How do I start?

I have taught a number of people how to invest and trade options. Today someone asked me how I approach teaching something so complicated. Easy - start simple. I began this blog reminding people that you should not start any type of investing until you have an emergency fund fully funded (six months of living expenses). That is simple step number one. Simple step number two is to set up a Roth IRA (in addition to your employer’s sponsored retirement program which I strongly recommend you contribute the maximum to). If you trade in an IRA you can invest and trade tax free. Taxes can eat up a lot of your returns so you need to be tax aware when it comes to investing. The more you can trade within tax free retirement accounts, the better.

Setting up a Roth IRA or any type of investment fund is easy. You can usually do it on-line. If you are new to investing, it is better to go with a large established firm with a full suite of financial products, e.g IRAs, investment accounts, HSA accounts, etc. Larger firms have a large range of educational tools to help you learn about the market and investing. Their tutorials can be very helpful. They also give you access to analyst reports which are essential learning tools. I do have favorite sites but this blog is not about pushing products, so do your own research and pick the platform that makes the most sense to you. Look for firms that have low or no fees for trades - but sites that offer ‘free trades’ are not necessarily the best. You end up paying for trades one way or another. And educational resources are important for beginners.

If you are looking to also trade options as a means to enhance your returns, you need to learn the basics and the best way is by doing. Make sure the platform you chose to trade on allows you to trade options. It should require you to do some critical paperwork and should limit what you can do initially (eg no ‘selling short’). If it does not have these guard rails, I would hesitate to use the site. Being able to trade options without experience and no guard rails can be dangerous, you can lose a lot of money quickly if you do not know what you are doing.

I began trading options after I had accumulated some stocks. The first type of option contracts I wrote were covered calls. I was frustrated to learn that each option contract represented 100 shares of a stock. It was very limiting. I only had a few holdings of 100 shares or more. I decided I would try options using my Pfizer and AT&T shares. These solid dividend paying stocks formed the bulk of my portfolio. I was very conservative when I started investing and wanted well known companies that paid a dividend, so I did not have any of the growth stocks that I now own.

My first option contracts were call contracts. These contracts stated I would sell my AT&T and Pfizer for a strike price that I set 20% above where they were currently trading. I chose an expiration date in the upcoming month. The premiums I was paid for these contacts were just pennies. The money appeared in my account the minute I sold the contract, but it showed in my account as a negative value. It looked like I had lost money. It took me a while to get used to the fact that the account appeared negative because, while I had the cash in my account, the contract was a liability until it was closed. Since options contracts trade just like stocks, the price of the contract fluctuated day to day, hour to hour. Sometime it was positive, sometimes negative.

Options contacts generally expire on the third Thursday of every month. Both of my initial contracts expired on that day with the stock trading well below the strike price. I made a little money. I was thrilled. It was like free money. I was hooked. Investing suddenly became a lot more interesting.

The Market Today: It was up again, closed at new highs. Last week’s 2% correction is forgotten. I, however, am uneasy about the Fed meeting this week and the taper talk that may come out of it, could swing the market a lot. My best trades today were calls for my BABA holdings, I was in and out 4 times and made a tidy sum (mind you, I have a huge loss on BABA I am trying to make up). Was also in and out of MRNA, NVDA puts today. Today was all about trading, not investing, but everything I bought last week to hold is up nicely. Wrote a lot of calls. A total of 28 trades today, a lot for me but making up for last week.

A little good news goes a long way

So last weeks gradual sell-off was arrested today by good news on the Pfizer vaccine getting FDA approval (which should allow organizations to mandate it). The hope is that by getting more people vaccinated we may be closer to getting the world back to normal. The market was up and everyone seemed relieved, but it is not all clear by any measure. We have the Jackson Hole symposium later this week (where central bankers could detail tapering plans) and that could swing the market strongly one way or the other.

Market rebounds like today, however, soothe me. On days the market is down, I sell put contracts. When we have a string of them in a row, with no up days, it means I accumulate a lot of them. Given the uncertainty of the last week, I was careful and only wrote a couple of contracts each day on the stocks I want to own. But if there are no days when the market is up, I generally can’t ‘buy to close’ any of these contracts as they generally become more negative as the market slides. Sometimes, it reaches a point where I have so many open contracts, most or all of which are negative, I have to stop writing them. While my trading platform limits how many contracts I can have open at any one time, I always like to have considerably less. By Friday of last week I was approaching my limits. When the market swings up though, I often find a good many of these contracts turn positive. I closed well over half of my outstanding contracts today and made more money today that I did all of last week.

The lesson here is patient and faith. It is hard to watch the value of your investments fall. But there is not reason to panic, the stock market generally comes back. You have to view market pullbacks as opportunities. You need to have a plan and stick to it. It is hard to trade or invest when the market is a falling, but it can be profitable. I made money on the options I wrote into last week’s falling market, the dividend stocks I bought and even on the speculative stock I am playing with. It may be erased tomorrow, but today I feel good about gritting my teeth and buying last week as the storm clouds gathered.

Picking up speed

The market downturn is taking hold. While the S&P and Nasdaq indexes eked out gains after a mostly down day, the DOW was negative. The mood is very much wait and see. August is generally a tough month for the market even in good years. People are on vacation, so there is less trading going on and lower volumes can accentuate changes. Add in the fact that there are concerns about the Fed easing earlier and pontiffs talking about being at a peak in terms of company earnings. Underlying these market forces, we also have rising Covid cases has everyone depressed as it appears to be dampening the economic expansion we were all counting on. The international picture is also cloudy; China regulators are gutting the China trade, Europe is still struggling to open up, and the debacle in Afghanistan is grim. Given the earnings season is pretty much behind us, there is simply no good news to lift the market, no clear positive catalyst anyone can see.

I did trade. I bought three dividend paying stocks with cash that had accumulated in my retirement accounts. Oil and gas and healthcare (down today) stocks which all have dividends of over 5%. Small purchases. Investments.

I did make money on my Nvidia put as I had hoped. Closed it too early though, could have made a lot more if I have been patient. Closed a couple others I had opened during the day but most of what I closed today were calls I had sold a while back. When you are closing calls you know the market is dropping.

Sold a range of puts. Pushed the expiration dates out a couple months to give them more time to work. All were on stocks I would like to own; Exxon (XOM), Tapestry (TPR), Moderna (MRNA), Dow (DOW) and a gold EFT (GLD). Hoping a couple come good tomorrow.

Hope the week ends better. As of today, heading for a down week which has been a rarity this year.

More of the same

So the market was down again today. It’s earning season, that is the couple weeks every quarter when companies report their earnings. Most of the earnings were good, but the companies forward projections were murky. As a result, it did not really help the market or participants’ moods. Compounding the negativity was the release of The Federal Reserve minutes. The Fed meets formally eight times a year and minutes from these meetings are released three weeks later. Everyone pays attention to these minutes. Today it appears they were suggesting that the ‘Fed’ may begin to ‘taper’ soon (ie reverse the quantitative easing that was stimulating the economy and leaving it awash in cheap money). The market waffled on this news, until it took a decided turn for the worse. I don’t like the negativity. Feels like the market is talking itself into a slump. As a result, I am being cautious, not trading much. I do, however, have a shopping list of stocks I would buy if the market falls a lot and they go on sale.

When I feel like I should not be trading, I look instead to fine tune my investments (the stocks that form the backbone of our portfolio, the stocks I will hold for years). I check that I still like my picks, and decide whether I should trim these holdings (because they have grown too large in my portfolio or I have a lot of profit I don’t want to lose) or plan to buy more if the market drops. I check on the stocks I have on my shopping list to make sure I still like them, and confirm what price I am willing to pay for them. Given my cautious mood, I currently have about 15% of my portfolio in cash. I want to be ready to buy if things get ugly.

On days like today when I don’t trade a lot, I also garden and do laundry. I may even play hooky, read a book or something fun. I don’t like to let market slides get to me.

As an update, the speculative stock I bought yesterday was up slightly. It was negative when the day began but turned positive too quickly for me to buy more. If I get a gain of over 20% in the next month or so on this stock, I will probably sell it. A lot of people hang onto winners but when I am buying speculative stocks for a trade (some thing I am only going to hold a couple months) I tend to take my profits and run.

The NVIDIA puts I wrote yesterday were mixed. I made some quick money on one set when the market initially was up at the open. It then turned down and my other contracts went negative. There were a couple times I was slightly positive on the contracts but I decided to wait. NVIDIA was going to report earnings after the market close and I was hopeful that it would be a good report and there would be a positive reaction. Results were good and it is up over 3% in after-hours trading, so now I am eager to see what the contract value will be when the market opens at 9:30 tomorrow. I will likely close it in the first 5 or 10 minutes of the day at a nice profit. But if the market opens down, so could NVIDIA despite the good earnings. There is a bit of luck at play here.

I did manage to sell a couple calls on holdings I have, closed most of them before the day was done. Not making a lot but every little bit helps.

I had sold a put on Home Depot (HD) yesterday when it tanked on earnings. I often write puts on good companies that sell off on their earnings as the market often over-reacts to news. My strike price is well below where if traded to. The stock frequently pops the following day when people realize the market over-reacted. Even on down days, this strategy can work. And it did. Which gave me a little more profit.

Small profits can add up. I prefer to take what I can and then play again another day.

Down Days

The market was down today, again. It has trended down for the last couple of days and there is a lot of hand wringing going on when you listen to the pundits and economists. After weeks of record closes, today the sky was falling. All day I heard was; it’s only downhill from here, it was to be expected, batten down the hatches, lookout below. Sigh. Markets do go down, sometimes a lot and sometimes it drags on long enough to make people doubt it will ever recover. But so far it always has. Recently it has recovered quicker than normal, in part because there is a lot of money on the sidelines that is waiting for a chance to get in. The market has been so high lately that it has been foolish to jump into most stocks. But in the last couple years, if people have ‘bought the dip’ in the market, they have done very well.

The S&P 500 index is still up 20% for the year to day, even with the recent pullbacks. So far, 2021 is a good year. It could drop 10% and it would still be a good year. Do not freak out. Personally I lost about .5% of my portfolio’s value today. Always frustrating to see it fall in value, but as long as it drops less than the market, I figure I’m doing something right.

I did not trade much today. I bought one speculative stock I had my eye on, but only 1/3 of the position I would eventually like to have. I will buy more if it drops more.

I did sell a number of NVIDIA puts (NVDA) with the hope of closing them tomorrow at a profit (markets often stage a bit of a comeback after a couple day drop) but I wrote them at a strike price well below where it traded today so I have time to see if it comes good. I don’t currently own NVIDIA but I would like to. I just find it expensive now and would like better at a price 20% below where it is trading today. When I sell puts, it is generally because I am trying to build a position.

I could not sell any calls, none of my holdings were up enough on this down day. If I write them when the stocks are down, I risk losing them if the market turns positive quickly. I will wait. I did manage to close call contracts on DR Horton (DHI) and Chargepoint (CHPT). Look them up on Yahoo Finance to see what each does. I bought both this year and the dividends are small or non-existent. While I have a bias toward dividend paying stocks, I try and make sure I have sold calls on those that don’t just to have money to make if the market, or the stock, goes down. Again, I set the call strike price at least 20% above what I paid, so if I do get called out, I have a tidy profit. So far this year I have made about 2.2% return on my calls on my DHI holdings (I also have a 12% return on the stock itself) and a 5% return on CHPT (which I currently have a 8% loss on). I expect both stocks will be profitable but the sale of calls makes me money while I wait. I make more on CHPT calls because it is more volatile, so its option premiums are little larger and I can trade in and out of the calls more frequently.

I will let you know how the NVIDIA puts do tomorrow…

Day to Day

Someone liked my recommendation to watch Cramer and asked what else they could do to get familiar with the market. There are lots of ways, but let’s start the basics. Every morning I start my day by looking at CNBC to check the pre-market (I have their app on my phone). Many people may not realize this but the stock market trades outside of its opening hours. The professional traders who make up most of the participants in these out-of-hours trading set the market’s opening levels. Mind you, the pre-market does not reflect what the market will actually do that day. It just gives you and indication of whether the market will open up or down.

If the market is slated to open way up or way down (over a 1% point swing either way on the indexes), I make sure to be at my desk at 9:30 and have my trading page open and ready to go. Often I can take advantage of a big swing in the open to open or close option contracts. Or, better still, buy a stock that has had a hit due to a weak earnings report or bad news. If the hit looks an over-reaction to news (and over-reactions are common) it can be a buying opportunity.

Before I sit down though, I have my first cup of coffee and scan the Wall Street Journal before the market opens. I get the actual newspaper (old fashioned but very satisfying) and check to see if there is any news on companies I own or would like to own. It this instant news world, most of what is in the paper version of the WSJ is old news by the time I get to it but the in-depth articles help if I am trying to really understand something (like Bitcoin).

Once the market opens, I am at my desk and very busy for the first half hour. I frequently make 80% of my daily trading profits before 10am. Then I get more coffee and start taking care of other things; laundry, gardening or general housekeeping stuff. If the market is volatile, I may sit and actually watch my account and CNBC. I try to be nimble, I may open and close the same trade a couple times a day. If the market is flat, I may go out and run errands. Today the market is moving up and down so I am watching. Surprisingly, Robinhood stock is up 35% (it went public last week - which means it offered some of its stock on the Nasdaq exchange for the first time). Because it is a ‘buzzy’ stock, people are scrambling to talk about it on CNBC. There was also some jobs data that disappointed but business inventory info that was positive. There was a big real estate deal. So market is all over the place and I am looking for opportunities. I will watch today.

Learning about the stock market

I was finishing up some numbers on the trades I had done today when Jim Cramer’s show, Mad Money, came on my CNBC feed. I don’t really watch his show much anymore but I did when I was just starting out. I would recommend it to anyone who is new to the stock market. Jim Cramer is a legend on Wall Street. He is a former hedge fund manager and co-founder of TheStreet.com. He is affable, smart and committed to making the market accessible to people. You will learn a lot of the basics, especially vocabulary and market mechanics, if you watch him regularly. The show airs every night at 6pm on CNBC.

Mr Cramer knows more about the market than most people will learn in a lifetime, and he loves to share his insights. His show is colorful and fun. Jim has had a long career on Wall Street. He has worked a well known investment bank (Goldman Sachs) and besides his current show he has side gig as a CNBC correspondent. He also still manages a charitable investment trust and works with TheStreet.com. He has also written a number of great books about investing (Get Rich Carefully is a favorite of mine) and just generally lives and breathes the market.

True, he has come under some criticism for his outlandish behavior on his show (he has buzzers and sound effects and will dress up to make a point) but he does so with a purpose. He understands the stock market can be intimidating to newbies and he wants to demystify it. Yes, he does tend to fawn on his CEO guests, but he would not coax as many onto his show if he wasn't so positive. He does get behind some stocks that don’t work out, but to his credit he admits his mistakes. In doing so, he reminds us that mistakes are part of investing - no one gets every trade right (don’t remind me about Ali Baba). But learning when to admit a mistake, when and how to take a loss (“Your first loss is your best loss”) and then moving on is part of the process of learning to invest. You just have to get more right than wrong. It’s like life.

Investing, trading or speculation?

Since you are reading this, I assume you have some interest in investing. I hope you have your savings cushion and you are now wondering about next steps. Before we start I want to make sure you understand some very important distinctions. Investing is something you do for the long term; five, ten even twenty years or more. Trading is something you do short term, usually keeping a stock or option for a couple weeks or even a couple of hours. Speculation, which has been in the news a lot lately, is different. Whereas investment and trading are usually based on facts and data, speculation is largely based on hope and guesses. I don’t speculate - no Reddit trades or meme stocks for me. I like to work with something that gives me a statistical edge, some real known facts. It moves the odds in my favor. This approach has worked very well for me. I may not make a killing on a sexy stock, but I do enjoy steady returns.

I invest for our retirement and, as I am in my 60s, I have an emphasis on income producing stocks. If you are younger, you can afford to forgo a focus on income and look for stocks that might appreciate a good deal over the years. You should consider your investment time horizon before you start buying any stocks.

If you only have small amount to invest, say less than $5,000, I would suggest you look first at an index fund. Index funds are baskets of stocks, you buy the fund and get a diversified mix of stocks. If you have more than that, you may be ready to start building a portfolio of stocks. I will talk tomorrow about how to get started.

I would be happy to answer any questions you may have about investing. You can use the ‘contact us’ button above to ask them. I will answer questions as they come.

Start at the beginning…

To be able to manage your money, you have to have some. This is why you save. Growing up I lived in a home where my parents both had good jobs but money always a source of stress. My parents did not save. They vaguely planned on their respective pensions to support them in retirement, whenever that was going to be. My Dad made more money than my mother but never seemed to have any. Mom, the better money manager, squirreled away what little extra money she had in a secret account she kept from my father, but that was always being depleted by the ‘wants’ of four kids. My parents constantly bickered over money. I believe that is why I became a compulsive saver. As allowances were sporadic, I relied on sneaking into my Dad’s closet and emptying his pockets of spare change. My parents were shocked when they found I had accumulated hundreds of dollars this way by the time I reached my teens. I learned that pennies do add up. When I began working, babysitting and a part-time job at a local business, I made a point of saving 80% of what I earned. When the opportunity came up for an overseas scholarship, I was able to take advantage of it because their objection, “We can’t afford to send you” was moot. At 17, I had the money to support myself for a year.

Saving is a habit. It should begin when you are young but it can be learned at any age. If you are old enough, set up a separate account for your savings to rest in so it requires extra effort to get to it. Be aware, I make a distinction between savings and investments. The latter is how you make your money grow (which I will discuss in detail as this blog evolves), Savings is simply money you keep aside so you do not have to disturb your investments in case of an emergency. Mentally, you need to think of your savings account as a ‘no go’ zone. It is for emergencies only. There is a lot of literature as to how much you should have in this account but I think 3 to 6 months of living expenses should cover you.

Make getting your savings account fully funded a priority. If you live paycheck to paycheck try and give up all discretionary purchases and fund this account. Limit eating out, entertainment, clothing purchases etc. to get this account going. Once you have 3 months saved, reward yourself but keep going. Remember too, as your living expenses rise, remember to top up your savings accordingly. Having a savings account will be a major stress reducer in life.

Tip: Consider using an on-line bank for your savings account. In general they pay a higher interest rates. While interest rates are laughable at this point in time (I earned 8% on mine when I was a kid), they will eventually rise. When they do, interest will help your savings grow.

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Coming Soon…

Have you ever been cheated? Then realized it was your own fault? By simply letting our family’s hard earned retirement savings run on autopilot. It was a devastating loss and, in retrospect, empowering for me. I learned that financial advisors can’t be held responsible for losses, especially if they are not a fiduciary (more on that later). I also learned that their firms will be remorseful but not make you whole. As a result, I decided Enough. I was going to learn how to manage our money myself. Fifteen years later, I have learned a lot about personal finance and particularly about investing. So much so, that I successfully trade options for a living and wrote a book to help friends and family learn about how to do it themselves. This blog is here to help you learn a bit about finance as well. I am going to share my observations about the stock market, some of my daily trades and other financial tips I have learned along the way. I am not a professional financial advisor and am not endorsing any particular stock or trade. I am simply here for those starting out in the world of personal finance who would like a sounding board or somewhere to ask ‘dumb’ questions. I can’t guarantee I will answer everyone’s queries or concerns but I will share, daily, the insights I have gleaned over the past fifteen years. Because at the end of the day, money matters.