Foreign bonds are considered riskier than domestic bonds because of the unavoidable uncertainty due to exchange rate risk and country risk. The same is true for foreign and domestic common stocks. Such investments as art, antiques, coins, and stamps require heavy liquidity risk premiums. You should divide consideration of real estate investments between your personal home, on which you do not expect as high a return
because of nonmonetary factors, and commercial real estate, which requires a much higher rate of return due to cash flow uncertainty and illiquidity.

Studies on the historical rates of return for investment alternatives (including bonds, commodities, real estate, foreign securities, and art and antiques) point toward two generalizations.

1. A positive relationship typically holds between the rate of return earned on an asset and the variability of its historical rate of    return. This is expected in a world of risk-averse investors who require higher rates of return to compensate for more uncertainty.

2. The correlation among rates of return for selected alternative investments is typically quite low, especially for U.S. and foreign stocks and bonds and between these financial assets and real assets, as represented by art, antiques, and real estate. This confirms the advantage of diversification among investments from around the world.

In addition to make many direct investments, such as stocks and bonds, we also could use investment companies that allow investors to buy investments indirectly. These can be important to investors who want to take advantage of professional management but also want instant diversification with a limited amount of funds. With $10,000, you may not be able to buy many individual stocks or bonds, but you could acquire shares in a mutual fund, which would give you a share of a diversified portfolio that might contain 100 to 150 different U.S. and international stocks or bonds.

2. Plan your trade and trade your plan. Having a plan means being prepared for whatever the market may give you, so that you can execute without stress or hesitation. After coming up with a solid  trade plan, stick to it. Remember, if you fail to plan, then you have already planned to fail!

3. Get stopped out – the right way. A trader shouldn’t set their stop loss levels according to how much of their account they are risking. Rather, stop loss should be set at points where the original trade idea is invalidated, or no longer has the potential to be successful. That means you should set stops well beyond established support/resistance areas, or when you system signals an exit.

4. Don’t forget the fundies. Not every trader or trade requires absolute mastery of economic analysis and forecasting–but that would be nice, wouldn’t it? It’s possible that winning trades can be made on technicals alone, but the astute trader has to be aware of upcoming economic events on the forex calender.  These events may have the potential to create an environment that their trading system or method was not designed for. Avoid learning the hard way of not knowing you put a trade on right before a major event.

5. Be flexible. The markets are fickle and what catches the markets’ attention today will not necessarily move the price tomorrow. Be ready to move with that next major sentiment change and never be married to a position!

6. Don’t force trades. If your system or trading method does not give you a clear signal to be in the market, then that means there is no edge for you to win in the current environment. Stay out and don’t put a trade on just because you’re bored and itching for some action.

7. You will have losing trades. Let me say again…YOU WILL HAVE LOSING TRADES. The sooner you accept this, the sooner you are able to remove the emotional stress of losing a trade, and you will have a clearer head for making the right decisions and adjustments.

8. Journal… everything. This doesn’t mean only technical and fundamental analysis. You must also include your thoughts, feelings and what you were doing at that time. With your trading jounal,  you can look back.  Those small lessons can really add up to becoming a better trader, so keep a journal because no else is there to record and teach you those lessons about yourself.

9. Learn to take a break. Like a developing athlete, resting is just as important as the time you are “working it.” Keeping up with markets can get rough, and a trader’s mind and body can get stressed when things aren’t going their way. These are the times when it is necessary to step back, get your mind off forex trading, and recuperate. You will come back stronger and refocused to take better advantage of the next opportunity.

10. Manage risk consistently.  This can’t be stressed enough. There will be times where you feel so strongly about a trade or times where you want to make back your losses that you go beyond your normal risk tolerance. If you won, then all is good… but what if you lost? Then you are that much farther from reaching your trading goals. The secret to trading success in the beginning is to survive. The markets will always be there and opportunities will always be around the corner. Don’t take those opportunities away from yourself by blowing out your account.

Canadian interest rate expectations have risen sharply following improvements in the labor market and a rise in consumer prices. The central bank is expected to remain on hold until mid-2010 but we could see them act aggressively if inflation becomes an issue. Governor Carney in a recent interview stated that their remains considerable slack in the economy and is sticking to the commitment to keep rates low. However, the central bank leader would go on to say that there are signs of stabilization in the labor market and that the housing sector is seeing strength.

U.S. interest expectations have started to stabilize as weaker than expected personal income and spending figures have tempered the outlook for future tightening. Nevertheless, the improvement in both areas reaffirms a recovery is underway which should keep the central bank on track to raise rates sometime in the second half of 2010.

Buy lower strike put + Sell middle lower strike put + Sell middle higher strike call + Buy higher strike call = Long Iron Condor

With Long Iron Condors, your outlook is direction neutral. You expect little movement in the stock price. It’s safest to trade this strategy on a short-term basis, preferably with one month or less to expiration.

Maximum Risk:  [Difference in adjacent strikes - net credit]
Maximum Reward:  [Net credit received]
Breakeven Down:  [Middle short put strike - net credit]
Breakeven Up:  [Middle short call strike + net credit]

Advantages

1. Profit from a rangebound stock for no cost and low downside risk.
2. Capped and low risk compared with potential reward.
3. Comparatively high profit potential if the stock remains rangebound

Disadvantages

1. The higher profit potential comes with a narrower range between the wing strikes.
2. The higher profit potential only comes nearer expiration.
3. Bid/Ask Spread can adversely affect the quality of the trade.

Example

ABCD is trading at $27.50 on April 12, 2009. Buy the May 2009 $20 strike put for $0.25. Sell the May 2009 $25 strike put for $1.25. Sell the May 2009 $30 strike call for $1.30. Buy the May 2009 $35 strike call for $0.35.

Net Credit:  Premiums sold – premiums bought
                                                 1.95
Maximum Risk:  Difference in adjacent strikes – net credit
                                    5.00 – 1.95 = 3.05
Maximum Reward:  Net credit
                                                  1.95
Breakeven Down:  Lower middle strike – net credit
                                    25.00 – 1.95 = 23.05
Breakeven Up:  Upper middle strike + net credit
                                    30.00 + 1.95 + 31.95
Max ROI:  63.93% if the stock is between the middle strikes at expiration

Ideally the stock will remain between the lower and higher strikes, with the maximum profit occuring if the options expire when the stock is priced at the central strike price.

Buy lower strike put + Sell middle strike put, Sell middle strike call + Buy higher strike call = Long Iron Butterfly

Maximum Risk:  [Difference in adjacent strikes - net credit]

Maximum Reward:  [Net credit received]

Breakeven Down: [Middle strike - net credit]

Breakeven Up:  [Middle strike + net credit]

With Long Iron Butterflies, your outlook is direction neutral. You expect little movement in the stock price. It’s safest to trade this strategy on a short-term basis, preferably with one month or less to expiration.

Advantages

1. Profit from a rangebound stock for no cost and low downside risk.

2. Capped and low risk compared with potential reward.

3. Comparatively high profit potential if the stock remains rangebound.

Disadvantages

1. The higher profit potential comes with a narrower range between the wing strikes.

2. The higher profit potential only comes nearer expiration.

3. Bid/Ask Spread can adversely affect the quality of the trade.

Example

ABCD is trading at $25.00 on April 12, 2004. Buy the May 2004 $20 strike put for $0.30. Sell the May 2004 $25 strike put for $1.50. Sell the May 2004 $25 strike call for $2.00. Buy the May 2004 $30 strike call for $0.50.

Net Credit:  Premiums sold – premiums bought
                                           2.70
Maximum Risk:  Difference in adjacent strikes – net credit
                                         5.00 – 2.70 = 2.30
Maximum Reward:  Net credit
                                        2.70
Breakeven Down:  Middle strike – net credit
                                      25.00 – 2.70 = 22.30
Breakeven Up:  Middle strike + net credit
                                     25.00 + 2.70 = 27.70
Max RO:  117.39% if the stock is at the middle strike at expiration

The higher strke call that you buy is further OTM than the lower strike call that you sell. Therefore, you receive a net credit because you buy a cheaper option than the one you sell. If the stock falls, both calls will expire worthless, and you simply retain the net credit. If the stock rises, then your breakeven is the lower strike plus the net credit you receive. Provided the stock remains below that level, then you’ll make a profit. Otherwise you could make a loss.

Sell lower strike call + Buy OTM call = Bear call spread

Maximum Risk: [Difference in strikes - net credit]

Maximum Reward:  [Net credit received]

Breakeven:  [Lower strike
net credit]

With bear calls, you outlook is bearish or neutral to bearish. It’s safest to trade this strategy on a short-term basis, preferably with one month or less to expiration.

Advantages

1. Short-term income strategy not necessarily requiring any movement of the stock.

2. Capped downside protection compared to a Naked Call.

Disadvantages

1. Maximum loss is typically greater than the maximum gain, despite the capped downside.

2. High yielding trades tend to mean less protective cushion and are therefore riskier.

3. Capped upside if the stock falls.

Example
ABCD is trading at $28.00 on May 12, 2004. Sell the June 2004 $30 strike call for 1.00. Buy the June 2004 $35 strike call for 0.50.

Net Credit:  Premium sold – premium bought
                 1.00 – 0.50 = 0.50
Maximum Risk:  Difference in strikes – net credit
                 5.00 – 0.50 = 4.50   Maximum risk is greater than your net credit
Maximum Reward:  Net credit
                    0.50
Breakeven:  Lower strike + net credit
                30.00 + 0.50 = 30.50
Max ROI:  11.11%
Cushion:  $2.50 or 8.93% from breakeven

The lower strike put that you buy is further OTM (stock price > put strike price) than the higher strike put that you sell. Therefore, you receive a net credit because you buy a cheaper option than the one you sell. If the stock rises, both puts will expire worthless, and you simply retain the net credit. If the stock falls, then you breakeven is the highere strike less the net credit you receive. Provided the stock remains above the level, then you’ll make a profit. Otherwise, you could make a loss.

Buy lower strike put + sell OTM put = Bull put spread

Maximum Risk:    [Difference in strikes - net credit]
Maximum Reward:   [Net credit received]
Breakeven:   [Higher strike - net credit]

With bull puts, your outlook is bullish or neutral to bullish. It’s safest to trade this strategy on a short-term basis, preferably with one month or less ot expiration.

Advantages

1.Short-term income strategy not necessarily requiring any movement of the stock.

2. Capped downside protection compared to a Naked Put.

Disadvantages
1. Maximum loss is typically greater than the maximum gain, despite the capped downside.

2. High yielding trades tend to mean less protective cushion and are therefore riskier.

3. Capped upside if the stock rises.

Example

ABCD is trading at $27.00 on May 12, 2004. Buy the June 2004 $20 strike put for $0.50. Sell the June 2004 $25 strike put for$1.00.

Net Credit:  Premium sold – premium bought
                  1.00 – 0.50 = 0.50
Maximum Risk: Difference in strikes – net credit
                  (25-20) – 0.50 = 4.50 
              Maximum risk is greater than your net credit
Maximum Reward:  Net credit
                  0.50
Breakeven:  Higher strike – net credit
               25.00 – 0.50 = 24.50
Max ROI:    11.11%
Cushion:    $2.50 or 9.26% from breakeven

 Maximum Risk:    [Put strike - put premium]
 Maximum Reward:   [Put premium]
 Breakeven:   [Put strike - put premium]

Example

ABCD is trading at $27.35 on May 12, 2009. Sell the June 2009 $25.00 strike put for $1.05. You Receive Put premium $1.05.
Maximum Risk:  Strike price – put premium
                 $25.00 – $1.05 = $23.95
Maximum Reward:  Put premium
                 $1.05
Breakeven:     Strike price – put premium
                 $25.00 – $1.05 = $23.95
Return on Risk:  4.38%
Cushion (from Breakeven):  $3.40 or 12.43%

Advantages

1. If done correctly, you can use Naked Puts to gain a regular income from rising or rangebound stocks.

2. The Naked Put is an alternative way of buying a stock at a cheaper price than in the current market. This is because if you’re exercised, you’re obligated to buy stock at the low strike price, having already received a premium for selling the puts in the first place.

Disadvantages

1. Naked Puts expose you to uncapped risk if the stock falls.

2. Not a strategy for the inexperienced. You must only use this strategy on stocks you’d love to own at the put strike price you’re selling at. The problem is that if you were to be exercised, you’d be buying a stock that is falling. The way to avoid this is to position the put strke around an area of strong support within the context of a rising trend.