Most of my extended family lives in India. No, correction… ALL of my extended family lives in India. Every five or six years we take a vacation to go visit them. Personally, I love going to India not just to meet my family, and to see the sights, but because I get to stuff myself with the best tasting (and freshest) foods available.

Another aspect of India that I love is experiencing the chaos and hustle of the streets. With over a billion people, there always seems to be something going on, something to watch … literally, 24/7. In this video, I captured a clip of a cool, calm, collected cow casually strolling the streets of Delhi. Listen for the honks of the cars that are just weaving almost within inches of its body. I think there is even a rickshaw in the clip.

Priceless!

How this helps you as an investor: The market is crazy and at times seems very illogical – especially during bearish pullbacks, or worse, a bear market. When everyone else seems to be losing their reasoning, YOU have to maintain your composure. Remember, if you maintain proper risk management and position sizing, you will be able to weather any storm. Any survivor of the Bear Market of 2008 will tell you the same.

Keep calm. Everything will be ok … even when the bottom seems to be falling out.

Wait, before you take a sip of that pink Kool-Aid: when something seems too good to be true, it usually means that it is.

The price you pay for buying a stock option, the premium, is a mixture of two components: intrinsic and extrinsic value. The best way to explain the difference is with an example.

Example: Apple Shares are at $250 per share.

(Remember, this is an example, so by the time you read this post, Apple shares may not be $250)

If you’ve ever looked at an option table, there is a wide variety of options that we can choose from in any given expriation month (depending on how liquid a stock is, we can actually choose options set at $1-wide strike prices). Basically, the difference between these options is the mixture of intrinsic and extrinsic values. Deep-in-the-money options will have more intrinsic value, while out-of-money options will be entirely made of extrinsic value.

Do you want to see option charts where this is explained better? You can download this full report, with colorful pictures, when you join my free newsletter, see the right sidebar.

The reason why stock options get a bad wrap is because many people who trade options ar elooking for the quick POP in price, which usually results in a fantastic ROI (this is where you get the 150%+ ROI) In order to get these unbelievable ROI’s, the more popular types of stock options are the ones that are cheaper, or better stated, out-of-the-money – where the premium you pay for that option is entirely made of time-decay and volatility … better known as extrinsic value.

The reason they suck is this: Unlike stocks which you can own forever (unless the company runs into problems), stock options expire after a certain time period. That is why they suck. For simplicity, extrinsic value is the price you pay to prolong the death of your option: more time to expiration, the higher the extrinsic value, and more expensive is the option. In fact, I’m going to go one step further on the suckage factor: if there is no intrinsic value in the stock option at its expiration, your option will expire worthless – AND YOU WILL HAVE NOTHING TO SHOW FOR YOUR MONEY.

Do you like burning money? This is as close as one can get without literally lighting paper currency on fire.

As mentioned earlier, you can actually download the full report of “Why Stock Options Suck,” for free, when you sign up for my newsletter, or you can continue reading this series on the blog.

On a particular Sunday, I curiously Googled, “A beginners guide to stock options.” What I found was disgusting, or rather, non-existent. The information I found online was either:

• Blatant rip-offs of definitions stolen from a finance textbook by a guy who probably never invested in his life; or
• Some “get rich quick scheme” of how stock options will explode your investment account to the size that would make the World’s Bank look like the neighborhood corner Mom and Pop Money Mart.

Even though disgustingly fantastic returns like a 33% ROI in a month is possible, in my 5 year experience as stock option investor, I have never found this to be consistent – unless you have your finger on the pulse of the Dow Jones. Personally, my career doesn’t offer this luxury because:

• 1. I work a real, 40-hour-a-week job where I am often out of the office. All of my investments have to be very low-maintenance and less time intensive; and
• 2. In my opinion, I find watching the SP500 index tick up and down to be unnerving.

I wrote this series of blog posts (which you can download the full PDF version, for free, if you join my newsletter -> SEE RIGHT SIDEBAR) to give a true perspective of stock options, and all examples used in this report are derived directly from my own experience. You may want to reference this series, “Why Stock Options Suck”, because I guarantee that at some point you will run into at least (if not all) of the following roadblocks which if not careful, could cause your portfolio to fall to a catastrophic demise.

Please handle with care!

Essentially, there are two types of options, a CALL option, and a PUT option. For the covered call strategy, you only need to know how to use a CALL option, and only how to SELL a CALL option.

So what is an option, what is a CALL option, and how do you sell one?

Let me give you a simple, everyday example that will relate how options work. Let’s say you own a house. The market value of this house is currently $200,000. You are an astute investor, and you know that the real estate market is hot but in the short term (next few months), the market looks like it could be trending sideways or even downwards – meaning not much profit to be made during this time. You decide to test the market waters, and put the house up for sale.

One day, you find someone who wants to buy your house, but he doesn’t have the money to buy it right now. You and the prospective buyer talk out a deal, and you offer him an option to buy the house for $205,000, and this option is only good for three months. From today (the day you offer this option) to the end of three months, this buyer can use the option to buy the house at $205,000.

In return for this option, you charge him $3,000. And he has to pay you this amount no matter whether he decides to buy the house or not.

Now, there are two storylines that could happen:

The first is that the market stays the same (or temporarily goes down), and the house loses a little bit of value (not too much, but lets say the house is now worth $198,000). The buyer won’t use his option – why would he pay $205,000 for a house that is only worth $198,000 on the market??? So the option expires, the buyer doesn’t buy your house and thus, you get to keep the house. Not only that, but you are $3,000 richer because that’s how much the buyer paid you for the option to buy your house. So now you have a house PLUS you have $3,000 in cash!

However, the second situation is where the house actually appreciates over the time the option is valid, and by the end of the third month, the house is worth $210,000. The buyer decides to take you up on the offer, and you have to sell the house to him for $205,000 (as agreed in the option).

That is how selling options work: When you sell an option, you give someone the choice of buying your shares at a certain price. If he doesn’t use the option, you keep your asset (the shares), and you keep the premium he paid you for the option. But if he does use the option, you have to sell the asset at the specified price set by the option.

Here is the summary of the initial transaction, and two scenarios. I am going to give some technical terms as well (you’ll need to know this later on):

Initial Transaction

• Current house value is $200,000
• You SELL an option for someone to buy your house, and give this option a duration of 3 months. The buyer can use this option, between the time you sell it to him, right until the last day the option is valid, i.e. there is a deadline.
• The buyer pays you money for this option you offer him. This money that you get is called the PREMIUM.
• This option entitles the buyer to buy your house at $205,000 (this is the STRIKE price). If the house is worth more than the STRIKE price (i.e., if the house value is greater than $205,000), then the buyer will EXERCISE their option, and buy your house at the STRIKE price.

Scenario 1: House value is LESS than the STRIKE price (i.e. house market value < $205,000)

• The buyer will not EXERCISE the option since the current value of the house is less than the strike price.
• You get to keep the PREMIUM and the house.

Scenario 2: House value is MORE or equal to the STRIKE price (i.e. house market value >= $205,000)

• The buyer will EXERCISE the option, as the current value of the house is equal or more than the strike price.
• You still get to keep the PREMIUM.
• You MUST sell the house to the buyer.

Hope you enjoy it!

As you are aware, I am in the middle of preparing (and delivering) a series of posts about the Covered Call, a strategy which I really like using because it is a pretty good introductory level to stock options, particularly getting your feet wet with selling options.

In this introductory video, I discuss two aspects of the covered call, which I really like (and is the main reasons I love this strategy). The two points are:

• 1. It can provide a good way to generate monthly income. Remember, stock options have an expiration date, so if you sell monthly call options, this should generate a pretty nice (and steady) income cheque. Obviously, you have to know how to do this correctly – there are many ways to get burned (I don’t discuss this in the video, but will in future videos that I have lined up).
• 2. It can provide a cushion against times when your stock investment has a minor correction or pullback. But don’t let this confuse you against major corrections – where you will need to utilize more heavy-duty hedging tactics to protect your portfolio.

One thing I didn’t talk about in this video: this strategy is absolutely fantastic when the market goes sideways: First, because your main stock investment doesn’t lose too much value, and second, you are getting paid just to hold your investment.

It truly is a win-win situation. If you liked this post, check out the rest of my Covered Call series.

One of the reasons why I love stock options is because I can get a little more “umph” from these momentum-type stocks. What do I mean? Well, let me just show you via illustrations:

Take for example, Netflix. If you bought NFLX on April 12, 2010 and held it till November 1, 2010 (about 6 months):

You would have had your stocks double in that time frame. Pretty awesome.

But if you had an at-the-money call option (meaning a call option with a strike price that is closest to the price of the share price, $85) that expired in 6 months (in the example below, I chose the January 2011 call options, since November 2010 options were not available on April 12, 2010). For example:

And similarly, if you held it till November 1, 2010, that same stock option would be worth:

A 638% ROI. Obviously, I’ve written about a grand slam story of investing in stock options, but I’m sure you know that there is more to this story. So let’s get right into the details: what are stock options? In the next post we will look at what are stock options and how do they work alongside the actual stock equity.

A well known fear about anything close to stock market investing is, “I have a fulltime job and cannot watch the stock market, so I leave it to the professionals.” This is a completely fair excuse. But let’s be clear, it is an excuse.

I work a fulltime job. Serious. This is me and my hardhat posing on a recent jobsite:

RIP to the “I have a fulltime job …” excuse.

I’m not going to tell you that stock market investing is easy. Far from it. But what I have noticed, the huge chasm that divides Average Joe from a “Professional” is organization. For over 5 years as being an investor in the markets, it hasn’t been my stocks that have changed – I still invest in dividends just like the pros; but I have become a far superior organizer than how I used to be.

If you’ve noticed my “Bamboo Plant Stock Market Investing Strategy,” the number of physical trades made or time spent monitoring the portfolio is miniscule. And that is the purpose – to show you do not need to be linked in to the markets. You can do this on the side of your real job. The only difference is that I use the “Fork in the Road Organization Tactic.”

What is the ”Fork in the Road Organization Tactic?”

Stock market investing is very cut throat: either you will make money right now, or you will lose. It’s like if you get to a fork in the road, are you going to go left or are you going to go right. Each road leads to a decision you will have to make.

HelloStockMarket is not about the hottest tip on the block. If you notice, I hardly spend a lot of time showing charts and such. But what I do spend a lot of time is organization, and figuring out what is the next move. It’s about design sticking to a plan that suits your lifestyle, and tweaking inefficiencies to make it perform better – while you go about your day-to-day routine.

If you want the hot stock tip of the week, this website isn’t for you. But if you want to know how to grow a portfolio from scratch – you may want to stick around.

-Kunal

P.S. Action step: Do me a favor and in the comment section below, write about one problem that you have encountered while investing – was it emotional, was it mind frame driven, execution? What was it, and how were you able to get over it, or if you are still struggling with the challenge, what steps have you taken thus far.

P.S.#2 I work as an engineer – so that picture I have at the start of this post is actually a project constructed from scratch. The similarities that exist between a stock market portfolio and a building are neat: both require problem solving, strategy, organization, and decision-making.

The purpose of the Bamboo Plant Investment Strategy

As many readers know, I do work a fulltime job, so I wanted to create an investment business that served 3 purposes:

• 1. I did not have to babysit the portfolio: My day-to-day routine doesn’t allow me to constantly monitor the markets, so I needed to develop a system that has little volatility, and therefore less actionable steps on my part (awesome!).
• 2. It shows us the money! Why do all this work for something that loses? Obviously, we cannot predict the future, and as much as we hate to admit it, there will be times when the markets will go against us. But over the long-term, we want a portfolio that will rise in value. Obvious, right?
• 3. It must have the ability to grow organically: When I hear organic, I automatically think of high-priced vegetables. Rather, what I mean here is that I can use the money I make via covered calls/dividends, reinvest it, and grow the portfolio larger. That is why I love dividends stocks and covered call-type option strategies – both are meant to generate cash flow even while you hold onto your main collection of stocks. Digging a little deeper, sometimes covered calls can be used to protect our portfolio from downdrafts. Funny, if you notice this month’s covered call-type of trade did not yield positive cash flow, see below.

What to expect from the reports: I treat investing like a business – as the pros say, “Think of it like a business, it will pay you like a business.” Right? Right. The format I am using to list the month’s activities are along the lines of how a business cash flow statement is prepared: we will look at realized cash in and out of the business. I am only interested in the actual cold hard cash that was transacted during the month. I may have covered calls currently in the portfolio, but unless they are closed for the month, I will not consider them since those gains/losses are still virtual. The only unrealized value I will give is how much my shares went up or down – probably since I won’t be selling those for a while (well, unless they are taken from me due to a call option being exercised). As this is my first progress report, I do anticipate questions from readers – I will adapt these reports to mould information according to feedback.

My underlying stock: As mentioned before, I love dividend stocks, so for this strategy, I chose Altria, ticker:MO as my underlying stock that I will grow over the months. There was a strategic method on how I chose this. I have not written this strategy on the blog (as yet), and this could become something I could address later, should readers request it.

Without further ado, here are the stats. Remember, this is for educational purposes only. Trading involves risk. If you continue reading this report, you do accept my disclaimer about how trading involves risk, and that I am not a financial advisor, nor do I advocate any buying or selling of securities.

September 2010 – The REPORT (all figures are WITHOUT commissions, and are derived directly from my brokerage statements):

• I bought 100 shares of MO on September 2, 2010 for a purchase price of 22.71/share, therefore, my total investment: $2, 271
• Share price of MO closed at $24.02 on September 30. So, from the time I bought my shares till closing of last day in September, I had an unrealized (since I did not sell my shares) profit of: +$131
• Realized profit/loss in cash: I sold a call vertical, and then had to buy it back within a week: -$47
• Number of trades made (on separate days):3 (buying the shares, selling call vertical, buying same call vertical back)
• Total time for me to run this portfolio: roughly 2 hours spread over the entire month. (I even went on a quick vacation).

Let’s discuss: Every month I want to sell a covered call strategy, what this allows me to do is generate monthly income. However, if you notice above, I didn’t actually sell a straight covered call, I sold a call vertical. This is like the baby brother to the covered call, where you sell a covered call, but then use some of that premium to buy a call option that is at a higher strike price than the covered call you sold. What this allows you to do is limit how much profit you miss on, should the stock continue to soar.

Looking at the graph of MO during the month of September, we can clearly see that the stock soared, so selling a covered call by itself would not have been the wisest decision:

The Big Event that Happened: One Friday morning, while I was in Canmore Alberta, enjoying some of the sights of the beautiful Rocky Mountains, it dawned on me to check when the ex-dividend date was for Altria. Hopping onto their corporate website, I found out the ex-dividend date was the next Monday! Realizing that a call I sold was in-the-money (and mostly comprised of intrinsic value), which meant that if there was a high probability of someone exercising their call option, the moment would be now – since they could take my shares from me, just in time for the ex-dividend date, and then THEY would be eligible for the dividend payout – NOT ME! So, I quickly closed the call vertical, and was very happy to find that my MO stock was still sitting in my account, the day after the ex-dividend date.

Commissions: I don’t include commissions in the above figures, simply because everyone who reads this uses different brokerages. With that being said, I use a discount broker, which allows me more freedom to make trades that someone who pays high commission costs may not do.

How was this Progress Report? Leave a comment below, I’ll answer it.

Thanks for reading,
Kunal

In this special episode, I find myself in the Canadian Rockies, in a small town called Canmore located in Alberta, Canada. For many reading this post, Canmore may seem like a place you’ve never visited, but trust me, you’ve always wanted to come visit here…

What I love about going to the Rockies is that the everyday hustle of capitalism seems to have taken a backseat. People are much more in touch with nature, and their lifestyles are focused on living happy and with leisure, rather than work out the day-to-day grinds of packed subways, unrealistic deadlines, or five cups of coffee (before lunchtime). How ironic for me to type that as I am a proud stock market investment company owner and operator (however small it may be ) where I have my sights set on Fortune 500 companies who manage billions of dollars of revenues on a quarterly basis…

Perhaps it’s because I am an engineer, but I love architecture. Much of the architecture that is developed in Canmore comes from being inspired by the wilderness that surrounded it. A lot of the buildings built are cabin-like and has that very earthtone-like characteristics. I love these shots:

I love technology. And the best technology that I have on me (almost 100% of the time) is my iPhone – and thank goodness I brought it with me on my vacation! I had to make a pretty frantic trade!

As many know by now, I run a small little experiment called the Bamboo Investment Strategy – which is basically about maximizing gains by using conservative and consistent strategies. Well, for the most part, I like to minimize the number of trades I make in a month, but sometimes you absolutely need to make a trade, and today was one of those days.

I’m not even joking, but I happened to wake up this morning thinking, “I wonder when the ex-dividend date for Altria is?” Yes, I did actually think that as soon as I got up … Hopping onto the Altria website, I found out that the Ex-Dividend date was on Monday (today being Friday!).

The ex-dividend date is the cut off date to own shares prior to the dividends being given out. If you own shares on the day after the ex-dividend date, sorry, you are out of luck, and you will not get a dividend.

Because I had sold a call option that was largely comprised of intrinsic value, if I didn’t notice the ex-dividend date, someone could have exercised their call option, taken my shares, and ultimately got the dividend.

So I had to close my short call option, ensuring me that I will own shares on the ex-dividend date!

Thank you iPhone, and thank you Rocky Mountains!

I started the strategy in early September 2010, so the first progress report (for September) won’t come out till early October 2010, after all the dust and stats have settled for the month.

I’m sure you feel how I felt when I saw the trailer for “Wall Street 2,” it looked fantastic, but the bloody movie wasn’t scheduled to come out for another 6 months!

Luckily, you just have to wait for a few weeks.

Thanks for the patience…