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Why Size Matters – Especially In Options Trading

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In my previous article I wrote about how style drifting could kill your trading account. It’s a must read in my opinion.

Today, I want to talk to you about another major blunder new (and even experienced) investors make. Like style drifting, it can do a lot of damage to one’s account.

What am I referring to?

Investors can put themselves at a terrible disadvantage simply by sizing their positions incorrectly. This usually occurs when their position is too big relative to the risk and account size.

The key to getting the relative sizing correctly is understanding the risks associated with the position. Let me walk you through a likely trade scenario an investor not familiar with relative sizing might make.

For example, let’s say on 7/31/14 an investor looking to take advantage of a short term move… sold call spreads in UVXY. UVXY is the PROSHARES Ultra VIX Short-Term Futures ETF. It attempts to replicate, net of expenses, twice the return of the S&P 500 VIX Short-Term Futures index for a single day.

On 7/31/14, UVXY was trading at $31.70. Let’s assume on that day an option investor sold 20 $36/$39 call spreads (expiring 8/8/14)… collecting a premium of $0.57 or a total $1140 (minus fees and commissions).

Their goal is to get out of the position when the premium of the spread reaches $0.29… in which they would be buying back the spread for a profit of $560.

Taking profits at 50% of the premium collected is a great level to exit… as outlined in my previous article.

The max risk on this trade at expiration is $4,860.00 (the value of the spread minus the premium collected multiplied by the number of contracts times the multiplier).

$3 – $0.57= $2.43 x 20 = $48.60 x the multiplier of 100 shares = $4,860

However, the option investor is only willing to risk $1,000 on the position on a $50,000 portfolio. They will buy back the spread for a loss if it gets close to $1.05. On 7/31/14, the UVXY exploded… moving up more than 16% and closed at $31.70.

The investor felt that this was a good time to sell some premium as the UVXY has a history of sharp moves up followed by sharp declines.

Well, on 8/1/14, UVXY continued to climb higher as fears escalated both geopolitically and within the US equity market. It finished the day up nearly 10% and closed at $34.73. The value of the spread closed at $0.93.

Although the investor was looking at a paper loss of $720, they decided to get out of the position… if UVXY gapped up on the following Monday, it would probably get past the amount they were willing to lose.

(Note: UVXY is a product I wouldn’t personally sell call spreads on… I’ll explain my reason a little bit later.)

Now, when I typically short premium via structured trades… I size the trade to represent my max risk and play the odds. For example, if I were to put on this trade and was risking $1,000 on the trade… I’d sell 4 call spreads which would have a max risk of $972.

I’m not a proponent of stopping out of short premium trades.

As you know, most options expire worthless. However, there are cases where outliers occur and short premium trades go ITM and end up being losers.

By sizing my trades according to the amount I’m willing to lose… I’m not really stressed about any large overnight moves or morning gaps.

You see, I’ve already outlined my line in the sand.

In fact, this is one of the problems that I have noticed with those that use option strategies like iron condors.

Now, I’m extremely disciplined about following my rules. I know that if option volatility isn’t elevated (or rich)… it doesn’t make sense to add on more risk (to receive a greater premium) because that’s how potentially big losses can occur.

Some of my clients achieve a great deal of success after a few weeks of learning my simple rules-based approach. However, when some tell me their profits, relative to their account size. I won’t hesitate to let them know if they’re taking on too much risk and sizing poorly.

Of course, some listen… but others will still size up to big… thinking that they will always have a chance to get out of position before it reaches max loss. But sometimes it doesn’t work that way… stocks can gap up or down pre-market… and you may never get a chance to cut losses at desired levels.

If you’re over-leveraged or sized incorrectly… one loss can wipe out several weeks or months of gains. Not only that, but if you’re sized up too much… you might not have enough capital to adjust the position if it starts moving south.

I just wanted to mention my approach and what has worked for me… however, I understand that some investors like to use more leverage on their trades.

For that reason, I’ll explain to you what else you need to take into consideration if you trade bigger than what you’re willing to lose.

So where did our option investor go wrong?

First, they were trading options that were expiring in a little bit over a week. By selling 20 call spreads right off the bat, they didn’t give themselves a whole lot of margin for error.

These short call spreads were still OTM, meaning the time decay and option volatility would really get sucked out of the option premium… if UVXY prices declined or even traded flat for a couple of days.

By fully sizing up, you leave yourself no margin for error.

In fact, if they still believed in the trade they would of have probably wanted to sell more call spreads at those strike prices or even further out for higher premiums.

However, they were forced to get defensive because they were sized up incorrectly.

(Note: The following Monday, UVXY traded at $31.50… down 9%… the value of the call spread was $0.47. On Tuesday, it rebounded to $35.93… the value of the call spread was back to around $1.00. In 3 Ways To Keep More Profits & Know When To Sell, I explain the importance of closing out a position into strength.)

What other information can we use to figure out the right size if you’re going to use more leverage?

Well, we need to know the risk associated with the trade or position.

Are there any event or headline risks?

Like an earnings announcement, conference call, analyst day, economic data release, Federal Reserve or other central bank meetings in the coming future, legal verdicts coming out, possible M&A or a reaction to earnings etc.

In this example, the UVXY ETF is associated with fear in the marketplace. The event or headline risk would be macroeconomic as well as geopolitical.

Are there any key technical levels?

Some questions to ask yourself: Is a key moving average that is broken, support or resistance levels violated, a spike below or above the VWAP or whatever technical indicator you’re looking at.

Now, I know some option investors who don’t use price charts or technical analysis; some are very successful.

However, even if you don’t… understand that there are other traders who do (with serious money behind them)… just knowing what levels they might be getting in and out of could be some useful information.

Is There Liquidity Risk?

During periods of high volatility… option and stock bid/ask spreads widen. Always play out a worse-case scenario in your head and try to calculate what the damage could be.

For example, the value of the spread when the investor got out was $0.93… but good luck getting out that price… most likely they would have had to pay up to exit the trade.

Sometimes the theoretical or mid-market price of an option… is just that… theoretical. The only thing that matters is what you can buy or sell at.

Are you giving yourself enough margin for error when looking at the volatility?

Over the last year, UVXY has had 23 (+/-) 10% single day moves or greater. In addition, option volatility can really take off in this ETF.

For example, on 7/24/14 the 30-day option volatility in UVXY was 105.3%… on 8/1/14 the 30-day option volatility was 158.63%… on 8/4/14 the 30-day option volatility went down to 132.1%… on 8/5/14 the 30-day option volatility was back to 152.1%

Pretty wild… right?

(These kind of swings along with the wide bid/ask spreads and the upside risk are the reasons why I don’t like selling call spreads in this ETF)

The 52 week high in option volatility in UVXY is 185.18%. Again, the investor in our example was probably thinking now is a good level to short some premium.

However, they wasted all there bullets without any room for error. Going all in or full size was not the right play in this situation.

You see, it’s important to have some kind of perspective and understanding of the stock or ETF you’re trading. The type of move we saw in UVXY is not uncommon relative to how it trades.

The option investor should have been aware of this and sized smaller.

Putting volatility levels into context is essential if you’re going to be using options to express investment ideas.

Examine the time frame?

In my previous article , I share a story of one of my trades, where I had to close out a position because I was leaving to go to a dentist appointment.

I bought back some short puts for $0.10 expiring in an hour… those options that I bought back ended up closing deep ITM.

Again, near-term options have the potential from being deep OTM to deep ITM very quickly (and vice-versa). Position sizing is critical for near term options… it doesn’t matter if you’re buying or selling premium.

In many cases, if I do buy premium on an option expiring in a short time frame… I’ll make it a binary trade.

Basically the premium spent on the position is what I’m willing to lose. For example, if options are $0.50 and I want to risk $500 max on the trade… I will buy 10 contracts. If I get my move… I’ll take my profits.

Too many times… traders will buy 20 or 30 contracts under the same risk parameters… see the options go to $0.30 and get out… only to see the stock start moving in their direction… but no longer in the position.

The same could be said for those who sell weekly options on Thursday or Friday… the options have the potential to move very quickly… if you’re sized up too much… you’ll be out of the trade with a loss before you even got a chance to see the idea play out.

For longer term time frames you have to be more concerned about the volatility risk. A classic example is a biotech company that announces their drug results in a couple of weeks.

In anticipation, traders start buying and selling options in the contract month the announcement will be made. Of course, option volatility rises due to the uncertainty of the outcome.

Again, you almost have to treat these like binary trades as well. Even if you think you’ve got time on your options… anything could happen. For example, they could come out and say that will not have their results ready and change the announcement date to something else.

Those who bought option premium will see the value of those options lose a lot of value because of the volatility crush.

(For the record, I don’t usually trade biotech’s because of all these wild card factors)

Putting it all Together

Relative sizing is one of the toughest things to get right as an investor or trader. If you invest for a long enough time… you’re bound to get it wrong on some positions. The key is trying to get a deeper understanding of the risk associated with the position, what option factors influence (time, volatility, stock price movement) it and how.

For me, I like to play the number’s game and let the probabilities work out… by sizing my positions with the max risk already set in place. However, I understand that some of you have a little bit more risk tolerance than me… so I wanted to show you what else to consider when taking on more risk by sizing up.

Obviously experience is the best teacher… but I’m also here to help.

In the UVXY example, the investor should have kept their sizing small in case they were off with the timing of the trade.

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Source by Joshua Belanger

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Where to Find Those Efficient and Hardworking Affiliates?

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Everyone wants a hardworking affiliate, employee, associate, partner, or even spouse, and why not? It’s the next best thing to doing the work yourself. However with the massive outbreak of work and income opportunities available online, how can you beat everyone else and find that one (or more) ideal person who will make your online business explode with success? Here are some of the most ingenious and uncommon ways to snag the idea affiliates for your affiliate program

Direct Sales Agents

Direct sales people are really one of the most enterprising, hard-working individuals in business. They mostly work on commissions or rebates and are willing to literally go door-to-door offering their products to anyone and everyone they bump into. Imagine how much easier their job would be if they could be an affiliate and simply work via the Internet and a mobile device or desktop.

Also, most direct sales people tend to carry more than one brand in their product arsenal so signing up as an affiliate would be almost the same type of work but using a different approach.

Colleges and Universities

Many college kids would be interested in a part-time income opportunity if it would mean funds to help pay for their education, loan, or partying. All you have to do is make sure to offer them products they can endorse as a student.

Freelancers

Did you know that the U.S. Census Bureau’s latest annual report show that 75% of U.S. businesses used freelancers in 2011? Freelancers earned a whopping US$990 billion in 2011 which is a 4.1% increase from the previous year. The only industries where the number of freelancers decreased were in insurance, finance, and construction. Most probably your affiliate program isn’t a part of these 3 industries.

Furthermore, online business and finance experts are predicting the growth to increase incrementally every year even with an economy that is improving. People just want income security and more control over their earnings. With the spate of lay-offs, it’s understandable why many would prefer to work as an affiliate than as an employee.

Scout For Them At Affiliate Conventions

There are annual affiliate conventions held in different cities around the country. You should try to catch one when it is held somewhere near your location. The average turn-out for these types of conventions has increased regularly over the years. Last year, many of them were sold out weeks before the event.

Advertise!

The US Census Bureau has said that as of 2012, 15% of Americans are poor, 43% of young adults depend on their parents to some extent for money. Even more surprising is that the median income of young adults in 1982 was $31,583 and last year it was $30,604 for the same age group! Income is dropping and people are looking for ways to earn additional income outside of their 9 to 5 jobs. That’s where you can come in playing the hero and helping others realize their dream income.

Finally, go online and talk about your product. Make the affiliate marketers come to you and have the luxury of picking the best candidates. You will need some help in marketing your affiliate program so target a marketer who’s experienced in affiliate program and SEO.

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Source by Lina Stakauskaite

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Recession Is Here… Six Costly Mistakes Home Sellers Make During Recessions And How To Avoid Them

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The U.S. is officially in a recession. What is a recession? A recession is a business cycle contraction or general economic decline due to significant drop in spending and other commercial activities. Most pundits and politicians will blame Covid-19 crisis for the recession, but even pre-Covid-19 the proverbial writing was on the wall.

The U.S. had over 120 months of economic growth, which was the longest expansion in the modern history. Other indicators, such as negative yield spread on treasuries (long term bonds having lower interest rates than short term T-notes), were pointing to an imminent change of the economic cycle and an impending recession. The only real question was: when and how bad?

Then Covid-19 came… If the cycle was going to change anyway, Covid-19 acted as a huge and unexpected accelerant to make the recession much more immediate and severe.

Inevitably during recessions all classes of real estate, including residential homes and condominiums, will be negatively impacted as lower consumer spending and higher unemployment rates affect real estate prices and marketing times.

Here are the six costly mistakes home and other real property sellers make during recessions and how to avoid them:

Mistake #1: This will pass and real estate market will be hot again soon

First thing to remember is that real estate cycles are much longer than general economic cycles. Even if the general economy recovers, which eventually it always does, a typical real estate cycle takes as long as 10 to 15 years. The cycle has four key stages: Top, Decline, Bottom and Rise.

Let us consider the last real estate cycle, which lasted approximately 14 years:

  • 2006 – Prices hit the Top
  • 2006 to 2012 – Prices Decline
  • 2012 – Prices hit the Bottom (Trough)
  • 2012 to 2019 – Prices Rise*
  • 2020 – Prices hit the Top
  • 2020 to? – Prices Decline

*NOTE: In 2016 the national residential real estate price index reached its pre-recession 2006 peak levels. It took 10 years for the real estate market to recover.

The way to avoid this mistake is to recognize that real estate cycles take years to run and plan accordingly. Additionally, nobody knows for sure when the prices will hit the top or bottom until after the fact.

Mistake #2: Low interest rates will make the economy and real estate market rebound

Between 2006 and 2011 the interest rates (Fed Funds) were continuously cut by the Federal Reserve Board and went from low 5% to almost 0%. However, that did not stop the real estate recession and depreciation of property values.

Undoubtedly, low interest rates made the economic decline and real estate recession less severe and saved some properties from foreclosures, but it still took six painful years for the real estate market to hit the bottom and then four more years for the prices to go back to their pre-recession levels.

Some markets had never fully recovered. For example, residential home prices in some parts of California, Arizona and Nevada are still below their 2006 highs.

To avoid this mistake, one needs to realize that although low interest rates help stimulate the economy and the real estate market, they do not cure them.

Mistake #3: I don’t need to sell now, so I don’t care

If you do not need to sell until the cycle plays out, which typically is over ten years, then you will not be as affected, especially if you have a strong equity position, limited mortgage debt, and solid liquid assets.

However, it is good to keep in mind that “life happens” and either professional or personal circumstances can change and we may need to sell property before the downturn runs its course.

Furthermore, if a property has a mortgages and its value declines to the point being “upside down,” meaning the mortgage loan balance exceeds the value of the property, then the options of selling, refinancing or even obtaining an equity line of credit, will be significantly limited.

This does not mean that everybody should be rushing into selling their real estate if there is no need to do so, just keep in mind that circumstances may and often do change and property options will be affected, so plan in advance. As one wise proverb says: “Dig your well before your thirst.”

Mistake #4: I’m selling, but I won’t sell below my “bottom line” price

This is a common and potentially very costly mistake. Generally speaking, every seller wants to sell for the highest price and every buyer wants to pay the lowest price. That’s nothing new. When selling real estate, most sellers want to achieve a certain price point and/or have a “bottom line.”

However, it is important to understand that the market does not care what the Seller, or his/her Agent, think the property value should be at. The market value is a price a willing and able buyer will pay, when a property is offered on an open market for a reasonable amount of time.

Overpricing property based on Seller’s subjective value or what is sometimes called an “aspirational price,” especially in a declining market, is a sure first step to losing money. When a property lingers on the market for an extended period of time, carrying costs will continue to accumulate and property value will depreciate in line with the market conditions.

Additionally, properties with prolonged marketing times tend to get “stale” and attract fewer buyers. The solution is to honestly assess your selling objectives, including the desired time-frame, evaluate your property’s attributes and physical condition, analyze comparable sales and market conditions, and then decide on market-based pricing and marketing strategies.

Mistake #5: I will list my property for sale only with Agent who promises the highest price

Real estate is a competitive business and real estate agents compete to list properties for sale which generate their sales commission incomes. It is not unusual that Seller will interview several agents before signing an exclusive listing agreement and go with the agent who agrees to list the property at the highest price, often regardless if such price is market-based.

Similarly to Mistake #4, this mistake can be very damaging to Sellers, as overpriced properties stay on the market for extended periods of time costing Sellers carrying expenses such as mortgage payments, property taxes, insurance, utilities and maintenance.

Furthermore, there is the “opportunity cost” since the equity is “frozen,” and it cannot be deployed elsewhere till the property is sold. However, the most expensive cost is the loss of property value while the real estate market deteriorates.

During the last recession, we have seen multiple cases where overpriced properties stayed on the market for years and ended up selling for 25% to 40% below their initial fair market values.

The solution is to make sure that your pricing strategy is based on the market, not empty promises or wishful thinking.

Mistake #6: I will list my property only with Agent who charges the lowest commission

Real estate commission rates are negotiable and not set by law. A commission usually represents the highest transactional expense in selling real properties and is typically split between Brokers and Agents who work on the transaction

Some real estate agents offer discounted commissions, in order to induce Sellers to list their properties with them. But does paying a discounted commission ensure savings for the Seller? Not necessarily.

For example, if the final sales price is 5% to 10% below property’s highest market value, which is not that unusual, due to inadequate marketing, bad pricing strategy, and/or poor negotiation skills, it will easily wipe out any commission savings and actually cost the Seller tens of thousands of dollars in lost revenues.

The solution is to engage an agent who is a “Trusted Advisor,” not just a “Salesperson.” A Trusted Advisor will take his/her time and effort to do the following: 1) Perform Needs Analysis: listen and understand your property needs and concerns; 2) Prepare Property Analysis: thoroughly evaluate your property and market conditions; 3) Execute Sales and Marketing Plan: prepare and implement custom sales and marketing plan for your property; and 4) Obtain Optimal Results: be your trusted advocate throughout the process and achieve the best possible outcome.

Finding such a real estate professional may not be always easy, but it certainly is worth the effort and will pay off at the end.

In conclusion, this article has outlined six costly mistakes real estate Sellers make during recessions and how to avoid them. The first mistake is not understanding that real estate cycles are long and take years. The second mistake is a misconception that low interest rates alone will create a recovery. Another mistake is not realizing that circumstances may change and not planning in advance. Mistakes number four, five and six pertain to understanding the market value, proper pricing and selecting the right real estate professional.

By understanding and avoiding these mistakes, real estate Sellers have significantly better chances of minimizing the negative impact of a recession while selling their properties.

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Source by Robert W. Dudek

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Useful Tips To Build The Best Gaming Computer

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Every gamer will want their computer to be the best gaming computer among their peers. Sometimes, with a little knowledge and tips and tricks, it is possible to build the best gaming computer and show it off to your peers. This article will show you how:

1) You can’t get the best gaming computer from computer retailers

If you want to get the best gaming computer, you have to build your own. Different gamers have different requirement for their gaming machine. Unless you are willing to pay a high price, you will not be able to buy a commercial computer that fulfills all your gaming needs. The only option you have is to build your own gaming computer.

2) You don’t have to be rich to build the best gaming computer

It is not necessary to burn a hole in your pocket to build the best gaming computer. With some due diligence, do some market research and compare prices around the marketplace. Merchant such as TigerDirect and NewEgg give regular discount to their products and you could save a lot of money if you catch them during their promotional period.

3) Most expensive parts do not have to be the best part

Sometime, the latest model or the most expensive model does not have to be the best part for your computer. It requires various components to work together to form the best computer system. When choosing a computer part, what matters is how well it can integrate with the rest of the components. Compatibility is more important than individual performance. What use is there if you spend lot of money on the latest quad-core processor and find that your motherboard doesn’t support it?

4) You don’t need to change the whole PC to own the best gaming computer

It is a misconception that you have to change the whole gaming machine to build the best gaming computer. If you already have a good barebone system, what you need to do is to upgrade the necessary parts and your gaming computer can roar back to life instantly.

5) Brand is important

Unless you want to see your computer system malfunction every few days, it is important that you purchase the parts from branded manufacturers with strict quality control. Motherboard brand such as Gigabyte, ABIT, ASUS are some quality brands that you can consider

If you follow diligently to the tips stated above. You will be on your way to build the best gaming computer. While price can be an issue, it is better not to scrimp on important computer parts such as motherboard, CPU, RAM and graphics card as it will cost you more to upgrade in the future.

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Source by Damien Oh

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