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Funding Your Investment with 60% of Other People's Money

Updated on March 18, 2011

Use Other People's Money

 

Funding an investment with 60% of other people's money and only 40% of your own money is one great head start. It is now June and you pay $3,000 for a stock option C which bears an expiration date which is the third Friday of September. You do not know what may happen to that stock option C in the months ahead; the stock option may come to be worth more or less in resale value than you paid for it, but after the expiration date it becomes useless. Also, bearing a definite expiration date, the stock option tends to lose value steadily as time passes.

However, on that very same day you spend the $3,000 acquiring that stock option C, you are entitled to sell another stock option A (which you do not own) bearing a July expiration date and to sell it for $2,000. You can either put that $2,000 in your pocket or you can credit it toward your purchase of the September stock option C and then pay only $1,000 out of your own capital. The stock option A you sold expires on the third Friday of July, entitling you to sell another stock option B bearing an August expiration date for $1000 - maybe more, maybe less cash than the July stock option A. Maybe more, maybe less because fluctuations affect both July stock option A and August stock option B. When August stock option B expires, then exit by selling September stock option C for $1000 or whatever price it will be worth.

Horizontal Calendar Spread Table

Fire Enough Shots?

 

All people are not created equally. Some make the same mistakes over and over again. Others will bring some improvements in their procedures which make as much difference as changing deck chairs on the sinking Titanic.

In the stock market, if you fire enough shots, you are sure to hit the target eventually. The opposite is also very true: if you take enough steps, you are sure to step on a land mine eventually.

Cover yourself against land mines by using horizontal calendar spreads.

Calendar Spreads takes Advantage of Time Decay

This kind of stock options trading is called horizontal calendar spread: you sell an option and at the same time you buy another option of the same type (a call or a put) on the same stock and at the same strike price, but with a further out expiration. When an option has several months remaining before expiration, time decay is relatively slow. As time goes by, the rate of time decay increases. When the option has less than 30 days remaining, time decay goes into a high rate. Calendar or time spreads take advantage of this characteristic.

From the table, the calendar spread which cost you $1500 a month ago would now be worth $2500, for a profit of $1000. That's a 67% return in only 30 days. Of course, there would be commissions and bid/ask slippage, but you get the idea how this strategy works.

All people are not created equally. Some make the same mistakes over and over again. Others will bring some improvements in their procedures which make as much difference as changing deck chairs on the sinking Titanic. In the stock market, if you fire enough shots, you are sure to hit the target eventually. The opposite is also very true: if you take enough steps, you are sure to step on a land mine eventually. Cover yourself against land mines by using horizontal calendar spreads.

The Author’s page is designed to help beginners and average readers make some money as an extra income to supplement what they may be earning elsewhere - details of which you can find in My Page, if you will.

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    • profile image

      Stock Market Funding 8 years ago

      At SMF, we fund investeors and traders with 90% of Other People's Money

    • ngureco profile image
      Author

      ngureco 8 years ago

      Thank you Stock Market Funding. It would be worthy to check at SMF and evaluate if the risks are equally high at 90%.

    • Douglas45 profile image

      Douglas45 7 years ago from Winston-Salem, NC

      Hmm...

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