Secrets
Of
Stock Market
Traders
Exposed!
Dale Beaumont
With Warren Stokes & Foreword By Ron Ianieri
Disclaimer
Please note that: The presenter/s and authors of this information may not be financial planners, advisors, registered accountants, or financial professionals and may not hold an Australian Financial Services License (AFSL). The information presented is based on personal experiences of the presenter/s as an entrepreneur, consultant, coach, trader and investor and on the experiences and lives of others he/she has modeled in detail. The model that is used is designed for each individual to do further research or adapt to suit your personal financial situation. Without limiting the generality of the forgoing, no person, persons or organisations should invest monies or take other action on the reliance of the material contained herein but instead should satisfy themselves independently. ASIC recommends for Australian investors that you seek the advice of an AFSL holder as to the appropriateness of any action. If any particular stock is mentioned it is for illustrative and educational purposes. An example is never to be seen as a recommendation of any type. Book readers further acknowledge that none of the presenters or staff of Dream Express International Pty Ltd and Universal Trading Solutions Pty Ltd shall be (i) held liable for any decisions or actions you may take, and by reading this book (ii) you indemnify Dream Express international Pty Ltd, Universal Trading Solutions Pty Ltd; staff and presenters of Universal Trading Solutions; resellers and commission agents of Universal Trading Solutions; against any future actions, losses, expenses, and legal costs, for yourself, or any outside party you may provide information too. You agree that you will not use or divulge any of the accepted copyright material to any unauthorised party, whether for business or personal use, without the express permission of Dream Express Publishing Pty Ltd or Universal Trading Solutions Pty Ltd. You further accept that failure to do so may facilitate legal action and maximum penalties available in your country and/or state of domicile.
First Edition 2007
Copyright © 2007 Dream Express International Pty Ltd
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission from the publisher.
National Library of Australia
Cataloguing-in-Publication entry:
Beaumont, Dale.
Secrets of stock market traders exposed!
1st ed.
Includes index.
ISBN 9780980308648 (pbk.).
1. Stocks - Handbooks, manuals, etc. 2. Investments - Handbooks, manuals, etc. I. Title. (Series: Secrets exposed).
332.6322
Published by Dream Express Publishing
A division of Dream Express International Pty Ltd
PO Box 567, Crows Nest, NSW 1585 Australia
Email: info@SecretsExposed.com.au
Website: www.SecretsExposed.com.au
Distributed in Australia by Gary Allen
For further information about orders:
Phone: +61 2 9725 2933
Email: customerservice@garyallen.com.au
Editing by Simone Tregeagle [simone@inkcommunications.com.au]
Cover design by Jay Beaumont [www.thecreativehouse.com]
Illustrations by Grant Tulloch [www.tullytoons.com.au]
Smashwords Edition, License Notes
This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each person you share it with. If you're reading this book and did not purchase it, or it was not purchased for your use only, then you should return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.
To Ryan Butler. Thank you for always being there to lend a helping hand and for being such a great friend! May all your goals and dreams come true.
Dale Beaumont
To Jackie, Tom, Harry and Emilia, and the hundreds of traders who helped make this book possible.
Warren Stokes
Acknowledgments
As with any major project, there are a number of very special people who contributed to making this book happen, so we’d like to take a short moment to say, ‘Thank You’.
To the ten exceptional traders featured in this book, thank you for being part of this exciting project. It has been wonderful to discover how each of you has achieved and, more importantly, what drove you along the way.
Next, a huge thanks to Emma Lyons, our very special project manager who worked tirelessly to pull together all the material for this book. Thanks for always keeping your cool in light of every challenge and issue along the way.
To the wonderful Simone Tregeagle and Kerrin Medenyak (from Ink Communications) and Neil Murphy, our great editors – thank you so much for your ongoing support. Sharon Witt, your efforts are also greatly appreciated.
To Jay Beaumont (Dale’s brother) for designing the book covers, to Bookhouse in Sydney who continue to do such excellent typesetting and to Robert Stapelfeldt – thanks for everything you do to bring all of the ‘Secrets Exposed!’ books to life.
Next, to the team at Sure Fire Marketing – thanks for all your efforts with the ongoing development of the ‘Secrets Exposed!’ website. We really value your work and thank you for the many emails after midnight.
Thanks to all the staff at Gary Allen (our wonderful distributors) and each and every sales rep that has helped to get these books into the stores – we greatly appreciate the work you do.
And finally, to tens of thousands of readers who have supported the ‘Secrets Exposed!’ series – a very heartfelt thanks. May the words from our books continue to inspire and guide your way!
Praise from readers of the ‘Secrets Exposed!’ series
“I believe that the path less trodden is the most rewarding, however it can be quite daunting, especially in business. I found the ‘Secrets Exposed!’ series a breath a fresh air among the countless business books that fill the shelves. It’s great to find an easy read which makes small business owners not feel so alone and helps explain the end worth of building a business.”
Jason Ham – Uniforms.com.au
“As a business owner and investor, I’m always looking for ‘new’ information in order to set my goals, and improve my knowledge and financial position. I found that by reading your books I was able to gain some valuable information from mentors who have been there already, which I believe will assist me in achieving those goals in the future. Reading gives you the spark to create ideas, the knowledge to make plans and the impetus to take action.”
Perry Hartikainen – Multiple Business Owner
“A riveting series of books that I am in awe of – I am ecstatic about them; they have turned me into a bookworm. They will show you how everyday people just like you and me can achieve amazing things. If you’re seeking inspiration and motivation to achieve your dreams then you have just found what is needed to take you to the next step in your journey.”
Sharon Barlow – Bouncing Bodz Pty Ltd
“Because of the ‘Secrets Exposed!’ series I have been able to make changes in my life. I have realised that up until now no one believed in me, so therefore I did not believe in myself; however, that has now changed! I have learnt so much from the contributors, which has helped me in determining where my life is going and how I am going to get there.”
Tracey Thompson – Account Manager
“I find the ‘Secrets Exposed!’ series to be very rewarding. Not only have such genuine and well-known people given to this project, they have given wholeheartedly and help people realise that with focus and direction, they can achieve their ultimate goals as well. Thanks to this series, my career is now full-steam ahead.”
James Lantry – NLP Master Practitioner, Hospitality Trainer
“I really enjoyed reading about how seemingly ‘normal’ people were able to leverage their time and talents to create hugely successful businesses. Normally you read about these people and their success in BRW and the like and you think, ‘If only I knew how they did it’, and then you read a book like this and you think, ‘Hey, I COULD do that’.”
Effrim Alex Volkoff – Managing Director, Wolf Business Group P/L
Contents
Preface
If I were in your position right now I’d be wondering if I really needed to read this section. However, if this is the first ‘Secrets Exposed!’ book that you’ve read, could I ask you to please resist the temptation to skip ahead, as I’d like to briefly share with you why this book has been created and how you can best use it to impact your life.
When I was growing up I heard somewhere that there are two ways to live your life: the first is through ‘trial and error’ and the second is through ‘other people’s experience’. At the time I dismissed it as just another one of those sayings that sounds good, but doesn’t make much sense. Then, like most teenagers I finished school with stars in my eyes thinking, ‘This is great! My education is over – no more books, no more lectures, no more people telling me what to do’. How wrong I was. After a few months of bouncing around, not quite sure of what to do next, I stumbled across the idea of personal development and started to hear concepts such as:
• Formal education will earn you a living, but self-education will make you a fortune.
• Work harder on yourself than you do on your job.
• You will be the same person five years from now, except for the people you meet and the books you read.
• Don’t wish that your job were easier, wish that you were better.
• You are your own greatest asset, so you must invest in yourself.
Since November 2000, I have been totally committed to becoming my own most valuable asset. After attending hundreds of seminars, listening to thousands of hours of CDs and reading shelves of books, I have discovered that the people who truly succeed aren’t any smarter, better looking or harder working than anyone else – they just think differently and have learnt to incorporate different values into their lives.
I am now in the very fortunate position of being able to travel internationally to present personal development seminars to teenagers and I am often asked, ‘What is the one thing you need to know to be successful?’ My answer is always the same: ‘The one thing that you need to know is that there is not one thing that you need to know to be successful’. I’ve learnt that success is multifaceted and that mastering one principle of success or area of your life isn’t going to take you to the top – the more you master, the more successful you will become. But if I did have to identify one of the most important success strategies, it would be this: ‘Find out what successful people do and do the same thing until you get the same results’.
That’s what this book is all about. The only difference is, instead of you going out and finding successful people, we’ve brought them to you.
You see, whatever you want in life, whatever you are shooting for, chances are that someone else is already living it. They have already invested years of their life and probably hundreds of thousands of dollars, they’ve made lots of mistakes, learnt from them and eventually succeeded. So why would you want to waste your own time, money and effort through ‘trial and error’ when you can fast-track your success by learning from ‘someone else’s experience’? As Sir Isaac Newton said, ‘If I have seen further it is because I have been standing on the shoulders of giants’.
Every time you pick up a book, attend a seminar or interview a successful person, you are compressing years of life experience into a few hours. With any of the ‘Secrets Exposed’ books, you can multiply that by between twelve and seventeen people and you’re looking at around 250+ years of experience and wisdom ready and waiting for you. It won’t prevent you from making mistakes of your own, far from it, but it will help you to make more calculated and purposeful decisions, rather than big, misguided and ignorant ones.
There is no shortage of information about how to achieve proficiency or even greatness in any area of life these days. Go to any bookstore or library and you’ll find the shelves sagging with titles from experts, all with their own theories and ways of doing things. But what I have discovered is lacking in almost all of these books is INSPIRATION. What’s missing is role models and mentors – the stories of people we can all look up to. People who started out exactly like you – with a dream in their hearts and with all the same fears and insecurities. Given the choice between reading a textbook or a dozen success stories about people who have actually done something, I’d take the success stories any day of the week. I’m not saying that theoretical information isn’t important, of course it is, but having presented hundreds of talks to all different types of audiences, I can confidently say that it’s always the stories that move people. It’s the whole, “If he or she did it, then so can I” that gets inside people’s hearts. When we’re inspired we get motivated and then we take positive action which leads to results.
The ‘Secrets Exposed’ books are not intended to be a one-stop-shop. They are an introduction to the wealth of knowledge available to you and to some of the real success stories of people who have reached the top in their chosen field of endeavour. That’s why at the back of each book you will find most of the contributors’ contact details and some of their other products and services that are available to help you continue your journey.
So, how did the whole idea for the ‘Secrets Exposed’ books come about?
Well, in 1998, when I was around seventeen, my nan gave me a copy of a book titled Collective Wisdom, by Brett Kelly. In it were transcripts of face-to-face interviews with a whole lot of prominent Australian personalities. And it was a fantastic read. Since then I have seen a handful of random ‘success story’ books, but the challenge I find with most of them is that they are either transcripts of interviews, that never really make complete sense in the printed form, or they are written by writers who paraphrase someone else’s story. The result tends to be a diluted message that doesn’t really allow you to get a sense of the individual’s personality or character.
In around 2001 I read my first Chicken Soup for the Soul book and realised that there were dozens and dozens of related titles designed to meet the needs of different people’s areas of interest. I thought that was pretty neat.
It wasn’t until January 2004 that the ‘Secrets Exposed’ idea boiled over. I was in my hotel room in Singapore relaxing after six straight days of presenting to hundreds of teenagers. I was reflecting on the ideas that had been shared with them. One of the most important was to seek out those who have already achieved what you want and ask them lots of questions. I was plagued by the thought that only a small percentage would act on that very valuable advice and that most would never take the step due to a lack of confidence, fear of rejection or an inability to contact the people they needed.
That’s when it hit me...’What if I could find the people and put together a number of books covering a range of different areas?’ I knew it would take a lot of effort, so for the next three days, I sat in my hotel room and developed the basis of an entire system to make it happen.
Based on my experience with other books, I decided that these books had to be non-time specific and be written (not spoken) by the people themselves. This way the answers would be planned and well thought-out, providing richer content and more interesting reading. I also wanted to make sure that there was an even balance between practical ‘how to’ information and inspirational stories that gave an insight into the highs and lows of people’s real journeys. I also wanted to ensure that a percentage of every book sold was donated to a charity relating to the nature of that particular book.
When I arrived home I got into action. However, between working out of a tiny one-bedroom flat and trying to manage two other demanding businesses, my plans were a little slow in the beginning and I had to be resourceful. So I bought a plastic tub and turned the boot of my car into a mobile office! Anytime I could find a spare hour or two, I’d park myself at the gym or a nearby coffee shop and make calls from my mobile phone.
Putting these books together has been both time-consuming and demanding, but it has also been a real privilege for me to have the opportunity to work with each of the people involved in the various books. Thank you, to each of you, for making it possible!
Well, I think you’ve heard enough from me. Now it’s time for you to discover for yourself the wonderful wisdom contained in these pages. I hope that you enjoy the read as much as we’ve enjoyed putting it together. And who knows, maybe one day we will be reading your story?
Dream Big!
Dale Beaumont
Creator of the ‘Secrets Exposed’ Series
Sydney, Australia
Download Your Free Audio Gift
Exclusive to readers of the ‘Secrets Exposed’ series...
In this 1 hour 43 minute recorded interview, author Dale Beaumont intimately shares the inner workings of the ‘Secrets Exposed’ series. Discover in greater details how he came up with the idea, how he managed to secure personal interviews with over 200 of the countries most successful people and what he believes are some of the most important business and life principles from each of the books in the series.
Simply visit the web page below and follow the directions to listen to or download the entire interview direct to your Notebook or PC.
Foreword
They say that there is more than one way to skin a cat. If that is true, then there are more than one hundred ways to make money in the market. The goal for each individual investor is to find which one is right for them.
Over the years I have observed that what works for one may not necessarily work for others. Different traders/investors have different strengths and weaknesses. They have different likes and dislikes, different philosophies, different risk tolerances and even different capital. I have therefore come to the conclusion that being exposed to a variety of information illuminating those differences is by far the best way for students to learn to become consistently successful investors and traders.
In Secrets of Stock Market Traders Exposed! Dale Beaumont and Warren Stokes have assembled ten very successful traders. Traders like Kim Reilly, Cydney O’Sullivan, Daniel Kertcher, Lyn Summers, Peter Elsworth, Nik Halik, and others represent educator-traders to private traders. Most importantly, the featured traders in this book are investors we can all relate to. They did not start out trading as a career but as a secondary source of income, and did it so well that trading has become their career.
Dale Beaumont introduces us to each of these traders and delves into their secrets. All the traders carefully detail different successful styles, disciplines and philosophies. More importantly, all acquaint the reader with different philosophies, strategies and disciplines that have worked.
Secrets of Stock Market Traders Exposed! is an excellent resource for new traders and experienced ones alike. The ten success stories demonstrate
Dale and Warren’s keen understanding that there are many ways to succeed in the market, none necessarily right and none necessarily wrong.
These ten stories offer a broad range of secrets. Readers have an opportunity to pick and choose information from the traders’ secrets and experiences. They can look at multiple ways of trading successfully without bias toward one particular style or discipline.
In my options courses I stress education. Secrets of Stock Market Traders Exposed! offers a chance for investors to learn from the successful experiences of others.
There is no ‘one style is right’ message here. This book proves that there are many ways to win in the market. And all of them are the ‘right’ way!
Ron Ianieri
Ex-Philadelphia Stock Exchange Floor trader (Foreign Currency Options; Equity Options)
Author of Option Theory and Trading Courses
Co-Founder of The Options University
Private trader that has executed over 100,000 trades
Introduction
Since the world’s first shares were issued on the Amsterdam Stock Exchange in 1602, there has been a global fascination in the stock market. People have marvelled at how instant fortunes have been made and how companies have grown from nothing to become household names.
In more recent years, people have watched as barriers preventing entry into the world’s stock markets have lifted. And in the last decade, through the power of the internet, they’ve discovered how it’s now possible to trade just about every major market in real time and in the comfort of their own home.
Most have simply observed these developments. Then there have been others who have made a decision to acquire some skills and get in the game. It is no secret that many have failed, however there have been those who have stayed committed to the task and amassed small or even large personal fortunes of their own.
In Secrets of Stock Market Traders Exposed! we’ve assembled an amazing group of ten highly successful stock market traders who are eager to share their experiences and pass on what they’ve learnt.
By reading each contributor profile you’ll see that we have covered a lot of ground:
• They range in age from 23 to 70.
• Some started learning about the stock market in their teens and one started at the age of 64 – without even knowing how to switch on a computer.
• For some it is a full-time career and for others it is now merely a sideline activity around a business or other hobbies and interests.
• Some exclusively trade the Australian market and others trade various international markets.
• All are successful in their own way, with portfolios ranging in size from $100,000 to well over $5,000,000.
If you are relatively new to the stock market, you will soon discover there are dozens of different markets open to investors. Within each there are hundreds of companies and commodities one can trade and a seemingly endless number of instruments and indicators that can be used to trade them.
In this book, the traders cover many of their major strategies, including stocks, options, futures, contracts for difference (CFDs), intra-trading, covered calls, SPI trading, e-minis, QQQQs, renting shares, naked trading and much, much more.
You’ll soon learn that there is a language to the stock market. To fully explain each and every term throughout the book would be a near impossible task. So we have taken the liberty of writing and adding a glossary of terms. It can be found at the conclusion of the book, so please refer to it as the need arises.
To further assist you in your own endeavours, a number of contributors have also very generously offered valuable gifts to all of our readers. Each contains excellent information designed to further sharpen your knowledge and skills. To receive them, all you need to do is visit the specified website provided and then follow the steps to download the bonus gifts – absolutely free.
Plus, at the back of the book we have included the contact websites of many of the contributors. You’ll discover that a number of them have their own books and educational materials, which we encourage you to investigate further.
In closing, it is important that you know this isn’t a book that will tell you specifically what and exactly how to trade. And it is certainly not a book that will give you some underground formula or one-touch solution to making millions overnight.
This is a book that is designed to share the ‘why’, and to take you up-close with successful traders – so you can understand how they think and what drives them to achieve.
Combine these insights with further education and, of course, your own personal experience and you’ll be on track to realising your own unique potential.
Enjoy The Read!
Dale Beaumont and Warren Stokes
Email: info@SecretsExposed.com.au
Get Educated
Daniel Kertcher
“All you have to do to be successful in the stock market is spend time becoming educated... Start investing with a small amount of capital and build that up as you become more confident in your trading.”
Profile
Daniel Kertcher
Daniel Kertcher was born in Toronto, Canada, in 1972. At the age of 16, he moved to Australia with his family. After finishing school he studied a Bachelor of Science, majoring in neurophysiology (brain research), at the University of Queensland.
In 1994, Daniel was going to commence a PhD study in neurophysiology but decided to become a licensed real estate agent instead. He opened an agency with his mother and soon became involved in most facets of property: development, investment, onsite management, sales and maintenance.
Four years later, Daniel became fascinated with the stock market. He started MetaShare International, his first stock market training company with two retired funds managers. By 2000, MetaShare had over 5,500 clients with offices around Australia and New Zealand.
In 2001, Daniel sold his shares in MetaShare and started his current business, Platinum Pursuits. Platinum Pursuits is an Australian-based stock market education company that specialises in teaching clients how to trade international stocks, options, CFDs and futures markets. By 2004, he was conducting his training seminars to huge audiences in Australasia, Europe and North America.
Over 70,000 people have attended Platinum Pursuits seminars in 22 different countries, with over 10,000 people continuing on to complete the various advanced courses.
Today, Daniel spends approximately four to five months a year conducting courses internationally. The rest of the year he spends with his family and on leisure, investment, business, spiritual and charity interests.
Why did you decide to start trading in the share market?
After I graduated from university I entered the real estate industry where I remained for five years. I became fascinated with the stock market in the mid-1990s because the Australian property market was a bit sluggish – there wasn’t a great deal going on and prices were fairly stagnant. However, I noticed that the stock market was really heating up, particularly in the US, which later became known as the ‘tech boom’. I knew nothing about the stock market and really wanted to learn, as I was extremely attracted to the analytical side of trading.
At university I studied neurophysiology (brain research) and I was used to looking at charts and numbers. Seeing the stock market and the numbers and prices displayed in graphs was much more interesting for me than real estate. Don’t get me wrong, I am still a huge advocate of real estate; I own a lot of it and I encourage others to invest in this asset class too. But it is more of a hobby for me now.
In the beginning what markets did you choose to trade and how have you moved onto other markets?
I have changed my trading strategies and techniques quite a lot over the past ten years. Initially I traded the Australian and New Zealand stock markets, primarily because my mentors were based in New Zealand. During the late 1990s tech boom, it was reasonably easy to make high returns just by trading shares in those markets. However, when the tech crash hit in early 2000 and prices fell extremely fast I needed to find alternatives to trading shares. That was when options trading became very popular, as options allow traders to make profits in falling markets.
Through some American contacts, I developed a keen interest in trading the US market because of its phenomenal amount of liquidity and the wide range of trading opportunities available. What’s more, in 2000 there were a few US stock and option brokers who started opening their doors to international traders, allowing non-American residents to trade the US market at cost-effective brokerage rates. For the past seven years I have been trading almost exclusively in the US market.
“Within four days the share price doubled and I made a profit of $100,000...”
In 2004 I came across contracts for difference (CFDs) and learnt how to trade them. As CFDs are traded globally it gave me the opportunity to trade in the US, UK and even Australian markets. So these days, I trade predominantly the US market with options and CFDs, and a few positions in the Australian and UK markets.
What was your first big win in the share market?
One of my first big wins came during the tech boom of the late 1990s. I was aware of a company called Powerlan, an Australian stock that was rising fast. I could see that the company had a bright future and I bought $100,000 in shares. Within four days the share price doubled and I made a profit of $100,000, which at that point was the largest amount of money I had ever made in the market on any single trade in such a short period of time. However, at that time the market was extremely volatile, and the share price literally dropped overnight and my profit fell from $100,000 to $50,000. I closed out the trade and even though I made a profit of over $50,000 I learnt a lot of lessons about controlling risk, capital preservation and money management.
How do you think the stock market compares to other investment vehicles such as business or property?
I believe that the stock market is the single greatest business concept in the world today. I approach my trading in the stock market as a business. If you use the analogy of a store – you buy your stock at a wholesale price and sell it on at a retail price – in essence, that is what we are doing in the stock market. We are buying stock at a certain price and selling it on at a (hopefully) higher price. The benefit over other businesses is that we can trade the stock market with $1,000, $100,000, $1 million or more. There is really no limit to what we can do.
What’s more, there are strategies in the stock market which allow us to make profits in rising, falling or even sideways markets! So trading the stock market is a much more versatile investment arena than traditional businesses, or even real estate.
To be successful in a traditional business you have to have a good product, excellent marketing, and a competitive price, while also being a master of many different business skills such as leadership, management and finance – there are a lot of things you need to be good at in order to be successful. All you have to do to be successful in the stock market is spend time becoming educated on how the market works and how to protect your capital, and then start gaining experience. Start investing with a small amount of capital and build that up as you become more confident in your trading.
In the property market you only really make money when the market rises. You need a substantial amount of capital to get into the market, the rental income may not always cover the mortgage, and you may have an ongoing cash shortfall. If you want to sell your property it may take months for the property to settle and for you to gain access to the cash from the sale. In the stock market, you can close out all of your positions and have all of your cash back in as little as two business days!
What’s more, the commissions and expenses for running property are huge compared to trading similar amounts of money in the stock market. The sale of a property worth $500,000 would cost tens of thousands of dollars in commission, not to mention the stamp duty upon purchase, rates, land taxes and so on. In the stock market, you can buy or sell a parcel of shares worth $500,000 and pay as little as $625.00.
There are advantages and disadvantages in the business and property markets; however I believe the overall advantages of the stock market far outweigh the risks and rewards of business or real estate.
Can you describe your current trading strategy and why you have chosen to take this approach?
My current approach involves a combination of different instruments and strategies. Ultimately, my approach is to split my money into two different engines. One is the ‘Capital Gain Engine’, which makes capital gains and the other is my ‘Income Generation Engine’, which generates consistent monthly cash flow that I can then use to fund my other activities.
In terms of capital gains strategies, I mainly specialise in CFD hedging and a new technique in the US market, known as portfolio margining. CFDs have a lot of similar characteristics to options, particularly from a trading point of view. They allow us to control approximately ten to 20 times more shares than simply buying shares directly. This is known as leverage. So, if a share price moves ten per cent in our favour, we make a profit of between 100 and 200 per cent, similar to an option. We then use options to hedge (insure) our CFD trades, which provides downside capital protection in case the stock moves the opposite way to what we expect. A big benefit CFDs have over options is that CFDs never expire. Therefore, I can place a CFD trade on a stock and let it run as long as I like. With an option, I must close the trade out within a few weeks or months, as the option is going to expire. This limits the potential upside return.
These days I spend no more than 15 to 20 minutes a day trading with CFDs. When we make a profit with CFDs, average profits have been in the order of 100-300 per cent per trade. When the trade has gone against us, the greatest loss we have had has been approximately 25 per cent, because I use options to insure the trade, limiting the downside risk.
For my Income Generation Engine I use a series of very popular strategies involving option writing. I write a variety of different types of options, including covered call options, cash covered and short stock covered put options, and option spreads. They are very passive strategies, which take only a few minutes to set up once a month and generate between 3 and 12 per cent return each month.
You are well acquainted with just about all stock market strategies. Is one strategy really better than the other?
When it comes to trading the stock market there are many different strategies. Most people believe that the only way to invest in the stock market is to simply buy shares and hold them for the long term. While that is one strategy, there are many more that allow investors to make money in rising, falling and sideways markets over the short and long term. However, despite all the different strategies, they all fall into two categories: one is for capital gain and the other is for income generation.
Options allow traders to make both capital gain and income. The simplest form of options trading is to buy a call option. If the share price goes up then you will make a capital gain. There is no income from buying a call option; it is purely a capital gain, which you make if the share price moves sufficiently in your favour. An alternative strategy would be to write a covered call. With this strategy you purchase shares and then write a call option against those shares. That way you can make a capital gain on the shares if they rise in value as well as an income from writing the call option.
“A big benefit CFDs have over options is that CFDs never expire.”
CFDs provide investors solely with a capital gain if the stock moves in their favour and if the company pays a dividend.
Some strategies are easier and simpler to execute than others and some are potentially more profitable than others. It’s up to the trader to determine if they want to have capital growth or income (or a combination of both), and then choose the appropriate strategy that will enable them to achieve the desired outcome.
Markets never just rise in value – they often fall and/or move sideways. Highly successful investors and traders do not rely on knowing how to implement just one strategy. Instead, they have a range of strategies with which they are familiar and experienced. They then choose the appropriate strategy at the appropriate time depending on the market conditions and their desired outcome.
How many active trades do you recommend people should have going at one time?
For income generation, I would suggest no more than 15 option writing strategies per month – these might be in any combination of covered calls, covered puts, and call and put spreads.
For capital gain, I would suggest no more than 10 open trades at any one time. There’s no point having 50 to 100 open positions because the time it would take to select, monitor and calculate all the different scenarios would be ridiculous. Some people open a huge amount of positions to reduce their risk through diversification. However there are many superior strategies available to reduce risk in the market without diversifying your portfolio. The fewer positions you have, the easier it is to monitor your account.
What profit margins or return on investment do you look for when trading?
Profit expectations vary between different strategies. When it comes to income generation strategies, such as writing covered calls and covered puts, we look at returning between 2 and 6 per cent per month on our investment capital. For cash-covered put options we specifically look at returning between 5 to 20 per cent per month.
When it comes to capital gain strategies, such as CFD hedging and portfolio margining, we look for a minimum of 75 per cent return per trade, with an expectation of closer to 100 to 200 per cent per trade. CFDs have a 1:10 leverage ratio, meaning that for every one per cent the stock moves we make a ten per cent return on our CFD investment. This is why the returns are much greater than most people are used to (or expect) out of the stock market.
I must stress though that we are extremely careful with our trading, and only trade CFDs with option protection, which acts like insurance. We are very aware of the risks of trading with a large leverage ratio, and by insuring our CFD trades, we protect our CFD capital from loss should the stock price move in the opposite direction to what we expect.
What is a covered call and how can it be incorporated into your strategy?
A covered call is one of the simplest and lowest risk strategies that can be used in the options market. It is an income-generating strategy where an investor owns a parcel of shares and then writes an option against those shares for which they are paid an immediate income.
In order to understand how to write a covered call, one must understand what an option is. An option is a financial instrument that provides the owner of the option with the right, but not the obligation, to buy or sell a parcel of shares at a set price on or before a set date in the future.
There are two different types of options, call options and put options: a call option gives the owner of the option the right to buy shares; a put option gives the owner of the option the right to sell shares.
“Now that you have written the covered call, there are only three things that can happen...”
For example, let’s assume you purchase 100 shares in Microsoft (MSFT) for $26.50. You can then write one call option for $27.50, which is a set strike price.
You then sell the call option to another trader who pays you money for it. The money paid for the option by the other trader is referred to as the premium.
Now that the other trader owns the $27.50 call option, they have the right, but not the obligation, to buy your 100 shares from you for $27.50 on or before the date the option expires.
The other trader is hopeful that the share price will rise above $27.50 before the option expires. If it does, they will be able to buy the shares from you for the agreed price of $27.50.
The value of the premium you will be paid will vary depending on the volatility of the stock, however, Microsoft options are usually worth approximately three per cent of the underlying stock’s value (for options that will expire in one month’s time). When writing covered calls, it is typical to write an option that will last no more than one month.
Three per cent of $26.50 is equal to $0.80 per share. As there are 100 shares per option contract, the premium paid to you for this trade would be approximately $80.00.
Now that you have written the covered call, there are only three things that can happen to the stock value by the time the option expires – it can rise above the strike price of $27.50 or it can be at or below the strike price.
If the share price rises above the strike price of $27.50 by the time the option expires, then the trader who owns the option will exercise it and buy your shares from you for $27.50. You keep the premium of $0.80 per share, and make a capital gain of $1.00, being the difference between the stock purchase price of $26.50 and the sale price of $27.50. That will leave you with a total profit of $1.80 per share, or a return of 6.8 per cent for a one-month exposure.
If the share price is at $27.50 or lower by the time the option expires, then the trader will let the option expire. You keep the shares and the premium, leaving you with an income of three per cent of the value of the shares. You are then free to write another option for the next month, and earn more income.
If the share price falls below $26.50, then the option will expire, you continue to own the shares, and experience a loss on the stock. However, you also keep the premium income of $0.80 per share, meaning that the stock price would have to fall to $25.70 before you start to make a true loss.
Writing covered calls is therefore a strategy that is less risky than simply owning shares, because as soon as you write the option, you are paid a premium income, which you never have to return to the trader. The premium income immediately lowers the break-even point of owning the shares.
You can write one call option for every 100 shares that you own on the US market and there are over 2,800 shares on the US market that an investor can write call options against. The strategy works exactly the same way on the Australian market, except that you can write one call option for every 1,000 shares that you own on the Australian market. There are over 110 shares on the Australian market that an investor can write call options against.
Most people believe that the only way to make money in the share market is to buy shares, hold them for a long period of time, and then sell them to make a profit if the shares rise in value. Alternatively, you can purchase the shares and the company pays a dividend to you, so you receive an income for owning the shares. In my opinion, writing covered calls is a superior strategy, as it provides both capital gain potential and immediate income, as well as reducing the break-even price of owning the shares.
As far as an income generation strategy, writing covered calls is definitely one we use to establish a regular monthly income in our portfolio. We devote approximately 30 to 40 per cent of our entire trading capital to writing covered calls, and the premium income that we generate is between two and six per cent per month of the total capital invested.
I write covered calls solely in the US market because of the large market depth and liquidity, and look for a good spread of between five and 15 different stocks. Writing covered calls is one of the main techniques of our overall wealth creation plan.
Can you explain ‘naked options’ and do you recommend them?
Writing naked options refers to writing options without owning the underlying stock. When writing covered calls, the investor owns the underlying stock and has therefore locked in their purchase price. When writing naked options, the investor does not own the underlying stock, and has therefore not locked in the purchase price. They write a call option at a set strike price. If the share price rises above the strike price, then the option owner will exercise the option and buy the shares from the investor at the strike price. The problem is that the naked call writer does not own the shares, and therefore must buy the shares from the open market at the current market price and then sell them to the option owner for the strike price, which is now lower than the market price of the stock, thus making a loss.
There is no limit to how high the share price can rise, and therefore, there is no limit to how large a loss can be. Writing naked call options is the single riskiest option strategy that exists. The good news is that there is an easy way to avoid the risk – don’t write them! I personally never write naked call options. I have in the past, but every single time I did, I lost money.
Writing naked put options, however, is a highly profitable and much lower risk strategy than writing naked call options. When an investor writes a naked put option, they are selling another trader the right to sell their shares to them for the strike price, which is usually lower than the current share price, on or before the option’s expiry.
The investor is immediately paid the premium income and must only buy the shares from the trader if the share price falls below the strike price.
The key to writing profitable naked put options is to only write them on stocks that are very profitable, and that you would really like to own. That way, the stock is less likely to fall in price. The option will expire and you will keep the premium income without owning the shares.
Share prices can fall, but they cannot fall below zero and therefore by writing naked put options you do not have the same unlimited risk as writing naked call options.
I have found writing naked put options to be a very powerful income generation strategy. I have been writing them every month for the last five years and currently on approximately five to ten stocks per month. I would definitely suggest writing naked puts to other traders, however I would absolutely not suggest writing naked call options to most traders, especially novice, inexperienced traders.
“I have found writing naked put options to be a very powerful income generation strategy.”
What are the common ways that investors could lose money in the stock market?
The first way that an investor could lose money in the stock market is simply because of the position that they are in – that is, if you buy a share and the share price falls, you will lose money. If you buy a call option and the share price falls, you will lose money.
Nobody can make a profit on every single trade they make – not even Warren Buffett gets all of his trades right. Making money in the stock market is about balancing profits and losses, while at the same time maximising the profits and minimising the losses.
There’s nothing you can do as an individual to make the share price go up. What you can control however is how much you give back to the market when it goes against you. You can’t control what profit you make, but you can control how much you lose. The most important strategy to building wealth in the stock market is to keep your losses small.
The other common way to lose money is to not know what you are doing. Warren Buffett said it best when he said, ‘Derivatives (which include options and CFDs) are financial weapons of mass destruction’. What he meant was that when used by educated, informed and intelligent traders, derivatives can be used to build phenomenal wealth in the stock market, due to the leverage and risk protection elements of CFDs and options. Used by the uneducated, naïve, uninformed, and the just plain greedy, they can absolutely destroy your trading account. If used incorrectly, CFDs and options can result in a trader losing most, if not all, of their entire trading capital and potentially even more!
I like to think of it like walking across the street. Walking across the street is risky. Looking both ways first is risk management. If you are going to blindly walk into the options and/or CFD market, without taking the time to look both ways, and learn how to protect yourself and your money, then frankly, you deserve to be hit. It might wake you up and help you realise how important it is to know what you are doing.
Once you know what you are doing, you know the risks, and more importantly, know how to protect your money and reduce those risks, then trading CFDs and options can result in fantastic profits.
Can you explain the different ways in which you can protect the downside when entering into a trade?
The most common strategy used by investors and traders is to put a stop loss in place. A stop loss is an order to your broker that says sell the position if the share price falls to a certain amount below the purchase price, thereby reducing the amount of risk and preventing any further loss on the trade.
If we consider writing covered calls (where you buy a share and then write a call option against the stock) the income you receive in writing the call option immediately reduces your downside risk because it reduces the initial purchase price of the stock.
When trading CFDs you can put a stop loss in place; however, my preferred method for protecting my risk with CFDs is to buy options to protect them. For example, if I buy 100 CFDs I will buy one put option. The put option gives me the right to sell my CFD shares for the agreed strike price. If the CFD falls in price then I have protected the downside risk because no matter how low the share price falls, I have the right to sell the CFD shares for the set strike price. The key is to buy the shares at the same price as the strike price of the put option.
Ultimately, the most important thing before you enter into a trade is to do your research, with both technical and fundamental analysis. The easiest way to avoid a loss is to make a profit. However, no matter how convinced you are that the share price will move in your favour, you must protect your capital in case it moves in the opposite direction. Many traders use a stop loss to protect their capital, but my preferred method when trading CFDs is to use options to hedge or protect the downside risk.
“A lot of people are brought up with the belief that it’s not right to have too much money...”
What are the common fears most people have about stock market investing and how do you overcome them?
The biggest common fear that people have about trading the stock market is the fear of losing money. I have met tens of thousands of people and without a doubt every single one of them is more afraid of losing money then they are of making money.
You need to develop the right mind-set and that comes through confidence in what you are doing. You need to have the belief that money can easily flow to you from the stock market. You need to have a financially abundant mentality.
A financially abundant mentality is the understanding that you know how to make more money than you will ever need, for the rest of your life, without having to physically work for it. In other words, it’s knowing how to make your money make money for you, rather than you having to go out to work for it. In order to develop a financially abundant mentality, you need to use instruments that allow you to make a significant amount of money in a short period of time, over and over again – so many times in fact, that eventually you realise that you can keep doing it as long as you like.
Some of the trades will make losses, however, over a period of time you will learn to deal with these losses, improve your success rate, maximise your profits, minimise your losses and improve your choice of trades. Once people get over the fear of losing money they begin to focus on the important thing in trading, which is making money.
Another common fear is the fear of becoming successful. A lot of people are brought up with the belief that it’s not right to have too much money, or that they don’t deserve to have lots of money, or that money is hard to make. These are what we call ‘limiting beliefs’.
People are afraid that their friends and neighbours will think that they don’t deserve their money or that somehow they have earned that money illegally. It’s unfortunate that people put a low self-value on themselves just because of their current financial situation. People are afraid that they will lose some of their friends because of their financial success.
The way to overcome this is to realise that there are a lot of people out there who think differently in terms of success. You will gravitate toward these people as your life changes and as your level of success increases. I love the old saying, ‘You are who you spend time with’.
Who are the mentors that have inspired you and what important lessons have you learnt from them?
When I first got started in the stock market I was introduced to two retired traders, Max Lewis and Bruce Barnard; both were well into their sixties, and both had over 30 years’ experience trading in the markets. They lived in Auckland, New Zealand, and would see people on a one-on-one basis to teach them about the stock market. So one day I knocked on one of their doors and said, ‘Look you don’t know me, but I have been referred to you and I would like to know about the stock market’.
So we sat down for a few hours and I was really impressed with their knowledge. I decided to hire them for a week. I flew both of them over to Australia and had them teach me everything they knew about the stock market. The most important lessons I learnt from them would definitely be the technical analysis side of trading. Virtually all my initial technical analysis training came from them and the books they suggested I read.
The next mentor I had was Anthony Robbins, the famous American motivation coach. I attended all of Tony’s live events back in 1999 and had the honour of actually meeting him in 2000. Tony was one of my biggest role models and taught me that you have to have balance in your life. He made me realise that I had to work smarter, not harder. I had to make my money work for me, so that I didn’t have to work for my money, and I could then spend my time working on the other areas of my life, such as my health and relationships.
Another great mentor I had was Charles Mellon. He was a senior broker for the Chicago Board of Options Exchange (CBOE). Chuck really inspired me to start trading the US market. He took me under his wing and taught me a lot about the US market and the scope of different stocks and some of the strategies that could be implemented solely on the US market.
I owe most of my success in the stock market, and life in general, to these people.
However, my greatest mentors, who laid down the foundations of my ambition, integrity and optimistic enthusiasm were my parents. Both contributed in different ways, but each had a profound impact on my development. My father taught me the importance of being honest, having integrity and being responsible. My mother taught me how to teach, how to share and how to enjoy life. I am eternally grateful to them for their guidance and love.