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Stock Market - I Am Ready To Begin - My Long Term Goal
So you've now had the opportunity to establish your short term goals and now it's time to think about your longer term goals. These can be as short a period of time as ninety-days or as long as five years.
So if we break it out into pieces, we can easily determine the proper course of action for your trade plan.
Setting up longer term goals takes much more planning than setting up your shorter term goals.
We've already established our account with a broker we're comfortable with and we've prepared for some of the eventualities that can come with shorter term trading so now we are ready to begin setting our a longer term plan.
Since options trading can be done in the form of 'day trades' (i.e. trades that are liquidated at the end of the trading day they are purchased), or in incremental trades of 30, 60, or 90 days (or longer if you look at investment products such as LEAPS), it is wise to begin thinking in increments of trading.
If you're 'long term' plan is for thirty day trading then your investment strategy will be different from those who have a longer-term plan (say 90 days or more) and you will want to invest slightly differently.
So let's discuss various trading techniques that you can accomplish in 30 days.
You have invested in shares of DELL and have purchased 1,000 shares of the stock at a cost of $27.00 per share, but are concerned that the stock price could drop below that. You want to do your best to protect this asset, and because of that you decide that an option is the best way to do so.
Armed with this knowledge you are prepared to make your first trade in a PUT option, and a review of the available puts helps you to determine that your best price will be at the 30.00 share level, just slightly above your original purchase price.
You find that the put option is trading in the 2.60 price point and determine that you will purchase 10 put contracts which expire in 30 days, (giving you the option to sell the stock at 27.50 per share). Your total investment for the contracts will be $2600 plus broker and transaction fees (keeping in mind that each contract is for 100 shares and 10 contracts therefore is 1,000 shares). As it turns out the stock drops to 26.00 per share before your contract expires and you now decide to exercise your option to sell the stock at 30.00 per share. The seller of your contract has committed to you that they will purchase your shares for this amount so you can now sell your 1,000 shares of DELL at $30.00.
What would have happened if you did not have the option? Your initial investment of $27,000 (1,000 shares of stock at 27.00 per share) would have shrunk to $26,000 resulting in a net loss of $1,000 (plus commissions and trading fees), instead you were able to realize $30,000 from the sale of the stock. Even after taking into consideration the cost of the option (and associated fees) you have realized a small gain (depending on commissions and trading costs) of approximately $400 on the sale of the stock.
Note that this example is for illustration purposes only and should not be considered investment advice.
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