As stated in Advanced Financial Literacy with Cashflow 202, I need to start first with Capital Gains in order to buy assets that will produce passive income for me.
An opportunity just presented itself.
The image above is a Daily Chart of iShares Silver Trust (SLV). The chart above depicts the particular activity of the stock in a per-day basis, meaning that one candlestick (a rectangle that has lines sticking on its ends) equates to one day. As depicted by the chart, SLV started trending upward since the last week of August, went down a little from October 11-23, then started going up again.
What is SLV anyway?
SLV is basically a stock that has physical silver in it (or claims to have). A good characteristic of SLV is that it tracks the movement of physical silver in the international markets.
So what are you going to do with it?
There are two ways (that I currently know of) on what I am going to do with this opportunity:
- Buy the SLV stock itself then sell it later for a profit.
- Buy call options on SLV.
Options? What's that?
A Stock Option is basically an insurance policy on that particular stock. It gives the option buyer the right to buy (or sell) that particular stock at a given price (called Strike Price) on or before a given date (date of expiration).
There are basically two types of options:
- Call Option - a kind of option wherein you are given the right to buy that particular stock at a certain price (the strike price) no matter how much the stock price goes up (or down in value) on or before the expiration date. For example, if you buy an option for Great Teacher Onizuka Systems (GTOS) that has a strike price of $10 and an expiration date of December 21, 2012, you can use that option in order to buy the stock for only $10 a share even though you found out that after a few months the stock price rose to $200 a share! What a bargain! But if you decided to use the call option after December 21, 2012 (the date of expiration), you have no right to buy the stock at $10 a share no matter how many chickens you sacrificed to the statue of Bart Simpson.
- Put Option - a kind of option wherein you are given the right to sell that particular stock at a certain price (the strike price) no matter how much the stock price goes up (or down in value) on or before the expiration. For example, you have some shares of Barney Stinson's Legen-Dairy Products (BSLDP) at a price of $50 a share and you bought put options on it with a strike price of $50 and an expiration date of January 1, 2012. If a few months from now BSLDP declared bankruptcy and its stock price went down to $0 a share, you can use the put option in order to sell the shares that you have to a price equivalent to your put option's strike price which is $50. So instead of losing your entire stock portfolio, you have recovered most of your money because the Put Option acts as an insurance policy for your stock. You are allowed to use your Put Option on or before its expiration date which in this case January 11, 2012. After the expiration date the put option you bought will expire worthless and you will have no insurance anymore.
Multiple Ways to Play the Stock Option
You are given a lot of ways on how to play with options:
- Buy low, sell high
- Treat it as an insurance
- Use it to reserve X amount of shares that you want to buy but don't have enough money yet
- Treat it as your periodic (maybe monthly or quarterly) source of income
The Basic Concepts of Trading
Trading (whether it be stocks, options, forex, etc) has a higher chance to be more profitable when one employs these two popular forms of analysis:
- Fundamental Analysis - pertains to "What to trade". I have given the explanation in The 131,000 Philippine Peso Lesson
- Technical Analysis - pertains to "When to trade". The chart I have posted above and the other charts that follow gives the signal that now is the time to buy SLV call options.
Going Deep into Technical Analysis
I would like to go back to the SLV Daily Chart I posted above but this time I will apply indicators on that particular chart:
An indicator is basically a thing you put on the chart to help you understand past patterns and predict future ones. I believe (and experienced) that the financial markets - stocks, options, forex, etc. - have specific patterns and that history rhymes. There are lots of indicators on a trader's toolbox just like different kinds of brushes on an artist's repertoire but the indicators I used on this part are my favorite ones which are:
Seeing the Forest and the Trees
The SLV daily chart allows me to see the individual trees while the Weekly chart below allows me to see the entire forest:
The chart above indicates that SLV (which tracks the price of physical silver) will go north of $25 for the next months (since a single candle of this chart indicates a week of trading the SLV). After reading the tutorial on the MACD indicator and the tutorial on the ADX indicator, you will also be convinced that silver will have a good 2011.
On the next post I will show how I will buy the call option for SLV and also explain the possible risks of my trade that will make me lose my $430 in the next few months.
Stay tuned!
For more information about silver and Options Trading please get a copy of:
WARNING: Articles posted in this blog are from my actual life experiences and opinions. These do not guarantee a life of riches, alleviation of poverty, or making the world a better place. I am NOT LIABLE if you follow any of the articles posted in this blog and got poor.
INVEST AT YOUR OWN RISK. YOU ARE RESPONSIBLE FOR YOUR OWN DESTINY.
