology, or if you know very little about stock options – this is more to show you how crazy the world of stock options can be.

The following story is not exactly glamorous, but if you have ever experienced anything like it, you will know that it is life changing. And I know this because it has forever changed the way I look at any stock and how I invest.

It was a dark and gloomy October 2008, but rather bask in the dark (and gloom), I was actually celebrating this occasion. Over the past few days, many of my positions had fallen in price along with the rest of the market. This was fantastic news because I was “short” positions (meaning I was bearish, so in my case falling price was a good thing).

I had a position in the Oil Service Sector, ticker symbol “OIH”. I had actually opened the position a few days earlier, on October 02, 2008 – I had a January 2010, 120/115 bear put spread (we will be talking about stock options later).

Note to fellow option traders: Yes, I know 2010 expiration is a little excessive considering we were only in 2008, but I didn’t like being bullied around due to time decay.

When I opened the position, the OIH was just north of $120, so an out-of-the-money bear put spread, while a little more aggressive of a strategy, should pay handsomely should the trend continue and the stock resume its price decent. Furthermore, with the volatility and bearish trend even among the indices, a bearish position seemed pretty reasonable of an idea. I figured, “Why not?”

Continue reading, Part 2

What a psychological level! I know we’ve fallen below 10,000 but it seems like such a momentous milestone to be whipsawing back and forth. It kind of reminds me of the Bear Market days when the markets were falling and major levels were being broken.

Later in the day, the markets did manage to find stability and claw back to find footing on positive ground.

I would be interested to see if we can hold these levels, since after all, we are in an intermediate bearish trend.

Don’t worry, joining my newsletter is free, and I won’t be sharing your email with anyone (well, except the shady spamming company that lives down the dark alley from where I live … I’m joking of course).

Thankyou for supporting my site, and I totally value your time that you spend here.

Kunal

I follow 4 strict guidelines when researching for a “high-quality” stock that I can woo into being part of my portfolio:

Criteria #1: The stock has a primary or multi-year bullish uptrend. Aka, “This baby can shoot to the moon!”

When you deal with different time periods, you deal with different trends. There’s your longer-term, multi-year trend, or primary trend. The primary multi-year trend can have periods of multi-week or even multi-month pullbacks or corrections.

Personally, I have an affinity towards multi-year uptrending stocks, simply because:

• 1. Short-term trading, sucks: I don’t have the stomach for it nor the time to watch daily price movement. (Um, hello, anyone else reading this have real desk jobs as well?).
• 2. It’s more forgiving: If you choose multi-year uptrending stocks, you have the luxury of time to weather multi-week or multi-month corrections. Heck, in 2009, even the major US indices made up for value lost from the severe attack of the Bear Market of 2008. However, if you are a short-term trader or even an option trader, you would have to entertain the idea of exiting positions early to avoid option time-decay or risk-management skews – in these cases, being patient can be costly.
• 3. It’s cubicle-friendly: Being a long term trader also works for people like me who may only have a total of 2.34 minutes during a lunch break to make any time-sensitive, or “save-the-portfolio-from-utter-destruction” trades.

But a good burger is only as good as the cow it comes from. Feed it well, treat it well, give it a little affection, and you’ve got a fantastic burger. Believe it or not, this holds true for your portfolio as well. It is too easy to get caught up in hot stock tips, where the stock goes the exact opposite direction (as soon as you enter it). How many of us can relate to that? I’ve been there, too. Note to self: one day it would be a fun little experience to enter a hot stock tip, and take the exact opposite side of the trade. I wonder how many winners I would have!

How do we create a cash cow system that can pay us time and time again? I’ve broken it down into 3 hooves, I mean, 3 categories:

• 1. Pick awesome stocks. Sounds pretty easy, but is extremely vague – hear me out: I look to accumulate high-quality stocks that pay dividends. By doing so, I get the benefit of what I like to call, “The Double-Whammy Effect”: First, I get the payoffs of dividends and second, I get the payoffs of picking stocks that gain in value over time. Basically, I like to find stocks that go up (steeper the better), less volatile (moves more technically rather than on news or emotion), offer a plethora of stock options to choose from, and give good dividends (because I like getting paid while holding onto my stocks).
• 2. Protecting your portfolio from pullbacks, corrections, and bear markets. One thing I love about stock options is the creativity when it comes to protecting your portfolio.
• 3. Create monthly cash flow. While we cannot predict the stock market, when it comes selling stock options, we are certain that at some point it will expire, and that we collect money for selling this option (known as the “premium”).

These three components are the fundamental blocks of my investment strategy that I will use to create monthly cash flow. Let’s go through each of these criteria.

Thinking about burgers,

Kunal

When I first started this blog, I wanted to do something pretty grand: I wanted to document my journey of creating a full time income from part time investing. But then, I realized that many people would be turned off by this, and not be able to relate to this – after all stock market investing should be tough and difficult, and requires the divine intervention of a professional, (well that is what your stock broker would like you to believe, right?). So I decided to change my tag line to be, “How to make your monthly rent payment from part time investing.” That sounds a lot more lighter, fun, and less late-night-info-product-launch.

So that is what this website is all about – how I am starting from scratch to create consistent income per month through conservative, repeatable, and logical sound investing techniques.

I have to be upfront with you, while I have had 5 years of experience in investing, it has never been anything like this – in my past, I was essentially a short-term trader – finding trading opportunities to capitalize for short-term movements. What I am trying to create on this site is something that is a little more scheduled and regular – how to make money consistently and conservatively on a monthly basis. The end-goal being to create cash cow vehicles that can generate anything from a few bucks a month for groceries, your rent payment, or even something meaningful, like a job salary.

With that being said, this journey will be new to both you and myself, as well. My specialty is stock option investing, but I do realize the important of building a portfolio and protecting your investments, so you will see a lot of those aspects highlighted throughout my strategy building.

I am pretty new to blogging, and video making, so I apologize for how home-grown these videos are, but I hope my information that I’ve collected from about 5 years of investing shines through these Mickey Mouse-made videos, and that you can use some of this information in your own trading endeavors.

Well, that’s me in a nutshell, and I would personally like to say, “Thanks!” for visiting my website, and I hope to have you here again in the near future.

Kunal

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“Why Stock Options Suck” was a report I wrote from the heart. It’s pretty emotional. It transforms me back to pretty tumultuous times … Times when I wished I had someone’s guidance. I was a kid, lost in a deep dark cave, without a flashlight. It sucked.

I started this site to help you, the reader who wants to learn more about stock market investing. If you were stranded in a cave, I would be there to give you a flashlight, and an extra set of batteries.

Before you download my report, all I ask is for one simple thing: I am currently working on a series of posts about the Covered Call. These posts are unlike anything you’ll read in a normal stock option book – a real Insider’s look from someone who has traded this strategy many times in the past.

In the Comment section below, list 3 problems/concerns that you have had with the covered call. If you’ve never traded the covered call (but would like to learn) leave a comment about what has held you back from the covered call.

What I want to do is take these comments and use them for basis of future posts.

After you leave your comments, go ahead and click here to download “Why Stock Options Suck”. :

Thank you for your time. And believe me, as an option trader, I know how valuable time is.

Kunal