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Closed Trades
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We believe it is imperative that you read and fully understand the following risks of trading and investing:
GENERAL RISKS OF TRADING AND INVESTING
All securities trading, whether in stocks, options, or other investment vehicles, is speculative in nature and involves substantial risk of loss. We encourage our subscribers to invest carefully and to utilize the information available at the websites of the Securities and Exchange Commission at http://www.sec.gov and the Financial Industry Regulatory Authority (FINRA) at http://www.finta.org. You can review public companies filings at the SEC's EDGAR page. FINRA and its predecessor entities have published information on how to invest carefully at its website. We also encourage you to get personal advice from your professional investment advisor and to make independent investigations before acting on any information that we publish. Most of our information is derived directly from information published by companies or submitted to governmental agencies or which is otherwise publicly available. We do not independently verify any of this information. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way warrant or guarantee the success of any action you may take in reliance on our statements, ratings, or recommendations. Unlike bank accounts, investments in securities are not federally insured against loss of principal. We make no warranties of any kind regarding our analyses, ratings or any other contents of our websites, which you are utilizing at your own risk.
1. You may lose money trading and investing.
Trading and investing in securities is always risky. For that reason, you should trade or invest only "risk capital" -- money you can afford to lose. As a rule of thumb, we believe that you risk no more than 10% of your liquid net worth -- and, in many cases, you should risk less than that. Trading stock and stock options involves HIGH RISK and YOU can LOSE a lot of money.
2. Past performance is not necessarily indicative of future results.
All investments carry risk and all trading decisions of an individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or trading signals will result in profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any kind of trading or investing they choose to do.
3. Hypothetical or simulated performance is not indicative of future results.
Unless specifically noted otherwise, all profit examples provided in the our websites and publications are based on hypothetical or simulated trading, which means they are done on paper or electronically based on real market prices at the time the recommendation is disseminated to the subscribers of this service, but without actual money being invested. Also, such examples do not include the costs of subscriptions, commissions, and other fees and transaction costs, or examples of other recommendations which would have resulted in losses had our recommendations and timing been utilized. Because the trades underlying these examples have not actually been executed, the results may understate or overstate the impact of certain market factors, such as lack of liquidity (discussed below). Simulated trading programs do not reflect human factors that come into play when making actual purchases, sales and other investment decisions involving real money in the market. We make no representations or warranties that any account will or is likely to achieve profits similar to those shown, because hypothetical or simulated performance cannot guarantee any profits and are not indicative of any future results.
4. Don't enter any trade without fully understanding the worst-case scenarios of that trade.
Trading securities like stock options can be extremely complicated, so make sure you understand these trades before entering into them. For example, aggressive positions in options have a greater probability of losing, while less aggressive positions are less likely to yield substantial profits. Similarly, far out-of-the-money options are unlikely to finish in the money, and options purchased close to their expiration dates are very high-risk. And certain positions, such as credit spreads/iron condors entail a risk of loss greater than the potential profit, even though these may be appropriate trades given a certain view on risk/reward and anticipation of the underlying security's likely range at the time of the trade. Also, options involve a cost factor for the time until the expiration date, as you are paying for the right to buy or sell a security for a certain period of time without paying the purchase or sale price. You should not make any investment unless you fully understand not only the financial risks involved, but also the mechanics of your investment.
5. We are a financial publisher and do not provide personalized trading or investment advice.
We are a financial publisher. We publish information regarding companies in which we believe our subscribers may be interested and our reports reflect our sincere opinions. However, the information in our publications is not a personalized recommendation to buy, hold, or sell securities or any particular security - including the derivatives on any securities. As a financial publisher who has elected not to be registered as an investment advisor with the Securities and Exchange Commission, we do not and will not give personalized trading or investment advice to any of our subscribers. If a subscriber chooses to engage in trading or investing that he or she does not fully understand, we may not advise the subscriber on what to do to salvage a position gone wrong. We also may not address winning positions or personal trading or investing ideas tailored to a particular subscriber. Therefore, subscribers will need to depend on their own mastery of the details of trading and investing in order to handle problematic situations that may arise, including the consultation with their own brokers and investment and financial advisors as they deem appropriate.
6. Profits can be lost if they are not taken at the right time.
Subscribers are advised to take profits at whatever point they deem optimal, regardless of the profit target set in any given recommendation. Strategy services such as those we offer provide recommendations. Subscribers are free to follow the recommendation in full, follow it in part, or ignore it altogether. If a subscriber believes a given profit is at risk, the subscriber should take the profit, regardless of the advice being suggested by this service or its editor/staff. Subscribers must understand that profits can be lost if they are not taken at the right time. Similarly, if a subscriber feels a position is likely to lose value, or a losing position is likely to fall further, the subscriber should use their own discretion to exit at any time to preserve capital. The final decision as to when to take profits or minimize losses remains in the sole discretion of the subscriber. PowerHouse Options and its editor/staff assume no responsibility for the timing of profit-taking or loss-minimizing actions. Again, we only offer advice and recommendations, it's solely up to the subscribers how to act upon or not act upon this advice.
RISKS OF INVESTING IN SECURITIES
Investments in securities and/or their derivatives always entail some degree of risk. Be aware that:
1. Some investments in securities cannot easily be sold or converted to cash due to liquidity issues and other limitations. Check with your broker to see if there is any restriction, penalty or charge if you need to sell an investment quickly.
2. Investments in securities issued by a company with little or no operating history or published information involves greater risk than investing in a public company with an operating history and extensive public information. There are additional risks if that is a low priced stock with a limited trading market, e.g., so-called penny stocks.
3. Investments in securities, including mutual funds, are not federally insured against a loss in market value.
4. Securities that you own may be subject to tender offers, mergers, reorganizations, or third-party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions. They involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your securities before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment.
The greatest risk in buying shares of stock is having the value of the stock fall to zero. On the other hand, the risk of selling stock short can be substantial. "Short selling" means selling stock that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading strategy for some investors, but assumes that the seller will be able to buy the stock at a more favorable price than the price at which they sold short. If this is not the case, then the seller will be liable for the increase in price of the shorted stock, which could be substantial.
SPECIFIC RISKS OF STOCK OPTIONS TRADING
IMPORTANT: When you open a stock option account, you should receive a booklet entitled "Characteristics and Risks of Standardized Options," which is also available on the Chicago Board Options Exchange website at http://www.cboe.com/resources/intro.asp. This booklet contains an in-depth discussion of the characteristics and risks associated with stock options trading. We strongly encourage you to carefully read and understand this information.
1. Assignment of exercise to writers.
As a writer of a stock option, you may be assigned an exercise at any time from the date of sale through approximately two days after the date of expiration. The consequences of being assigned an exercise depend upon whether the writer of a call is covered or uncovered, as discussed below. Since an option writer may not be informed of the assignment of exercise until up to two days after expiration, special risks can come into play. For example, an option writer who sells out their underlying position upon expiration may find out the next day that they have to surrender stock they do not now own.
2. Risk of unlimited losses for uncovered writers of call options, high level of risk for uncovered writers of puts.
First, we will rarely if ever be advising you to write "naked" or uncovered options, but it's still good for you to have an understanding of the risks of doing so.
A "naked" or uncovered writer of a call option is at substantial risk should the value of the underlying stock move unfavorably against the position. For a naked call writer, the risk of loss is theoretically unlimited. The obligation of a naked writer that is not secured by cash to meet applicable margin requirements creates additional risks. A harsh adverse move in stock prices can create steep margin call scenarios in which a brokerage firm may liquidate other holdings in the writer's account(s) to cover the option. Since pricing of options tends to be magnified relative to the underlying stock, the naked writer may be at significantly greater risk than a short seller of the underlying stock.
Similarly, there exists a high level of risk for uncovered or naked writers of put options. The writer may be forced to purchase the underlying shares at the strike price written or pay an equivalent amount, even if the shares have sold-off to levels substantially lower than the strike price level (or gone to zero in the case of insolvency, bankruptcy, delisting, etc.).
3. Deep out-of-the-money options carry high risk of loss.
Although purchasing stock options at strike prices significantly above or below the current market price can be very inexpensive, you are at high risk of losing your money. There are two versions of deep out-of-the-money options:
A deep out-of-the-money call is an option to purchase 100 shares of stock at a price far above the current market price.
A deep out-of-the-money put is an option to sell 100 shares of stock at a price far below the current market price.
Although these options seem inexpensive, the chances of making a profit on such transactions are extremely low. Therefore, novice traders should avoid buying deep out-of- the-money options.
4. Out-of-the-money options near their expiration date carry a high risk of loss.
The closer you buy an out-of-the-money option to its expiration date, the less likely it is to end up profitable. Although these options are cheap, in order to win in such situations, you will need precise timing and the occurrence of a major event that significantly moves the underlying future in your favor. Therefore, even though the option may appear inexpensive, the risk probability associated with these options is relatively high and you are more likely to lose your entire investment in these positions.
Each strategy service we provide will offer a special discussion of risks. As you move through the educational materials that teach you how to use each service, be sure to carefully read the risks section. It elaborates on risks specific to the types of recommendations you might see in that service. Do not enter any trade without understanding all risks associated with that type of trading.
Conclusion:
Once again, we stress the importance of understanding all of the risks of any form of trading or investing that you choose to do. One should fully understand the worst-case scenario prior to trading or investing real dollars. Past performance is not necessarily indicative of future results. You take full responsibility for all your trading decisions, and should understand the risks and mechanics involved before making any investment decision.
IMPORTANT NOTE ABOUT TRADE ALLOCATION:
Many investors prefer to roughly equally allocate each position based on their account specifics, but some may prefer to overweight or underweight certain strategies or types of trades, so much of your allocation decision will be based on a combination of account size, available buying power/margin, personal preferences and risk tolerance.
It is not advisable to dramatically overweight one or two positions, since that concentrates risk and reduces your ability to diversify over multiple positions. Consider the initial cost on initial net debit or long positions and your broker's margin requirements on net credit positions when determining your position allocations. Also, we advise you to always check the commission costs before placing a trade, especially on trades involving larger numbers of contracts (if excessive you may want to consider shopping brokers).
IMPORTANT STOP AND PROFIT/TARGET GUIDELINES ON ALL TRADES:
Stops: Unless I advise otherwise on specific positions, and depending on your risk tolerance (some investors choose not to use stops) I advise closing out half of any position should the underlying shares move "against" us - down for bullish positions, up for bearish positions - by 25%/20%/15% (for underlying stocks priced <$5/<$25/>$25) or more after entering a trade. You can do this with a "One triggers other" or OTO order (most brokers offer this) tied to the underlying share price or by watching the shares and manually exiting the options. On options with wide bid/ask spreads, it's advisable to attempt to manually exit and attempt to improve over what you'd get with a market order.
Profit targets: It's a common practice and a good strategy to close out the first HALF (H1) of any long options positions should the position reach profits of 250% or 500% and immediately place an OCO order to exit the remaining position should the underlying shares move more than 30% or 35% against you from that point. Let the other half ride. The specifics depend on your trading style and risk tolerance. This locks in a nice assured profit on the entire position at the first exit and still allows the potential to let the profits run further. Credit positions stops: On high-priced underlyings (such as indexes or stocks like Google), stop out half 1/half 2 of the position if the underying moves 10/15% against us or the shares get within 5% of the closest strike in the spread, whichever comes first, unless I'm advising specifically otherwise.
IMPORTANT NOTE ABOUT IMPROVING EXIT ORDERS:
If you can, I advise attempting to improve the fill on your exits over a simple market exit order once the underlying shares breach my suggested stop level. Many options have a fairly wide bid/ask spread and you can often exit somewhere near the middle. Over time this can save you a good bit of money. Targeting an improved exit is as much art as science, depending on the liquidity and dynamics of each option, and involves placing an order somewhat "better" the bid/ask mid-point, and then incrementally adjusting it from there until you get a fill. as opposed to simply using an OTO order and having the position exit as a market order. Be careful not to try to be too clever though if the shares start to move in the wrong direction - close it quickly at that point.
To attempt an improved manual exit, you can either keep an eye on the shares or use one of the many alert services (Yahoo finance and Microsoft offers this, as well as many others) on the web to notify you if the underlying shares breach my stop level, then attempt to exit the option favorably, as discussed above. If you don't have the time or interest in doing this, just go with a plain OTO market order based on the share price.
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