basic cash flow - amazon s3 › 4pillars › manuals › pillar3... · cash flow strategies online...

BASIC CASH FLOW

CASH FLOW STRATEGIES ONLINE TRAINING PROGRAM

- THE DIFFERENCE BETWEEN PUTTING ON POSITIONS FOR CAPITAL GAINS AND CASH FLOW

- YOU WILL INTRODUCED TO STRATEGIES FOR THE MARKET GOING UP, DOWN, AND SIDEWAYS

- USE YOUR COMPUTER TO BUY AND SELL WHILE YOU ARE AWAY DOING WHAT YOU ENJOY

- YOU WILL LEARN CASH FLOW VOCABULARY ESSENTIALS

- YOU WILL DISCOVER A FAVORITE WARREN BUFFETT STRATEGY

- YOU WILL LEARN IMPORTANT CASH FLOW CRITERIA

IMPORTANT DISCLAIMER INFORMATIONTANNER TRAINING LLC IS PROVIDING THIS TRAINING AND ANY RELATED MATERIALS (INCLUDING NEWSLETTERS, BLOG POSTS AND OTHER COMMUNICATIONS) FOR EDUCATIONAL PURPOSES ONLY. WE ARE NOT PROVIDING LEGAL, ACCOUNTING, OR FINANCIAL ADVISORY SERVICES, AND THIS IS NOT A SOLICITATION OR RECOMMENDATION TO BUY OR SELL ANY STOCKS, OPTIONS, OR OTHER FINANCIAL INSTRUMENTS OR INVESTMENTS. EXAMPLES THAT ADDRESS SPECIFIC ASSETS, STOCKS, OPTIONS OR TRANSACTIONS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND MAY NOT REPRESENT SPECIFIC TRADES OR TRANSACTIONS THAT WE HAVE CONDUCTED. IN FACT, WE MAY USE EXAMPLES THAT ARE DIFFERENT OR THE OPPOSITE OF TRANSACTIONS WE HAVE CONDUCTED OR POSITIONS WE HOLD. THIS TRAINING IS ALSO NOT INTENDED AS A SOLICITATION FOR ANY FUTURE RELATIONSHIP, BUSINESS OR OTHERWISE, BETWEEN THE STUDENTS OR PARTICIPANTS AND THE TRAINER. NO EXPRESS OR IMPLIED WARRANTIES ARE BEING MADE WITH RESPECT TO THESE SERVICES AND PRODUCTS.

ALL INVESTING AND TRADING IN THE SECURITIES MARKETS INVOLVES RISK. ANY DECISION TO PLACE TRADES IN THE FINANCIAL MARKETS, INCLUDING TRADING IN STOCK OR OPTIONS, IS A PERSONAL DECISION THAT SHOULD ONLY BE MADE AFTER THOROUGH RESEARCH, INCLUDING A PERSONAL RISK AND FINANCIAL ASSESSMENT, AND THE ENGAGEMENT OF PROFESSIONAL ASSISTANCE TO THE EXTENT YOU BELIEVE NECESSARY.

ANDY’S EDUCATION CONTINUUMTM

PHASE 0

401 K MUTUAL FUNDS

HANDS OFF

LITTLE OR NO FINANCIAL EDUCATION

PHASE 2

ADVANCED CLASSESSELECT YOUR STYLE

SPECIFIC RULES DETAILS

SELECT YOUR STYLE

PHASE 1

BASIC CLASSES

STRATEGIESVOCABULARY

CONTEXT CLASSES

PHASE 3

MENTORMARKET LABS

EXPERIENCEPRACTICE INCOME!

MARKET LABS

IGNORANCE COMPETENCEAWARENESS PROFICIENCY

FUNDAMENTALANALYSIS

TECHNICALANALYSIS

CASH FLOW RISK MANAGEMENT

STRENGTH OF AN ENTITY STRENGTH OF A MARKET EARN UP, DOWN, SIDEWAYS EXPECT THE UNEXPECTED

FOUR PILLARS OF INVESTING

WHAT ARE YOU GOALS?

CAPITAL GAIN(FLIP THE HOUSE FOR PROFIT)

CASH FLOW(RENT THE HOUSE FOR INCOME)

HEDGE(BUY INSURANCE FOR PROTECTION)

BEFORE YOU INVEST

CAPITAL GAIN(FLIP THE HOUSE FOR PROFIT)

I

E

LA

NET WORTH

NET WORTH


CASH FLOW

CASH FLOW

RENTI

E

LA

INSURANCE

HEDGE(BUY INSURANCE FOR PROTECTION)

PROTECT ASSETS

I

E

LA

CAPITAL GAIN(BUY LOW SELL HIGH)

AMCE CO.STOCK

100 SHARES NET WORTH

NET WORTH

I

E

LA

DIVIDEND

CASH FLOWCOLLECT A DIVIDEND FOR INCOME

CASH FLOW

AMCE CO.STOCK

100 SHARES

CASH FLOW

I

E

LA

I

E

LA

INSURANCE

HEDGEBUY A OPTION TO HEDGE RISK)

AMCE CO.PUT OPTION

100 SHARES

PROTECT ASSETS

LA

I

BUILDING FINANCIAL INDEPENDENCE

$15,000/MONTH

$10,000/MONTH PASSIVE INCOME > EXPENSES

= FINANCIAL INDEPENDENCE

E

LA

I

E

LA

I

E

CASH FLOW AND NET WORTH

$1,000,000

$15,000/MONTH

$10,000/MONTH

CHARITY

LEISURE

TRAVEL

SET YOUR GOALS

$1,000,000FAMILY TIME

LA

I $15,000/MONTH

$10,000/MONTH

E

C) LIKELY

EDUCATED INVESTOR, POWER TEAM,

DILIGENT EFFORT

A) IMPOSSIBLE

THE THREE WISHES PLAN, COMPLETE WITH A

GENIE!

B) HOPEFUL

THE LOTTERY, 401(K) PLAN, OR

SWEEPSTAKES

WHAT IS THE STATUS OF YOUR CURRENT PLAN?

WARNING SIGNS

DECADE OF NOTHING

WARNING SIGNS

WHAT IS BILLIONS IN FEES LIKELY TO GET YOU?

MIMICKING THE MARKET

PLANS THAT MIMIC THE MARKET

S&P 500 401(K)

1200 $120,000

2011 AGE 50

$1,200,00012,000

WHAT ARE THE CHANCES?

A) IMPOSSIBLE

B) HOPEFUL

C) LIKELY

RISK IS RELATED TO CONTROL

ARE YOU HOPING...

...OR BUILDING?

NO CONTROL

FUNDAMENTALANALYSIS

TECHNICALANALYSIS


CONTROLWE CAN’T CHOSE WHAT THE DATA SAYS WE CAN CHOOSE HOW TO HARVEST IT

UPWARD MOVEMENT DOWNWARD MOVEMENT TIME MOVEMENT

ALWAYS OPPORTUNITIES FOR INCOME

UPWARD MOVEMENT


BUY STOCK

“LONG” MEANS YOU BUY IT, AND OWN IT

STOCK

90

100

120

110

130

80

ENTRY

TARGET

TARGET

ENTRYENTER WHEN THE STOCK FITS YOUR CRITERIA

SET A TARGET THAT IS LIKELY TO BE ACHIEVED

5 BASIC POINTS TO IDENTIFY

YOUR ASSETS MUST DO WHAT YOU EXPECT - OR ELSE!

BUSINESS REAL ESTATE STOCKS

WHAT CONTROL DO YOU HAVE IF YOUR EMPLOYEE IS

SLEEPING ON THE JOB?

TERMINATE

WHAT CONTROL DO YOU HAVE IF YOUR TENANT

REFUSES TO PAY THE RENT?

EVICT

WHAT CONTROL DO YOU HAVE IF THE STOCK DOES

NOT PERFORM?

SELL

90

100

120

110

130

80

ENTRY

TARGET

EXIT

EXIT

TARGET

ENTRYENTER WHEN THE STOCK FITS YOUR CRITERIA

SET A TARGET THAT IS LIKELY TO BE ACHIEVED

PLAN YOUR EXIT POINT, BEFORE YOU ENTER THE POSITION

REWARDTHE REWARD IS THE DISTANCE BETWEEN THE ENTRY AND THE TARGET

RISK THE RISK IS THE DISTANCE BETWEEN THE ENTRY AND THE EXIT

5 BASIC POINTS TO IDENTIFY

REWARD TO RISK RATIO

REWARD = $20 RISK= $10

HOW ABOUT STOCK GOING DOWN?


SHORT STOCK

“SHORT” MEANS YOU BORROW AND SELL IT

STOCK

DOWNWARD MOVEMENT

SHORTING CONCEPT MADE SIMPLE

SELL IT ON EBAY FOR $500

LET THE PRICE DROP

BUY IT BACK FOR $300

GIVE YOUR BOSS HIS PHONE

$500

$300

WHAT IS LIKELY ?

BARROW YOUR BOSS'S PHONE


BARROW YOUR BROKER’S STOCK

SELL IT ON NYSE FOR $500

LET THE PRICE DROP

BUY IT BACK FOR $300

GIVE YOUR BROKER HIS STOCK

$500

$300

WHAT IS LIKELY ?ACME

1 SHARE


MON WED FRI

$20

$40

BUY

SELL

SOLD AT $40BOUGHT AT $20

PROFIT OF $20

LONG

SOLD AT $40BOUGHT AT $20

PROFIT OF $20

SHORT

MON WED FRI

$20

$40

BUY

SELL

ACME

1 SHAREACME

1 SHARE

LONG OR SHORT - SAME POINTS TO IDENTIFY

LONG

SHORT

ADJUST THE EXIT

90

100

120

110

130

80

EXIT

90

100

120

110

130

80

ENTRY

TARGET

EXIT

WHY DON’T BROKER JUST DO ALL THIS FOR ME?GOOD QUESTION.

INCENTIVES TO “INCREASE ASSETS UNDER MANAGEMENT”

1,000 CLIENTS

1000 DIFFERENCE GOALS

1,000 AGES

1,000 DIFFERENT INCOMES

1000 DIFFERENT RISK TOLERANCES

IF EACH HAS 10 STOCKS, 10,000 STOCKS POSITIONS TO TRACK

WHERE DO YOU WANT TO GO?CHOICE A

CURTAIL YOUR GOALS TO FIT A STRATEGY

WORK LONGER,LIVE CHEAPER,

LEAVE LESS

CHOICE B

LEARN STRATEGIES TO FIT YOUR GOALS

HOW CAN YOU GET THERE?

WHATS THE RISK?

TWO QUESTIONS:

WHAT VEHICLE? WHO IS DRIVING?

AWARENESS +COMPETENCY+PROFICIENCY

= LESS RISK

RATE OF RETURN

INITIAL INVESTMENT$100

FINAL INVESTMENT$110 -


FINAL INVESTMENT - INITIAL INVESTMENTINITIAL INVESTMENT

= RATE OF RETURN10%

INFINITE RETURN


FINAL INVESTMENT$100 -


FINAL INVESTMENT - INITIAL INVESTMENTINITIAL INVESTMENT

= RATE OF RETURN(INFINITE)

INITIAL INVESTMENT

$LOTS OF MONEY$ $NO MONEY$

MJ SPECIAL! $5,000

HAS THECHOICE

MAKES APROMISE

SUIT $1,000

LAY- AWAY

BUYS THE CONTRACT

STRATEGY COMPARISON$LOTS OF MONEY$ $NO MONEY$

BUY THE SUIT FOR $1,000

SELL FOR $5,000

PROFIT $4,000

400%RETURN

LAYAWAY FOR $0

SELL AGREEMENT $4,000

PROFIT $4,000

INFINITE RETURN

STOCKS AND CALL OPTIONS

100 SHARES @ $50 $5,000 AT RISK

1 OPTION @ $3 $300 AT RISK

SELL 100 SHARES AT $100 FOR $10,000

PRICE IS $100 BUT YOU CAN BUY AT $50

RISK WAS $5,000 RISK WAS $300

REWARD WAS $5,000 REWARD WAS $4,700

LEVERAGE : 100 SHARES / CONTRACT

STOCK OPTION(OWN SHARES OF THE COMPANY) (CHOICE TO BUY AT SET PRICE)

$100

$50

MAXIMUM RISK = PREMIUM PAID!

STRATEGY COMPARISON$LOTS OF MONEY$ $LESS MONEY$

BUY THE STOCK FOR $5,000

SELL FOR $10,000

PROFIT $5,000

100%RETURN

BUY THE OPTION FOR $300


PROFIT $4,700

1500% RETURN

CALL OPTIONS“AN OPTION IS AN AGREEMENT”

MAKES APROMISE

HAS A CHOICE TO BUY STOCK

EXPIRATION DATE!


EXPIRATION DATE!

OPTION CHAINSTRIKE PRICE@ $25.00

BUY @ $25SELL @ $25.51

PROFIT = .51

INTRINSICVALUE

OPTION PREMIUM = $1.50 SO WHAT IS THE OTHER .99 FOR?

TIME VALUE

=.99

= .51

INTRINSICVALUE = .51

ANYONE

CAN BUY

ONLY YO

U

CAN BUY

STOCK PRICE$25.51

$21.70CALL OPTION PREMIUM TIME VALUE

$.60INTRINSIC VALUE

$21.10 $71.10STOCK IS...

$50BUY YOU CAN BUY FOR...


BUY THE STOCK FOR $52,000

SELL FOR $71,100

PROFIT $19,100

36%RETURN

BUY THE OPTION FOR $5,800


PROFIT $15,900

274% RETURN


MAKES APROMISE

HAS A CHOICETO BUY STOCK

STRIKE PRICE (AGREED PRICE TO BUY OR SELL STOCK)

PREMIUM(AMOUNT PAID FOR TIME AND VALUE OF OPTION)

EXPIRATION DATE(DAY THE AGREEMENT EXPIRES)

CALL OPTIONS EXAMPLES

MAKES APROMISE

$24.15

$24.15 FOR THE CHOICETO BUY APPLE @ $380BEFORE EXP: OCT 2011

SHORTING STOCK AND PUT OPTIONS

SELL100 SHARES @ $100 $10,000

(INFINITE AMOUNT AT RISK)

1 OPTION @ $3 $300 AT RISK

BUY 100 SHARES AT $50 FOR $5,000

PRICE IS $50 BUT YOU CAN SELL AT $100

RISK WAS INFINITE RISK WAS $300

REWARD WAS $5,000 REWARD WAS $4,700

LEVERAGE : 100 SHARES / CONTRACT

STOCK OPTION(SHORT SHARES OF THE COMPANY) (CHOICE TO SELL AT SET PRICE)

$100

$50

MAXIMUM RISK = PREMIUM PAID!


SHORT THE STOCK FOR $10,000

BUY FOR $5,000

PROFIT $5,000

50%RETURN

BUY THE OPTION FOR $300


PROFIT $4,700

1500% RETURN

PUT OPTIONS EXAMPLE

$1.71

FOR THE CHOICETO SELL PG @ $62.50BEFORE EXP SEPT 2011

MAKES APROMISE

UPWARD MOVEMENT DOWNWARD MOVEMENT TIME MOVEMENT


TIME DECAY“A LANDLORD AND TENANT MAKE

AN AGREEMENT”

PROMISES HE CAN LIVE IN THE

HOUSEBUYS TIME THE PERSON THAT BUYS THE

LEASE SPENDS MONEYTHE PERSON THAT SELLS

THE LEASE RECEIVES INCOME

RENT IS A EXPENSE

I

E

A L

LEASE AGREEMENT

RENT IS INCOMEI

E

A L

LEASE AGREEMENT

OPTIONS HAVE TIME DECAY

2 MO EXP3 MO 1 MO

$P

REMIUM

2 MO EXP3 MO 1 MO

OPTIONS HAVE TIME DECAY

$P

REMIUM

MAKES APROMISE

HAS A CHOICE TO BUY STOCK

FOR A TIME

THE PERSON THAT PURCHASES THE OPTION

SPENDS MONEY

THE PERSON THAT SELLS THE OPTION RECEIVES

INCOME


EXPIRATION DATE!

CHOICE TO BUY

PREMIUM IS A EXPENSE

I

E

A L

PROMISE TO SELL

PREMIUM IS INCOMEI

E

A L

BEFORE YOU INVEST

I

E

A L- =

HOUSE285,000 215,000

MORTGAGE

PAYMENT $1,500

RENT $2,000CASH FLOW

$500

NET WORTH-$50,000

235,000


TWO SIDES OF EACH INVESTMENT

$300,000

$200,000

SPECULATION TIME DECAYRENT = $2,000

CAPITAL GAIN

HOUSE PAYMENT = $1,500

JAN FEB MAR APR MAY

$500 $500 $500 $500 $500

CASH-FLOW = $500

TWO SIDES TO THE INVESTMENTSPECULATION

CASH-FLOW

IYR

$30

$40

$50

$60

$70

JanFeb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb

JanFeb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb$1000

$2000

$3000

$4000

$5000

$6000

CASH FLOW IN A DOWN MARKET

A L

215,000

MORTGAGEHOUSE

$285,000

$235,000

I

E PAYMENT $1,500

RENT$2,000CASH FLOW

$500

NET WORTH$50,000


CASH FLOW IN A DOWN MARKET

A L

215,000

MORTGAGEHOUSE500 STOCK

$285,000$72,500

$235,000$61,500

I

E PAYMENT $1,500

RENT$2,000

SOLD OPTION$1,061CASH FLOW

$500$1,061 NET WORTH

$50,000$11,000

CASH FLOW(COLLECT A PREMIUM FROM SELLING AN OPTION)


SPY - EXCHANGE TRADED FUNDSPECULATION

CASH-FLOW

133138143148153158

128123

Jan Feb Mar Apr May Jun JulAug Sep Oct Nov Dec

$1,500

$3,000

$4,500

$6,000

$7,500

$9,000

Jan Feb Mar Apr May Jun JulAug Sep Oct Nov Dec

BUFFETT AND COCA-COLA PUT OPTIONS

MAKES APROMISE TO

BUY

HAS A CHOICE TO

SELL

CHOICE TO SELL

(INSURANCE)

PREMIUM IS A EXPENSE

I

E

A L

PROMISE TO BUY

PREMIUM IS INCOMEI

E

A L

Warren Buffett And Options

Written by Travis Morien

In April 1993, with Coca Cola stock hovering around $39 per share (before splits), Buffett valued the company and determined that he would be interested in buying some more shares if the price fell below $35.He wrote 5 million put options with a $35 strike price.If Coke stock fell below $35, the option takers would "put" their shares to him, Buffett would be forced to buy at $35. This was perfectly fine for Buffett because he wanted to buy at that price anyway. If Coke rose instead Buffett would be happy enough, he collected a $1.50 option premium ($7.5 million) even if the stock never fell to his target. Being a strict value investor he would not have been interested in buying Coke at more than $35 so therefore the fact that it went up without him buying it was perfectly fine by him.

STRIKE PRICE: $35

COKE PUT OPTION

STOCK PRICE: $39

PREMIUM: $1.50

5 MILLION PUTS


MAKES APROMISE TO

BUY

HAS A CHOICE TO

SELL @ $35

$1.50

Warren Buffett And Options

Written by Travis Morien

In April 1993, with Coca Cola stock hovering around $39 per share (before splits), Buffett valued the company and determined that he would be interested in buying some more shares if the price fell below $35.He wrote 5 million put options with a $35 strike price.If Coke stock fell below $35, the option takers would "put" their shares to him, Buffett would be forced to buy at $35. This was perfectly fine for Buffett because he wanted to buy at that price anyway. If Coke rose instead Buffett would be happy enough, he collected a $1.50 option premium ($7.5 million) even if the stock never fell to his target. Being a strict value investor he would not have been interested in buying Coke at more than $35 so therefore the fact that it went up without him buying it was perfectly fine by him.

STRIKE PRICE: $35

COKE PUT OPTION

STOCK PRICE: $39

PREMIUM: $1.50

5 MILLION PUTSPROMISE TO BUY @ $35

$7.5 MILLIONI

E

A


THREE SCENARIOS

STRIKE PRICE: $35

COKE PUT OPTION

STOCK PRICE: $39

PREMIUM: $1.50

5 MILLION PUTSPROMISE TO BUY @ $35

$7.5 MILLIONI

E

A

STOCK GOES UP:

STOCK STAYS THE SAME:

STOCK GOES DOWN:

OPTION EXPIRES, BUFFETT KEEPS HIS $7.5 MILLION

OPTION EXPIRES, BUFFETT KEEPS HIS $7.5 MILLION

OPTION GETS EXERCISED, BUFFETT KEEPS HIS $7.5 MILLIONBUYS COKE AT $35

WARREN BUFFETT AND DERIVATIVES

Buffett Scores With DerivativesBy KAREN RICHARDSON

Billionaire insurance salesman Warren Buffett has been selling more derivatives recently.

This year, Berkshire Hathaway Inc., the Omaha, Neb., holding company headed by Mr. Buffett, has collected premiums of about $2.5 billion from selling insurance on stock indexes and bonds in the form of derivative contracts, which guarantee payment to the buyer in the event of a specific loss in an underlying entity of the contracts.

PROMISES TO BUY STUFF

$2.5 BILLIONI

E

A

MAKES APROMISE TO

BUY

HAS A CHOICE TO

SELL

CASE STUDY: SMALL INVESTORS CAN SELL PUTS

$41,000

$41,000CASH

I

E

A L

WOULD I BE WILLING TO CONVERT MY CASH TO 1000 OZ SILVER?

$1,000 SLV

1,000SLV

I

E

A L

$41,000CASH

$41 STRIKE PUT SOLD FOR $990

I

E

A L

1000 SLV

SHARES

$38 STRIKE CALL SOLD FOR $530

I

E

A L

1000 SLV

SHARES

$38 STRIKE CALL SOLD FOR $495

I

E

A L

1000 SLV

SHARES

$41 STRIKE CALL SOLD FOR $1,463

I

E

A L

$42 STRIKE PUT SOLD FOR $800

I

E

A L

MAY JUNE JULY AUGUST SEPTEMBER

AVERAGE CASH FLOW = $855/MO AVERAGE CASH FLOW = 24% ANNUALIZED RETURN

$45,478CASH

CASE STUDY: SMALL INVESTORS CAN SELL PUTS

SUMMARYUPWARD MOVEMENT DOWNWARD MOVEMENT TIME MOVEMENT

BUY STOCK

BUY CALL OPTIONS

SELL STOCK

BUY PUT OPTIONS SELL PUT OPTIONS

SELL CALL OPTIONS

ANDY’S EDUCATION CONTINUUMTM

PHASE 0

401 K MUTUAL FUNDS

HANDS OFF

LITTLE OR NO FINANCIAL EDUCATION

PHASE 2

ADVANCED CLASSESSELECT YOUR STYLE

SPECIFIC RULES DETAILS

SELECT YOUR STYLE

PHASE 1

BASIC CLASSES

STRATEGIESVOCABULARY

CONTEXT CLASSES

PHASE 3

MENTORMARKET LABS

EXPERIENCEPRACTICE INCOME!

MARKET LABS

IGNORANCE COMPETENCEAWARENESS PROFICIENCY

FUNDAMENTALANALYSIS

TECHNICALANALYSIS


STRENGTH OF AN ENTITY STRENGTH OF A MARKET EARN UP, DOWN, SIDEWAYS EXPECT THE UNEXPECTED

FOUR PILLARS OF INVESTING

CONGRATULATIONS!YOU HAVE JUST COMPLETED

BASIC CASH FLOW

basic cash flow - amazon s3 › 4pillars › manuals › pillar3... · cash flow strategies online...

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