Seems like it ought to be a title for a film, doesn’t it? With all seriousness though you can and ought to use this strategy especially at a nasty bear market. Lets face it, who actually knows when we’re in the base? Stocks that resemble a bargain today can have their values halved in a short time period. Does that imply you sit on the sidelines and await a recovery? The answer is yes, but that’s a whole lot easier said than done. Very few people would invest in the base of the marketplace. In fact most people wait till it’s too late to get into the marketplace. With this simple strategy you wont need to wait, and you wont need to worry about whether you bought the inventory too premature or ought to have waited. If you follow the strategy as outlined you will have the ability to purchase a stock at a discount on the current market price and if not still make a return that’s above average expectations.
A while ago I wrote Bottom Fishing With the Bears summarize a process of investing in bad markets. Now I’d like to show you a different approach to use for bear market investing, actually it’ll work in all sorts of markets as long as you’re an investor with realistic yield expectations. Now I want to recommend you to read Bottom Fishing With the Bears, both approaches can be used concurrently and have the potential to develop into an significant part your investment preparation. Don’t kid yourself serious investing requires preparation! Everyone can purchase shares in a company but overlook the next and most significant part investing–appropriate money management.
Bottom Fishing With the Bears used a fictional company trading on the NYSE (New York Stock Exchange) under the symbol DOG. Remember that although the inventory is fictitious the true illustration is based on a genuine ETF comprised of DOGS and it does trade on a major U.S. stock exchange. We want to keep the strategy as real as possible without giving any particular investment advice. It’s the strategy that I want to concentrate on and depart the investment decisions and selection on your capable hands. Yes I know I’m stroking you a little, but since you took the time to read this far you demonstrated that you’re open to fresh ideas and do have enough common sense to decide on your own.
Back to the Simple Plan: Buying stocks at a discount on the current market price. How is it done? Though the concept is straightforward, take sometime to reread the strategy since a number of the tools used can be complicated and require whole comprehension. Don’t rely on anybody else, understand it yourself before you start execution. There are three things you will require immediately before you start. They’re money, cash brokerage account and an options account. While the first two are evident with an options account could be unknown. But, you will need all three.
Having everything in position and your account funded with $10,000 in cash, I would not advise that you ought to use this strategy with less. Anything less and your yield will be diminished by commission costs. In the $10,000 level the commission costs are nearly trivial, depending which financial institution you’ve got your account. Now that you’re prepared to go, lets see and what you’d do in order to get shares at a discount at the ETF of DOGS.
Remember even though it’s for demonstration purposes only it’s based on a genuine trading ETF. Since DOGS consists of a number of the biggest U.S. institutions crushed down from the present market circumstances, this may be a fantastic time to jump ahead and invest. Since the marketplace is bad you are not sure whether the stocks will go much lower or whether they bottomed out in this level. Your apparent choice is to head out and purchase 1,000 shares of DOGS at $8.24 for a entire investment of $8,240 before commission. The rest of the illustration will be dependent on costs before commission. That is one way and many of us are familiar with this technique. But, let’s look a bit deeper and see what we find.
What’s a PUT? Fantastic question, I’m glad you asked. A PUT is an option giving the proprietor the RIGHT to SELL 100 shares of an underlying instrument at a specified price by a specified time period. On the other hand the seller or author of the PUT has an OBLIGATION to purchase 100 shares of DOGS at $8 per share during this 6 month period whatever the purchase price of the stocks. Got all that?
Rather than outright purchasing 1,000 stocks of DOGS at $8.24 you put your funds to a high yield money market instrument. Since each PUT represents 100 stocks and you sold 10 PUTS you’re now OBLIGATED to purchase 1,000 shares of DOGS at $8 per share. With this OBLIGATION you will receive $2,340 ($2.34 x 100x 10). During the subsequent six months three potential situations can occur with DOGS. The price of the stock can go down or remain the same. Correct? Well let’s see what happens with each scenario.
You’re restricted to the price you would through ordinary method bought the inventory plus the premium on the PUTS you received ($8.24 $2.34=$10.58). Anything above $10.58 is the cap. However should this occur your return using the easy plan is 28.3 percent in six months. This does not include the interest earned on your initial funding of $10,000. Overall a pretty good yield, a 57 percent annualized rate of return. If the stocks of DOGS remain at $8 or any amount above your yield will be precisely the same as above.
On the other hand if the price of the stock drop below $8 per share during this 6 month time period the person who owns the PUTS will market you 1,000 stocks of DOGS at $8 per share and you will be OBLIGATED to purchase the stock at $8 per share or $8,000. As long as the inventory is $5.66 or higher you have not lost anything. Had you bought the stocks at $8.24 and the stock is trading currently at $5.66 your reduction would be $2.58 percent or 31.3 percent rather than zero. Also, keep in mind that you now have 1,000 stocks of DOGS in a price of $5.66 per share. Any gain from this point is a gain in your pocket.
Think about this strategy as opposed to outright stock purchasing. It’s a terrific way to fish. As I have mentioned previously, very few people understand when we are in the base. A number of us get lucky and purchase at the base, but this is an exception and not the rule. Investing requires careful preparation, luck happens but shouldn’t be depended upon. I am reminded of an expression that a broken clock is right at least twice a day. However, I favor having once that runs. What about you personally? Employ this Simple Plan to your own investment ideas and workout the possible returns. It’s worth the attempt.