Futures and Options for High Rollers

When you invest in futures and options, you must be prepared for a bumpy ride. The futures and options market is not for the amateur investor. You can make a lot of money in these financial markets, but you could also lose more than your shirt.

Betting on the Futures

The best way to describe what futures are is to look on the shelves or in the freezer of your neighborhood grocery store. Orange juice, wheat, sugar, and corn, to name a few, make up the products that investors "bet" on in the futures market.

Unlike stocks, bonds, and mutual funds, there is no ownership or IOUs—just exponential rewards if you win big—but you have to know how to play the game. A future is simply a contract in which a "pre-selling" of the commodity is taking place at an agreed-upon price today for delivery in the future. Each delivery date is different because they are pre-set by the financial futures exchange. The months in which the contracts expire are known as the spot months.

The people who do not own the underlying commodity, but rather, bet on the rise and fall in the commodity prices, are known as speculators. As a speculator, you try to achieve a profit from the ups and downs in the price of the contract. Speculators invest in futures contracts either to buy goods they do not want or to sell goods they have no intention of delivering. If you own the underlying commodity (like a farmer who owns his wheat crop and is trying to sell it) you are known as a hedger. The floor traders at the exchange are known as scalpers.

Even though you are not obligated to come up with a lot of start-up money to invest—usually about 5 to 10 percent of the contract's value—it doesn't make the futures market any less risky. In fact, if your contract is dropping in value, you may have to put up additional money to keep your position—definitely not an investment for the beginner!

If you're interested in the futures market, but don't want to risk as much money, you may want to invest in mutual funds that invest in commodities. These are called commodity funds or futures pools, and there have been some surprising profits in these. The performance of these pools varies widely from fund to fund and from year to year. Usually, they will do well when the markets move sharply upward or downward and the pools are invested on the side that will profit.

If you want more information about the different commodity funds available to you, contact Managed Account Reports, the newsletter that tracks the commodity funds industry. For a sample copy, call (212) 213-6202.

If you want to protect your investments, consider dabbling in the options market. Options, like futures, have an expiration date and can help protect your portfolio. Call options allow investors the right—but not the obligation—to buy the underlying security (typically stock) at a set price (the strike price) for a particular period of time. Put options, on the other hand, give you the right—yet not the obligation—to sell the underlying security at a set price for a particular period of time.

Many times put options are used if you are feeling bearish and expect to profit from falling stock prices or to protect your investment portfolio, kind of like insurance. Let's say you own 100 shares of XYZ Company stock. You hear rumors that third-quarter earnings reports are not expected to be all that great, so you're worried about the stock price taking a hit because of the news. Instead of selling all your shares (because, of course, you are investing for long-term price appreciation, no matter what bumps happen along the way), you can purchase insurance. The price drop is just short-term, so you don't want to sell your stock, but you still need to protect your shares against any decline.

To protect your position, you could cushion the blow in case XYZ Company stock price drops. Here's how. Assume you bought XYZ Company stock at $25 a share a few years ago. The current price is $36, but you've noticed it starting to pull back a bit. Instead of selling your shares, you can buy a put option (not a call option) because it

Investing in commodity funds takes a big chunk out of your initial investment because of the high commissions that these portfolio managers earn. But that's not all, additional fees—sometimes as high as 6 percent of managed assets—are assessed. That's on top of high commissions, sometimes as much as 10 percent This type of investment is for high rollers who have the money to invest and don't mind the ups and downs of the futures market

Watch Your Wallet

Investing in commodity funds takes a big chunk out of your initial investment because of the high commissions that these portfolio managers earn. But that's not all, additional fees—sometimes as high as 6 percent of managed assets—are assessed. That's on top of high commissions, sometimes as much as 10 percent This type of investment is for high rollers who have the money to invest and don't mind the ups and downs of the futures market

Know Your Options will give you the right to sell 100 shares of XYZ stock at whatever the strike price is— no matter what the current trading price is.

Plug in some numbers. If you bought an XYZ put option with a strike price of 30 for $200 (quoted as $2, which is the premium) and the XYZ stock price falls to 30 or below, you have two choices:

> You have the right to exercise (sell) your option by selling your shares of your underlying XYZ stock for $30 a share, no matter what the current stock price is.

> You can hold onto your underlying stock and "close the position," meaning, sell your put option. If you did this, you would make a profit because your put option would be in-the-money. It has to hit the price of 30 and keep going down for you to be in-the-money. If, however, the option never dropped to 30 before expiration, your option would expire worthless. Your loss? The total amount you paid for the option, which is the premium. But it's insurance, so consider yourself protected!

Fiscal Facts

Think of call and put options this way: Since you buy call options when you think the underlying market is going up, remember call options as "calling up" someone. Buy put options when you think the market is going down, as in "put down" your foot Call up...put down. Remember that

The Least You Need to Know

>- If you want to make money on Wall Street, first you have to know what your investment profile is. Make sure you take into consideration your risk tolerance, -your financial goals (and dreams!), your tax exposure, and your time horizon (which is when you need the money). ■

>- The way to make money in investing is to buy low and sell high. '

>- If you are investing in stock to receive cash dividends, you must be a shareholder on the record date. ;

>• You can make a good return off growth stocks if you invest for the long term.

>- Interest rates and bond prices move in opposite directions.

>- Mutual funds usually involve less risk because your investments are diversified. ; Make sure you look for a no-load fund that doesn't involve a lot of extra fees. \

>- Futures and options are not for the faint of heart.

Chapter 6

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Attracting Wealth Through The Law Of Attraction

Attracting Wealth Through The Law Of Attraction

Wealthy people have this so called millionaires personal mindset, a way of thinking that separates the achievers and successful individuals from the rest of the population. Your subconscious is much powerful than the conscious mind. This can either help you fulfill your dreams or hold you from success that you want in your life.

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