The $10 Lesson in Options Trading

Fathers’ Day in Australia falls in September - unlike much of the world, which celebrates it in June.

This year, Facebook reminded me of a “gift” I received from C, my second daughter, about a decade ago (*shudder*… I still can’t quite get used to using that word).

C had made a gift - though for the life of me, I can’t remember what it was. (oops!) And regrettably, I didn’t keep it safe. 😢 But what caught my attention wasn’t the gift itself - it was the ticket that came with it.

Attached to the present was a handwritten coupon that read:

“Ticket to open (the gift) whenever you like.“

No need to wait till Father’s Day.
Instant gratification - for a small fee.

You see, this “ticket” wasn’t free. It was priced at $10 - a princely sum for a then-seven-year-old.

I have no idea what inspired her to create it, but I imagine she put herself in my shoes and thought, “No one likes waiting - especially Dad.” So she came up with a way to skip the queue. Of course, early access must come at a price, and $10 felt perfectly reasonable to her.

And that’s when it hit me: my daughter had just invented an options contract. #soimpressed #mydaughterisagenius

In the world of finance, an option gives you the right - but not the obligation - to do something in the future, usually at a cost. There’s even a famous formula called the Black-Scholes Model that determines what that right is worth. (We’ll skip the math - this is a weekend issue after all.)

While I first learned about options in university, it wasn’t until a few years ago that I really started exploring the real-world side of options trading.

Warren Buffett once called derivatives (which include options) “financial weapons of mass destruction.” Yet ironically, he’s used them himself - quite successfully. One of his better-known moves was using options to build his position in Coca-Cola in 1993.

Having traded options myself with modest success, I’d say - like most things - they’re not inherently bad. They can be powerful tools if used wisely. The real danger lies in not understanding them. Like driving, the risk drops dramatically with knowledge and experience.

So, going back to C - no, I didn’t actually introduce her to Mr Black and Mr Scholes (I barely know them myself 😅). But I do hope that one day she’ll rediscover that early “contract,” learn what options really are, and maybe even start selling options like she once did - to me.

Your Turn:
Have you ever received a gift that carried a hidden lesson?
If your child charged you $10 for an early surprise, would you pay it?
What’s something you learned from your kids that no textbook could ever teach?

👉 Hit reply and share your thoughts — I’d love to hear what’s resonating with you.

☕ If this musing gave you a smile (or reminded you to keep going), you can shout me a coffee on Ko-fi.

Dipping Your Toes in the Stock Market Pond

Alright, future financial gurus! After understanding the Foundations of Investing, assessing your Personal Financial Situation, and getting a grip on Risk and Return Fundamentals, it's time to put that knowledge into action. Today, we're taking our first gentle paddle into the vast ocean of equity investments, which are a key type of investment vehicle. Think of equities as owning a tiny, tiny piece of a company. Yes, you, a bona fide business owner! 

We're talking about Common Stocks, the most straightforward way to become a mini-mogul. You buy a share, you own a slice of the company, and if it does well, your slice gets bigger (and more valuable!). You might even get a little thank-you note in the form of dividends. But remember, just like that dodgy old car you once owned, there are no guarantees. The value can go up, or it can go down. This is where your understanding of risk tolerance becomes crucial, as stocks generally carry higher risk but also higher potential returns.

Then there are Preferred Stocks, the slightly more refined cousins. They're a bit of a hybrid – part stock, part bond. They usually offer a fixed dividend payment, which is lovely for income, and they get paid before common stockholders if the company hits a rough patch. The trade-off? You usually don't get a say in company decisions (no voting rights for you, sorry!). 

Ever wanted to invest in a foreign company but found the idea of dealing with international markets as daunting as assembling flat-pack furniture? Enter Depositary Receipts (like ADRs in the US or GDRs globally). These clever chaps let you buy shares of foreign companies right here on your local exchange, in your local currency. It's like having a passport to global investing without the jet lag! 

Finally, some companies have Share Classes, which just means they have different types of shares with different rights. Think of it like first-class and economy seats on a plane – both get you to the destination, but with different perks. 

So, whether you're eyeing a slice of a tech giant or a steady dividend payer, understanding these basic equity instruments is your first step to navigating the stock market pond. Don't worry, we'll keep the water shallow for now!

L-Plate Takeaways

• Common Stocks: Buy a piece of a company, potential for growth and dividends, but no guarantees. Think of it as being a part-owner of your favourite local bakery.

• Preferred Stocks: Get fixed dividends and priority if things go south, but usually no voting rights. A bit like a VIP pass, but you can't pick the music.

• Depositary Receipts (ADRs/GDRs): Invest in foreign companies easily on your local exchange. Global investing, local convenience!

• Share Classes: Different types of shares can have different rights. Always check the fine print to know what you're getting.

• Start Simple: Begin with understanding the basics before diving into more complex options. No need to rush into the deep end!