Tools for making Money in Stock Markets in Bengal and all over the World

How to earn huge money from stock market, how can we buy and sell stocks at right time, what are the tricks and tips to earn easily from stock exchanges? This article gives every detail to earn money from stock markets. Guide for making money easily from the stock market. This article give you the perfect guidelines for the stock exchanges.

You now have the basic perspectives to help you understand the approaches described in this book for investors who are bullish on the market:

1. There are no guarantees in the stock market except premiums from covered-call writing, but covered-call writing is primarily an income play and not for those who are truly bullish on the market.

2. To succeed as a bull, you must be both an investor and a speculator, expecting that the odds are against buying at the low (or selling at the high), that stock prices will swing, that leverage is important, and that hedging will shield you on downswings.

3. You must understand the more widely used tools of the bull: buying stock long, selling (writing) puts, and buying calls; and some not very well known tools, such as warrants and rights.

The major tools will be discussed briefly in this article, to provide you with background.

How to select good stocks

Those bullish on the market will buy stocks first and then sell them, hopefully at a higher price. This differs from the strategy of those who are bearish on the market. They will sell the stocks first and then buy them, hopefully at a lower price. The bull buys long; the bear sells short.

Stocks for long term

You purchase 100 shares of Citicorp at $18 per share because your research has made you bullish on the stock. Two years later, the stock reaches a market price of $35 per share and proves you were right. You sell the 100 shares. Your profit before commissions and other fees is $17 per share, or $1,700.

Important Terms in Buying stocks

1. Bear: Investor who expects a stock or the market in general to go down. A bear generally shorts stock and calls, and buys puts.

2. Bull: investor who expects a stock or the market to go up. A bull generally shorts puts but goes long on stocks, calls, warrants, and rights.

3. Buy Long: Traditional trade. stock is purchased first, and then sold later for a profit or to cut losses.

4. Hedger: Investor/speculator who uses a combination of investment tools to limit risk or, possibly, to assure profit if the market moves substantially in either direction.

5. Investor: Generally buys long and for the long term. Rarely shorts stock but may write covered calls.

6. Primary Movement: Long-term price direction for a stock or the market in general.

7. Secondary Movement: Temporary price movement for a stock or the market in general.

8. Sell Short: stock is sold first, and then purchased later for profit or to cut losses. Profit and loss is still determined by the difference between purchase and selling prices.

9. Speculator: Trades often. Buys long or short in stocks or options—uses any tool and plays any game that can mean short-term or big profits.

Profit is determined by simple arithmetic. Subtract the cost of the stock from the selling price.

Selling Short in stock market

You sell short 100 shares of Citicorp at $35 per share because your research has made you bearish on the stock. (Note that you do not already own this stock you have just sold.) Over a period of about a year, the stock falls back to $20 per share and proves you were right. You buy the 100 shares with instructions to your broker that you are "covering your short position." Your profit before commissions is $15 per share, or $1,500.

In this example, profit is determined the very same way. Subtract the cost of the stock from the selling price. In the first example, the stock must go up in price for you to profit because you "bought long." In the second example, the stock must go down in price for you to profit because you sold short.

You can be both a short seller and long buyer at the same time, playing some stocks to go down arid others to go up. However, in this book the emphasis is on buying long, so the strategies are designed for stocks expected to go north in price.

Notice the word expected. stocks do not always go the way you would like them to go. And if they do, it is rarely in the time frame you expect. It often happens that they go down in price when you own them, and go up in price after you sell them.

stocks generally have primary and secondary movements. The primary movement indicates the major trend of the stock. If the primary trend is bullish, then despite occasional dips in price, the stock will continue, to reach for new high ground. If the primary trend is bearish, then despite occasional climbs in price, the stock will continue to fall to new lows. The secondary movements are the occasional changes in price direction because of profit taking, bear raids, or rallies.

Understanding Put and call Terminology in stock market

Before we move on to the basics of dealing in stock options, it is necessary to have a firm grasp of options terminology.

Puts and calls are types of stock options. They are ideal for investors who do not like to tie up a great deal of cash. Puts and calls can be traded just as stocks are. They can be bought long or sold short. In put and call trading, however, a short seller is usually referred to as a "writer." This is because when he sells an option he actually "writes the contract" for it.

In reality, there are no contracts changing hands. Option contracts are standardized, so the only transaction records that are necessary are the statements from your broker. It is a perfectly legal way of doing business and one that helps to keep the options markets quick and efficient.

When you buy and sell puts and calls, it is almost always through the secondary markets provided by the exchanges dealing in these options.

As investors become more aware of the different ways to invest directly and indirectly in the stock market, they are becoming more and more interested in dealing with stock options. They especially like puts and calls for a number of reasons:

1. The leverage available from low-priced puts and calls gives investors opportunities to double, triple, and even quadruple their money in short time. These types of returns are very rarely possible from stocks.

2. The low price of the options encourages portfolio diversification. A couple of thousand dollars can have an investor playing six or seven different options on underlying stocks that would ordinarily be out of the small investor's reach.

This does not mean, however, that options are not risky business. Writers of I options stand the risk of losing a great deal of money. Writers are short sellers, and I there is no ceiling on the losses short sellers can incur—not in the stock market, and not in the options market. In the options market, these losses can be incredibly large because of the percents of increase and decrease that options experience.

There are basically two types of transactions in options trading, an opening transaction and a closing transaction. The first position, whether long or short, is called the opening transaction. The second position, whether long or short, is called the closing transaction.

Often there is only an opening transaction. Why? First of all, many options quickly lose so much of their value that if the owner sells, she will not make enough to cover the cost of the sell commission. Second, many stocks do not reach the striking price, so writers never have to cover their positions. Third, often a buyer exercises her option to deal in the underlying stock, in which case the writer does not have a chance to cover her position and must instead—and unfortunately—trade, the underlying stock to meet her obligations.

Not all options listings take the same format, and sometimes the same financial source will list them differently. For instance, Mondays through Saturdays, the New York Times lists all calls then all puts for each underlying stock but then on Sundays lists them still by underlying stock but also by order of striking price.

Options listings only represent a scoreboard of the previous day's activities. They are not meant to be the basis for any decision making on what option to write or buy. Only a thorough analysis of the underlying stock and a thorough understanding of the time and intrinsic value of the related options will help you avoid a bad decision.

Major stock option Markets

1. New York: American stock Exchange, New York stock Exchange
2. Chicago: Chicago Board Options Exchange
3. District of Columbia: National Association of Securities Dealers
4. San Francisco: Pacific stock Exchange
5. Philadelphia: Philadelphia stock Exchange

These exchanges/markets are all owner-members of the Options Clearing Corporation, which functions as the guarantor of all listed option contracts in the United States. Through its associate members, the OCC is also the guarantor of options traded on major European exchanges. Its function is to assure that there are writers and buyers for all listed options.

Put and Call Terminology

Expiration Date: The date on which an option expires. Puts and calls expire on the Saturday after the third Friday of the month.

NY Close: Price at which the underlying stock closed on the previous day. It is not the price at which the last option was traded.

Option Buyer: Long buyer of a put or call. Trades the options as she would trade stock.

Option Writer: Short seller of a put or call. Trades for income from the premiums she will receive.

Premium: The market price of the option. The listed premium is almost always 1/100 of the cost of the option. If the premium is listed at $2.5, the price of the option is $250 before commissions. (Each put or call represents 100 shares of stock.)

Strike Price: Price at which a buyer of an option can exercise her rights.

Underlying stock: The corporate stock on which a stock option is written.

What is Strike Price in stock market

Also referred to as the expiration price, this is the price at which an option is "at-the-money" and may be exercised. When you write a put, you will generally want the striking, price to be relatively lower than the market price of the stock so that the option remains out-of-the-money. When you buy a call, you will generally want that striking price to be lower than the market price of the stock so that you are in-the-money.

As the underlying stock changes in price, new contracts at adjusted striking prices will be introduced. New options on higher priced stocks are not usually introduced unless there has been a price movement of 10 points in either direction. New options on lower priced stocks may be introduced on price movements in either direction of 2.5 to 5 points.

Calls Last, Puts Last

The numbers under these columns are the premiums for the calls and puts or, more specifically, the market price of the listed puts and calls. As these are the prices at the close of the bell on the last day's trading, you will have to call your broker to find out what the current bid and ask prices are for each of these options.

The prices that appear in these columns are based on the assumption that the puts and calls represent 100 shares of stock. So, multiply any of the listed values by 100 to determine what is the true value of the related put or call.

Option premiums are generally quoted in bid-ask spreads of anywhere from 1/8 of a point to 1/2 of a point. When bidding on an option, generally start with an offer to buy or sell at the mid-point between the buy and ask prices, unless you are expecting a significant decrease or increase in the price of that option.

These premiums are what drive the options markets. Options traders are no different man stock traders; they want to buy low and sell high. This is true even if an option buyer is not interested in trading the option but, rather, is interested in later acquiring the underlying stock. In the latter case, as soon as there is enough of a difference between the stock's market price and the related option's striking price to impress the trader, he will exercise his option.

Whether or not the stock price must be below or above the striking price for the related option depends upon whether the trader is dealing in puts or calls. If he is the buyer of a call, he will want the stock's price to be above the striking price. This is because call buyers are bulls, and look to profit from upswings in a stock's price. If he is the buyer of a put, he will want the stock's price to be below the striking price. This is because put buyers are bears, and look to profit from downswings in a stock's price.

Option writers, on the other hand, are mainly interested in the premiums. These premiums represent added income to portfolios. Speculators short their options when they feel the premiums are worth the gamble. This means they feel the underlying stock will not move enough to make it beneficial to the buyer of the option to ever exercise her rights and force the writers to cover their positions by taking a loss on the resulting stock trade.

The months listed represent the expiration dates of the contracts. The specific date is not given because it is expected that all options made available on the U.S. options exchanges expire on the first Saturday after the third Friday of the month. Sometimes this is the third Saturday of the month; sometimes it is the fourth.

Expiration cycles differ for individual stocks. Not all are on the same monthly or quarterly cycles. As one expiration date expires, another is usually listed unless the options for a given stock will be terminated.

All equity options traded on the major exchanges mature according to a series of monthly cycles.

1st cycle: January sequential
2nd cycle: February sequential
3rd cycle: March sequential

These cycles have been initiated in response to demand for short-term trading opportunities. But as the cycles are structured so that expirations can actually occur as late as eight months away, they also offer the type of environment in which longer-term traders will be interested. This last means that if in December, you are interested in IBM options with later expirations, you can write or buy long July puts and calls.

Money Positions

I. Calls

In-the-money if the striking price is below the market price of the underlying stock.
Out-of-the-money if the striking price is above the current price of the underlying stock. At-the-money if the striking price is the same as the current market price.

stock Market Price Strike Price Money Position
AT&T $60 $55 In-the-Money
AT&T 60 65 Out-of-the-Money
AT&T 60 60 At-the-Money

II. Puts

In-the-money if the striking price is above the market price of the underlying stock.
Out-of-the-money of the striking price is below the current price of the underlying stock. At-the-money if the striking price is the same as the current market price.

stock Market Price Strike Price Money Position
AT&T $60 $65 In-the-Money
AT&T 60 55 Out-of-the-Money
AT&T 60 60 At-the-Money

If an option is in-the-money, this means it has intrinsic value and generally commands a high premium. If it is out-of-the-money, this means it has no intrinsic value. If it is at-the-money, it can be in-the-money with any decent increase in the price of the underlying stock.

For example, if you own the in-the-money call on AT&T, you can exercise your option and buy the stock at $55 per share and immediately sell it for a profit at $60 per share, because the call gives you the right to "buy" at the striking price. But if the call is out-of-the-money or at-the-money, there is no profit potential.

In the case of puts, if you own the in-the-money put on AT&T, you can exercise your option and buy the stock for $60 and immediately sell at the striking price. But if the put is out-of-the-money or at-the-money, there is no profit potential in exercising your option.

You will notice that there is a relationship between the value of premiums and the time to expiration date. This is because the prices of options decay with time. As expiration dates approach, option prices generally fall in value, sometimes even when the underlying stock is increasing in price. Time decay is not the same for all options; many factors influence the rate of decay. Nonetheless, some mathematicians and market experts continually attempt to formulate the decay rate. The rate of decay generally accelerates considerably during the few days before expiration date, but is often close to zero during the first few days after an option is made available. Movement in price of the underlying stock inhibits, reverses, or accelerates time decay of an option, depending upon when (in relation to the expiration date) the price change takes place.


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