I have finally decided to enter the world of margin accounts. When I first began investing, I quickly became one of the world’s best poor performing stock pickers. I somehow always found myself purchasing these promising looking stocks, only to find them dropping like a rock right after I bought them. I have since improved my skills at picking stocks, but I have found myself yearning to profit from my keen ability to choose bad stocks.
To profit from poor performing stocks, one needs to open a margin trading account through their broker. With a margin account a trader can short sell stock, as well as trade options. After looking through the multitude of online brokers I settled on optionshouse.com. I went with these guys because they offered a low fixed rate fee for trading options. They currently charge a flat $9.95 per trade for options on an unlimited number of contracts. Many other brokers will charge a fixed fee plus a per option fee too. With Optionshouse.com, no matter how many options I trade, each trade will be the same fee. They also allow you to buy and sell stocks for a very low price as well. They currently charge $4.95 per stock trade for an unlimited number of shares. I hope to do a more detailed review on optionshouse.com once I have had a little more experience with their site.
For those who don’t know much about margin accounts, here is a quick primer:
The two main things that can be done with a margin account are short selling and buying options.
Short selling is the sale of shares of stock that you do not personally own. The broker essentially borrows the shares from one of its other traders and sells it on your behalf. Then at a later date, you must repurchase the shares and return them to the broker. The strategy in short selling is that you hope that the price of the stock falls so that you can buy it back for less. Look for a more detailed definition in the next issue of the financial word of the day.
When trading options, and investor has a few basic options (no pun intended). Options were created as a hedging tool, but can also be used as investments as well. Look for a more detailed definition to follow later on in the financial word of the day. With options you can choose puts or calls. Puts give you the right to sell and calls give you the right to buy. The curveball thrown in on this strategy is that options are time dated. When you purchase a particular option it comes with an expiration date. If nothing is done with the option before this date it will expire worthless. If you trade it before the expiration you can stand to make some money.
Enough with the definitions already! They will be defined in full living color soon enough!
Today I made my first options trade. I decided to purchase a February 2008 $5 put on JetBlue (JBLU) at $.75 per share. I’ll be honest here, I’m a bit of a chart trader. Take a look at this one year chart for Jet Blue. Their las uptrend was at the very beginning of 2007. It was so early in 2007 that it doesn’t even show it on this graph. Historically, stocks with charts like this typically don’t just recover overnight. With this put placement, I am willing to bet that by mid-February this trend will not have reversed itself. I see Jet Blue trading down as far as $2.50 a share before it starts to see any sort of recovery. 
So we shall see how this all works out. Hopefully well. After just one day my put is trading at $.80 per share…a modest gain of $.05 per share. As a side note: Options are for 100 shares, so this $.05 per share gain turns out to be a $5 gain per option purchased.
As a final note: I am 100% for full-disclosure. Any time I make comments about a particular stock or company, I will state in plain English whether or not I have a monetary stake in the company. This way the reader won’t have to worry about me trying to pump up a stock. I will not however disclose specific monetary figures that are invested in a particular company, since this is not necessary. I will state whether or not I have a financial interest in any of the companies mentioned at the time of the article printing. It is possible that I may buy or sell a stake in the company at some point after the publishing of the article. I plan at some point creating an entire page devoted to what securities I currently own, so that I can be as open with this information as possible.
Additional note on 2/21/2008: Today when I came home from work I found an envelope from Optionshouse waiting for me. Enclosed was my monthly statement, something that I totally did not expect to be receiving from a discount broker like Optionshouse.com. All in all it included a detailed transaction history, a correspondent notice about 1099 forms, and another letter that covered Anti-Money Laundering, privacy policy, a margin disclosure statement, a day trading risk disclosure statement, and an extended hours trading risk disclosure. All in all, I must say that I am very impressed that they sent me all of this. As a final note, their money market account for uninvested cash is paying a lovely 3.64% right now.
Additional note on 3/09/2008: So I am beginning to find out that trading options are a little bit trickier that I had initially imagined. I think I would be better off just shorting stocks. I have no problem picking the ones that are going to go down, it is just that whole time decay thing about the options that is getting to me. Ideally I would like to work with a longer time period, but I can’t justify paying the extra premium for it. On a better note, I have just found my first winning option in Radio Shack (RSH). This company shot up about 22% right after its’ earnings report a week or so ago, but ever since it has been falling. Keep falling Radio Shack, I’m loving it right now!!!