A trading plan is the roadmap or set of rules that define your trading. A good trading plan should include these elements:

• The specific instruments you’ll be trading
• The strategies you’ll be using
• The entry and exit signals including your profit or loss targets
• Your trading times and importantly when you won’t be trading e.g. 15 minutes before news announcements
• Your total trading bank and the maximum allowed per trade
• Emergency contact numbers for your Broker’s desk (in case you lose your internet connection)

In addition to your trading plan, you should always capture details about the trade you take. You should capture:

• The instrument you traded
• The date & time
• The strategy and entry signal
• The price and profit or loss
• The emotions you experienced during this trade
• A screenshot of your charts
• Any other metrics to help you analyse your trade performance

Analyse your trading performance regularly and with this modify your trading plan to maximise your returns.

Developing your trading plan can take some time because you need to test your strategies and signals using your trading style. You can do this using a live simulator (most trading platforms provide this facility) and execute trades over a month or two.

Alternatively you can accelerate this process by using an historical simulator such as this one stock market simulator. With this simulator you test your plan very quickly using real historical stock data. It can save you heaps of time and effort.

Now you may have noticed that so far I haven’t used any technical terms in describing this stock investing strategy. Like most things in life, brokers and other people in the financial industry have developed there own language when talking about this stock investing strategy.

So let me introduce you to the technical language. Please don’t be put off by the strange words; it’s really quite straight forward.

The stock investing strategy we have been talking about is technically called; “Writing, out of the money, covered calls”. Pretty strange hey!

Well let’s just go through it and you’ll see that it’s really easy.

The word “writing” in technical speak simply means “selling”. We are selling the right for someone to buy our shares. So just replace “selling” with “writing”.

The term “out of the money” simply means that the agreed price, the price we have agreed to sell our share at, is higher than the current market price. So “writing out of the money” simply means that we are agreeing to “sell our shares at a price that’s higher than the current market price”.

The term “covered” simply means that we “own the stock” that we are agreeing to sell. You can also enter into an agreement on stock that you don’t own but that can be very risky and is not recommended.

The term “calls” simply describes the type of agreement. There are “call” agreements and “put” agreements. When you write a “call” agreement you are selling the right for someone to buy your shares. When you write a “put” agreement you are selling the right for someone to sell their shares to you. Don’t worry about the “put” agreement for now; we’re just looking at the “call” agreement.

So that’s not too difficult so far. Now lets complete the technical description. The technical term for the type of agreement we are entering is called an “option” agreement. I’m sure you’ve heard of options before and even if you haven’t I can guarantee you’ve used one before.

Ever bought something by paying a holding deposit? If you have, you bought the option to buy the item at a later date (that’s a call option). Do you have car insurance or house insurance? Well if you have, you have bought a put option. By paying the insurance premium to the insurance company, the insurance company has agreed to pay you an agreed amount of money if your car is damaged or your house burns down.

So options contracts are all around us in our everyday lives. BUT here’s a very important point. In the stock market, options are seen by many as very difficult and very risky. Well this is true if you are on the side of buying options. Buying options can make people a lot of money or lose a lot of money. It’s a business for only experienced people. Remember our analogy to the lottery company? Well the option buyers are the ticket buyers of the lottery company except that the stakes are much higher. Most people lose when buying lottery tickets and it’s the same with buying options.

We on the other hand with this stock investing strategy are “selling” call options. And we are selling them “covered” meaning that we own the stock and hence cannot get caught out with unlimited exposure.

OK now just a few more technical terms and then I show you where you can see what contracts are available.

We spoke earlier about the “price we agree to sell our shares at”. The technical term for this price is the “exercise” price.

We also spoke about the “agreed date” that’s the date the agreement ends or expires. The agreed date is called the “expiration” date of the agreement. The expiration date is the Saturday following the third Friday in the month. Though Saturday is the official expiration date,the third Friday is the last trading day. If the third Friday is an exchange holiday then the Thursday prior becomes the last trading day.

And finally we spoke about the fee that you receive and the technical term for this is the “premium”.

Pretty straight forward right.

So let’s sum up with an example. Here is a table from the Chicago Board Options Exchange (CBOE) showing some of the call options available for a company called Motorola. They’re the people who make cell phones.

OK let’s go through each part of the chart and explain how to read it.

You’ll soon see that’s it’s not that hard to understand.
Starting in the top left area we have MOT(NYSE). MOT is the stock exchange code for Motorola and the stock exchange that the stock is listed on is the New York Stock Exchange (NYSE).

At the top right we have two numbers “15.8 and -0.78″. This is the current stock price ($15.80) and the price change from the previous day. So the current stock price is $15.80 which is down 78 cents from yesterday.

Next we have “Jul 18,2004 @ 18.54 ET (Data 20 Minutes Delayed)”.  This gives the date and time that the information was retrieved.  It also indicates that the information is delayed by 20 minutes.  You can get delayed information like this for free but you’ll need to pay to get it live.  For the stock investing strategies we are talking about, the delayed information is fine.

Now we have the table headings:

Calls refers to the type of agreement we are looking at.  In this case “call” agreements.  Remember when you sell a call agreement you sell the right for the other party to buy your shares at the exercise price on or before the expiration date.

Last Sale is the price the last sale of the call contract occurred at.

Net is the change from the previous sale.

Bid is the price that people are offering to buy the call options.

Ask is the price that people are offering to sell the call options. Notice the difference in the Bid and the Ask.  Basically sellers, that’s us, what to get the highest price and buyers what to pay the least they can.  At some point a seller will lower their price to a low enough level and/or a buyer will raise their price to a high enough level for there to be a match and the transaction occurs.  This transaction then becomes the Last Sale price and on it goes.
Vol is the Volume or number of option contracts bought and sold for the day.

Open Int is the Open Interest in the option contract and gives how many options contracts are currently written.  When you write a contract you will add 1 to the Open Interest amount.  The contract you write however may be bought and sold many times during its life hence the Volume indicator.

If you want to read how the CBOE defines these as go here… CBOE Definitions. Be sure to come back though because we’ve got just a bit more to go through.

OK that’s the headings. Now let’s select a particular contract and see what it says.

The stock price is currently at $15.80. Our strategy is to sell “out of the money” calls and so we might choose to write, or in other words sell, the $16.00 call option. Here are the details of this option contract taken from the table above.

Calls	Last Sale	Net	Bid	Ask	Vol	Open Int
04 Aug 16.00 (MOT HQ-E)	0.85	-0.5	0.95	1.1	875	1527

Now what does this say. It says that we are writing or selling a call contract that has a $16.00 exercise price (the price you agree to sell your shares), that expires at the end of August 04 (the date the agreement ends). The code used to define this particular contract is MOT HQ-E.

The premium of the last sale was $0.85 per share (that’s the fee that you get); that is down 50 cents from yesterday. The current price that people are offering to pay is 95 cents and the price that people are offering to sell is $1.10.

The volume was 875 for the day, that’s the number of this particular option contract that were traded i.e. bought and sold. And there are 1527 option contracts open. That means that for this particular option contract 1527 are currently open and able to be bought and sold by others.

If you had written one of these contracts then your’s would be one of these. If you closed out your contract by buying it back (yes you can buy it back anytime) then this number would reduce by 1. Only the person who originally sold the contract (in other words opened the contract) can close it; although this one contract can be bought and sold many times by others, hence the volume figure.

So with this contract MOT HQ-E we are agreeing to sell our shares, that are currently priced at $15.80, for $16.00 if we are asked to by the expiry date (that’s the third Friday in August). For this we will receive a premium of between 95 cents and $1.10, depending on the prices at the time you sell the contract.

Let’s say you get 95 cents. 95/1580 is a 6% return for just over one month. And if the stock price rises to $16.00 or above by the end of August then we get to sell our shares for a further 20 cent profit as well. Of course if the stock price doesn’t get to $16.00 by the end of August then we can write another call for September. What do you think about that???

So you can see that it’s not that hard to read these charts and once you’ve seen a few of them it will become second nature to you.

You can look at the options contracts for any of the stocks you like by going to the CBOE website. Click here… Options Contracts then enter the stock code, tick the “List near term at-the-money options” item and then “Submit” and you’ll get all the options for that stock that are around the current stock price.

If you need to find out the stock code for a particular stock then click on the “Stock Symbol Look-up” tab.

OK we’re nearly there. Just a few more things to cover.

Firstly, there are some nuances to stock investing with options that you need to understand. Things like, how is the price of an option calculated, what happens to the price of an option as a stock dividend day approaches, what stocks are best for covered call writing and so on. I’ve given you the basics here but to make this work you need to commit to learning these things. Believe me, the rewards of making this stock investing strategy work for you with be worth you investing a little bit of your time.

So where to get this information. Well there’s lots of information around on this stock investing strategy. An excellent source of information is this book by Rick Lehman titled “New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing”. Click here Bookstore then enter “covered calls” in the Quick Search Box.
If you want to get started even quicker then you can subscribe to a covered call service whereby you are recommended, on a weekly or monthly basis, specific call options to sell.

Here’s a covered call service that’s reasonably priced. You can actually trial this service for 2 weeks for just 99 cents to see if it suits your style… Stock investing service

If you want an homestudy course to learn this and many more strategies in the comfort of your home then this one is the best I’ve seen.

It covers the strategies I’ve shown you here plus many more. This course is focused on Positive Cash Flow from shares and comes with one year email support.

It’s great value because it covers 47 strategies and the support is procided by the Author, who is in fact a Fully Licensed Financial Advisor. To find out what’s in this course click here… Positive Gearing for Shares.

OK so now let’s ask you to make a decision…

Is this stock investing cash strategy the one that you want to start with in building you wealth machine?

If it is, and trust me that it is a great way to start, then go ahead and do something about it. Read some books from the Bookstore.

Or is you really want to get going fast, get this Paper-Trader software that shows you the strategies in a safe, simulated environment (it’s like a flight simulator but for the stock market)… Paper-Trader.

Disclaimer:
The information provided herein is NOT FINANCIAL ADVICE. It is educational material only. You must make your own decisions when investing and seek appropriate qualified investment advice. The author is not a financial adviser.

What’s the downside is a very obvious question, especially when it seems on the surface that this stock investing strategy so straight forward and so stacked in our favour. Well there are a couple of things to consider. Firstly, since you own the stock there is always the chance that the stock price will fall. If this happens you of course get to keep the fee paid to you but you have a paper loss on the stock.

Now in reality if you are happy to own a stock then you’ll always have the risk the stock will fall in price. Remember though that we are dealing with good stocks and history will show that stock prices on average will rise in price over time; albeit with price dips along the way.

In fact have you noticed what happens each time you receive your fee from this stock investing strategy. You actually reduce the cost of your shares so that employing this stock investing strategy continually REDUCES YOUR RISK compared to simply buying and holding the shares.

In our example, our stock would actually have to fall to $19.50 before we lost any money. That’s $20.00, the price we paid for the stock, less 50 cents the first fee we received. So it’s a risk reducing stock investing strategy.

The second thing to consider is that if the stock price does rise substantially, and it might on some occasions, our profit is limited to our agreed price. In our example our profit on the stock is limited to $1.00. That’s $21.00 the price we have agreed to sell at, less $20.00 the price we bought the shares for. However as we have already said it is much better to be the one that receives the small regular cash each month than to be the one HOPING for a big rise in price. In other words better to be the seller of hope that being the one hoping.

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Disclaimer: This information is provided for educational purposes only.

Well once again you don’t have to do much here because the sell price, the agreed date and the fee are all pre-determined for you with this stock investing strategy. You just need to go through the list (I’ll show you where to find this in a minute) and choose the one you like. Then you call your broker and say which one you want and they’ll execute the agreement. Your fee (the money the other party pays you for the right to buy your shares) gets paid into your account virtually immediately. And as we said before you get to keep this fee regardless.

Are you beginning to see the simplicity of this stock investing strategy? And are you beginning to see how effective this stock investing strategy can be at making you extra monthly cash? Depending on how many shares you currently own or how much cash you have you could easily be making an extra $3,000 per month. Well let’s complete the picture…

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Disclaimer: This information is provided for educational purposes only.

The good news about this stock investing strategy is that finding someone to enter into an agreement with you is actually done for you. There is a whole market of people out there, on the stock exchange, who have already placed requests to enter these agreements. You really don’t have to do anything; the stock exchange will match you as a seller with a buyer, and it happens virtually instantaneously. In reality there are thousands of people using this stock investing strategy right now; it’s been going on for years but unfortunately most average people don’t know about it.

I’ll show you later where to go to actually see on the internet what the current sellers and buyers are doing with this stockinvesting strategy, what stocks are being used, how much is the fee etc.

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Disclaimer: This information is provided for educational purposes only.

People enter into agreements to buy shares at a future date like this all the time. Why? Because the person who pays you for your promise believes that the price of the shares is going to increase before the end of next month. If the current stock price is say, $21.00, they might think the price will rise to $22.00 by the end of next month.

If this happens then the person who paid you will be able to buy your shares for $21.00 and sell them for $22.00, making a $1.00 profit. If we subtract 50 cents for the rent they paid you, then that’s a net profit of 50 cents. They only put up 50 cents (the fee they paid you) so if they are right and the shares do go up to $22.00, then they have made a 100% return on their money in a little more than a month.

Now look at what’s happened to you in this stock investing agreement. You bought shares at $20.00 and received a 50 cent fee when you sold the right for someone to buy your shares at $21.00. If the shares don’t reach $21.00 by the end of next month, then you get to keep the fee paid to you, plus you get to keep your shares. How good is that?

Now if the stock price rises to $22.00, you will have to sell your shares for $21.00 making a $1.00 profit. PLUS you get to keep the fee paid (you keep this fee regardless of what happens). So you will have made a total profit of $1.50. That’s a 7.5% profit for you in a little over a month.

So you can see that in this agreement both parties win. The difference is that the person paying the fee for the right to buy your shares is taking a bet that the stock price will rise. You on the other hand are happy to take their money, just like a lottery company takes money from people, because you know that no matter what happens you win. And do you know what you do the following month with this stock investing strategy? Yep that’s right, you do the same thing again.

Now be aware that if your stock rises to say $30.00 you’ll need to sell your stock for the pre-agreed price of $21.00.

But what generally happens when stock rise sharply like this? That’s right they tend to fall again. So you can miss out on some upside but in return you are getting cash flow.

If you want to test what return you’d get if you did write covered calls versus if you didn’t, you could take a look at this Stock Market Simulator. It lets you test and practice without risking your money. Click here… Paper-Trader

Generally they don’t rise so sharply and even if they do rise it’ll usually end up not much higher than the $21.00 in our example. So you’ll usually get to keep most of the profits. If the stock price does rise and you really don’t want to sell you shares, I’ll show you how you can “buy back” your agreement.

CONTINUED…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Check out the answers by clicking on each question. If you have a specific question, ask it at our New Stock Market Forum. Be the first to ask a question.

Disclaimer: This information is provided for educational purposes only.

When you buy stocks at a discount, two things happen. First you effectively make an instant profit because you could immediately turn around and sell your stock at the market price. And second you lower your risk because the stock price needs to fall further before you’re in the red.

Click on the video below to learn more…

Resources:

1. To learn about Technical Analysis

2. To open a Trading Account. Note, only use an online Broker such as this if you’re totally comfortable with the strategy. If not you should use a Full Service Broker, at least to get started.

3. To practice this strategy using a Stock Market Simulator

Now there’s a way to get knowledge and experience BEFORE risking real money. This stock market simulator lets you practice trading stock, options and CFDs.

• Practice at any time over the past six years
• Behaves just like the real stock market using real stock prices
• You trade just like you do for real
• CFD trading, Option strategies and any combination of stock, CFDs and options
• Practice simple trades and complex combination strategies
• Come pre-programmed with Covered Call, Credit Spread Strategies, Debit Spread Strategies

This is a great piece of software with good support and is very inexpensive. We totally recommend it… CFD Trading & Option Strategies

Stock Market Software | Option Strategies | Spread Trading | CFD Trading

The price of CFDs follows closely the underlying stock price. So the price Microsoft CFD will be very close to the price of the Microsoft stock itself.

The differences between CFDs and Stocks are:

• You borrow and pay interest on 100% of the CFD price
• You deposit around 10% of the CFD price so leverage is very high
• CFD brokers either charge a standard brokerage fee OR a spread price where the CFD price you pay is slighly higher than the stock price
• You can short CFDs just as easily can going long
• When you go short, you get paid interest but you must pay the dividend
• When you go long you receive the dividend but you must pay insurance
• The dividend for CFDs is paid and received without any franking credits

Resources:

1. To learn how to trade CFDs, use this Stock Market Simulator

2. Information about Technical Analysis

Stock Market Software | Option strategies | Spread trading | CFD trading

So let’s get started in understanding this stock investing strategy. Let’s first look at how this stock investing strategy works and why it is so good in lowering risk and giving such great returns. Stock investing for regular monthly cash couldn’t be easier.

Right, let’s assume for a moment that we own some shares in a good company. I’ll show you later how to get the money to buy these shares. Let’s say that you bought this stock at $20 per share.

What we do is this… With this stock investing strategy we make an agreement with someone to buy our shares from us for say $21.00 if they ask us to on or before an agreed date (let’s say for this example the agreed date is the end of next month).

Because we are selling to them the right to buy our shares, they pay us a fee; let’s say 50 cents per share. So we have entered into an agreement to sell our shares that we bought for $20.00, to the other party for $21.00, if they ask us to by the end of next month. Pretty simple hey!

It’s similar to renting out your house, because when you rent out your house you give someone the right to use your house and in return you get paid rent.

Now when I explain this stock investing strategy to people I always get the same four questions…

1. Why would anyone pay me to buy my shares at a higher price than I paid for them?

2. How do I find someone to enter into an agreement like this?

3. How do we agree on the sell price, the fee and the date?

4. What’s the catch?

5. The Technical Stuff

Check out the answers by clicking on each question. If you have a specific question, ask it at our New Stock Market Forum. Be the first to ask a question.

Disclaimer: This information is provided for educational purposes only.