While you never know which way the market is going to move, historically, it continues to go up, rising along with the economy. January is often a good time to buy, and it certainly appears there are some great trade ideas going into the New Year. If you look at the Forex Market, it appears that AUD/USD is set to start rising towards that .80 mark. Certain stocks are at discounts, as I have been getting many 52 week low notifications. There are many great trade opportunities.
Whether you trade or buy and hold, it’s important to understand the options market, too. The options market can help you make extra income on your investments, and it can also serve as insurance. Let’s say that you have a good belief that there is a trade opportunity for company X. You decide that you are going to make an investment and buy 500 shares.
But let’s say that company X doesn’t perform immediately like you thought it would. The next quarter is reported, and the price of the company’s stock goes down $2 a share. You just lost $1k, or did you? You see, let’s first assume that company X is a dividend paying company. So you can calculate the dividend on 500 shares and subtract that from your losses. Now let’s add stock options to the mix.
Let’s say that you decided to write covered calls for those 500 shares. You pushed out the timeframe so that you would receive a bigger premium. Had the stock price of company X been on the rise and landed in the money according to your covered calls, then your shares would be called away from you. Yet you would have made the money on the increase in share price, and possibly a dividend for the quarter.
Yet with the decline, you’re counting on that premium. You still have your shares, you still have your dividends, and you get to collect the premium. And you can do this over and over again, protecting your investments. With this type of trade idea, you are wanting your stocks to increase over a period of time collectively. But you are protecting yourself and making money even in a market downturn. There are other strategies you can group with this to help you make that 15 percent compounded return annually while continuing to minimize your risk at the same time.