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Trading for a Living

AIA Investment Conference 2001. Trading for a Living. presented by John Aldersley Chief Executive, Direct Portfolio Services Limited. Credentials. 26 years of continuous trading & investing Never been broke or bankrupted Manage $135m in shares currently

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Trading for a Living

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  1. AIA Investment Conference 2001 Trading for a Living presented by John Aldersley Chief Executive, Direct Portfolio Services Limited

  2. Credentials • 26 years of continuous trading & investing • Never been broke or bankrupted • Manage $135m in shares currently • Winner of Sun Herald Money Race in 1998 • Columnist in Sun Herald each week

  3. Do you have what it takes? • Your sleep test • Your Stage of Life • Trading by young hopefuls • Retirement Trading • Financial backing/income needs • Knowledge, equipment & information • Handling the paperwork

  4. The case for trading…. Much higher volatility today 1987 crash

  5. Understanding Risk • Types of Risks • Security • Market Volatility • Liquidity

  6. Trading issues • Stay within your sleep factor • Allow for a run of losses • Uses/abuses of stop losses • Cash is sometimes the best option • Don’t be too impatient with the big winners

  7. Which structure to invest from? • Self managed super • Income splitting in joint names • Family trusts and companies

  8. Using other people’s money • Home equity loans • Margin loans

  9. My preferred money spinners • Naked put selling • Straddle and strangle writing (selling) • Trading LEPOS • Buying short dated calls • Buying back spreads • Stagging new floats

  10. Why use options (ETO’s)? • Suits variety of trading strategies • Income generation from premiums • Tax effective management • avoid crystallising capital gains on long term holdings • More refined/dynamic changes in exposure • Lower brokerage, no stamp duty

  11. Some essentials • The ASX Options market is 25 years old • Exchange traded options • @ 50 blue chip companies • Standardised contracts

  12. Call Option • Buyer - receives the right to buy shares in return for paying the premium to the seller. • Seller - receives premium from the buyer and is obligated to deliver shares if the buyer exercises

  13. Put Option • Buyer - receives the right to sell shares in return for paying the premium to the seller • Seller - receives premium from the buyer and is obligated to buy the shares if the buyer exercises.

  14. Valuing options • Share Price • Strike price (intrinsic/time value) • Term till expiry • Historic & expected (implied) volatility • Dividend timing • Level of interest rates

  15. Option time decay • Rough guide; • lose one third of time value during first half of option life • lose two thirds of time value during last half of option life

  16. IN THE MONEY AT THE MONEY OUT OF THE MONEY Time Value graphically

  17. Share & Option price curves Options $1.00 $5.00 O p t i o n P r i c e S h a r e P r i c e Shares 0.80 4.80 0.60 4.60 0.40 4.40 0.20 4.20 Exercise Price 0 $4.00 1 2 3 4 5 6 7 8 9 3.80 Months 3.60 Intrinsic Value 3.40 Time Value 3.20 $3.00

  18. Making AMP work harder $ Gain per share Breakeven on upside $1.00 Share price $0 $18.00 $20.50 $21.02 -$1 Strategy adds value at all prices to $21.02 and protects down to $19.98 -$2

  19. AMP $20.50

  20. Profit Short Straddle at Expiry 0.60 • Write NCP Nov 1600 Call@$2.23, Write NCP Nov 1600 Put@ $2.24 Share Price 0 Loss $16.00 $11.53 $20.43

  21. Short NCP straddle selling time

  22. NCP $15.61

  23. Employ an expert - DirectPortfolio • Managed fund with a difference • Individual portfolios • Can transfer across your existing shares • Active management incl use of options • Full administration including tax reports • Ideal of individuals, self managed super • Can draw a monthly income stream

  24. What are our clients like? • >600 investors with >1000 individual portfolios totalling >A$130m • Not one cigarette smoker • Over 90% enjoy red wine • Minimum $50,000 (average $287,000) • Two-thirds own a self-managed super fund

  25. DirectPortfolio lets you…. • Own your own shares • Have them professionally managed • Borrow other people’s money • Determine your own tax free monthly income • Eliminate paperwork & CGT hassles

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