First, a disclaimer: This is not an offer or a suggestion to buy or sell any security. The Stock Market / trading in the stock market is inherently risky and I am not responsible for any financial burden / issues that may come from your endeavors.
So it’s been a little while since I wrote one of these entries into Jaye’ thoughts. Trust me, it hasn’t been without great guilt that I have sort of left RYM hanging for a bit. However, because of the worldwide events, I felt like I couldn’t justify spending a great deal of time on it. What I have been spending a ton of my time, though, is the stock market and trading options.
Now this could be incredibly off topic especially for this brand but this is something that I’ve been wanting to share with everybody since I first learned that you can essentially make money when a stock collapses as well as when it rises. You just have to have luck and an intuition to 1) predict what’s going to happen and 2) To be able to manage risk well. I for one, don’t have this intuition and consistently lose money. It is something I enjoy pushing my luck on, and I haven’t risked more than I’m willing to lose, so I continue to test my odds.
I’m going to put all of these explanations in the most basic way possible. If you would like to learn more, please use google as your teacher as well as investopedia.
What is the Stock Market?
It’s just a place to buy and sell stocks / options / futures / etc. It essentially is a place where investors can exchange pieces of companies or contracts. For a person to buy a stock, someone else must be selling it at the given price. For someone to sell a stock, someone else must be buying it. That’s why it’s also called the Stock Exchange, because people are exchanging different securities.
Why would someone buy stocks / options / futures?
To make money. The ultimate goal of all of this trading is to make money. What’s great about all of this is you have multiple choices on how to do that.
When you buy stocks, you own a piece of the company you bought into, which is why it’s called a share. If I bought 1 share of Sirius XM I would own 1/4,500,000,000 (One Four Point Five Billionth) of the company. For some companies, this allows you voting rights and dividend payouts. Dividends are essentially the company rewarding it’s shareholders for investing in them by paying them some money. One of the main ways people intend to make money with shares though, is for the value to rise in the stock market.
Options are how you protect yourself against the possible outcomes that don’t work in your favor. They are essentially stock insurance and exist in two major varieties: Calls and Puts. Calls give you the right to buy 100 shares of a stock at X date and for X price. Puts do the opposite and gives you the right to sell 100 shares of a stock at X date and for X price.
Making money with stock options is very complicated. Basically, you want the value of your position to rise. I will speak more on this later.
Futures are like options but they mainly deal with commodities like gold, soy beans, corn, crude oil, etc. Manufacturing companies often enter into futures contracts because it enables them to have consistent prices in markets, and producers of commodities will enter into these contracts to protect their selling prices in the event of a downturn. I’m not super interested in futures and don’t know much more beyond that.
So how do I make money when things are declining?
Think of the age old adage, buy low and sell high.
Well did you know with stocks you can actually sell them buy for bought them? This is called Short Selling and usually this requires a margin investing account. That means the exchange platform you’re using gives you extra money to invest with. This can really f*ck you up the a** though because you can end up losing more money than you put in and then end up owing the broker. So my recommendation is to not do that. But basically if you think the stock is value is going to decline, you sell what you don’t own, but then since you owe it back to the broker, you must buy it back in the future.
For example: Let’s say RYM (Rotyourmind) is publicly traded and is trading at $10 per share. When you catch wind of the coronavirus sh*t you expect that this is going to cause some issues with shipping and revenue to fall. So you go ahead and sell the stock at $10, putting $10 in your trading account. Then, like you predicted, it falls to $8. You owe the broker 1 share so you then pay the $8. You just made $2, congratulations shark. Let’s say you’re wrong and RYM is going to blast your a** for disagreeing with it’s value by having the price rise to $12. You still have to buy back one share because you owe it to the broker so you just lost $2.
Here’s where it gets crazy: Options trading.
I’m not going to go into complete detail because frankly I don’t halfway understand them. But essentially you can buy and sell this stock insurance. Let’s say you bought a RYM Call Option with a strike price of $10, expiring May 22nd. First, It would look something like RYM|Call|$10|5/22. Second, this affords you the right to buy 100 shares of RYM stock at $10 on 5/22. So if the stock rises and is valued at $12 now, you can then buy the 100 shares for $10 and then resell them for $12, making a $200 profit. The opposite is true for puts. Let’s say you bought a put option with the same strike price and expiry date. So if the stock value decreases to $8, you still have the right to sell your shares at this price, still earning you a $200 profit. This is where a lot of profits are made with options trading during a crash. Buying and selling put options is basically betting against a stock.
Now you may be wondering, why doesn’t everyone just get options contracts instead of buying stock outright? Well, there’s a few reasons. 1) You can’t hold onto options indefinitely and they will eventually expire. 2)Options trading risk is magnitudes larger and instantly turn $1000 into $0 3) Entering into options contracts requires you to pay a premium, like $0.20 per share ($2 total).
So I said you can sell options as well. Well just like with stocks, you can short sell your options. This doesn’t require a margin account but can be restricted if you’re new to a broker like Robinhood. You can essentially collect the premium if the option expires worthless. Let’s say you sell someone that RYM|Call|$10|5/22 for $5 and the value of the stock decreases to $8. This call is now “out of the money” and will expire worthless unless the stock value moves back into a favorable condition about $10. Let’s say it doesn’t. There’s no reason why anyone would buy stock at a higher price that’ it’s worth so you just keep the $5. The opposite is true for put options. You want the the stock price to be higher than the strike price because no one is going to want to sell the stock for a lower value than it currently is at.
Keep in mind that you actually have to own the 100 shares of RYM in order to sell the call option, and to sell the put option you have to have collateral in your account so that in event that you’re wrong, you are required to buy 100 shares at the strike price from the person who bought your contract. There are a few ways to get around this and mitigate risk by doing something called a spread. That’s where you trade multiple options at one time. I’m not going to get into all of that though, that’s super advanced.
If you’re interested in learning further, I would recommend reading “Trading In The Zone” by Mark Douglas as a primer to trading, and then if you’re interested in options trading, “Option Volatility and Price” by Sheldon Natenburg. Keep in mind that when you’re reading the latter book there is a metric sh*tload of math and abstract concepts to keep up with.
Anyway, If you read this far I’m assuming you must’ve been really interested in stocks. Well, I don’t know a lot of people IRL who are beyond thinking it’s super easy and a lazy profession. So if you would love to discuss some ideas add me on my personal discord at ohjayesimpson#8278.
Well that’s it.
Jaye “Wolf of Wall Street” Ward signing off.