A Critically Important ABC that any serious investor needs to read: Enjoying profit opportunities and avoiding pain are two of the mainstay pillars of any investment strategy. All very obvious, so why an article on the subject?
Well, it is one thing knowing something – another, actually acting upon it. This is a theme that we have iterated many times over the past decade – through these articles. Our bootcamps. Workshops and many other mediums. So let’s take a look at a couple of real time examples.
A is for…. Apple!
Apple Inc. (NASDAQ:AAPL) has been running hard and is in the lead up to its launch of the iPhone 6. In just a couple of weeks. The stock’s run has been stratospheric and well in line with our Outrageous Market predictions 2014. The new iPhone6 will likely boast a larger screen. Repositioning the Cupertino giant to recover those that moved to Samsung for a larger screen. All bodes well for a further round of multiple billions in terms of profits. As users migrate from old to new technology. However, the stock looks toppy on a technical basis. And a pull back in the price is a very likely possibility, post announcement. This may represent another buying opportunity for those who sat back and watched. Versus those who took action and got paid.
Looking at our client accounts. We are presently sitting on a gross 5.3% profit from the last 2 weeks. On our Apple Inc. (NASDAQ:AAPL) September Covered Calls, and a whopping 19.2% gross profit over the same period (2 weeks). On the more geared Call Diagonal trade. Now of course there are risks on these trades (after all, trading does involve risk of loss). And hence why both have stops on them, in order to protect capital – which we will likely be tightening up, to lock in these profits. For those that have attended our training, you will recall I spend half of the first day, providing a set of 4 Rules to help you minimise the risk on trades like these. However, it could be argued that the bigger risk was watching this happen ie Apple Inc. (NASDAQ:AAPL) going up, and you not making a red cent from it.
If you missed either of these trades, Click Here and one of our team will be happy to discuss our strategies in more detail.
B is for… BHP
BHP Billiton Limited (ASX:BHP) is also in an interesting position. The stock has remained surprisingly strong, in spite of the sharp declines in Iron Ore prices (from just north of $120/tonne at the start of the year to a $88.90 yesterday). Part of this can be argued away by BHP Billiton Limited (ASX:BHP) being more than just an Iron Ore play. Part of this sell off has been attributed to a weakening property market in China.
The company is in the midst of spinning off its non-core businesses to its shareholders. As well as going ex dividend next week. The non-core businesses are touted as being worth around $4/share so by default. That is $4 of intrinsic value that is currently sitting in the BHP Billiton Limited (ASX:BHP) share price that will be carved out on the follow through of this action. In addition, with the dividend in the wings – around 64c. That is also an amount of intrinsic value to be stripped from the shares.
With both of these factors in mind, as well as the elephant in the room – Iron Ore prices falling. We expect to see a further short term pull back in the stock. Now of course, this is not a bad thing, as it presents a new buying opportunity to get into BHP Billiton Limited (ASX:BHP) from lower levels. Point here being YOU HAVE BEEN WARNED!!
This exposes the danger of blindly holding the shares for the long term. Particularly if you can hop out of the trade, let all of the dust settle. And then re-enter later, at a better price. While some will argue that you may then miss out on owning a stake in BHP Billiton Limited (ASX:BHP) non-core businesses. There is a reason BHP Billiton Limited (ASX:BHP) is spinning them out of its operation!
Ok so how is a fall in the share price a good thing?
Part of the reason we use various strategies to trade the markets, is to enable our clients to have profit opportunities across a range of market conditions. Looking at BHP Billiton Limited (ASX:BHP). We entered a Bear Call Spread (a strategy that profits from a fall in the price of the shares) on the 24th July, this year. At that time, BHP Billiton Limited (ASX:BHP). was trading at $39.37 – a level we believed was a bit over the top.
Today, we are closing this position – one month later, for a gross profit of 60.84%. Again, there are risks to this kind of trading. To help manage them, we used in this case, a debit spread. Ensuring the risk on the trade contained to the outlay on the trade, and nothing more. Additionally, we ran a stop on the trade too. To make sure that if our view was wrong. The loss would be cut early.
If you missed this trade, Click Here and one of our team will be happy to discuss our strategies in more detail.
C is for… Confidence
We always hear in the media, how important confidence is. Whether it be in the broader economy and retail sales. Business confidence and of course market confidence, when it comes to investing.
Confidence is often associated with certainty – not so easy, when it comes to investing. But an alternative definition is that “a chosen course of action is the best or most effective”.
Selecting what is likely to be most effective comes down to one very important component in trading – in fact this is Rule 1 of the 4, I teach at bootcamp. That is you simply must have a View. If you don’t, then stay out of the market.
Note that there is a difference here between having a view and being right. As can often be the case and hence why risk management is critical. In the above article, I have shared with you a snippet of our views and more importantly, how we have taken actual trades to profit from these views. You may have been on them – if you were then great – enjoy spending or re-investing the proceeds. But if you weren’t on them, why not?
Chances are, it was because you are lacking confidence and that is what typically separates the spectators and the players in the market. The good news is that it is something we can probably help you with and as such. Why not spend a few minutes with the team. Click Here to set a time and we look forward to assisting you.