In this blog I will talk about share trading with Options. I am not a stock broker or licensed financial advisor, I am not aware of your current financial situation and the information contained in this blog is not intended to be financial advice.

I am however, an astute and well educated investor and the intention of this information is to open your mind to the possibility of minimising or even eliminating the risks involved in share trading. I recommend that you speak to a stock broker who has a proven track record and is licensed to trade Options.

If your broker tells you that trading shares with options is risky then I would urge you to hang up the phone and find another broker.

If you’re a ‘mum and dad’ type investor who buys a parcel of shares on advice from a broker whom you trust with the intention of holding the shares long term for capital gain, then you might be interested to learn that it is possible to protect your investment in a similar way to which you would insure your car using a put option.

You can purchase from the market an Option to sell your shares at any time at an agreed price regardless of what’s happening in the market. This is called a ‘put option’.

You can set whatever price you like; however, the higher the price to more expensive the option. Insurance is no different.

Option contracts (on the Australian Market) can only be done on parcels of approximately 1,000 shares and the contract period is a minimum of one (1) month. With the right shares you can purchase an Option over 12 months or more.

This means that if the price of your shares drops below the agreed price you can choose to (but you’re not obligated to) sell your shares at that agreed price. Therefore, the only loss you will sustain is the difference between what you paid for the shares and what you sold them for plus what you paid for the Option and the brokerage.

H.I.H was considered a blue chip company before it went broke and thousands of investors lost a fortune because their investment was not protected.

Would you spend $250,000 on a house and not spend $2,500 to protect it with insurance? Of course not, so why do so many people invest their life savings in something and not protect it? The answer is, they didn’t invest the time educating themselves and took the advice of ‘experts’.

If your life savings are invested in a Managed Fund, ask the fund manager if your investment is protected with a Put Option. If not, why not? You looking for a straight answer, not the traditional “Trust me, we know what we are doing” response.

It’s worth noting that you can really only trade Options on high end blue chip shares in lots of 1,000. However, would you rather spend $50,000 on a properly protected investment or would you spend $10,000 on speculative shares with the potential to lose it all. If you going to do that – you’ll get better odds on the Melbourne Cup.

Bye for now

Tim

It’s a commonly held belief that investing your hard earned money in the share market or business or to a lesser extent property is risky. So is it really risky?

To answer that question you first need to have a clear understanding of what risk is. My definition of financial risk is to invest a set amount of money into something which has the potential to reduce that amount of money but not eliminate it. To invest in something with the potential to eliminate the investment is stupid not risky!

The belief that share trading or business ventures are risky generally comes from people who have either lost significant amounts of money (or know someone who has) because they chose that investment on the advice of someone but didn’t have their investment properly protected.

Protection of your investments is best done with a combination of two things. The first is insurance. Even shares can be insured to minimise the risk. I will explain that in detail in my next blog. The best protection will always be your own education. Don’t invest in anything you know very little about and are completely reliant on an ‘experts’ advice. Only a very small percentage of ‘experts’ actually know what they are doing. This is because the vast majority of their clients are uneducated.

Choose a stock broker or real estate professional (notice I didn’t say real estate agent) that only deals with education institutional investors.

Think about this for a moment…

If you took a loan 10 years ago for $25,000 and purchased a parcel of shares in Woolworths what would your investment be worth now?

On the other hand if you took a loan 10 years ago for $25,000 and purchased a Holden Commodore what would your investment be worth now?

The answer to this question seems so obvious and yet the vast majority of people will actually buy the car.

The fearful uneducated will say ‘well if I could see the future of course I would buy the shares but there’s no guarantee’. My answer to that is if you want a guarantee, you’d be better off buying a Plasma Screen TV, they come with a 5 year guarantee! But seriously, when they purchased the car 10 years ago they were guaranteed that after they paid the bank around $32,000 for a $25,000 vehicle in 10 years time it would be worth $5,000. Even with that guarantee they still went ahead and invested the money.

It’s important to remember that the key to becoming a successful investor is education! Learn how to protect your investment before you invest. A proper education will teach you that what you have been doing in the past is far riskier than any properly protected investment portfolio.

Bye for now

Tim