Hot Money Girl

Options II

2004-11-20T20:19:00.000-07:00

Options are very emotional. Many are purchased to hedge other positions when investors are panicked. For example, if a trader owned $1 million of QQQ shares and he thinks the QQQ are going lower, instead of selling his position, he may just buy put options to hedge the position. If the QQQ falls, his losses would be offset by the gains in his put options. And, he wouldn't have a taxable event since he didn't sell his initial position.

Because options are often purchased in panic, their prices swing wildly. When the market is rising, calls get extremely expensive. When the market is plummetting calls get dirt cheap. There are all kinds of valuation methods to determine whether options are expensive or cheap but they are far beyond the scope of this series. Generally, at market lows, calls are cheap and that is the opportunity we are seeking.

So, one key is obviously determining if we are at a market low. At market lows:

The market has fallen significantly.
There is a reason that the market is unlikely to fall anymore.
There is a reason that the market should turn upward for a few days.

We must have some method of determining whether 1, 2, and 3 above are likely to be true.

Has the Market Fallen Significantly (#1)?
There are many ways to determine whether this is true. We are looking to keep this simple. The simpliest method of determining whether this is true is by looking at the Dow Jones Industrial Average (DJIA) in relation to its 21-day moving average. The DJIA is the stock market index that is the most visible to the dumb money. This is why I like it so much. The DJIA is just 30 big companies stocks added up and divided by some number. Even though it's only 30 stocks, it represents the stock market very well.

The 21-day moving average (21DMA) is just the last 21 days' closing value of the DJIA added up and divided by 21. This 21DMA smooths out all the ups and downs in the DJIA.

Historically, the DJIA oscillates around its 21DMA and this is the key to giving us some of the information we need.

If the DJIA is far above it's 21DMA, then it's "high".
If the DJIA is far below it's 21DMA, then it's "low".

Therefore, as long as we can define "far" we have determined whether the stock market is "low" (#1 above).

Historically, the DJIA is "low" when it is 3.5% below its 21DMA.

(click graph to enlarge)

The graph above is the DJIA with three lines. The middle line is the 21DMA the lower line is the 21DMA minus 3.5%. As you can see, the DJIA often makes a significant low at the lower line which is "3.5% below the 21DMA". Therefore, when the DJIA is at the lower line, it has "fallen significantly" and #1 is true.

We still need a reason that "the market is unlikely to fall anymore" (#2 above). Therefore...

To be continued...

--HMG

Options I

2004-11-17T09:43:00.000-07:00

I've been asked to write a bit more about options. Again, I highly recommend you educate yourself at the CBOE.

I like to keep things simple so I currently only trade call options on the QQQ and XAU because I've found it's relatively easy to pick short-term bottoms in these indexes with about 70% accuracy. (I may start buying some bond related puts as I believe interest rates are going to rise significantly over the next few months). Generally, I only hold options five days maximum. This way I can pick an option that's traded with high volume (good liquidity) and doesn't experience significant time-decay over the five days. I generally buy "at the money" or slightly "out of the money" calls that are expiring in less than two months.

I expect any investment in calls to have a 40% chance of being a total loss. Therefore, the first thing I must consider is money management. I never invest more than 10% of my option account in a single position. E.g. if you start with $10,000, then the largest options buy you can make is $1,000. You'd have to have ten losers in a row to go bust which is unlikely if you are patient, disciplined, and only utilize proven methods of picking bottoms.

Secondly, you want to use "house money" as soon as possible. What I mean is, you want to pull out your $10,000 intitial investment quickly so you are operating on pure profit from past trades. Also, pull profits out on a regular basis so that this remains fun and not stressful. I also suggest you never take a call option position that is more than 1% of your annual income. Therefore, if you're making $50,000/yr you'd be buying $500 calls maximum. If you want to take larger positions, make more money.

Remember, this is risky stuff. You can easily lose your entire investment and many people do. You should look at this as a game like betting in Vegas. Only, the odds should be in your favor instead of in the favor of the casino. One thing you must be is patient. Good option setups don't occur all that often, but when they do, be ready to pounce. Lastly, if you get good at this, you will have created a money machine.

In this series I am going to be as basic as I can and still give you a chance to make money. I'll tell you right now that this will just be a small subset of the techiques I use. This is a skill that takes time to develop. (I started trading options when I was 18 years old and have studied the markets heavily every since.) But I promise you the payoff can be huge. My best call option profit in 2004 was over 900% (It's a Hyundai).

(To be continued...)

- HMG

(This is not investment advice. This is only an educational discussion of how I invest in options. Any investment you make is totally at your risk. Option trading is risky. You could lose your entire investment in just minutes.)

We need oil.

2004-11-14T22:07:00.000-07:00

We have a massive amount of proven, probable, and possible oil reserves in ANWR in Alaska. This land, currently a wildlife refuge, was set aside specifically for oil production. It is crazy that instead of developing this property we are enriching foreign producers.

With $50 oil and the Republican victory, oil will flow from ANWR. Environmentalists, please don't fret...

Drilling an oil well is just a small hole in the ground. Any drilling will be done on snowcover so there will be limited damage to the tundra surface, which is delicate but is also extremely abundant in the world. We gots lots of Tundra.

If you hate oil wells, visit Ranger, Texas some day. This was the site of a huge oil boom with wall-to-wall derricks, pumpjacks, fires, and wellhead blowouts spilling oil all over the ground. I bet they even peed on the ground. It's an absolute environmental disaster. Except that the land has completely recovered and you can't even tell where the old wells were. They're just small holes in the ground now sealed with concrete, overgrown with plants and trees.

Wells don't blowout any more. Drilling has evolved into a relatively clean activity. Oil doesn't mix with dirt. If it spills on the ground, it's easily cleaned up. Oil is money. No one wants to spill any.

If you are against drilling in ANWR or elsewhere on environmental grounds, your case is weak. Schools in West Texas drill wells in playgrounds to generate income to educate kids.

If you're against drilling in ANWR because it's "corporate welfare" to big oil or some other silly accusation, you need to think logically. The US government will require oil companies to pay a lease bonus and standard royalties. The lessee and bonus amount will be determined via auction. This is the standard arrangement between landowner and oil producer. Plus, the US government will generate a massive amount of revenue.

If you're against drilling in ANWR because it will disrupt wildlife, so what. These animals are not endangered and will surely adapt.

It's going to happen so prepare yourselves. You're going to be OK. And you'll spend less money each month on gasoline. If you don't want those savings, send them to me.

-HMG

Never buy an oil drilling share off a sales call.

2004-11-13T22:57:00.000-07:00

My parents both grew up in Midland, Texas. My grandfather was a landman for the state of Texas. This means he researched and purchased mineral rights for Texas. Each time he found a good property he bought some for himself and became very wealthy.

Once you have some success you get on investor lists and then get a lot of sales calls to invest in oil/gas drilling projects. I sometimes get five a day. Don't you dare ever buy one of these. Good prospects are easily sold to insiders and professionals. Anyone who needs to cold-call to sell a project has a poor project. It's that simple.

My family owns extremely good land. The companies that drill on it go by the names of Shell and Exxon and such. They don't need to "sell" the projects to investors.

FYI, I've never seen a dime of this money. Someday I will but hopefully not too soon.

--HMG

Money doesn't buy happiness but...

2004-11-08T11:16:00.000-07:00

Sometimes it ain't bad.

On election night I went to the Dallas Mavericks season opener against the Kings with a good friend. We had gold parking which means you bypass all traffic and park under the arena with the players. We entered a door where my date and I were greeted by security by name, "Good evening Mr ...

We entered the arena under the bleachers and walked to our seats. We were on the front row under the goal. There was waitstaff and food/beverages were all complimentary.

At halftime we went to the VIP lounge and ate a prime-rib dinner with player's wives and the wife of team owner Mark Cuban (she was very nice and has a beautiful new child). At that point neither Florida or Ohio had been called for Bush. All those texans were very worried watching the returns on plasma TVs.

I'm not a huge sports fan but I have to say that the game was a tremendous experience. A Kings player even fell in my lap and asked me if I was OK. I don't know any of the players by name but my date knows quite a few of them as he often flys on the team plane to games.

After the game we hung out "backstage" and talked to cheerleaders and players as they left.

These are the types of experiences that are just not possible without money. I don't think these seats can actually be purchased and I have no idea how much they would cost. But this experience is very motivating for a young entreprenuer like me.

--HMG

There's always another train.

2004-11-07T08:21:00.000-07:00

I closed out my QQQ call at 2.15 near Thursday's close for a profit of 230% in just seven trading days.

The lesson is that even if the stock market is moving higher and leaving you behind, don't fall into the emotional trap of feeling like you're missing out. This is one of the reasons people tend to buy at market highs and lose money.

Because of options and other derivatives you can make massive profits by just being a little right. You don't have to catch exact tops and bottoms. If you miss one opportunity, there's always another one coming, like a train.

I can't sum up my 12 years of studying markets in this column but the US stock market should being moving much higher in the next couple months and there will be many opportunities to make money with QQQ call options.

Sorry for the delay in posting. I was traveling and every time I tried to post, blogger wasn't working.

--HMG (Went to the Dallas Mavericks season opener. Quite a story which I'll tell when I have more time.)

Example of a niche real estate deal.

2004-10-28T17:31:00.000-06:00

About ten years ago I bought an old frame house on a corner that had a very large backyard. The house next door was a rental which I also purchased. I spent just $65,000 to acquire both these old homes.

Then I rezoned and replatted the backyards into four duplex lots with a shared driveway. Each of these lots sold for $12,500 immediately. Therefore, I ended up getting both these homes for $15,000. Counting commissions and fix-up expenses I ended up acquiring these houses for about $12,000 each, rental ready.

Both these properties were rented about 95% of the time and generated about $750/month in pre-tax cash-flow for ten years.

This weekend I will be putting both these properties on the market for about $60k each.

Just because someone is trying to sell you an opportunity, don't assume it's a sham. Making money in real estate is easy if you are smart, patient, and don't mind getting dirty. A friend of mine has had a muddy dog paw print from a construction site dog on his back for three weeks. He wears the same fleece pretty much every day. And, he's a multi-millionaire building a $2.7 million house.

--HMG (Looking for her next opportunity...)

Big Money in Options

2004-10-26T10:38:00.000-06:00

If you had owned the Nasdaq 100 stock market index (NDX) during the last two days in October and the first three days in November, You would have profited 81% of the time since 1983. During this time, your investment would have appreciated at an annual rate of 388%, which is spectacular. The NDX has never lost over 1% during this five-day period.

There is an ETF traded on the American Stock Exchange, QQQ that is a like a stock but models the NDX. There are also options traded on the CBOE for the QQQ.

A QQQ call option gives you the right to purchase the QQQ at a certain price during a certain period.
The 04 NOV 36 QQQ call option gives you the right to buy a share of the QQQ at 36 until the third friday in November. It is currently trading at $0.65.

The QQQ is currently trading at 35.60. If the QQQ rises to 37 (+3.9%), the call option would rise to approximately $1.65 for a 153% gain. It could rise even more as call options become in great demand as the underlying prices increase.

This gain is because you own the right to buy the QQQ at 36. If the QQQ is at 37, there's $1 in profit that is automatic if you were to exercise the option. The additional $0.65 would remain (and probably increase) as in just five days, the opportunity for more gain would not be significantly reduced.

Therefore in the scenario above, if you invested $500 you'd make $769 in profit.

However, if the QQQ were to drop significantly your call option would become virtually worthless. When buying call options in the short-term, you should assume that if the QQQ goes down, you will experience a total loss of your investment. This is actually an advantage. You get limited risk but unlimited opportunity.

In this case, history states that you have a 20% chance of a total loss and an 80% chance of a significant gain. Considering the popularity of Las Vegas, these are pretty darn good odds.

-HMG

(This is not investment advice. This is simply a technique I have used in the past very successfully. You should educate yourself at the CBOE website before buying options.)

Your problem or THEIR problem?

2004-10-24T10:13:00.000-06:00

There's an old saying, "if you owe $1 million it's your problem." If you owe $1 billion it's their problem"

The same holds true for the US federal debt. It's not really the problem of the US government. It's the problem of those holding the debt. In the case of a truly devastating terrorist attack on our country the US government may suspend interest payments on that debt.

Despite all the rhetoric you hear about our children and grandchildren having to repay this debt, it will not happen. That's right. The US federal debt will never be paid back.

The debt is actually an imaginary number anyway. The US Treasury prints money. They can print as much as they want. They could just print enough to pay down the entire debt. What would happen is that the value of the US dollar would plummet, but the debt would be repaid. Since the dollar would lose so much value, inflation would skyrocket accordingly. It's not a good idea.

A better idea is to balance the federal budget now and let the debt be slowly inflated away. Instead of our children and grandchildren having to repay the debt, the debt would eventually become relatively small due to inflation. In fact, as long as the increase in debt is held to below the level of inflation, the debt is actually being reduced in real terms.

Inflation is currently 2.5% annually. The current federal debt is $7.44 Trillion. Therefore, any deficit under $186 Billion is actually reducing the federal debt in real terms. We are obviously above that figure but when inflation is considered, the goal of systematically reducing the federal debt is not such a daunting goal.

In January 1980, inflation was 13.3%. At that rate, the federal debt would be reduced by 80% in only 11 years.

Things are often not as they seem.

-HMG

What's a Federal Deficit ever done to you?

2004-10-24T09:29:00.000-06:00

The US federal deficit set a "record" of $422 billion in Fiscal year 2004. However, raw numbers are meaningless unless they are considered in comparison to a larger picture.

If a person earning $100k per year spends $103,500 they run a $3,500 deficit, which is 3.5% of their income. That is not the same thing as someone earning $12k. In their case, a $3,500 deficit is 29% of their income.

If one compares the US budget deficit to the size of the US economy. The $422 million deficit is 3.5% of the US Gross Domestic Product (GDP). While this is large, it's not even close to a "record". Clinton recorded a 3.8% deficit in 1993. In fact, Bush's deficit per GDP on average is 1.78%, which is less than that of Clinton in his first term (2.6%). (Source). Clinton ran surpluses in his second term and Bush could easily do the same thing if given the opportunity.

Deficits are highly correlated to the economy. At the top of cycles, deficits are small. At bottoms, deficits are large. This is true regardless of who is president.

So, what's a deficit ever done to you? Nothing negative, but some things positive.

Deficit spending expands the ecomony because money is spent twice. Once by the government and secondly by those who didn't pay it in taxes.
Deficit spending provides a risk free investment. The US government borrows from people. This borrowing is considered the lowest risk investment that exists.

Every business and person borrows money to expand their wealth. What's so wrong with the government doing the same thing? Nothing.

-HMG

My Friends all Drive Porsches, I must make a...

2004-10-22T17:44:00.000-06:00

Not really.

But, I do like to measure in Porsches. The car above is a 2000 Porsche 911 Cabriolet with 47,500 miles that you can buy for about $40,000.

The monthly payment at 5% for 60 months would be $755.

Therefore, if you start a little ebay business that nets $755 per month, you just made yourself a Porsche. If you have a great marketing idea that increases your net profit by $2,000 a month, then you just made yourself 2.65 Porsches.

Why measure in Porsches? Would you work really hard just to see your monthly bank statement balance go from $24,135 to $24,890? No. Numbers on a piece of paper are not what motivates people. It's what those numbers can do (Eg. buying a Porsche), that will make you put in those extra two hours of work each day.

Decide what you want in life and get busy getting it.

-HMG

John Kerry will Raise Almost Everyone's Taxes.

2004-10-20T10:24:00.000-06:00

!!!! ENTREPRENUERS BEWARE !!!!

John Kerry claims here that he would, "Restore the top two tax brackets to their levels under President Clinton".

As you can see above (click on the image for details), that means a tax increase for those earning over $132,600. So much for his "in the camera" debate pledge of not raising taxes for those earning less than $200,000.

If you believe that John Kerry will not be raising taxes for all but the poorest Americans, I got lots of stuff to sell you.

-HMG

Easy money

2004-10-18T11:14:00.000-06:00

Well, no money is really easy unless you inherit or marry it like both the Kerry's. But in my opinion, all entreprenuers should utilitze the amazing part of the tax code that states:

If a house is your primary residence for 2 out of 5 years, some of the profit you make upon its sale is exempt from federal tax. This exemption is $250,000 for a single person and $500,000 for a married couple. At a 25% tax rate, $250,000 tax-free is equivalent to $313,000 if you were to earn it normally.

The keys to making this easy money is:

Get a steal on the land. Take your time. You must walk out of the closing amazed that you got such a deal.
Make sure the land is one that has a unique, scarce, and very desirable location.
Design a great house that is absolutely the most for which you can get financing.
Pick a great builder.

In a resort area such as where I live housing prices are outrageously high. Many locals have built homes every two years and made fortunes in tax-free profit. A few years ago I decided to do the same thing.

I looked for a lot for about a year and got one at about $80k under market.
I got lucky and its value pretty much doubled because of various reasons.
It took about a year to design the perfect house.
I hired a great builder and the house is now 75% finished.

The day I move in I will make over $500,000 in profit. Plus I get to live in a mansion. My plan was to sell the house after two years but I'm not sure I can do it. I love this house and it's been the funnest project I've ever done. I've got my eye on a couple of other pieces of land. My goal is to get an even better deal this time.

-HMG

Pay your bills on time.

2004-10-17T21:40:00.000-06:00

You will never succeed if you do not pay your bills on time.

A friend of mine with good credit who is building a house was very pleased that he got 6.5% on his construction financing. I have excellent credit and my rate is 4.75%. I am currently paying $875/month less in interest on this project than my friend would be paying. Also, I have paid down $60,000 of my loan with 0% financing on credit cards. This move alone saves me $237/month.

Your credit is extremely important to your chance of success. I'm shocked at how many young people allow their credit ratings to be destroyed before they even really get started in life. They will not recover and are almost guaranteed to financially struggle forever.

Yesterday, I had someone skip out on their lease on one of my properties. You do this type of thing and you will be a failure forever. I would work 100 hour weeks and sell everything I own before I'd do this to another person. It's a real shame.

Paying your bills on time is just the right thing to do. Karma is real. Don't be on the wrong side of it.

-HMG

Teresa Heinz Kerry is a tax dodge

2004-10-15T23:15:00.000-06:00

Teresa Kerry released her 2003 tax return which indicated that she only paid 15.7% in federal income taxes which is about the same as someone who earns $30,000 per year. This is largely due to her $2,781,791 of income from tax-free municipal bonds.

This is very revealing. Rather than invest her money in CDs where banks could multiply it and loan it out to individuals to build businesses and homes and such, Teresa loans it to government so they can waste it.

It's ironic that the Kerry's want to raise the taxes on hard working entreprenuers while they do everything they can to dodge taxes. Rather than take venture capital risk or simply put the money in a bank, both of which would grow the economy, they "invest to dodge".

It's ironic that they are doing exactly what their higher tax plan will encourage others to do. That is, investing to dodge taxes instead of creating products and jobs.

Since neither Kerry has ever earned any money themselves, it's not surprising that their policies are going to be so unfriendly to business.

-HMG

Low earners have a great advantage.

2004-10-14T09:07:00.000-06:00

Those who have high paying jobs are at a great disadvantage in the quest for wealth. Those jobs probably have high time commitments and great responsibility. They are very difficult from which to walk away because of the high pay. High earners often have a lifestyle to keep and therefore don't really add much to their net worths.

A low income is very easy to replace with a small business that offers oppportunity and freedom. The best place for anybody to start is ebay. The stakes are small and you'll learn much about business operations and making profits. I haven't read any books on ebay business but I'm sure there are some great ones out there. I'd be that one could spend a few hours per evening reading ebay books and be very well educated in a couple months.

I started a small ebay business for fun and it's netting $1,000/month on 10 hours/month of labor. I can't tell you exactly what it is for obvious reasons, but I will tell you what inspired me...

A few years back I was buying large lots of gold nuggets on ebay because gold prices were so low. I was competing with another person on these buys. I went back about a year ago and saw that this person had taken his nugget lots and split them into single nuggets with unique packaging and was selling them at a 150% markup. This was my exact idea. I expected the price of gold to rise. Eventually, I'd sell single nuggets for huge profits when gold hits $1000 per ounce.

The lesson is that you can buy inventory on ebay and then resell it for profit. I'd bet there are hundreds of opportunities waiting for you. I run my little business from my notebook on the couch watching TV.

If your income is low, rejoice. You can easily replace it with a little ebay business and then you're FREE!

-HMG

Have your Damn Latte !

2004-10-13T08:24:00.000-06:00

You cannot save your way to wealth. I hate when I read a financial book and it makes an argument such as:

Stop drinking that morning Latte and you'll save $4 a day, which is $1460 a year, which at 10% in 20 years will be $93,440. The math is correct. But in reality this just won't work that way for 99% of folks and here's why:

Life is for living. If you enjoy a morning Latte, you shouldn't go without and be unhappy just to have a bigger number on your bank statement.
Things are not that simple. It may be that your $4 morning latte earns you $20 in increased productivity. (I actually believe this is true for me.)
There is just too much tempting marketing out there. Even if you did horde a bunch of latte cash, you'd almost certainly spend it on something else like a new plasma TV.
This type of thinking leads to you becoming a greedy miser. Where does it end? Why not just eat rice for every meal? Then you'd really be "rich".

Instead, if you desire to be wealthy you must develop your income side. If you have developed an income stream, you can always temporarily reduce your spending in order to generate cash to start a business or make an investment. I do this all the time.

Having said all that, I will certainly admit that living beyond one's means is a huge mistake in one's quest for wealth. Don't act rich until you are rich. But please, live your life. Enjoy your success. Create assets that generate income and you will become wealthy.

-HMG

Paul Krugman is a partisan shill

2004-10-12T22:23:00.000-06:00

Paul Krugman is a smart guy. Therefore, his recent NYT op-ed can only be interpreted as his usual partisan, intentional distortions.

Jobs
Krugman claims that "Mr. Bush is the first president since Herber Hoover to preside over a decline in payroll employment". While this is technically true because of his term payroll employment, what he doesn't tell you is that the Establishment Survey, which shows a decline of 585,000 jobs under Bush, is a sample of the payroll of large employers. This survey ignores modern employment alternatives such as consulting, contract labor, self-employment, etc. The Household Survey which includes all types of employment shows that there has been a gain of 1.67 million jobs created under Bush.

Unemployment
Krugman claims that the 5.4% unemployment rate (which is identical to Nov 1996 during Clinton's reelection) is only low because, "some of those without jobs stopped actively looking for work". Of course Krugman has no idea how many of those people choose modern types of employment alternatives. He acts as if the phenomenon of people who stop looking for work was created under Bush, which is ridiculous. Krugman knows full well that the unemployment rate is computed based on the Household Survey which more accurately represents the true employment picture.

The deficit
Krugman claims that "tax cuts caused about two-thirds of the 2004 deficit". One can certainly determine how much money taxpayers were able to keep due to the tax cuts. Further, it's easy to compare that number to the 2004 deficit. However, what cannot be computed is, whether or not the tax cuts reversed the economy and therefore increased revenues as compared to what would have occurred without tax cuts. It's also not possible to determine the tax revenue that has been and will eventually be generated by the power of people keeping, investing, and spending their own money.

The tax cuts
Krugman claims that "most of the tax cuts went to the best-off 10 percent of families". Well of course it did. Those are the people that pay taxes, invest, start businesses and employ the middle class.

The Kerry tax plan
Krugman claims that "only a tiny percentage" of small businesses will be effected by Kerry's tax increase plan because the administration broadly defines a "small business". The fact is that every person in the US that makes over $200,000 per year employs people in some way. If you increase their taxes, people will lose their jobs. Penalizing people when they succeed is bad policy but it sells well to jealous people who have given up on their own financial success.

I could go on but this rant has already become quite boring, even to me.

-HMG