Options are contracts to buy or sell a stock at a certain price. We can buy them as a proxy for buying or selling securities. We can sell them to generate income. Or we can buy them to protect other positions we own.
Options come with strict time boundaries. This aspect puts options purchasers in a race against time. The more time on that option, the more we would have to pay for it. We are “buying time” for the option to generate profit. Imagine we bought a QQQ call option instead of buying the QQQ shares for the current Turbo Buy signal. If we bought options expiring in January 2017, we would have paid around $400 per option contract (a contract represents 100 shares of QQQ). If we chose instead to buy a call option expiring in September, we would have only paid $100-200 for the contract. The big difference would be that we have a few weeks for the Turbo signal to generate a profit with the September contract. We have several months for the January 2017 contract to pay off with a profitable Turbo signal. And we are paying a good deal more for that extra time.
For sellers of options, time can be a friend. Assume you bought QQQ shares with the current Turbo signal. You could sell the September call option and put that $100-200 in your pocket to further pad your return. If the price of the QQQ goes above the strike price of your option, then your shares will likely be sold for that strike price. So you need to be aware of that and be happy that you’ve banked the amount you sold the option for in addition the gain on your QQQ shares.
Buying protection in the form of buying put options (when you own the QQQ shares) just gives you insurance in the event of a market decline. This strategy works best when you are happy with your gain and want to lock in a portion of your profit. If the QQQ begins pulling back and declining while the Turbo signal remains a Buy, you will be profiting from that put while your QQQ shares decline; thus, minimizing or even completely neutralizing the decline in your portfolio.
We have spoken of using options in the past and encourage those of you interested in these strategies to consult those prior weeklies on the topic. You should also make sure you fully understand from your broker the ins and outs of option contracts. They can be powerful tools to help your portfolio. Implemented without knowledge, however, and options are powerfully dangerous.
How to invest without emotions?
Our simple Buy–Sell–Cash signals attempt to make investing decisions mechanical, taking the emotion out of the decision. Still, we worry about our investment accounts and losing money. An interesting study confirmed what we already have observed. People who watch the market are typically more nervous than people who don’t. The study found that investors who looked at their account annually were far more comfortable investing in stocks. That’s because stocks don’t often show a major loss over a year’s time-frame. There are very painful exceptions, of course, and more than most are comfortable with over the past decade. Still, investors watching the daily gyrations of stocks can easily get frozen in a volatile market and walk away from investing completely. Letting our signals light your way works. If that’s not comfortable enough, letting our friends at MarketTrend Advisors implement the signals for you is another option. Watching the market can cause heartburn and worse. We all know and have experienced that. The less we watch, for most people, the happier we are.
With the bulk of earnings announcements done and a majority of companies again beating meager lowered expectations, investors largely slept through the week. The only substantive news came on Wednesday, delivering the much anticipated Fed July meeting minutes which indicated that two Fed members (but only one voting member) favored a 0.25% rate hike while the other dozen members opted to wait for more data. Even the Fed minutes however were not enough to motivate traders as the post-earnings lull continued throughout the week, with stock trading volumes below average for 25 consecutive trading days as of Friday.
The Dow and S&P500 both closed down around 0.1% for the week while the Nasdaq Composite squeaked out its 8th weekly gain, closing up 0.1%.
Warm wishes and until next week.