What can Options Traders do better?

What is a Reverse Split?

Why I hedge

First off, your probably thinking why am I talking about a bush in an Options Trading group. Well I'm not. A hedge in the financial world is basically protection in case the market goes the wrong way that my position is in. For example, let's say I'm long 300 shares of SPY which as of close on Friday May 15th is worth $85,884.00. Now with the run the market has been on, you don't want to add anymore shares and you feel like the market could go down a bit or a lot depending on how you're looking at the market overall right now. 

So you think the market's going to go down. You can buy puts on SPY, but those tend to be pretty expensive and you have limited cash available. Well you can buy a butterfly put spread with strikes of 260/255/250 on SPY with a June 19th expiration date for 0.14. That's a max profit of $486 per butterfly. Remember a typical butterfly is you buy one of the first strike, sell two  of the middle strike and buy one of the way out of the money strike. The goal of this to negate the effects of the market going the opposite way that your position is. It's a way to control exposure and manage risk. You can hedge with UVXY call butterflies as well but the liquidity is much better on SPY. The reason I hedge my long positions is because if even one of these hedges hit's max profit, it saves my portfolio, it helps negate the bleeding when the market tumbles. If just one hit's during the year, and that's the only one that saves me, it makes it worth it in my case.  It's up to you to figure out how much you want to spend and potentially lose on hedges. 

Disclosures: I am currently long a June 19,2020 50/55/60 UVXY call butterfly. This is not intended to be investment advice. For entertainment purposes only, please do your own due diligence before investing. I have no position in the above stock(SPY).

Strategy: SPX Put Credit Spread

I Want to Start Investing. Where Do I Even Begin? Part 1: The Importance of Saving

I Want to Start Investing. Where Do I Even Begin?

Part 1: The Importance of Saving

          "I want to start investing. Where do I even begin?" These two sentences are something most of us say to ourselves at some point in our lives. From knowing how much money to start with, knowing what kind of account to open up, and knowing what a stock even is, there is a mass amount of information that can seem overwhelming to a new investor. This often discourages most people from attempting to manage their own money. I believe, for those who have the want to take on this feat, it is a very liberating feeling to be able to have direct control of your financial future. It is also rewarding to watch your wealth grow as you stick with it. I won't be able to provide you with every detail, but I will cover as much as I can.

This first article of many is going to cover the VERY first place one would need to start: that is knowing priorities and how to save and allocate money from work.

Priorities

The number one rule of investing is to not lose money. This can happen in many different ways. It can happen from buying a bad company's stock. It can happen from gambling on penny stocks. One way it can happen may not be so obvious. 

Priority #1 - Employer Matched Accounts

One way of losing money is not taking advantage of opportunities right in front of us. Many times, employers will offer matching contributions to a 401(k) or 403(b) (if you are unsure of what these are, we will go over different account types in a future article.) Ask your employer if they have a 401(k) plan with matching contributions. If your employer doesn't offer this, you do not have to worry about this. If your employer DOES offer this, pay attention to what I am about to tell you. If your employer offers matching contributions for a retirement account, you need to be maxing out whatever they match. Let's say they offer 100% matching contributions up to 3% of your income. You need to be contributing ALL 3% of that income. Why? This is an automatic 100% gain on your investment! If you are making $40,000/year, 3% would mean you should be contributing $1,200. This is crucial. If your employer is matching that, you just made an extra $1,200 on your initial investment!

Priority #2 - Savings

Pay yourself FIRST. The first bill you need to pay is your savings or retirement account. This should be treated as a non-negotiable bill. This may seem counter-intuitive, but study after study shows that making sure you have a safety net/nest egg reduces stress, keeps you disciplined on your budget, and helps build your wealth tremendously over time. If you are participating in matching contributions, paying yourself first would technically be the second place to allocate your money. The common response that comes up is, "What if I need to pay my bills?" If you are only making enough income to cover what I call essential spending (rent/mortgage, utilities, phone, gas, food, etc), then this would be understandable. Anything that is not an absolute necessity does not count. If you can only save 5% due to ESSENTIAL spending, save 5%. A common rule is to set aside at least 10% of your paycheck every payday, but you really need to save a minimum of 20% of your income.

Accessibility to your savings may also be important. Of course, you have your traditional savings accounts, checking accounts, savings bonds, and Certificates of Deposit as a means to stow away money. But, most of these options are inconvenient should an actual emergency occur. One option would be to use an Aspiration Summit Checking Account. This company provides a checking account that pays you up to 1% annual interest on accounts with $2,500 or more, 0.25% annual interest on accounts with less than $2,500, has no ATM fees worldwide, no service fees, no minimum balances or monthly deposits, and is FDIC insured. The interest that can be made in this account is greater than the majority of checking and savings accounts provided by other banks. The best part - it is highly accessible because it is a checking account. The only inconvenience would be that this is an online-only bank. You can still set up direct deposit with your employer, have paper checks sent to you, and also deposit checks through their mobile app. This checking account provides you with a place to hold cash without it completely decreasing in value due to inflation. To sign up for an account, just go here. 

Priority #3 -Essential Spending

The third priority should be to set aside exactly what you need for all of your essential spending. If you pay rent/mortgage, set that aside. If you have a car payment, set that aside. Utilities, cellphone, Internet, you should already know what you will have to pay each month. Fixed expenses should never cause a problem with a budget. You should also know how much you spend per month on food and gas, which are not fixed expenses. You can use a site/app like Mint to track your spending habits and set your budget.

After you have an average for your food and gas, set a budget for it slightly higher (e.g. $190 average per month on food would mean a $200 budget), and do NOT go over it! This should apply to all variable expenses that are considered essential. Examples of essential spending include: food (not dining out), gas, personal care (razors, shampoo, soap, makeup, etc), home supplies (paper towels, dish soap, detergent, etc), and essential clothing (work clothes, socks, underwear, etc.) It is important to set a budget for each of these expenses. This allows you to know exactly where your money is going each month and allows you to stay financially stable. 

Use the 20/50/30 rule to determine if you need to generate more income. The 20 part refers to your savings by using 20% of your income. The 50 part refers to the essential spending of your income using 50% of your income. The 30 refers to all other expenses using the remaining 30% of your income for this portion.

Priority #4 - Debt

Debt is not always a bad thing. Debt allows us to purchase a home, purchase a car, go to college, and build our credit scores. However, letting yourself be consumed by debt can ruin any one's financial goals. I'm not here to teach you how to get out of debt (this is a series about investing.) What I can tell you is this, after you have done the first 3 steps above, its time to start prioritizing debt. Some debt carries interest that a typical investment cannot keep up with. If you got stuck with a 10-15% on a car loan, for example, it does not make sense to put your extra money into investments. Paying off your car should be the priority due to the interest. You should still pay yourself first! Debt should only take priority after you have contributed to an employer-matched 401(k) (if applicable), saved at least 20%, and set aside enough for your essential spending. The one exception to this rule is if you have saved enough for a 6-month emergency fund - that is - enough saved up to fund your budgeted essential spending. If you look at the picture below, you can see the effects of debt interest.

Priority #5 - Pleasurables

Most people aren't robots and need some form of joy in life. If you have met all the priorities before this one, now it's time to enjoy yourself. The remainder of your income is okay to be spent on pleasurables. This can range anywhere from dining out, going to a movie, or buying a new gaming console. While I am somewhat of a robot and would prefer to save more than the 20% minimum of my income, I understand the importance of living a little as well. It is perfectly fine to do these things. 

The problem occurs when we don't pay ourselves first and live paycheck to paycheck, when it really isn't necessary. 69% of Americans don't even have $1,000 in savings. This is a HUGE issue and one of the reasons I am starting this article series. As you can imagine, something as simple as car trouble or getting sick can throw a major wrench in some one's financial situation, especially if they don't even have $1,000 saved. I understand that sometimes it just isn't possible to save even $1. I was in that situation for the majority of my life. For those in that situation, I hope you are able to find a way to start paying yourself first. Getting a second job, working overtime, and getting education/certification are the best way you can get out of that situation.

Ben Shapiro (a Harvard Law School graduate) is gifted at using statistics to give very informative (and often controversial) speeches. One statistic he uses often applies to this article in particular. It states that as long as you can do the following 3 things, you only have a 2% of landing in poverty while having a 74% chance of being in the middle class: 

1. Graduate from High School. 

2. Don't get married until after your 21st birthday, and don't have kids until you are married.

3. Have a full-time job.

Because of this, I believe the majority of those 69% of Americans have the ability to pay themselves first. 

Summary

The goal of this article is to emphasize the importance of saving your hard earned money. We need to take advantage of opportunities if available, such as employer-matched retirement accounts. We need to understand saving is as important as essential bills. A simple 20/50/30 rule can help you determine where you stand with financial stability. When saving, only debt can justify allocating your minimum of 20% savings to paying off your debt (after your emergency fund is set up.) We also need to learn that we don't have to be robots when it comes to saving money. 

Now that I have gone over priorities and income allocation, you are ready for the next step to investing.

Disclosure: The information provided in this article is not to be construed as investment advice. Any securities you buy are ultimately your decision. Investing carries risk. Always do your due diligence before buying/selling any security. We are not being compensated for writing this article.

Originally posted by finsightcapital.blogspot.com

Do you know your Vix Basics?

     Hello fellow members of the Facebook group Option Traders.  As one of the moderators of this group I am starting a series of blog posts aimed at providing a window into the world of theVix as well as into the world of moderating Facebook financial groups. We are a diverse group of to be sure and I fear the posts that are most memorable tend to be those that are removed for one violation or another. What you may not know is that the moderators and admins have our own chat where we discuss the markets and this group. Interacting with the people who I have met as a moderator here is one of the highlights of my trading day and when Jake, our defacto leader asked me to talk about the Vix for a moment here, I was happy to oblige.
     So I was thinking in preparation for writing something; what is the minimum a retail trader needs to know about the Vix? What is the shortest amount of blog posting I can do that will get across to a rookie trader the essence of the Vix and how this fits together with trading? I suppose the answer starts with talking about where the Vix came from and what it is as well as where I came from and who I am very quickly. So here goes :).
   The Vix appeared in the late 1990s and came out of the CBOE. The CBOE is a trading floor in Chicago, Illinois in the US. The trading floor was most active in the late 1980s and 1990s. Now it is closed due to the Covid thing but when it reopens around June 1st? it will be opening as it closed a month ago with the Vix pit and the SPX pit being the main products.  I was a trader at the CBOE from 1994-2003. Back then it had around 50 different "pits" or spots where people stood and used the open outcry system to trade stock and index options. There were around 50 small pits with somewhere between 3 and 20 stocks in each pit and each pit trading options on these products with different expiries. There were also some index pits, the biggest of which was the OEX pit with the SPX pit a close second and the NDX pit really not distinguishable in size from normal equity pits. All those pits are gone now from the CBOE and it is now a big empty area with the Vix and SPX trading areas at one end. 
   Back then in the late 1990s we became aware of the Vix as a number. It was like an indicator. As time went by however, futures on the Vix were created. The published number with the name Vix associated with it is based on a formula which samples a strip of option prices in the SPX. The SPX is an index of top US publicly traded companies. As option trades we have a way of comparing option prices of one stock to another. We talk about vol... So we may say that stock a has a vol of 55 average and stock b has a vol of 70 average.  Indices also have a vol number which is usually way lower than an individual stock. This sort of makes sense because the movement of several stocks together is going to be less than a single stock as several of the stocks will offset each other.
    Think of the Vix as the vol level of the SPX. It is actually more accurately the implied volatility of options on the Spx. The Vix is the price level of options in the Spx 30 days out in time. So if you were to pull up a screen with Spx options on it you would find that the level of prices on Spx options that expire around 30 days from now will correspond to the current price of the Vix.
   Why do you care? Well knowing the level of the Vix and following it day to day is going to give you useful information about the state of the financial markets. The Vix generally is higher when the markets are down and people are concerned and generally higher when markets are calm. This is why it is sometimes called the "fear gauge." A key takeaway is that the Vix is just a number that comes out of this formula. It is not shares of anything. There is no direct way to trade it. As previously stated there are Vix futures. These trade freely and although relate to the Vix, they do so in a complicated way. We use the Vix term structure to describe what is going on with them at any one point in time.
Vix futures however can be complex to trade and thus trading the Vix should occupy a separate space from considering the Vix and an indicator and a way to help you profit when trading equities (stocks) or options on stocks. For the purpose of this series we are going to stick to the Vix as an indicator and to ways we can use it to enhance our trading of other products.
   So there you go. That is a start.. More to come....... 

In the meantime please check me out on Youtube and sub to my channel to support me: https://www.youtube.com/user/Dewdrop142

Is trading part time better?

I work full time. I have a wife, two kids, and a mortgage. I have enjoyed investing and trading for many years (decades now that I think about it!), but have always needed to find a way to do it part time. Today, I explore some of the advantages to trading part time vs. full time.

1. Free time. This is a “gimme”. Assuming trader A and trader B both make $50k a year trading and trader A can do it in 40 hours a week and trader B can do it in 5, I would much rather be trader B. This would allow for more free time to pursue other interests – read (or write) a book, go for a run, donate time to charity, or finally catch up on that Netflix (ticker: NFLX) series you keep hearing about.
2. Planning. I cannot watch the markets all day. That means I need to set up my trades ahead of time and execute them in small windows of time when the market is open. The benefit is that I can really think through the trades before I put them on, considering what can go wrong, and making sure my sizing is appropriate.
3. Discipline. A lot of traders suffer from “overtrading”. Staring at the screen, watching candles grow (or shrink) can lead traders to put on trades trying to catch small movements or “scalping” the market. While some are successful at this approach, many more are not. I don’t chase trades, I don’t try to scalp, I don’t see a short term loss and panic and put on more trades to get ‘even’. I Can’t do these things, since I simply don’t have the time.
4. Defined risk. Traders that can watch the markets continuously have a bit more flexibility in the positions they put on as they can more easily adjust positions or more quickly take off losers. As I don’t have this flexibility, almost all of my trades have defined risk going in. That way, even if I can’t get to the markets, I know exactly how much I can lose on any given trade. If I keep this small enough relative to the size of my account, I can never go bust.

So what is the disadvantage?

Covered a bit in #4, there are simply certain trade types that I can’t put on and others that are harder to capture all the profits, since I can’t be in front of the screens all day. I think the advantages outweigh the disadvantages though. Disagree? Am I missing others? Drop us a line via email, Facebook, or Twitter.

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