Rich Dad Education Blog tag:www.richdadeducationblog.com,2012://1 2012-01-19T13:39:26Z Movable Type 3.2 Presenting Your Property –Staging and Landscaping tag:www.richdadeducationblog.com,2012://1.283 2012-01-19T13:37:08Z 2012-01-19T13:39:26Z It is always a shame when you leave profits on the table. This is particularly true in the area of real estate investing. Many entering into the real estate arena spend time learning strategies, putting together a Power Team, and... Administrator It is always a shame when you leave profits on the table. This is particularly true in the area of real estate investing. Many entering into the real estate arena spend time learning strategies, putting together a Power Team, and acquiring marketing skills. Meanwhile, they relentlessly make offers until they find their deal. After they have acquired their property, and despite all of their hard work, few fully maximize their potential profits because they don’t take the time to properly present their property. Novice real estate investors should not feel alone, as many veterans make the same mistake, too.

The little extra touch that goes into the presentation of the property can dramatically alter its perceived value. When the presentation is properly executed, properties move faster, and sell and rent for more. This all leads to more profits for the investor. As a real estate investor, you have invested the time; now, just spend those few extra hours on the fine tuning that makes a big difference in your bottom line.

]]> Many of the suggestions below require a bit of an artistic touch. This might not be your specialty, and may cause a level of anxiety. If you don’t feel you can refine these skills, then you may have someone in your life that can offer assistance. When there is money to be made, there is no shame in admitting that you don’t have a dormant interior designer inside you. If those around you are also lacking an artistic flair, there are several professional companies that can offer their services to help you present your property through staging your home and landscaping. Perhaps after utilizing these services, you can decide to continue to work with them, or you may have learned enough that you can duplicate their efforts in a reasonable manner.

Staging Your Home

When an individual walks into a home, a first impression is made. The nature of this impression is influenced by certain factors that you have no control of (number of bedrooms, bathrooms, etc.). There are things within your control, however, that can enhance your chances of creating that positive first impression in the potential buyer. Home staging is one area that increases the probability of creating a good first impression. Don’t spend countless dollars in attracting potential buyers to see your property just have their first impression be a bad one.

Home staging is a relatively simple process that involves decorating a home with temporary furnishings intended to create a more inviting home. It is likely that you have walked into a home that just had a certain ambiance to it. The home felt inviting, comfortable, and undoubtedly, you gave the homeowners credit for having a sense of style. This is the atmosphere you want to create for potential buyers when they walk into the home you have for sale. When done right, proper home staging can not only create a good first impression, it can create that wow factor that leads to quick closings.

If you have doubts to your creative ability to properly stage a home, there is no shame in hiring a staging professional. Not only do these individuals have the skill set to properly stage a home, they undoubtedly will have creative ideas that will lead you to purchase items that are inexpensive, yet create the desired feel. Many of these items will be able to be used repeatedly in your real estate investing career.

There is always the option to narrow down your home staging to a room or two. If you go this route, make sure one of the rooms you stage is the first room that potential buyers will see. Your second room might be a bedroom, particularly a child’s room that can be done inexpensively, creatively, and help potential buyers visualize their own children growing up in that room.

The bottom line is that staging a home gives you a tremendous advantage over an empty house. In time, it might become your favorite part of the selling process. If you don’t find enjoyment in staging, then the quick sale results you get will be well worth the effort.

Landscaping

While staging a home can help create that positive first impression once inside, it doesn’t hurt to grab buyer’s attention on the way up to the front door. When done in combination with proper home staging, landscaping can help create that one-two punch that makes potential buyers want to buy your property. The effectiveness of this approach will quickly make you become a true believer in home presentation.

Perhaps the single biggest reason most real estate investors don’t invest in landscaping is their fear that it will cost too much. While naturally, you don’t want an overly green thumb to drive your costs overboard, there are numerous things you can do to increase the appeal of the outside of the home without sinking your budget. Simple use of colors, patterns, and a good design can create this presentation without breaking the bank. The proper placement of plants, creating a clean feel to the yard, and a touch of creativity are all relatively inexpensive and go a long way to achieving your objective.

Your overriding goal with your landscaping project is to create a presentation that is appealing to potential buyers. Extravagant features are not needed in order to achieve this goal. You are not attempting to create an elaborate design that will win a contest. Clean and simple is best if you don’t have experience in landscaping. Drive up to the house, get out, and pay attention to what you see on your walk to the front door. What sticks out? What feel empty? What are your impressions?

Much like home staging, there is definitely an artistic element to landscaping. Your own creativity and taste can make a big difference in your landscaping efforts. If you don’t feel comfortable, and don’t have someone that is close to you willing to help, don’t be afraid to hire a landscaping company to create a design for you, or give you a quote that can help you achieve want you desire.

Both landscaping and home staging are avoided because many investors don’t want to put those extra dollars into home presentation. This is beneficial to every real estate investor that is willing to spend the little extra time and money, as their homes will stand out, and simply are more appealing to the average buyer.

]]> Iron Condors tag:www.richdadeducationblog.com,2012://1.282 2012-01-19T13:34:03Z 2012-01-19T13:35:36Z The number of things a sophisticated trader can do with simple calls and puts is truly amazing. The buying and selling of calls or puts can be combined in numerous option strategies, each offering its own unique way of capitalizing... Administrator The number of things a sophisticated trader can do with simple calls and puts is truly amazing. The buying and selling of calls or puts can be combined in numerous option strategies, each offering its own unique way of capitalizing on the various market conditions a trader will encounter. The key for any option strategy is to know what market conditions a particular strategy should be utilized, how to execute the strategy, and whether the option strategy fits within a trader’s risk parameters.

One of the more popular option strategies is the Iron Condor. The Iron Condor’s popularity stems from the cash flow and potential monthly income it can generate. The Iron Condor is simply the combination of two of the first strategies that beginning traders learn:, the bull-put spread and the bear-call spread. These two credit spreads are used in different market conditions. If the broader markets are at least moderately bullish and your underlying stock is also moderately bullish, then the bull-put spread is a viable option strategy. Conversely, if the broader markets are at least moderately bearish and your underlying stock is also moderately bearish, then the bear-call spread is a viable option strategy. These two basic credit spreads serve as the basis of numerous trades that option traders make, as they can capture profits in both market conditions.

]]> The Iron Condor is often used in a third market condition, one where the market or stock is neither trending up or down, but moving sideways. In combining the bull-put and bear-call spread in this particular market condition, a trader can collect credits on both spreads which leads to the option strategies strategy’s popularity. As with any potential trade a trader makes, proper due diligence should be conducted to ensure that the trade makes sense from both a technical and risk management standpoint.

Stage One: Technical Analysis

Whatever stock or broad market is being analyzed, you are looking for a market that has demonstrated the following:

1) No dominant trend; sideways moving stock or market
2) Clear area of resistance
3) Clear area of support

It is important to identify clear areas of support and resistance, along with properly identifying the trend of the stock, as this increases the probability of a winning trade occurring. Identifying these areas also help determine the strike prices that will be used, as they will be chosen above resistance and below support. A stock that has been trending sideways should have relatively clear support and resistance areas that you can identify. If it does not, then it might be best to look for another potential candidate.

Stage Two: Determining Strike Price and Expiration Date

Once you have identified areas of support and resistance, your strike prices need to be selected. Where you place these strike prices will depend heavily on your own trading rules and risk tolerance. For example, company XYZ has been moving sideways with clear support at $40 and resistance at $50. If a trader sells close to the money credit spreads, they will receive a higher rate of return if successful. However, aA trade with strike prices close to the money, however, will have a lower probability of succeeding than a trader who sells far out-of-the money spreads. Simply put, the stock has to rise or fall farther for you to be wrong. These out-of-the-money strike prices will produce a lower credit, and henceand rate of return, but, as a general rule, will have a higher probability of succeeding.

The expiration date traders choose between can also vary. A balance between the amount of time remaining in the option, versus the net credit received, heavily influences this decision. If a potential Iron Condor expires in three weeks, but offers little premium, then is simply would not make sense to do that trade. As a general rule, shorter term options are preferable, but often times, you have to go four to six weeks out to have sufficient time value associated with the premium. This can vary dramatically depending on market volatility.

Stage Three: Determining Risk vs. Reward

Your maximum reward will occur if the price of the stock at expiration is between the two spreads you created. This is why determining what strike prices to buy is critical, and why you should always determine the trend and support and resistance before entering the trade. Never blindly enter an Iron Condor trade simply because the credit looked appealing.

Your maximum risk occurs when support or resistance is broken and the price of the stock rises above or falls below one of the spreads you entered. At this point, you will lose the spread between the strike prices minus the net credit you initially received.

Other Risk-Reward formulas for Iron Condors:

Net Credit = Credit from bear call spread plus credit from bull put spread
Max Reward = Net credit
Max Risk = Spread between strikes of either credit spread minus net credit
Upper Breakeven = Lower strike call plus net credit
Lower Breakeven = Higher strike put minus net credit

If the risk of losing an Iron Condor trade violates your personal trading rules, then you should not make the trade. When properly executed, the Iron Condor trade is a high probability trade that can generate a significant rate of return. However, losses can occur, and, as with any trade, you should exercise sound money management principles.

Stage Four: Trade Management

Ideally, the stock stays in the expected range, and the options expire, worthless. In this scenario you keep the entire net credit. Many traders have developed their own personal rules involving Iron Condors (and credit spreads in general) that force them to close out of a trade when they have achieved the majority of their net credit. For example, an Iron Condor was placed on company XYZ. The price of the stock remains in a sideways trend, and enough time passes so the trade has realized 90% of its potential profit. In this situation, some traders might evaluate the risk remaining in the trade and made a determination on those factors. Others might simply close out the trade ,and move onto the next trade. How you approach this scenario is highly influenced by your own approach to trading.

Both of these scenarios involve managing a winning Iron Condor trade. Naturally, there are times that trades don’t work out as expected. There are numerous techniques that traders can utilize to help mitigate losses or repair Iron Condors. Next month, this section of the Rich Dad Ezine will address repairing Iron Condors trades.


]]> The Power of a Quote tag:www.richdadeducationblog.com,2012://1.281 2012-01-19T13:32:02Z 2012-01-19T13:33:55Z He said, “Raise your price. Make it ridiculous. That would make people perceive it as value.” ~Robert Kiyosaki The power of a quote should never be underestimated. Sometimes quotes serve as simple inspiration, allowing individuals to find motivation or maintain... Administrator He said, “Raise your price. Make it ridiculous. That would make people perceive it as value.” ~Robert Kiyosaki

The power of a quote should never be underestimated. Sometimes quotes serve as simple inspiration, allowing individuals to find motivation or maintain a positive attitude in turbulent times. Other times, quotes change the direction of lives by inspiring new careers, changing bad personal habits, and helping put importance on things that truly matter. Quotes can also transform the mindset of an individual so they fundamentally see the world differently than they ever had before.

]]> Anyone who has read a book in the Rich Dad series has most likely found a quote that was highly influential in their life. The Rich Dad works are not simply a guide to building wealth. The philosophy that serves as the foundation of Rich Dad not only addresses ways to increase one’s financial literacy, but also speaks to human nature itself. Quotes that are derived from this philosophy can be transformational in nature, if one simply takes the time to absorb their meaning.

Quotes, by their nature, are often brief. Their brevity draws a reader in, but too often, the short time spent reading the quote is the only time invested. A reader may read the following quote from Robert Kiyoskai:, “The most life-destroying word of all is the word tomorrow,” and think, “How true that is!” After the few seconds it takes to read the quote, the reader has had their moment of affirmation, and then moves on with their thoughts. While this may serve the purpose of inspiring the individual to maximize that particular day, the transformational value of that quote may be lost on an individual who doesn’t take those few extra minutes to reflect on the quote.

Examining the deeper meaning of quotes can be an entertaining and rewarding exercise. You likely have quotes that you already enjoy or are inspired by. Take your favorite quote, and spend a few minutes contemplating how it applies broadly and analyze how it applies to the strengths and weaknesses you have as an individual. Uncover the meaning of the words and phrases within that quote to uncover additional insight that might apply to you. The following exercise is just one writers attempt to find deeper meaning in the quote, “Raise your price. Make it ridiculous. That would make people perceive it as value.” If you spend time contemplating this quote’s meaning, you are likely to glean additional insight. That is the beauty of the written word, and the power of meaningful quotes.

“Raise Your Price.”

On the surface, this seems like the most straightforward part of the quote. If you charge a certain price, the simple task would be to increase that price. However, when you think about it, you may ask why you originally set that price in the first place? What made you sell the good or service you are providing at a price that needs to be raised? Why didn’t you instinctively set a price that didn’t need to be raised?

Convention is a likely suspect. A person might think, “tThat’s the going rate.” It is easy for individuals to look around at similar goods and services, and set their prices at levels that would make them competitive. This could be due to a lack of originality, or perhaps even a lack of faith that what they offer is not better than their competitor’s’ similar offerings.

What an individual believes their time is worth can be influenced by the occupation and jobs they have done in their careerslife. At some point, an employer told them that their work was worth a certain amount, and this mindset stuck. Their time had always been worth the “going rate,” so what would be different about their new work now? This individual runs the risk of judging their ongoing worth simply based on the past categorization of one individual or company. Our time and creativity is worth far more than another person’s opinion.

There are many potential causes for why you might have your price set at the level it currently is. Whatever that level might be, the call to action in the quote is simple. Raise them!

“Make it ridiculous.”

While “Fortune favors the bold” is a quote to examine at another time, it is most applicable here. It is easy to get trapped in a negative mindset when thinking of your worth in ridiculous terms. This mindset creates words and phrases like “unrealistic” or “nobody will pay that.” The ridiculous mindset tells itself, “Damn right I am worth that.” Remember, the quote reads, “Fortune favors the bold,” not, “Fortune favors the reasonable and practical individual.”

Ridiculous. That word will conjure up a different number for each individual. Here’s a rule of thumb:, when you think of a ridiculous price, the first number you think of is probably too low. Be bold. You are that good.

“That would make people perceive it as value.”

A few years back, a painting by Jackson Pollock titled No. 5, 1948, was reported by the New York Times to have sold for $140 million. Another paining, Woman III by Willem de Kooning, sold around the same time for $137 million. Search online for original paintings done by lesser known artists, and you can find thousands of such paintings for under $100 dollars each.

While you might find it outlandish, (i.e. ridiculous), that a particular painting sold for $140 million, the price of the painting sparks curiosity. You might search online to find more about it, or contemplate why a person would pay that much. The bottom line is, these paintings did sell for these sums, and on some level, you now attach tremendous value to works of art that you may never have heard of before. You might not like the paintings, but you still attach value.

This perception goes far beyond the artistic world. Assume a person meets two different people of the same profession at a cocktail party. One of these individuals charges $25 an hour for their services, and the other charges $300 an hour. An instant impression is made. A normal reaction is that the person that charges $300 for their services must be significantly better at their chosen craft than the other. This might not reflect reality, but that is inconsequential, as that is the perception that has been created.

In our society, the “best” is not always judged by a fair standard, as sometimes it is simply determined by price. When people feel that they have hired the best, they will always associate value with it. Start telling yourself that you are worth it, and don’t be surprised when others start seeing you that way.

The quote examined here has fourteen simple words, but carries powerful meaning. It speaks to our self-worth, societal norms, the nature of constructed reality, and can be applied in countless ways to individual circumstances. The next time you run across a quote that catches your eye, take a few extra minutes to think about what you just read. You will be surprised at what you discover.

]]> Commercial Real Estate tag:www.richdadeducationblog.com,2011://1.280 2011-12-27T14:12:21Z 2011-12-27T14:14:18Z Too often investors are one-dimensional in their approach to real estate investing. While these investors are light years ahead of individuals who take no action, these investors are still potentially limiting their success. One-dimensional investors also potentially limit their personal... Administrator Too often investors are one-dimensional in their approach to real estate investing. While these investors are light years ahead of individuals who take no action, these investors are still potentially limiting their success. One-dimensional investors also potentially limit their personal satisfaction by not exploring additional areas of real estate investing. You should never let the fear of the unknown, or a lack of confidence in your own ability, prevent you from exploring new areas of financial investment.

Commercial real estate is one area of real estate investing that is often overlooked. Many individuals bypass even investigating commercial real estate, simply because the topic intimidates them. This is unfortunate because commercial real estate can be a tremendous source of cash flowa primary reason many investors get involved with real estate in the first place. Many who have braved the world of commercial real estate have found they are able to generate more cash flow and wealth through commercial real estate then through any other real estate strategy, and that commercial real estate t is actually fairly straightforward and easy to learn.

Never limit yourself because of a lack of knowledge, or fear that an area of investing is too big for you. By learning the basics of commercial real estate, you can determine if this is an area that interests you, and one that might work for you.

]]> Reasons People Invest in Commercial Real Estate

Perhaps the number one reason that people invest in commercial real estate is the wealth building opportunities it provides. One deal completed in commercial real estateas a general ruleis more likely to produce cash flow than one deal completed in residential real estate. In addition, there is a level of cash flow protection that commercial real estate offers that residential real estate does not. If you buy a residential single-family home, then you are dependent on renting out that unit to produce cash flow. In commercial real estateparticularly when multiple units are involvedyou can have one or two units unoccupied, and still generate levels of cash flow. You also have the added benefit of having longer leases with certain types of commercial property.

Aside from financial considerations, many individuals choose commercial real estate because of lifestyle considerations. The central nature of commercial real estate means that if you own a commercial real estate property, you can deal with all prospective and current tenant issues at a single location.

Types of Commercial Real Estate Investing

In a broad sense, commercial real estate is any property that is used in conducting business. Four of the most common types of commercial real estate are:

Retail - The commercial retail market comes in all shapes and sizes, ranging from regional shopping centers to community malls to strip centers. The strip center is where most investors will first step into the retail market.

Industrial - Includes bulk warehouses, office warehouses, large manufacturing spaces, research and development parks, industrial parks, and storage spaces. Industrial-specific investments can be a wonderful source of income if purchased correctly. One of the members of your power team should be someone familiar with the industry you are investigating, and should be able to do inspections on the property.

Office - Office property can vary from high-, mid-, and low-rise buildings to garden offices. A garden office is usually considered to be a one- to five-floor complex with multiple buildings and open space in between. Investing in garden offices or apartments may be a great way to begin your investing with cash flow, and also offers the ability to hold large areas of land for future development.

Residential (multi-family) - Apartment buildings are perhaps the most popular choice of investment for the beginning investor. Technically, any property possessing more than four units is considered a commercial property. Apartments will always generate a need in society, as there will always be a segment of the population that cannot, or does not want to, purchase single-family homes.

In recent years, foreclosures, declining homeownership, higher lender standards, and a changing demographic base have all created more demand for apartment buildings. In their forecast for 2012, Kiplinger anticipates that home prices will continue to fall, around 2%, while home construction overall will increase by about 15%. The vast majority of this increase will be in apartment buildings “to serve the hot rental market” (www.kiplinger.com/businessresource/economic_outlook/).

While apartment buildings offer tremendous cash flow opportunities, other commercial deals might be a better fit for your investing goals and objectives. If you are interested in commercial real estate, don’t simply lock into one area unless you have investigated multiple types of commercial real estate to see what might be the best fit.

Property Valuation

Where comps are used often to determine the value of a single-family home, the property’s ability to produce cash flow is a primary deciding factor in determining a commercial property’s worth. Comps work with residential properties because it is fairly easy to compare one home in an area with others based on recent sale price, comparable size, condition, type, and year of construction of other homes in the area. Finding comparable commercial properties is often more difficult, and thus, different criteria are used in determining a property’s true value.

Remember, you are not buying a home to live in; you are effectively purchasing a business, and a detailed analysis of the cash flow the property can generate is an absolute must. The ability of the property to generate rental income is perhaps the most important criteria to consider. Other things that you should consider are the size, condition, and location of the building, financial stability of the market you are looking to invest in, and levels of competition that you are competing against.

Finding the Deal

Just as circumstances happen in residential properties to create motivated sellers, circumstances also occur to those who own businesses. Owners of commercial property can encounter personal and professional challenges that put them in a situation that forces them to sell, creating excellent opportunities for the savvy investor. The cash flow in the buildings they own may be positive, but extenuating circumstances may force the sell. Your knowledge of dealing with motivated sellers should be applied in these situations.

Finding deals in single-family homes is fairly straightforward to the nature of that type of investment. For beginning commercial real estate investors - as with any property you investigate - you should first ask yourself “Can the property I am looking to acquire generate positive cash flow immediately?” If it can, then you can continue with your due diligence. If it cannot, then you are probably best to continue your search.

When conducting your due diligence, be sure to work with the appropriate members of your power team to determine whether the deal makes financial sense. Commercial real estate can be extremely profitable, but there is also less room for error. Be sure that you acquire the knowledge necessary before you begin any venture. Rich Dad education offers classes in commercial real estate, taught by instructors who have vast experience in this field.

Commercial real estate can be an exciting area of investing. The advantages and cash flow generating opportunities are abundant. Many of those that succeed in commercial real estate would never consider residential properties as the work-to-reward ratio doesn’t compare. Whether or not it ends up being an area that fits your objectives, it would behoove you to investigate commercial real estate in more depth.

]]> Option Strategies – The Straddle and Strangle tag:www.richdadeducationblog.com,2011://1.279 2011-12-27T14:07:59Z 2011-12-27T14:11:38Z One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, competent traders can analyze the market conditions, their personal risk tolerance, and their financial objectives,... Administrator One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, competent traders can analyze the market conditions, their personal risk tolerance, and their financial objectives, and then choose the option strategy that best fits all criteria. Some traders find one or two option strategies that work best for them, while others utilize numerous strategies depending on the market situation they encounter.

The key for any option strategy is to know the market conditions that need to be present to use the strategy, to know how to execute the strategy, and to know whether the strategy fits within their risk parameters. When a trader anticipates a move to the upside, there are several strategies that the trader can utilize. For example, a trader may buy the stock, purchase a call, or use a bull-call spread. Correspondingly, when a trader anticipates a move to the downside, they may short the stock, purchase a put, or use a bear-call spread. The choice in strategy often depends on the trader’s personal trading rules, based on their risk tolerance and financial objectives.

There are also market conditions that many traders encounter when they anticipate a large movement in the price of a stock but are unsure of what direction the price will go. For example, the earnings report of a stock may be coming up, and a trader’s analysis indicates that a potential large movement may occur based on what the earnings report shows. A trader may also encounter a very volatile market and want to use option strategies that will allow them to profit from a rise in volatility. In these situations, some of the most widely used option strategies are the straddle and strangle.

]]> Straddle Overview

Straddles are very straightforward and simple in their execution. A straddle is executed when:

An equal number of calls and puts are purchased at the same strike price (ideally, at the money) with the same expiration date.

Straddle Trade Evaluation:

Cost: Price of call option + Price of put option + Commissions
Maximum Reward: Unlimited
Maximum Risk: Price of call option + Price of put option + Commissions
Upper Breakeven: Call strike + cost
Lower Breakeven: Put strike - cost

As all traders know, there are only three directions a stock can move: up, down, or sideways. The straddle is a bi-directional strategy designed to capture profitsno matter what direction the stock goes.

When Are Straddles Used?

Traders typically utilize straddles before expected important news events, such as earnings reports or major economic announcements that might greatly affect the overall market or the underlying stock. Because straddles involve the purchase of at-the-money calls and puts, the trade has potential to make money regardless of how the market reacts to the news.

Because at-the-money options are used in the trade, traders ideally want to enter straddles when implied volatility is relatively low, or if you are expecting a rise in volatility. At-the-money options are sensitive to changes in implied volatility and if you experience a drop in volatility, your options will likely decrease in value. Conversely, increases in volatility will likely cause your options to increase in their immediate value as option premiums become more expensive.

An important note: Because of time decay, many traders develop rules that close out straddle trades at least one month before expiration.

Risk Analysis

While straddles can capture profits in both bullish and bearish moves, one of the main drawbacks to straddles is the inherent cost to purchase both a call and put option. Because the straddle utilizes at-the-money strike prices, there will be little to no intrinsic value with the options you purchase.

A risk to reward ratio must be conducted in accordance with your own personal trading rules. If implied volatility is high at the time you enter the trade, then the cost of the options premium likely will cause the risk associated with the trade to be out of balance with the potential rewards in a movement of the underlying stock price.

Managing the Trade

When the news breaks, one side of your trade may quickly increase in value, but that will also mean that the other side of your trade will be decreasing in value. Your exit strategies and how you manage your trade will likely impact the profitability of your straddle trade. There are several techniques you can use as your exit strategy:

1) If you entered a straddle trade based on a news event (i.e., earnings) and the news creates a large movement in price based on the news event, you can exit both sides of the trade and take your profits. If you stay in your trade, then you risk having the stock revert to previous trading ranges.

2) One thing that you should always be aware of with a straddle is the inherent drawback that many options have - time value. If the expected move does not occur, then both the put and the call option will lose value every day. At this point, you can choose to do one of two things:

a. Close out both sides of the trade. Both the put and call option will likely have lost some value at this point. However, if your initial reason for the trade is no longer present, then you will need to evaluate your reasons to stay in the trade.

b. Close one side of the trade. Your technical analysis may indicate that there is reason to stay in one side of the trade and not the other. You should have a valid reason for doing this based independently on the technical data available to you.

3) If you experience a rise in implied volatility before the news event that makes your trade profitable before the news event, then you can exit the trade with a profit. If you believe that implied volatility may be peaking, it might be wise to take your profits and move onto another trade.

The most important thing to remember in any trade is to have your trading rules established in advanced so you are not winging it. The best traders are calculated, and know how they will react in the various market conditions they encounter.

Straddle Example

Company XYZ is announcing earnings in seven weeks. Your analysis of the company’s history indicates that there have been large moves around the last couple earnings, and that the stock is prone to large movements. Implied volatility has been relatively low, and you believe a straddle trade might also benefit from spikes in volatility in the coming weeks.

XYZ is currently trading at $25.00, and you explore strike prices two months out. The 25 call options are selling at $2.50, and the $25 puts are $2.00. If you bought one contract of each, your trade would have:

Net Debit = $450
Max Risk = $450
Max Reward = Unlimited
Upper Breakeven = $29.50
Lower Breakeven = $20.50

Your worst scenario would be if the stock stayed at $25.00 after the earnings announcement, as that would be your maximum loss. Both the call and the put are likely to retain some time value as long as you are not close to expiration. Your actual breakeven points will be much closer to the current price, as long as there is not a drop in volatility or you hold the trade within several weeks of expiration.

Strangles

Strangles employ the same basic strategy that is used involving straddles. The main difference is the structure of the trade. Where the same strike price is used for straddles, different strike prices are utilized for strangles. For example, with a straddle, you might:
• Buy an at-the-money call
• Buy an at-the-money put

With a strangle, you would purchase a call and a put option at different strike prices. For example:
• Buy an out-of-the-money call
• Buy an out-of-the-money put

Because you are utilizing different strike prices, at least one of the strike prices will be out of the money. At times, both of the strike prices will be out of the money. This naturally creates a lower cost basis for the trade, and the trade will carry less risk. It must be noted, however, that while there will be less initial cost, the breakeven points will be farther out as well. The stock will have to have a larger move to produce profits. If you choose to utilize the out-of-the-money strangle strategy instead of a straddle, there must be some reasoning behind the strike prices you purchase (i.e., the stock has demonstrated that it can make that type of move in the timeframe). If you simply buy them because they are cheaper, then you are entering the mindset of the gambler.

Another reason traders sometimes employ the strangle over the straddle is that they believe there is a stronger likelihood the stock will move one direction, but still want to capture the movement in the other direction in case the stock doesn’t behave as anticipated. This type of trade is not for the novice, as correctly guessing the impact news will have on a stock price is extremely difficult.

Strangle Example

Company XYZ is currently trading at $60 a share. Your analysis of the stock’s history indicates dramatic movement historically around earnings. You decide to employ a strangle purchasing the $65 call for $200 and the $55 put for $175. There is also currently relatively low volatility, making option premiums cheaper and giving you the ability to profit from spikes in volatility.

Net Debit = $375
Max Risk = $375
Max Reward = Unlimited
Upper Breakeven = $68.75
Lower Breakeven = $51.25

If the stock does not move about $65 or below $55, then your options will expire worthless, and you would experience maximum loss of $375 per contract. As noted above with the straddle, however, the call and the put are likely to retain some time value as long as you are not close to expiration.

Next month, we will discuss one of the most popular cash flow generating option strategies available, the iron condor.

]]> Goal Setting tag:www.richdadeducationblog.com,2011://1.278 2011-12-27T14:04:17Z 2011-12-27T14:07:38Z Outstanding individuals have a vision of who they want to become, and what they want to accomplish. Regardless of the circumstances they find themselves in, they dare to dream of a better life and becoming a better human being. While... Administrator Outstanding individuals have a vision of who they want to become, and what they want to accomplish. Regardless of the circumstances they find themselves in, they dare to dream of a better life and becoming a better human being. While they may occasionally look out a window and daydream of the day that this occurs, they remain focused on their vision for their life and steadily work each day to reach their destination.

The end of each calendar year marks the time that many individuals reflect on what they have accomplished during the past year and set goals for what they wish to do in the coming year. For people that have a clear vision of what they want to accomplish in life, the setting of goals for a coming year is an exciting time. They can take the time to measure what they have accomplished, analyze what still needs to be done, and outline the steps they will take in the coming year to get them closer to what they want in life. For those just starting out on a newly formed vision, the setting of goals is an essential activity. Goals can give direction, provide motivation, and help you create the working template of what you want to accomplish and who you want to be.

]]> One thing that is a certainty, the days of 2012 will eventually pass. The only variable is how you use the valuable time that you have been given. Will you simply let the days pass without accomplishment? Will you adhere to your own personal status quo? Will you be a better financial position one year from now? The upcoming year, 2012, is a leap year, so you even have an extra day to accomplish what you set out to do!

If you did not set goals this past year, there is no time like the present to start. Your goals are your dreams, the destination you want to get to, and the creation of the world and surroundings you want to live in. Spend some time in the coming days to think about what you want to accomplish in life and what you can do in the coming year to make that a reality. If you have a process that works for you in setting your goals, then by all means, do it! However, take the process of goal setting seriously, and don’t simply write down a few goals, or think in your head what your goals are. Take that extra time to analyze what you want and what you need to do this coming year to help you get closer to your dreams. As you engage in this process and find your thoughts wandering or feel a little lost, use the steps below to help you create the process that will help you set your goals.

Steps for Setting Goals

Step 1: Eliminate fear from your goal-setting session.

Many people do not set goals because they are afraid they will fail. Ironically, the moment an individual doesn’t dream to become more than they are, they immediately destine themselves to be limited in life. In the process of setting goals, emotions such as fear must be eliminated before you even begin the process. If you do not eliminate fear from the goal-setting process, it will be far too easy to limit your goals with sayings such as “I can’t do that,” “That goal is too big,” or “I have failed at that before.” Do not limit yourself, as you have the capacity to do tremendous things in this coming year if you have the right mindset.

So, before you do anything else, make the conscious decision to eliminate all aspects of fear from your goal-creation session. Be excited and embrace what you will accomplish in the coming year, and how these goals will help you achieve what you truly want in life.

Step 2: Write down your dreams in life.

Nobody knows your dreams better than you. What motivates you? What do you really want to accomplish in this lifetime? Do you want to be financially independent? Do you never want to work for another person again? Do you want to own a record studio? Do you want to travel the world? Do you want to provide your children the opportunities to follow their dreams?
Dreams are perhaps the most powerful force in the world. They provide us the image of what we can be and what we can accomplish in this life. No matter how dire the circumstances we find ourselves in, dreams allow us to escape the moment and project our future self and our future surroundings. As Robert Kiyosaki said, “I am successful because I am driven by my dream instead of my circumstances. Focusing on my goals helps me overcome disappointment and enables me to accomplish what I set out to do.”

Writing down your dreams in the course of a goal-setting exercise helps provide some direction while setting goals. For example, if my dream is to become a professional writer, then this dream sets the stage to accomplish the individual goals I set out to get me closer to my dream in 2012. Your dreams will serve as a motivational force for you to accomplish these individual goals in the coming year.

Step 3: Write down all potential ideas for goals that will help you accomplish your dream.

This is your proverbial brainstorming session. At this point, do not worry about practicality, feasibility, or whether these potential goals are realistic or not. Simply take some time to jot down any idea that could help you accomplish your overall dream. A simple rule to follow: if it pops in your head, write it down.

You may want to take a few days to accomplish this step. While one intense brainstorming session might capture the majority of the ideas you can come up with, great ideas can pop up anywhere, in the car, in the shower, or riding an elevator. For this step, take the extra time to produce as many ideas as possible that you can analyze in step four.

Step 4: Analyze your brainstorming ideas and focus your list.

At this stage, you will have numerous ideas that can serve as the basis for your goals in 2012. Now analyze each of the goals in relation to each other to determine what order the goals need to be accomplished in, the priority each individual goal has in accomplishing your dreams, and making your goals measurable.

Order - Accomplishing any overarching dream often requires a series of sequential tasks. For example, if your dream is to retire on a ranch in Montana one day, there will be a series of events that need to take place in order for that to happen. Determine if there is order that events need to happen, and naturally prioritize the events that need to occur first.

Priority - You may have several goals that focus on different dreams. One of your goals may be to become financially independent, and another goal may to become physically fit. While different goals can absolutely be accomplished in the coming year, you should analyze at this point if the goal is truly important to you, and the priority it has in relation to your other goals. Narrow down to things you truly are passionate about.

Make Goals Measurable - Let’s assume that one of the goals you made during your brainstorming session was, “I want to become a better person.” While this is an admirable goal, how are you going measure whether you accomplish it? Break down the goals you are passionate about into measurable components.

Step 5: Determine time constraints and practical application.

At this point, you should have a few goals that you are passionate about that will help you accomplish larger dreams you have in life. Each of your goals will require a certain amount of time and resources to accomplish. You should absolutely shoot for the stars and push your limits in the coming year, but also make goals that can be accomplished with the time and other resources you have available to you.

You should try to analytically determine whether some of the goals you have set are feasible. If you only have on average three hours of free time per day, then how much of this time are you committed to use to accomplish your goals? Can the goals you want to set be accomplished in this time? After breaking down each of the goals you set in step four, you may find that there is simply not enough time to accomplish them all. You may need to narrow down your list further.

As you estimate the time, this is a good place to write down estimated completion dates for each of your goals. If your goal is to exercise for one hour each day, then no completion date would be needed as it is a continual goal. However, if you wanted to do three real estate deals in the coming year, then write down when you want the first and second deals finalized.

Step 6: Talk with friends, family, and business partners.

Once you have reached this stage, solicit input from those close to you. They may give you ideas that you missed, bring up potential constraints you have not thought about, and give you encouragement about your goals. You will likely need the support and assistance of those close to you to reach your goals in the coming year, so including them in the process at this point can let them know of the expectations you have set for yourself.

Step 7: Write down and post your list.

Once you have finalized your goals for the coming year, don’t be a coward. Remember, in step one, you eliminated fear from this process. Print your list and post it in prominent places in your life. Frame your goals in a place you see every day at home and work. Post them on your Facebook account, create a screen saver to remind you, or find other creative ways that will remind you of your goals on a daily basis. Let the world know what you are going to accomplish, and don’t fear what others may think.

The Coming Year

During the course of the coming year, unexpected setbacks may occur. While some setbacks are unforeseeable, try to envision the hurdles you may have to overcome. If your family requires more time of you, how will you adjust? If you are sick for a certain period of time, what will you do? If you lose your job or primary source of income, what will your plan be? While you will not be able to anticipate every situation, visualize how you will encounter situations that are less than ideal. Hopefully, this vision is one that has you demonstrating strength and tenacity.

Whatever you do in the coming year, make a resolution to forward progress. You have amazing capacity to accomplish what you want in this life. Wake up each day with a determination to make your dreams a reality. If you have a clear vision of what you want in life and do what you need to do each day to make that vision a reality, then don’t be surprised if you wake up one day and it actually happens.

]]> Cash Flow and Rental Properties tag:www.richdadeducationblog.com,2011://1.277 2011-11-14T19:18:39Z 2011-11-14T19:22:03Z Cash flow is one of the primary reasons people are attracted to real estate investing. In their desire to escape the rat race, many real estate investors have the primary goal of generating enough cash flow so their expenses are... Administrator Cash flow is one of the primary reasons people are attracted to real estate investing. In their desire to escape the rat race, many real estate investors have the primary goal of generating enough cash flow so their expenses are covered by the income they generate. Once this occurs, they can take that true first step towards a state of financial independence for perhaps the first time in their life. The process of transitioning from earning a paycheck to replacing it with real estate income may not happen overnight, but it will happen if you have the dedication and acquire the how-to knowledge of becoming a successful real estate investor.

]]> Single-Family Homes

As with most area in real estate, the same principles apply at the beginning of the real estate investing process. Some of these principles include estimating property worth, analyzing repair costs, and finding motivated sellers. Motivated sellers are essential to almost any real estate strategy as one of the key principles in real estate investing is buying right. Once you have located a potential motivated seller, there are many techniques in which you can utilize to negotiate the buying of a property for little to no money down in a deal that makes sense for both sides.

Step 1: Find Motivated Sellers

It is important to remember that a motivated seller is someone who needs to sell their home, and not someone who simply wants to sell their home. This need can be the result of financial hardship or acquiring a new job out of state. Whatever the reason, the seller must have a strong desire to get rid of their property as soon as possible.

In today’s economic climate, motivated sellers are perhaps easier to find than ever before. While they do represent a small percentage of the overall market, motivated sellers can be discovered if you are willing to spend the time and know where to look. A few techniques to find motivated sellers include:

• Research classified ads in major newspapers
• Search internet ads
• Review radio and TV station classified ad sites
• Review the Multiple Listing Service (MLS)
• Research old or expired MLS listings
• Call on for-rent signs and ads

Whatever techniques you use, look for keywords that indicate the need to sell. At the end of the day, you want to be looking for motivated sellers, not properties. Motivated sellers are the building blocks of many real estate strategies.

Step 2: Buy Right

You need to be very selective about the properties you are going to own as long-term rental properties. You will own these properties for a long period of time, so due diligence should be done in the investigative stage in at least the following areas:

• Determine the crime in the area
• Determine the ratio of rental properties to owner-occupied properties
• Find the vacancy rates for similar properties
• Determine proximity to selling points (schools, public transit, etc.)

A little homework done on your end can go a long way to avoiding frustration in future months and years. This step is simply to identify properties that will be easy to rent, and to pick communities that you will be personally comfortable dealing with.

Step 3: Determine Cash Flow

Cash flow can be calculated by a simple step-by-step formula:

1) You need to evaluate what you can reasonably charge for rent based on what similar properties are renting for
2) Deduct all monthly expenses (property taxes, insurance, utilities, and maintenance)
3) Include vacancy factor
4) Deduct management fee
5) Deduct maintenance fund fee (for future repairs)
6) Deduct cash flow you desire

The resulting number will be the net rent to pay the monthly payment created by step four—financing the property. (Not included in this calculation are any repair costs before the property can be rented. Be sure to include these in your calculation if applicable.)

Step 4: Finance the Property

There are many cases where traditional financing is not available. In addition, for most investors, it is unlikely that traditional financing can get us to the point where we can buy enough properties to generate the type of cash flow we are looking for. Some people turn to private-money options at this point to finance their deals.

Private-money lenders are usually just average professional people or other real estate investors who have access to capital. These individuals are far more likely to invest in your projects if you have demonstrated that you have successfully completed a few real estate projects in the past for a profit. Finding private-money lenders does take some effort, but it is not as difficult as you might think. Work on your presentation, utilize your networking skills, and utilize social media. If the potential deal is solid, then you will likely be successful in your private money search.

Another alternative to traditional lending is seller financing. If you find a motivated seller, then it is important at some point to ask if they are willing to consider seller financing. Using the seller as a source of funding your investments is a highly practical and popular means utilized by experienced real estate investors. This type of financing can create a true win-win scenario for both parties.

One of the most popular methods of seller financing is the lease with an option to buy, better known as the lease option. In the September issue of this newsletter, lease options were reviewed as an exit strategy, but they can also be used as a potential entry strategy. For example, assume you want to buy a property for a long-term rental. You have located a motivated seller in a neighborhood in which you would like to own property, and they are open to seller financing. If you utilize some sort of lease option, here are some factors you will need to consider:

Option Consideration: This is the initial down payment that the buyer would require. It can vary in size, and naturally you would want to be as low as possible.

Length of Lease: This is usually directly tied into the final payment discussed in the next point.

Balloon Payment: In a traditional lease option, there is usually an option to buy at some point, where you pay the remainder of the balance and purchase the property. You may be able to eliminate the balloon (or at least reduce the balloon payment amount) by negotiating graduated payments into the deal. If the option to buy is in five years, this payment can be quite large, and could force you to refinance or lose the property. Graduated payments in each year (50 per month second year, 75 per month third year, etc.) should be offset by increased rents. For every year the final payment is delayed, it makes the final payment due more manageable.

Seller financing is a crucial skill not only to rental properties, but to many other real estate strategies. If you want to learn more about seller financing, contact a Rich Dad Education representative today to see what courses are offered in this field.

Step 5: Find tenants

Choose your tenants wisely! Your number one goal in this step is to find qualified tenants. Describing the ins and outs of the tenant screening process could easily justify an article itself. There are many legal requirements that prohibit what you can and cannot ask. If you don’t gain the knowledge through your coursework, be sure to consult a real estate attorney once you get to this stage to receive proper guidance.

Step 6: Being a landlord

Many people who strictly want to invest in rental properties for cash flow purposes budget in property management in step three of this process. Property management can do all aspects of managing your properties, or you can contract them to just do tasks you don’t enjoy or don’t have time to handle. It’s up to you which services you want to do yourself, and which services you want to have the management company do for you.

A few parting tips once you reach the landlord stage:

• Take good care of your property
• Treat your tenants with respect
• Always maintain a professional relationship with your tenants
• Make sure your tenants know all the rules.
• Enforce the rules

Rental properties can be a wonderful source of cash flow, and with every property you own, you come one step closer to escaping the rat race. Next month, we will discuss another means of generating cash flow with commercial property.

]]> Option Strategies – Covered Call and Married Put tag:www.richdadeducationblog.com,2011://1.276 2011-11-14T19:13:48Z 2011-11-14T19:18:27Z One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, competent traders can analyze the market conditions, their personal risk tolerance, and their financial objectives,... Administrator One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, competent traders can analyze the market conditions, their personal risk tolerance, and their financial objectives, and then choose the option strategy that best fits all criteria. Some traders find specific option strategies that work best for them, and others utilize numerous strategies depending on the market situation they encounter.

The key for any option strategy is to know the market conditions that need to be present to use the strategy, how to execute the strategy, and whether the strategy fits within their risk parameters. There will always be a little terminology to learn with any strategy, but once you get the basics down, you will discover the terminology becomes easier and easier with each strategy that you learn.

]]> Covered Call

One of the primary reasons that traders utilize covered calls is to generate cash flow. Covered calls are also utilized to offer some downside protection, and can be used to grow your portfolio. This can be done using stocks that you already own or stocks that you buy with the specific intention of writing calls against them. Covered calls are one of the first strategies that many investors learn, and are extremely popular among traders who wish to generate cash flow from the markets, but don’t have time to manage their trades during market hours.

Steps for Executing Covered Call Trades:

1) Build a watchlist of stocks with good fundamentals. The first step is to find candidates that would make good covered call trades. Because you are going to own the stock, fundamental analysis plays a large role in selecting the stock you will ultimately end up using. Good traders will build a sizeable watchlist of stocks with good fundamentals to give them multiple candidates to choose from. Good fundamentals decrease the probability of a bad news occurring, and many stock search programs can assist you in filtering out stocks with good fundamentals from stocks with average to below -average fundamentals.

2) Pick a stock in a neutral to bullish market. Some traders are fine choosing stocks with good fundamentals where the stock is in a sideways trend. They have the experience to take advantage of these trends, and will actively monitor the trade, and make adjustments if necessary. Remember, you are going to own the stock, so picking stocks in a moderate uptrend increases the chances that you are going to make a profit on the trade. Covered calls should not be utilized in volatile markets because the potential gain is minimal versus the potential downside loss that a volatile market can create.

3) Choose a strike price. There are two schools of thought in choosing a strike price. You can pick an out-of-the-money call option, or sell an in-the-money call option. While you have greater chance at assignment, selling in-the-money calls are is popular among traders who wish to protect against downside risk. A trader may have a stock in his portfolio that is experiencing selling pressure, and wishes to help protect gains he might have made up to this point. To offset the losses, he sells an in-the-money call. For every dollar lost from that point, he makes one back from the decrease of intrinsic value on the option.

Be sure to analyze the time value left in the option to help determine which option you should choose. For example, it would make no sense to sell a $35 option at 7.10 if your stock was at $42.00. There would be simply little reward.

4) Determine the month you are going to sell. As a general rule, you will want to choose the next available month. This will allow you more flexibility in managing your trade and more monthly opportunities.

5) Use technical analysis to determine entry point. Many traders time their entry into the covered call trade by using their knowledge of technical analysis. For example, let’s assume a stock is approaching a resistance point of $35. They own the stock already, and then decide to write a $35 call at resistance on a stock they wish to own long term. Another potential entry point might be if this same stock pulls back to a support level at $30. As soon as the stock demonstrates price movement upward, an astute trader might buy the stock at that point and wait to sell the call until it reaches the next resistance point, in order to capture more profit on the stock. This is known as legging in.

6) Monitor your trade. There will be times that the trend reverses, that your stock will fall through support, and you will be facing a losing situation. You need to check your stock each day at night or in the morning before the market opens, whatever your routine allows. Most days, you probably will need to do nothing. There are a few situations, however, you may need to monitor:

a. You will encounter situations where there is little time value left in the option you sold, and have captured the majority of potential gains possible. You may want to buy to close the call you originally sold.

b. If the fundamentals on a stock change, the market becomes volatile, or if support is broken on a stock, your rules may dictate that you exit the trade even though you are staring at a loss. In this situation, you would buy to close the call you originally sold and sell the stock.

c. If the call expires at expiration, you may choose to write another call on the same stock. Go through the same routine again to determine whether the stock still makes a good covered call candidate.

With covered calls, there is always the risk of being assigned (called out) on your position. Also, the stock may suddenly breakout of a resistance point, and the trader will lament that they simply didn’t hold onto the stock. Traders with experience have long accepted these situations, and don’t become overwhelmed with the what ifs of trading.

Married Put

The married put is another option strategy that is used when the trader or investor owns the underlying stock. Where covered calls are used primarily as a means to generate cash flow, married puts are used as a type of insurance policy when investors want to hold onto their stock, but are concerned about potential downside market risks. The primary benefit that investor receives is that they retain all benefits of stock ownership. They still receive any dividends, voting rights, etc.

How the Strategy Works

Let’s assume an investor has 2,000 shares of stock XYZ.

1) The investor would need to buy 20 put contracts at the strike of their choosing. The put contract guarantees a selling price of the stock.
2) The put serves as an insurance policy on the underlying stock with the insurance premium equaling the premium of the contracts.
3) The married put protects against sudden movements of the stock and situations where a stop loss might not full protect the investor.
4) The maximum profit is still unlimited.
5) The maximum loss is simply the stock purchase price minus the strike price chosen minus the premium for put contracts.

The married put is not for every trader, and may have very situational needs. For many investors, the use of a stop-loss is sufficient for their trading needs. However, if you find yourself in a situation that you wish to retain the shares of stock but want to minimize your risk, it is always good to have a variety of option strategies available to meet your particular needs.

Next month, we will continue to review different option strategies by examining the straddle and strangle.

]]> Never Close Doors tag:www.richdadeducationblog.com,2011://1.275 2011-11-14T19:03:56Z 2011-11-14T19:13:19Z In a very popular song written by David Coe (and later covered by Johnny Paycheck), the artist laments how his boss is a “riggity dog” and how the “lineboss is a fool” as he sings that he can’t wait to... Administrator In a very popular song written by David Coe (and later covered by Johnny Paycheck), the artist laments how his boss is a “riggity dog” and how the “lineboss is a fool” as he sings that he can’t wait to see their faces when he gets up the nerve to say:

“Take this job and shove it. I ain't working here no more”

You may never have heard of David Coe, or even heard the lyrics to the song, but undoubtedly the reference will be familiar to you as it has become part of our culture. There are countless scenes in movies and television shows where characters emotionally tell off their bosses. These characters have reached their limit, and leave a job despite having no viable opportunities in front of them.

Oftentimes, when these scenes are played out on the screen, those watching laugh and cheer on the person quitting in such a rage—perhaps because we admire the temerity of such an individual or in part relate on all too real of a level. While we might not have fanaticized in graphic detail on how we might quit our present jobs (or maybe far too many of us have), it is likely that anyone reading this newsletter has dreamt, planned, and is working on ways to get out of our current line of work. After all, there is nothing in the Rich Dad philosophy that celebrates remaining in the E quadrant for life.

]]> We can celebrate these moments on television or the big screen, and work towards the day we exit the rat race. However, we need to maintain an awareness of how small the world really is. How many people do we truly get to know over the course of a lifetime? How many opportunities will present themselves in the coming years? Will we lose out on the opportunities because we offended or insulted someone, or thought that someone was simply too unimportant to get to know? Can we afford to close doors simply because it makes us feel better in the moment?

Urban Legend

This story is centered around a joke that several co-workers play on one of their fellow workers. The worker regularly played the lottery, and bought a ticket nearly every day. One day while out to dinner, the co-workers copied the numbers from his lottery ticket and gave them to a waitress. During one point in the meal the waitress came up and said the winning lottery numbers had been announced, and asked if anyone was interested in them. After the man with the lottery ticket said yes, she read the numbers. The man checked his ticket several times before standing up to announce he was quitting and went around the table to insult his boss, each of the co-workers, and even admit that he had been having an affair with his secretary.

Talk about burning bridges.

Now, we might say that this is not in our character or that we would never do that, and perhaps you are right. We might not quit with quite so much vocalized rage, but it is likely that you do things every day that close doors without knowing, or don’t do the little things that can keep doors open.

Meetings, Conventions, and Social Gatherings

Those that have been successful in real estate know the power of networking. From building your Power Team to attending local Real Estate Investment Association (REIA) meetings, successful real estate investors likely have large networks to draw from. They meet Realtors, lenders, and fellow real estate investors at these meetings, all —of which could play a critical role in their future business dealings.

Whether at these meetings or other social settings, it is likely that you have met someone and felt that they could not assist you in your future dealings. You mentally close the door on this relationship. This is potentially a huge mistake. You never know where someone may be in five years, or where you will be in five years, and how that person may be able to help you.

In today’s age of social media, it is very easy to setup a social media page (i.e., Facebook, LinkedIn, etc.), dedicated to your business, and you should try to “friend” or connect with each and every person at one of these meetings. There is absolutely no downside to this approach. Who knows where your next source of private money might come from.?

Keeping Doors Open in One-on-One Dealings

In real estate and entrepreneurial fields, it is likely that you will make numerous offers, attempt to obtain financing, and place many different proposals before many different people. Today’s “no” may become tomorrow’s “yes.” Being gracious and professional to everyone you meet will keep those doors open. Focus on becoming the ideal professional.

The Ideal Professional

Dream of becoming the type of professional who has the following qualities:

• Kind
• Courteous
• A good listener
• Always makes eye contact
• Sends birthday wishes and holiday greetings to all of their contacts
• Is respectful
• Remembers names
• Smiles
• Is honest

Becoming this type of person will mean that you will have a happy and productive life. It is also a very good way to approach business. Along the path of success, you will meet all sorts of people. Some you will care for more than others. At times, there will be individuals who test every ounce of patience you have. What does it cost you to be nice and courteous to even those most contemptible of individuals? It costs you nothing, and you stand to gain both emotionally, spiritually, and even financially.

The Flip Side of Closing Doors

While we can always actively attempt to keep open the lines of communication to business relationships, we can also go that extra step by attempting to open up doors that would otherwise remain sealed. Modern technology and changing social norms have made this easier than ever. If you have never tweeted on Twitter or sent a friend request on Facebook, then you are about to be in the minority. According to checkfacebook.com, nearly 156 million Americans have a Facebook account.

This may be uncomfortable for many who are not familiar with social media, or for those who don’t want to share their thoughts with the entire world. If you don’t want to set up a personal site, then set up a business account on one of the many social media sites dedicated to professionals (i.e., LinkedIn). Utilize it, and invite all of the contacts you meet at meetings, conferences, or one-on-one dealings. For real estate investors, you can use social media to share potential deals that you need partnerships or financing on. You can use it to find members of your Power Team. You can use it for whatever you want. It’s free, takes little time (don’t tell that to your teenager), and can be one of the most powerful tools at your disposal.

The interpersonal relationships we make often define us as individuals, and can make or break our success in the business world. For all of those stock traders that took the time to read this article, you may not need people as much as the rest of us in your cold and calculating world of charts, patterns, and indicators. However, it can’t hurt to get to know a few people if you ever want to change professions.

]]> The Power of Passive Income tag:www.richdadeducationblog.com,2011://1.274 2011-10-17T13:51:49Z 2011-10-17T14:33:02Z One of the first principles taught to Robert Kiyosaki by his Rich Dad was the Cashflow Quadrant®. The quadrant is made up of the four different people who make up the world of business. The first box of the quadrant... Administrator One of the first principles taught to Robert Kiyosaki by his Rich Dad was the Cashflow Quadrant®. The quadrant is made up of the four different people who make up the world of business. The first box of the quadrant holds the E’s, or employees. According to Robert’s Rich Dad, these individuals could be identified by their core values, variations of the saying, “I’m looking for a safe and secure job with benefits.” These values can be identified in positions at every level of the company, from the very bottom all the way up to CEO.

Recent years should have illustrated clearly the fallacy of the “safe and secure job,” but that mindset undoubtedly will remain for millions of workers in America. Even if we assume for arguments sake that a person’s job is safe, the fundamental problem that so many individuals have in building wealth is that they simply are earning a paycheck. Individuals in our society often put long and tedious hours into the earning of that paycheck, and usually create a lifestyle to match the earnings of that paycheck. They invest their time into their core value of security, create a lifestyle to match their earnings, and get caught in the proverbial rat race of life.

]]> Perhaps nothing can teach a person this concept more powerfully than the CASHFLOW 101 game. The game quickly exposes the myth that you can create wealth by building assets such as a home or cars. It also teaches you that, through cash flow, you can achieve your dreams, free up your time, and never worry about money again as you escape the rat race forever. This concept of cash flow is perhaps center among the many principles and concepts and taught in this game. The concept of cash flow, or passive income, is also a primary reason why so many people flock to real estate investing.

Looking Forward to Retirement

Many individuals who have core values centered around safety and security undoubtedly have social security and some version of a 401k at the center of their retirement plans. Many individuals in recent years have had to delay their retirement due to fluctuations in the markets, and have been at the mercy of larger financial instruments to dictate how they spend the golden years of their lives. Needless to say, this line of thinking is not in line with the Rich Dad philosophy.

The Rich Dad philosophy teaches that our retirement begins the second we escape the rat race and no longer have to work for money. Retirement in this sense is simply a state of being, as we may choose to continue to work, volunteer our time, spend more time with our families, or simply go surfing every day. The key is that we no longer have to work for a paycheck because our cash flow exceeds our current and long-term expenditures. Thus, our options on how to enjoy and spend our precious time on earth increase tremendously. This is the power of passive income.

Replacing Your Paycheck with Real Estate Income

It is likely that most of us still are in a situation where we are working for our paycheck. Perhaps we are an employee for a company or own a small business; one way or another, we are putting in the hours for the money we bring in. The process of transitioning from earning a paycheck to replacing it with real estate income likely won’t happen overnight, but it will happen if you have the dedication and acquire the how-to knowledge of becoming a successful real estate investor.

Bringing the dedication and willingness to sacrifice will be up to you. No one can find the inner strength or desire for you. Rich Dad Education offers numerous courses that can teach you the how to build passive income through real estate. In addition, over the course of the next several months, this newsletter will be focusing on real estate strategies that are centered specifically on building passive income.

How Long Does It Take to Escape the Rat Race?

There are too many variable to answer this question with a simple answer. If you have ever played the CASHFLOW game, then you know that if you played with four people, one of the four got out of the rat race first while it might have taken other players many extra turns before eventually getting out. There are so many variables in life, and when you couple that with all of the various levels of dedication and skill sets that people bring to the table, it is nearly impossible to calculate. We can take comfort in the fact that numerous people have done it in real estate, and the formula is logical and time-tested.

For example, one of the key principles in real estate investing is buying right. Motivated sellers are the key, and there are many techniques in which you can negotiate buying property for little to no money down in a deal that makes sense for both sides. While this principle is true, negotiation skills can vary from individual to individual, and some people will just have a knack for dealing with people. With all other factors being equal, these individuals will be more likely to escape the rat race first, as they finalize deals at a quicker pace. Fortunately, if you enjoy working with people, are honest, and can learn to communicate clearly, then you will have a heads up in this department.

Real Estate Passive Income

In the November issue of the Rich Dad newsletter, we will discuss rental income dealing with single-family homes, and in December, commercial real estate and apartment buildings. All of these areas are powerful tools to create passive income. For example, if you own 20 units that generate an average of $200 per month of positive cash flow, that would create $48,000 in annual net cash-flow. It is easier than you think to get to this point. Next month’s article will contain a step-by-step guide on how to get to this point.

$48,000 annually may not seem like the answer to make all of your dreams come true. However, I dare say that it is far more passive income that you currently enjoy. It could also serve as the foundation to escape that rat race so you could devote extra time to building additional cash flow and true wealth. Whatever you do at that point would be your decision, which is the point we all want to reach in our quest to escape the rate race.

]]> Option Strategies - The Bull Call Spread tag:www.richdadeducationblog.com,2011://1.273 2011-10-17T13:47:31Z 2011-10-17T14:30:13Z One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, this type of trader can analyze the market conditions, their own personal risk tolerance, and... Administrator One of the most intriguing things about options trading is the variety of choices available to the educated trader. With dozens of option strategies available, this type of trader can analyze the market conditions, their own personal risk tolerance, and then choose the option strategy that best fits all criteria. Some traders find specific option strategies that work best for them, and others utilize numerous strategies dependant upon the market situation they encounter.

The key for any option strategy is to know in what market conditions to use the strategy, how to execute it, and whether the strategy fits within their risk parameters. There will always be a little terminology to learn with any strategy, but once you get the basics down, you will discover it becomes easier and easier with each strategy that you learn.

]]> The Bull-Call Spread

The bull call spread is a popular strategy among many beginning investors for two reasons:

1) As a general rule, beginning investors are often more comfortable going with strategies that correspond with a bullish market.
2) The bull call spread has inherently less risk than other bullish strategies, such as buying calls. For this reason it is a popular beginning trade for traders that are comfortable in the virtual trading arena, and want to step into live trading.

For these basic reasons, beginning investors tend to gravitate towards bull call spreads as one of the first strategies they utilized. Even after time, many investors stick with bull call spreads as one of the go-to strategies in their playbook.

Traders short on available funds also utilize bull call spreads as it requires much less capital compared to buying stock or buying long calls. The premium paid for the long call portion of the trade is hedged with a written short call. Naturally, this limits upside profit, but those short on capital or who are risk adverse will take this tradeoff.

Stage One – Technical Analysis

You will perform the same general technical analysis with the bull call spread trade that you would for any bullish play. At a minimum, you want the two following market conditions:

1) A bullish broad market environment.
2) The underlying stock to also be moderately bullish.

If the broader markets are at least moderately bullish, and your underlying stock is also moderately bullish, then the bull call spread is a viable option strategy. Since we are dealing with probability, a bull call spread in a bear market is not a high probability play. In an extremely bullish market, or if a stock is setup to breakout through a resistance point, then a better play would be to use a straight call option as you would want to take advantage of those trade setups.

Bull-Call Spread Example

Let’s assume that you have identified that the markets are trending bullish, and the underlying stock, company XYZ, is also trending moderately bullish. You decide to execute a bull call spread. Company XYZ is trading at $32, and in order to execute a bull call spread play, you need to buy the lower strike price and sell the higher strike price. In this example:

You buy the AUG 30 Call for 300 (equal number of contracts for both sides)
You sell the AUG 35 Call for 100 (the sell side of the spread is always at a higher strike price than the buy side)

In this example, the net investment required would be $200. If on expiration day, the stock climbs to $37, then your AUG 30 call now has an intrinsic value of $700, while the AUG 35 call you sold has an intrinsic value of $200. The $500 difference minus the initial investment of $200 leaves you with a $300 profit.

If you are completely wrong on your trade, and the stock falls below $30, then both options will expire, worthless. Your maximum risk in this instance is the $200 that you initially invested to execute the trade. The upside and downside risk for any bull call spread trade can be expressed in the following formulas:

Maximum Profit Formula:
• Max Profit = Strike Price of Short Call - Strike Price of Long Call - Net Premium Paid - Commissions Paid

Maximum loss formula:
• Max Loss = Net Premium Paid + Commissions Paid

Different Strike Prices

Choosing what strike prices to use is a matter of personal preference, and usually is directly associated with your risk tolerance. In the example above, you buy the AUG 30 call on a stock that was at $32 and trending upward. You could just as easily:

Buy the AUG 35 Call for 120
Sell the AUG 40 Call for 40

Or you could also:

Buy the AUG 30 Call for 300
Sell the AUG 40 Call for 40

The only fundamental difference in any of these approaches is the amount of potential loss and profit that are available in each trade. There is no right answer, but as a general rule, a trader should purchase a strike price high enough to create a decent upside profit potential. Choosing the expiration month is also an important consideration that there is no universal answer to. In order to minimize the effects of time decay, a trader may consider buying a spread at least six months before expiration. This gives a trader time to be correct in their technical analysis.

Adjusting a Straight Call Spread

Straight calls and puts can be converted into spread plays at any time during the course of a trade. Let’s assume that a stock you had on your watchlist has been approaching its resistance point of $30 for some time. The stock then breaks out of the $30 resistance point, and makes a steady climb up toward $38. Your analysis of the chart indicates that you are still moderately bullish on the stock, but you feel that the chart indicates that you have captured a large portion of the breakout.

You can always close out of your position and take your profits, but there still appears to be bullish growth. You can convert this into a bull call spread simply by selling the corresponding higher strike price. You already own the $30 call, and by simply selling a higher strike price (in this example, the 40 or 45 would be reasonable options), you have created a bull call spread out of a straight call position. Options are amazing instruments for this reason.

The more option strategies you have at your disposal, the better equipped you will be to handle the numerous situations you will encounter as a trader. Next month, we will continue to explore option strategies by discussing the married put and the covered call.


]]> Do What You Love and Success Will Follow tag:www.richdadeducationblog.com,2011://1.272 2011-10-17T13:43:11Z 2011-10-17T13:47:16Z Earlier this month, iconic Oakland Raider owner Al Davis passed away. Football fans around the world owe a debt of gratitude to Al Davis, as the professional game we now enjoy achieved its success due in no small part to... Administrator Earlier this month, iconic Oakland Raider owner Al Davis passed away. Football fans around the world owe a debt of gratitude to Al Davis, as the professional game we now enjoy achieved its success due in no small part to Mr. Davis’ work. Professional football lost a legend this month, and a personality that will never be replaced.

Al Davis spent his entire life doing what he loved. Upon graduation from college, he started coaching at Adelphi College, and spent the next sixty years involved in football. He is the only person to ever serve in professional football as a scout, personnel assistant, assistant coach, head coach, general manager, commissioner, and team owner. He was rewarded for his lifetime of service with induction to the Pro Football Hall of Fame in 1992.

]]> In recent weeks, many media and football greats have taken the time to comment on the life of Al Davis. One constant in all of the tributes was Al Davis’ passion for football. Mr. Davis was not some dot com billionaire or oil tycoon who bought a team. He started as a simple coach at a college few people have heard of, and, at the time of his death, was the principle owner for the Oakland Raiders. He achieved this success because of his work ethic, vision, intelligence, and the fact that he loved what he did. The Oakland Raiders are estimated to be worth close to $1 billion. This financial wealth was quite literally a by-product, not the goal, for Al Davis. This is something that we can never forget.

Commitment to Excellence

The phrase commitment to excellence seems like a modern creation of corporate America. The phrase was actually coined by Al Davis, and has been used as a rallying cry for Oakland Raider fans, or better known as Raider Nation, ever since. I guess it shouldn’t be surprising that such a phrase was created by someone who loved what they did. If you have a passion for what you do, then it would seem natural to want to achieve as close to perfection as possible. As another famous football icon Vince Lombardi said, “Perfection is not attainable, but if we chase perfection, we can catch excellence.”

A commitment to excellence is a powerful slogan. But what does it take to incorporate this into our daily lives? Let’s define the two words:

Commitment: an obligation, promise, etc., that restricts one’s freedom action.

Excellence: the state of quality of excelling or being exceptionally good.

Incorporating the slogan commitment to excellence in your daily life is a pledge to hold yourself to the highest standards possible, and to expect the best from yourself every day. Living this commitment means the bare minimum is not good enough. In trading the financial markets, you may have gauged past success on how much money you made. A commitment to excellence dictates that you become the absolute best you can be as a trader. If you excel at trading, then the money will follow naturally. The same holds true in real estate and other entrepreneurial activities. You judge yourself by the quality of your ability, and not the end result. Financial reward will naturally follow these activities if you excel at what you do, but it is not the primary objective.

There is a second part to the definition of commitment, the part that “restricts one’s freedom of action.” If you are truly committed to excellence, then dedication and sacrifice are required. Dedication and sacrifice seem like ominous words when describing activities that we truly don’t enjoy. In real estate, if you don’t enjoy making offers or evaluating properties, or don’t love dealing with people, then three things are likely to happen:

1) You are unlikely to spend that extra time, thoughts, and energy necessary to raise your expertise level from mediocre, to average, to good, to excellent.
2) Your happiness and enjoyment level will be low, and you will constantly be tempted by activities outside of your “chosen” field that will draw your time.
3) You have a lower chance of being successful than someone in your field who loves what they do.

The same principles apply to any field. Those that love what they do have such an easier path to excellence than those that engage in activities they don’t enjoy. Time is precious, both in life and in business, and it seems so obvious that we should follow what we love.

The Video Game Principle

Many years ago, Gary Larson drew one of his Far Side comics of two parents watching their son playing video games. Above their heads were thought bubbles with dreams of classified ads that listed high-paying video game testing jobs for their young son. The cartoon was meant as a comical look at kids who apparently had no discernable skills outside of playing video games and a world where that actually never exists.

Let’s assume that the parents in this cartoon worried that their son had shown no interest in anything outside video games. Well, video game design is not only a high-paying job, but also a growth industry. Take it one step further, they could encourage their son to create his own game or his own gaming company. Or perhaps they could identify the attributes about games that draw their son, and point out similar careers. Is it the constant motion, the analytic skills required, or the constant evaluation of moving parts? Sounds like a stock trader to me.

Doing what you love does not give you a license to never leave your basement and play video games the rest of your life. However, never be afraid to think outside the box in determining what you want to pursue in life. Never limit those around you either, as it probably seemed silly in early 1950 for a graduate of college to say that he wanted to go coach football the rest of his life. I doubt few people around him gave him a chance to own a billion dollar franchise one day.

I am not an Oakland Raiders fan, but I will miss Al Davis. He was a rebel, a creative thinker, and a true visionary. He will serve as an inspirational force in people’s lives for years to come. There are two quotes that I have looked at every day since he passed: “You don’t adjust, you just dominate,” and, “Just win, baby.” It is a whole lot easier to win and dominate when you do what you love.

]]> Lease Options tag:www.richdadeducationblog.com,2011://1.271 2011-09-22T12:36:40Z 2011-09-22T12:41:09Z For the last several months, this newsletter has discussed areas in real estate that are overlooked or underutilized. Too often, many novice real estate investors only utilize the buy-fix-sell model simply because it is comfortable and easy. The knowledge acquired... Administrator For the last several months, this newsletter has discussed areas in real estate that are overlooked or underutilized. Too often, many novice real estate investors only utilize the buy-fix-sell model simply because it is comfortable and easy. The knowledge acquired from buying homes, fixing them up, and successfully selling them provides invaluable real estate investing experience. This experience not only provides immediate profits, but benefits the investor no matter what strategy is later utilized. For many investors, however, this soon ends up feeling too much like a job rather than an investing career.

This feeling is understandable, since the buy-fix-sell model prevents an investor from generating the cash flow necessary to escape the rat race. There is no true wealth-generation in this model, and no real assets are accumulated. While financial necessity or lack of experience may force the utilization of this model, many real estate investors begin to seek other alternatives or exit strategies.

]]> A natural area that many investors turn to is the landlord investment strategy. This fulfills the financial principles of cash flow, and can be an excellent strategy for many investors. Some investors, through time or lifestyle constraints, do not want to put in the property maintenance and management work that is required of a landlord. When investors in these situations learn of lease options, they often never look back.

Lease Options

Conceptually, lease options are extremely simple to understand—there are abundant examples throughout society. Normally, when one leases something, they are simply giving the right of possession to another for a specified period of time (term) and for a specified consideration (rent). This occurs in high frequency in the car industry. If you lease your car, then you simply get the car for X amount of months for X monthly payment. Oftentimes, you are given an option when you lease your car to buy it after the agreed upon period of time expires. You have the option to buy the car, but do not have the obligation to do so. After the lease expires, you can simply return the car if you so desire.

Fundamentally, the lease option for real estate works in a similar manner. As the owner of the property (the lessor), you will be leasing your properties to individuals (lessees). This gives the option to purchase the property after an agreed upon timeframe. The lessee must pay something for this option consideration, which typically comes in the form of an upfront lump sum payment or a partially prorated amount spread over the course of the lease.

This option consideration is one of the key features of the lease option. Aside from the initial cash that the option consideration generates, it also helps you, as the investor, weed out those who might have an owner mentality from those that have a rental mentality. Those with an owner mentality will generally be more responsible and genuinely treat the property as if it were their own, as it very well might be. This can eliminate many of the headaches associated with traditional rentals. Never underestimate the mentality of ownership in how an individual treats your property. If someone does not live up to their end of a properly worded lease agreement, you can evict them and keep the cash deposit they gave for their option consideration to help pay for the repairs (which is typically more than a rental deposit). While this instance is rare, it is yet another advantage of the lease option.

There may be times that the tenant does not exercise their option. In this scenario, one of the advantages of the lease option is that you have not been hurt. You received a large payment for the option consideration, and received monthly payments that generated cash flow and helped pay down any potential principal on a loan. Now you can simply start the process all over again.

Amount of Option Consideration and Length of Lease

There are no set rules for how large the amount of the option consideration should be or the length the lease should be. One to three percent of the sell price is normal practice, but varies according to the finances of the tenant and your own motivation to make the deal. Lease terms also vary in length, as many prospective buyers may need two to three years to iron out their credit issues. As a general rule, the shorter the lease, the less risk to you as the seller.

Finding and Interacting with Buyers

The targeted buyers for lease options are often individuals who desire to be homeowners who have bad credit or lack the means to obtain traditional financing. Finding these buyers can be done through traditional marketing means such as online ads, newspaper ads, or signs. Flyers at apartment complexes, Realtors, model home sales people, or mortgage brokers are other possible lead sources. High impact phrases such as “No Bank Qualifying,” or “Why rent when you can own,” should attract many buyers, especially in today’s tightening credit market. Setting up a website is easier to do than ever before, and can serve as a place to highlight your properties and discuss the advantages that lease options can provide prospective homebuyers.

There are many advantages to highlight in your advertising, on your website, or with prospective homebuyers in person. Among these is the ability to start living in their home now while working on credit issues during the one, two, or three-year term that was agreed upon in the lease option. This time period could also demonstrate responsible homeownership through timely payments and upkeep of the property. There is also the opportunity to put smaller down payments than their credit might allow through traditional financing means. In addition, they can lock in their price for the existence of the lease. If the market crashes, they are under no obligation to purchase the property. On the other hand, if the market soars, they can buy the property at the agreed upon price. In today’s market conditions, this can be a major selling point for many prospective buyers.

For many, real estate investors who learn about lease options never use another strategy. Many others simply use it as one additional exit strategy in their real estate investment strategy book. No matter what type of real estate investor you eventually become, having multiple exit strategies at your disposal can greatly aid your overall success as an investor.

]]> A Beginners Guide to Options tag:www.richdadeducationblog.com,2011://1.270 2011-09-22T12:33:58Z 2011-09-22T12:35:56Z In 1973, the Chicago Board of Trade (CBOT) opened the Chicago Board Options Exchange (CBOE), and the modern era of options trading began. Since its inception, options trading has exploded in popularity. In recent years, billions of options contracts have... Administrator In 1973, the Chicago Board of Trade (CBOT) opened the Chicago Board Options Exchange (CBOE), and the modern era of options trading began. Since its inception, options trading has exploded in popularity. In recent years, billions of options contracts have been cleared annually. As more and more investors seek to control their own financial future, options become one of the first investment vehicles that new investors investigate.

If the incredible popularity of options had to be summed up in one word, it would have to be leverage. For an example of leverage, let’s assume that you have $2,000 to invest. You are interested in purchasing shares in company XYZ that is currently trading at $50. If you were to simply buy shares of stock, then you would only be able to purchase 40 shares. However, let’s assume that the $50 strike price call options are going for $2. With options leverage, you could buy 10 contracts (each contract equals 100 shares) at $2 per share, and control 1,000 shares. The power of leverage and options in this scenario would allow you to control 25 times more stock for the same investment.

]]> Owning 25 times more stock for the same investment offers much higher returns on investment than simply purchasing the stock, which is the natural appeal of options. One must always remember, however, that leverage cuts both ways. While there is higher profit potential, there is also a much higher loss potential with options investing. For this reason, it is strongly advised that you gain experience through virtual trading before you make any live trades.

Technical Matters

The same rules that apply to purchasing stock apply to the purchasing of option contracts. The ability to understand technical analysis—such as trends, support and resistance, candlesticks, and general chart reading—is essential before entering the world of options. Remember, you are not guessing or gambling; you are basing your trades on the expected probability of a stock behaving in a certain manner based on the history of the chart. The options world can be extremely profitable to those adept at technical analysis, and brutally cruel to those who are simply in it for the action. Technical analysis is the foundation of Rich Dad’s Financial Market education. If you want to know more, contact a customer service representative to see what program might best serve you.

Option Strategies

In the coming months, this Rich Dad newsletter will discuss many specific option strategies that may appeal to your investment style. There are aggressive strategies that try to capture potential large movements in stock prices, and numerous conservative strategies that allow for constant cash flow. Undoubtedly, there will be a strategy discussed that appeals to your level of risk tolerance. Before any of these strategies can be initiated, one must understand the fundamentals of the option world. The following simplified example uses some the essential terms and concepts of option trading to understand, before looking into specific option strategies.


Oscar the Options Trader

Oscar is extremely bullish on company XYZ. The company has been trending upward for months, and has hit resistance at the $50 level twice in the last week; a breakout pattern appears to be occurring. Oscar’s analysis of the chart shows that once the stock breaks the resistance of this $50 barrier, there could be significant movement upward. Of course, as a disciplined technical trader, he waits for his trigger (i.e., the moment the stock goes above 50) to enter the position.

Oscar decides to use a call option as his means to invest. Call options can be used when one expects a stock to rise higher, and gives the contract buyer the option of buying the stock in the future at a set price before the contract expires. Oscar is not forced to buy anything in the future; he simply has the right to do so if he so desires.

Oscar has two decisions to make when he buys the call option. First, he must select the expiration month—the point in which the options contract will expire. There will be several months to choose from, but the option expiration date for each month is the Saturday following the third Friday of each month. Thus, the third Friday of the month is the last trading day for all expiring equity options. This day is known as expiration Friday. It is one week before the current expiration Friday and based on his technical analysis, Oscar chooses an expiration date two months away. It is important to remember that after the options expiration date, the contract will cease to exist.

The second decision Oscar has to make is to pick a strike price. For our call option example, the strike price is simply the price where the stock can be bought up to the expiration date. There are normally many choices of strike prices that can vary and $1, $2.50 and $5 increments. For example a $50 dollar stock is likely to have strike prices at $47, $48, $49, $50, $52.50, $55, etc. The strike price you choose should be based on your technical analysis done on the underlying stock in combination with the expiration date that you have chosen.

The premium you pay for this options contract will be determined by numerous factors including the strike price chosen, the expiration date, and other factors such as volatility and interest rates. For example, in last month’s article, the VIX was discussed, and how, during recent sessions, the VIX hit a 52-week high. During these times, your options contracts are going to be more expensive than during times where there is a low amount of volatility.

Back to our example, based on his technical analysis done, Oscar picks a strike price of $55 with an expiration date that is a little over two months away. If he is right on his breakout, and the stock rises in the coming days and weeks, then Oscar stands to make a tidy return, as the value of his options contract will rise in value. Conversely, if the stock stays stagnate, then the options contract will start to lose value through time decay. If the stock starts to go down, then the options contract will start to lose value.

One of the most exciting things about options trading is the wide variety of options Oscar has to manage his trade once he begins. What starts off as a simple call options can evolve into numerous other strategies that help mitigate risk or secure profits based on additional information with each passing day. The wide variety of strategies available make options an exciting world worth exploring. Next month’s article will begin exploring these strategies, with ways to manage a call option trade that performs better or worse than expected.

]]> If at First You Don’t Succeed… tag:www.richdadeducationblog.com,2011://1.268 2011-09-22T12:30:03Z 2011-09-22T12:32:31Z Michael Jordan was cut from his high school basketball team. No matter how many times you read that sentence, it still is amazing. The man who would go on to win six championships, five MVP awards, ten scoring titles, and... Administrator Michael Jordan was cut from his high school basketball team. No matter how many times you read that sentence, it still is amazing. The man who would go on to win six championships, five MVP awards, ten scoring titles, and be named by ESPN as the greatest North American athlete of the 20th century, did not even make his high school basketball team his sophomore year. He was deemed too short to play at that level.

Being cut from an amateur athletic team produces a variety of responses in young men and women—for Jordan, he used it as motivation. He trained vigorously, set his goals high, and the rest is history. He never let go of the motivating influence of being cut from the team, as was illustrated many years later during his Hall of Fame induction speech. Jordan unceremoniously chided the high school basketball coach who had cut him. That act might have been petty, but it was obvious that the motivation created from being cut had long survived.

]]> Michael Jordan is far from the lone example of people who failed only to eventually succeed. As previously mentioned, Jordan was named the greatest North American athlete of the 20th century by ESPN, which is owned by the Walt Disney Company. The man who founded this company, Walt Disney, did not immediately find success. In fact, Disney had wanted to become a newspaper artist, but was fired from his first newspaper job because his boss felt that he lacked imagination, and did not have any good ideas.

Disney personified the entrepreneurial spirit from a young age, and did not let this early firing stop him. He decided to launch early businesses based on animation, only to have those businesses fail and put him into bankruptcy. At this point, Walt Disney had been fired, had failed at business, could barely pay rent, and had no money for food. So what did he decide to do? Move to Hollywood, and start a new business. At every point of failure, his dream became larger and larger. It was almost as if failure fueled the size of his dream. Generations of children and adults alike have been the beneficiaries of this perseverance.

Disney might have taken a different path without the technology available to him at the time. This technology was the result of relentless dedication of tireless inventors such as Thomas Edison. Thomas Edison is credited with developing the phonograph, the motion picture camera, and, of course, the incandescent light bulb. These are just some of his better known inventions, as his prolific inventing career ended up with 1,093 U.S. patents in his name. He also founded 14 companies—one of which is General Electric, one of the largest companies in the world.

Edison’s eventual success must have shocked his early teacher, who had told Edison that he was too stupid to learn anything. Edison also lost early jobs for lack of productivity. Edison never gave up on his passion and dreams, and he literally changed the world because of his perseverance.

Jordan, Disney, and Edison are far from alone as examples of individuals who went on to greatness after initial turmoil, setbacks, and failure. Here are a few more examples:

JK Rowling – Fired as a secretary. Went on to pursue her dream to be a writer and created the Harry Potter series.

Mark Cuban – The colorful owner of the Dallas Mavericks was fired as a salesman at a computer store. Never worked for anyone ever again and has amassed a billion-dollar empire.

Elvis Presley – Performed at the Grand Ole Opry once early in his career only to be told by the manager that he had no chance of success and ought to go back to his truck-driving job. Presley went on to become The King and one of the bestselling artists of all time.

Stephen King – His first book, Carrie, received numerous rejections.

Steven Spielberg – Rejected from the University of Southern California School of Theatre, Film, and Television multiple times.

Oprah Winfrey – Fired from her job as a television reporter because she was “unfit for TV.”


These are just a few of the names that went on to great success after initial failures and setbacks. While serving as a wonderful source of inspiration, it also makes you wonder what great art, books, inventions, songs, businesses, and technology is not available today because the journey was too hard or the criticism too much for those that housed the inspiration.

Thomas Edison was told as a child he was too stupid to learn anything, and Walt Disney was told he lacked imagination and good ideas. Thankfully, they possessed the inner strength and passion for their ideas to not let these criticisms stop them. It is amazing how much criticism we can face when we let the world know what our dreams are, even from those closest to us. Remembering famous examples of individuals that fought through their own critics should help us as we face those that do not understand, are jealous, or do not support the dreams you want to achieve.

Your Life and Your Dreams

There is a wonderful quote from Robert Kiyosaki that summarizes why those successful people in this article went onto their success: “The size of your success is measured by the strength of your desire, the size of your dream, and how you handle disappointment along the way.” Each of these famous people achieved tremendous success because they were passionate about what they did, had vision, and overcame the disappointment they encountered.

The recipe for success is no different for us than for Oprah Winfrey, Michael Jordan, Thomas Edison, or Walt Disney. Find something that you are passionate about, something that you truly desire to achieve. Dream big and eliminate the word “unrealistic” from your vocabulary. Be prepared for the setbacks that are likely to occur along the way, as how you handle them can very well be the difference between achieving your dreams and wondering what could have been many years from now.

We have wonderful and inspirational examples all around us. Use them as a source of motivation as you start your days in the coming month, and who knows? Maybe someday, someone will be using you as an example of motivation along with the likes of Elvis and Edison.

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