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Unlock the Secrets of Options Trading
Announcing Cabot Options Trader, our newest publication, which will help you leverage your investments. Get top options trading picks each week that can help you make money in any market. The first issue will be released on Monday, June 7--don't miss it! Click below to order now.
We recently introduced you to our newest newsletter, Cabot Options Trader, and today, I'm going to introduce you to the editor: Rick Pendergraft. I recently interviewed Rick so you can get to know him, just like you do all the Cabot editors. Enjoy!
Question: What's your investing background?
Answer: I have had a number of positions in the investment industry. Investing first got into my blood back in high school when my economics teacher entered me and two other students into an investment competition. In my freshman year of college I had a part-time job as a cold caller for a local EF Hutton office. Then I got my Series 6 license to sell mutual funds in 1987. At this point, I had quit school and was attempting to build a business, but things were not going as well as I had hoped and then the crash happened and I left the business for a while. I went to work in the banking industry for a few years and went back to school to finish my degree in economics.
When I finished college I went to work at Schaeffer Investment Research. I had always been more of a technical analyst and understood fundamentals, but I felt like there was something missing. It was at Schaeffer that I learned the value of sentiment analysis and why it worked. I was at Schaeffer for six years when an opportunity came up with a division of Agora Publishing in Florida. When I joined the company in the summer of 2006, the plan was to build an investment newsletter from scratch. We launched Investor's Daily Edge in August 2006 and within a few years we had built a subscriber base of over 250,000. I was eventually moved to the position of Managing Editor of the newsletter.
For the past year, I have been writing my own newsletters and have continued developing some strategies I had been working on for several years. These strategies gave me a more quantified approach to trading and they have lead to the development of the Cabot Options Trader.
Question: What are options?
Answer: Options are contracts that give the owner the right to buy or sell a stock at a specific price by a certain time in the future. For instance, the owner of an XYZ June 50 call has the right to buy 100 shares of XYZ stock at $50 anywhere between the time of purchase and the third Friday in June. If the stock is trading below $50, the option will be worth nothing come expiration day and the owner will not choose to exercise the right. If the stock is trading over $50, the option should be worth the amount that it is above $50. If the stock is trading at $60, the option will be priced at $10, which really means it is worth $1,000 since it gives the owner the right to buy 100 shares at $50.
You may notice that I keep using the word "right." This is a big difference between buying options and writing options. Buyers have rights, and on the other side is the writer of the option, who has an obligation to deliver the stock he wrote the call on should the owner choose to exercise his option.
Looking at the other side of the equation, the buyer of a put option has the right to sell 100 shares of the underlying stock at the stated strike price before the expiration day. Looking at the same XYZ scenario from the call example, if you own a June 50 put contract on XYZ, you have the right to sell XYZ at $50. If XYZ is above $50 at expiration, the put option won't be worth anything because you can sell it on the open market for a higher price. If the stock drops down to $40 and you have the right to sell 100 shares at $50, your put is now worth $10, or $1,000 since it represents 100 shares.
Question: Do you prefer options to other investment vehicles?
Answer: I can't say that I prefer options over any other kind of investment vehicle, I have just learned how to use them effectively over the years. Many people are scared of options because they don't really understand them. I have spent over 20 years learning to trade options and as a result of this practice, I have come to understand them better than most people. I will say that I got hooked on options at an early age when I was holding calls on a company and they were bought out by another company. I saw my small investment turn into a rather large stake. Unfortunately I went looking for the next buyout and lost most of the money I made on that trade. Fortunately that trade allowed me to make many mistakes and that was the cost of my education in the market. The leverage that options provide is incredible and once you learn to use that leverage effectively, options can be an invaluable weapon in your investment arsenal.
I believe that options should not be your only investment vehicle, nor should they be used as your primary investment vehicle. The best way to use options is as an enhancement to your long term portfolio. When we have a volatile period like we have seen lately, you can use the leverage of options to capture nice gains with less money exposed to the market.
Question: What did you learn from the Big Bear of 2008 and the historic recovery last year?
As an options guy, I tend to look at the short-term picture a little more closely than the long-term picture. In late 2007, my economics education gave me a pretty good heads up that a recession was on the horizon and that the market was in for a rough period. Little did I know how rough it was going to be, but the lesson I learned was that you can't get too caught up in the short-term and you have to step back and look at the bigger picture as well. I started getting pretty bullish toward the end of 2008 and that was because I was looking at daily, weekly and monthly charts. The S&P was more oversold than at any point in history on the monthly charts. Had I just been looking at the short-term, I would not have been positioned right for the huge rally in 2009. I actually have friends in the business that missed the rally last year and I think it is because they were too focused on the short term.
I'll be back with the second half of my interview with Rick next week. Stay tuned!
Click below to learn more about how Cabot Options Trader can help you profit in any market.
And now for today's Stock Market Analysis Video with Cabot China & Emerging Markets Report Editor Paul Goodwin. Paul discusses the importance of going into cash when the market is down and why he's feeling slightly more optimistic this week.
Paul also talks about the news that caused the market to bounce at the end of this week. However, it's still hard to say where the market will go from here. Stocks discussed include China Mediaexpress (CCME), Dr. Reddy's Labs (RDY) and Alaska Air Group (ALK).
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In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.
Cabot Wealth Advisory 5/24/10 - Throw the Bums Out
On Monday, Timothy Lutts wrote about the increasing opposition to the political status quo in the U.S. and around the world. Tim also discussed the current market situation and a hot stock in the advertising business.
Cabot Wealth Advisory 5/25/10 - Two Stocks from our Neighbor to the North
On Tuesday, J. Royden Ward discussed our neighbor to the north; Canada and the many investment opportunities that can be found there. Roy focused on two stocks that he thinks are good buys right now. Featured Stocks: Canadian Pacific Railway (CP) and Lululemon Athletica (LULU).
Cabot Wealth Advisory 5/27/10 - The Frequently Asked Questions Issue
On Thursday, Michael Cintolo answered some questions that our readers have been asking during the recent correction. He covered everything from what to do now if you're still holding losing stocks to when to buy when the bull market resumes.
Until next time,
Editor of Cabot Wealth Advisory
P.S. Don't miss the very first issue of Cabot Options Traders, which will be released on Monday, June 7. Get started with us right from the beginning with our Charter Subscription rate!