What is the PCE Index?

The PCE or Personal Consumption Expenditures Price Index comes from the Bureau of Economic Analysis or BEA. It tracks prices paid by households for services and goods. Compared to the CPI this index covers a broader range of what folks pay for and picks up on how folks change their spending habits to adjust for higher prices. The CPI Index only covers out of pocket payments by urban consumers. The CPE looks at all payments for durable and non-durable goods and services including things paid on behalf of households by employers, like health or other insurance.

How Does the CPE Differ From the CPI?

Over time the CPE commonly shows a lower rate of inflation than CPI although both track inflation and thus rise and fall more or less in parallel. As the graph from the Cleveland Federal Reserve Bank shows, the two indices do not differ widely but they do diverge enough at times to cause different FOMC decisions when following the CPE than if they solely relied on the CPI index.

CPE vs CPI 2000 to 2025, Federal Reserve Bank, Cleveland

When Are the CPI and CPE Numbers Released?

The release of the CPI Index by the Bureau of Labor Statistics happens between the tenth and thirteenth of the month, barring any government shutdowns. The CPE Index by the Bureau of Economic Analysis is released during the last week of the month assuming that the government is operating. Thus the CPI hits the news first and tends to drive the market up or down. Assuming that the CPE index is sufficiently different from the CPI its results may well drive the market in the opposite direction from what the CPI did.

How Should An Investor Use the CPE Index in Making Investment Decisions?

Because the CPE Index covers a broader range of consumer expenditures than the CPI it is not surprising that the Fed Open Market Committee prefers is to the CPI in making their decisions. So, it makes sense for an investor to pay more attention to the CPE than the CPI in making their own decisions. Successful long-term investors look at the intrinsic value of their investments. This means analyzing forward-looking earnings and how they affect stock prices going forward. Then the investor compares stock value based on intrinsic value with current market prices. To the degree that these numbers differ significantly an investor using this approach will buy, hold, or sell an investment. Successful long-term use of the CPE index as a tool will require that the investor looks to how the index reflects earnings going forward. This approach differs from the “hall of mirrors” approach used by short-term investors and traders who assume that bad new with the economy as evidenced by an index automatically means good news for the market based on expectations that the FOMC will react in a knee jerk fashion to a rise of fall of the CPI, especially when the CPE will follow in a couple of weeks and may differ sufficiently to lead to a different FOMC decision that what the CPI might have led to!

Effects of High Oil Prices on the World Economy

When the price of crude oil and natural gas go up so does inflation. Higher energy prices make it more expensive to produce and ship goods. Because ammonia used for fertilizer is derived from natural gas the price of food goes up both because farm equipment uses fuel and fertilizer becomes more expensive. The sum total of effects of high energy costs result in economic stagnation. It is of note that whenever energy prices go up producers raise their prices and pass on the cost to consumers. When energy cost subside it is rare to see producers pass those savings back to consumers thus prolonging the inflation effect of high energy prices.

How Much Has Gulf of Persia Energy Infrastructure Been Damaged?

As noted by the House of Saud website, hundreds of billions of dollars of infrastructure has been damaged by the Iran energy war. As the website notes, mines laid in the Strait of Hormuz can be swept and removed. Damage to oil wells and be repaired over months or a year. Damaged oil tankers can be repaired or replaced within a few years. However, damage to the two Saudi oil refineries, the huge Qatar LNG complex responsible for a fifth of all liquid natural gas, Qatar’s Ras Laffan Industrial City, the sprawling complex north of Doha that houses the world’s largest LNG export facilities, and similar damage to processing infrastructure took decades and hundreds of billions to develop and will take a decade or more to repair or replace. Thus the lingering effects of the war will keep oil and natural gas prices higher for the indefinite future!

Are There Investment Possibilities Related to the Iran War?

In September of 2025 Exxon stock sold for $115 a share and the Iran war sent the price over $150 a share. Providing that Iran is not able to attack and damage Exxon’s assets across the globe and in the USA the company is likely to see its share price remain high for perhaps a long as it takes for the Gulf nations to repair their infrastructure, namely a decade or more. Chevron stock has gone up and presents a similar investment opportunity to Exxon. Companies poised to help repair or rebuild Gulf oil and natural gas infrastructure include Haliburton, Saipem (Italian), Baker Hughes, Flor, Petrofac, and McDermott. In addition to repairing Gulf facilities it highly likely that Saudi Arabia will prioritize upgrading the pipeline to the Red Sea to reduce reliance on the Strait of Hormuz. Firms gaining such a contract will also benefit as the Saudis race to replace lost production, processing, and revenue.

Will Renewable Energy Benefit from the Iran Conflict Damage?

Although it would be impossible to ramp up solar and wind power energy infrastructure fast enough to drive down energy costs in the near term or to prevent associated economic damage, the hand writing is on the wall for many nations badly hurt by the current conflict. For the patient investor investment in companies that work in this niche including First Solar, Brookfield Renewable Partners, Enphase Energy, JinkoSolar and Sunrun may well be excellent long term investments.

Drones and the Future of Warfare

The Iran war has shown how $20,000 drones can inflict serious damage as Iran attacks Gulf neighbors who have had to use $4,000,000 Patriot missiles to shoot them down. Meanwhile in Ukraine the Ukrainians are using $2,000 drones to shoot down $20,000 Russian drones, copies of Iran’s drones. Swarming tactics with drones and use of drones for battlefield surveillance have become part and parcel of the war in Ukraine which has become the world leader in the use of these tools of war. Looking ahead one might consider companies that make and perfect both these vehicles and the AI controls as alternatives to Lockheed Martin, Boeing, and other defense contractors as investment opportunities.

Bloomberg reports that the managing director and chief investment strategist at Bank of America Merril Lynch Global Research, Michael Hartnett, warns about parallels between today and the market and financial picture in 2008 before the US and world economies nearly collapsed. Of concern today are the increasing risks in private credit and soaring oil prices. Back before the financial crisis it was subprime mortgages instead of private credit but crude oil doubled in price from July of 2007 to August of 2008. Today Brent Crude has gone up from $65 a barrel in the middle of February to more than $100 a barrel today. In addition, as noted by Hartnett, stock market price action resembles that of the immediate pre financial crisis era.

How Long Will the War with Iran Last?

Going into the combined US and Israeli attacks on Iran we were being told that it would be a short and decisive war knocking out Iran’s capabilities to build ballistic missiles, drones, and a nuclear bomb. Nevertheless, the conflict is dragging on and Iran appears to have a greater ability to endure attacks on their command and control and infrastructure than we had been led to believe. In fact, this war is an existential issue for those who have been in charge in Iran since the overthrow of the shah in 1979. Many are probably thinking of how when the US went after Sadam Hussein in the second gulf war he ended being executed by hanging along with his chief supporters. This time around in Iran the top hierarchy has been taken out by air strikes but the next lower echelon of leadership is likely still thinking that inflicting damage on anyone and everyone may be their best option for survival. Thus, we do not see a quick end to the war with Iran, reopening of the Strait of Hormuz, or a lower price of oil. Damage to Iranian oil facilities and those of Gulf of Persia neighbors may end up being significant enough to curtail supplies for some time after cessation of the conflict.

Why Is Private Credit a Problem?

In the aftermath of the financial crisis governments, especially the USA, forced banks to tighten up their lending practices. Thus many borrowers looked to private creditors for help when they needed money. The private credit market steadily grew over the last decade and a half to about $2 Trillion. One of the sectors heavily financed by private credit is the software industry, especially companies in artificial intelligence. As costs of AI development and operations risk so do private credit risks. Folks like Hartnett at Bank of America think the magnitude of risk may be close to that of the subprime mortgages that were at the root of the financial crisis.

How Should An Investor Deal With a Looming Second Financial Crisis?

The game plan for surviving a pending second financial crisis and Great Recession  reads like the sort of intrinsic value investing and strategies for starting investing that we have written about for years. Start by paying down high interest debt. Rotate a substantial portion of your assets into cash of safe cash equivalents and diversify into defensive stocks that pay dividends and have been doing so for decades. These are the sorts of companies that do not suffer during a recession because people keep buying hand soap, detergent, and even beer. And should the Iran war drag on or widen in scope there are always defense stocks in a world where the US launches offensive and defensive missiles at a million dollars a pop.

What Is Space X?

SpaceX or Space Exploration Technologies was founded in 2002 by Elon Musk with the stated goal of making space launches more affordable and eventually colonizing Mars. Although SpaceX has not yet reached Mars it is the world’s most valuable private company (about $800 billion), is the world’s leader for launches into near earth space, earns about $13 billion a year with more then half of that coming from its Starlink space-based internet service and is a leading user of artificial intelligence to fine tune rocket performance during launches and reentry.

How Dependent Is SpaceX on Elon Musk?

To a large degree an investment in SpaceX, just like Tesla, will be an investment in Elon Musk. Musk not only founded SpaceX but play a leading role in its continued operations by providing financial backing and making critical operational decisions. To the extent that Elon Musk becomes stretched too thin with Tesla, X (formerly Twitter) and other activities like helping Donald Trump get reelected president, such a situation could materially hurt SpaceX operations and profitability. Whenever the head of a company leaves the helm and someone new takes their place investors are commonly concerned about competence, effectiveness, and profitability under new leadership. This ought to be a significant concern with Musk who is 54 years old and, according to his biographer, subject to “crippling” stress, a heavy drug user and diagnosed with Asperger’s Syndrome (autism spectrum) which is characterized by difficulty with social interactions, repetitive behaviors and restricted interests. Musk if known to hold control of his companies very tightly and has, through his efforts, become the richest man in the world. Many who invest in Tesla and will want to invest in SpaceX once it becomes public will simply be investing in Elon Musk. Anyone following this course of action should be concerned about the stability and predictability of the leader they are following and investing in.

Should You Buy the SpaceX IPO and at What Price?

As noted by Bloomberg, SpaceX will pursue an IPO in 2026 and likely raise more than $30 billion. If predictions are accurate this will be the biggest IPO ever even surpassing the Saudi Aramco IPO. Musk’s company is promoting a company valuation of $1.5 Trillion for this IPO. A fair estimate of the value of an IPO share of SpaceX is about $110 but this is based on an evaluation of total SpaceX value of $210 Billion and not $1.5 Trillion. It is useful to remember that Tesla stock has often sold for more than one might rationally believe to be its fair market value because so many Tesla investors believe that Elon Musk will create more and more value for them over time. To the extent that you believe that Musk will stay healthy, not be diverted from running the company by too many outside interests, and generate more and more income, the $110 projected stock price may be a steal. To the extent that Musk falls down the X, politics or other rabbit holes and this affects his judgement and company management investment in SpaceX at any price will depend other people than Musk picking up the slack and maintaining SpaceX operations.  

What Will You Be Investing in if You Buy SpaceX Stock?

There are rumors that Musk will merge SpaceX with Tesla and even xAI before an IPO. Such mergers would complicate the picture for the IPO even though it would greatly increase the value of the eventual company. If this were to happen the issue will more and more be whether or not you are investing in Musk more so than evaluating the fundamentals and intrinsic value of the eventual company.

Will Musk Colonize Mars?

Remember in all this that Musk believes that humanity needs a “plan B” to be accomplished by putting people on Mars. He may or may not succeed in this task but anyone who is interested in SpaceX investment needs to consider how much effort will be devoted over the years to generating income for SpaceX investors and to what degree assets will be moved into efforts to put folks on the red planet! If the latter is something you want to sign on to, good for you, but do not confuse altruistic goals with solid investment decisions when deciding whether or not to buy stock in the SpaceX IPO.

Business Entities

Business entity options include being a sole proprietor, having a limited liability company, having a limited liability partnership, or forming a C corporation. There are pros and cons to each of these options.

Sole Proprietor

Most folks who start a business do so without setting up a special entity. They are sole proprietors. This business entity requires no work to set up as it the default, easy to operate, has no double taxation issues, and is the best fit for a business intended to operate only for the life of the owner and one with little potential liability. A significant problem with being a sole proprietor is that if your business runs the risk of being sued for actions that can be tracked back to you, you are personally liable for your business and may lose personal assets like your home in amounts far in excess of what you have invested in or gained from your business. Limited liabilities companies are designed to help protect your personal life from problems of your business.

Limited Liability Company

Although an LLC or limited liability company is not the default business entity it is easy to have one set up for you. Such an entity is simple to operate and does not require a separate tax return. Home deductions on taxes can be taken with an LLC. An LLC can also be easily dissolved when you no longer need it. The main purpose of a limited liability company is to protect your personal finances from problems in your business. With an LLC business problems, except for malpractice, will not spill over into your personal financial life. Four issues to consider are that self-employment taxes are assessed on all profit with an LLC, transferring ownership can be complicated, an LLC does not offer much in terms of fringe benefits for owners, and you will need to make sure to document all aspects of your business showing that it is totally separate from your personal finances! Not following this last step can result in losing LLC protection just when you need it.

C Corporation

A C corporation is a standard stock corporation where stock holders who have not hand in managing the business are totally separate from the business in Drawbacks of a C corporation are the double taxation of profits. complexity is setting up the corporation, and the need for both regular and documented director meetings and two tax returns instead of one.

Which Business Entity Is Best for Your Investing?

If your “day job” is your own business and not a job working for someone else, you may wish to consider an entity different from being a sole proprietor. This may especially be true if you have substantial investments and investment income as well as a personal business the carries large potential risk. Medical and legal professionals come to mind as those with a healthy income stream, growing investment income and the potential for being sued for large amounts of money. Individuals who have inherited substantial wealth need also to be careful in taking on risk from owning and managing an outside business with potential and substantial risk. To the extent that someone has joined a business partnership meant to supplement their investment income, choosing an LLC partnership can be an excellent idea. With such a setup the liability of a partner is limited to their investment in the partnership. Like with a single owner LLC, it is crucial that records are kept making a clear the limit of a partner’s involvement in partnership management and strict separation of business and personal finances in order not to lose LLC protection just when it is needed most.

What is Saving and What Is it Good For?

When you live on a budget, spend less than you earn, and put money aside as cash or in a bank account you are saving. By doing so you will have money for rent or your mortgage and other living expenses. And you will not need to be always borrowing money via a credit card. Over time, if you are diligent with your saving you will accumulate a fair amount of money. Sadly, inflation will eat away at your pile of cash or bank accounts over the years. If you want to build a financial future for yourself you will need to invest your money to at least stay ahead of inflation and ideally start using your money to make money.

When Should You Invest?

You should first save enough money to have a reserve for six months of living expenses and pay off all credit cards and other high interest consumer debts. Then start investing. As a rule the sooner in life you start investing the sooner the compounding effect of your investments will begin. Afterall the point of your investments will be that eventually your invested money will be creating more income than your “day job.”

How Much Should You Invest and How Often?

Ideally you will invest everything that you have available after putting aside money for emergencies and living expenses as well as paying off high interest debts like credit cards. Now the issue is timing your investments to take advantage of markets and not being taken advantage of by them. The best place for most folks to put their money over time has been the US stock market. The overall market has returned an average of ten percent year over year or seven percent adjusted for inflation for more than a century. The problem for folks starting out is that market performance is not uniform from year to year. There are banner years and there are market corrections and even crashes. However, if you stick with the US stock market over time, the market has always recovered from severe losses.

For example, If one had invested in an EFT that tracked the S&P 500 index right at the 1526 peak before the 2007 Financial Crisis and experienced immediate losses, they would today have more than four times as much value in the same investment with the S&P 500 today at 6900. Similar results would have been obtained by investing before the Covid Crash or even the 1929 Crash.

Timing to Avoid Severe Stock Market Losses

Although investments in the stock market tend to recover from losses over time one does not need to experience those extreme losses. A rational approach to investment timing is called dollar cost averaging. With this approach you will invest a set dollar amount each payday, month, quarter or even year and keep to that schedule no matter what the market is doing. That way you will be buying fewer shares when the market is expensive and more shares at bargain prices when the market has fallen.

Avoiding the Fear and Greed Investing Demons

The two most dangerous things for most investors are fear and greed. Far too many investors follow market trends, getting excited when the market goes up and getting panicky when the market falls. Legendary investor Warren Buffett long advised investors to be greedy when the market panics and fearful when the market is exuberant. If you have the skill and time to follow the market, this is excellent advice along with picking stocks with the greatest intrinsic value. For most folks the better choice is dollar cost averaging with an ETF that tracks the S&P 500 which was Buffet’s advice for most mom and pop investors.

Save First and Then Invest As Early As Possible

The point of long-term investing is that your money compounds over the years to the point where invested money makes more money than your day job. For example, at a yearly return of ten percent your investment will double in just over seven years. Over forty years, from your 20s to retirement, the original investment at 10% per year will be forty-five times as much. When you realize that you will be getting similar results for money put aside every year it becomes clear why you want to invest and not just save. Living within your means is always a good idea so start there. And when you have enough to start investing begin as soon as you can and keep at it for as long as you can. What to invest in is the next decision you will need to make.

What Is the Golden Dome?

According to Defense Feeds, the U.S. Golden Dome Defense System will be a multiple layer defense against intercontinental ballistic missiles and shorter range ballistic missiles, hypersonic missiles, cruise missiles, drone, bombers, and any new and currently nonexistent weapons arriving by air or from space. Trump promises that the system will be in place by the end of his term in 2029. Defense experts offer doubts about the projected costs and feasibility of the Golden Dome system. The backbone of the system will be space based interceptors that currently do not exist and for which technology will need to be developed.

Patented Technology Pertinent to a Golden Dome System

Although there are currently no specific plans for the Golden Dome System much technology exists. If you are looking ahead and thinking of investing in whomever will build the Golden Dome or who the subcontractors will be it will be useful to look at who currently has patented technology that will likely be used. The patriot missile system intercepts missiles, drones, etc. it has patented technology for systems such as radar, command and control, detection and interception, and hit to kill technology. Companies that own such patents include Lockheed Martin and Raytheon. Raytheon integrates the technology, and Lockheed Martin manufactures the missiles. In addition, Mitsubishi Heavy Industries in Japan is licensed to manufacture the system in Japan.

Space Based Versus Land Based Interceptor Systems

Although Lockheed Martin, Raytheon, and Mitsubishi Heavy Industries may have a head start with patents and experience in this area, the Golden Dome System will be built in and operated in space. As such one needs to think about who has the technology to efficiently and profitably place operating parts of the Golden Dome in space and operate them there. Two companies that are in the early bidding include Space X and Anduril. Space X has a huge advantage in carrying out multiple launches with their ability to reuse their boosters. Anduril specializes in AI and automated military systems. All in all there are currently more than a thousand defense contractors submitting bids on the Scalable Homeland Innovative Enterprise Layered Defense system with the acronym SHIELD.

How Can You Invest in the Golden Dome Project?

Assuming that much of the project will use existing technology, Raytheon and Lockheed Martin would seem to be beneficiaries. Over the last thirty years Lockheed Martin’s stock has risen from $26 a share to $478 a share. It currently has a PE ratio of 27 and a dividend yield of 2.89%. As it is a public company you can buy shares of its stock. Raytheon’s stock has risen over forty years from $28 a share to $180 today. Its PE ratio is 37 and its dividend yield is 1.51%. Both of these are big companies that provide a whole host of products for defense. As such any extra profit from the Golden Dome will be diluted as compared to a smaller company for whom a contract with the Golden Dome would be more significant. In the case of Space X, it is a privately held company with no plans to go public. The only way to invest is to do so indirectly by investing in a venture capital fund like the ARK Venture fund. This leaves you with the same dilutional effect as with Raytheon or Lockheed Martin. SpaceX, Palantir, and Anduril are bidding together on the project and while SpaceX and Anduril are private companies, Palantir is a public company and fairly young, being traded only since 2019 when it stock went for $9 a share while it goes for around $184 a share today. The company has a PE ratio of 430 and pays no dividend. Thus, it may be a viable option for investing in the Golden Dome but still suffers from the dilutional effect of being paired with Space X and Anduril plus it carries the risk of investing in a stock with a huge PE ratio and a stock price largely based on expectations of growth. Ideally one could find a small startup with unique technology that will benefit but that will require close attention to the defense tech sector and news of how bidding is progressing on this project. Good luck with your finding such a company and with any investment in the Golden Dome.

History of the Screwworm in the USA

The history of the screwworm in the USA is this. The new world screwworm is a fly that infects cattle by laying its eggs in injured tissue such as tick bites, where cattle have been recently branded, scratches or cuts, or near the mouth anus, or ureter. The larva enlarges the wound where it grows and causes sufficient damage such that the cow can die. Before that happens the larva turns into a new fly and infects other cattle. The way that the screwworm was dealt with years ago was to release sterile males in sufficient numbers that few or no new screw worms are produced.

The screwworm has been present in the American Southwest since at least 1842. In 1933 a shipment of cattle from the Southwest to the Southeast of the USA contained infected animals. The outbreak was especially troublesome as it occurred during the economic difficulties of the Great Depression. The method used then for dealing with the screwworm was to release massive numbers of sterile males and to do so repeatedly until the flies were eradicated. This will be the approach if the infestation reaches the USA and is how it is being dealt with in Mexico. In addition, Ranchers need to pay close attention to their animals and deal with any infected wounds. insecticides are used on a case by case basis.

The most recent outbreak in the USA was in 1976 and ended up with $330 million in losses for ranchers. Reasonable estimates are that a similar outbreak today would cost closer to $1.9 billion in losses.

The issue for those interested in trading live cattle futures is that a major outbreak would result in significantly higher prices beef and for live cattle futures.

What Are Live Cattle Futures?

Live cattle futures are contracts for delivery of 40,000 pounds of full grown, live cattle that are ready for processing. The contracts are for future dates and specify how much the buyer will pay as of that date. Meat packers and feedlot operators commonly use these contracts to hedge their risk against price fluctuations. Speculators use these contracts hoping to profit for the same fluctuations. Under normal conditions, the pertinent variables are the cost of cattle feed and other costs of raising and processing cattle. In the case of a screwworm outbreak in the USA, the issue would be a scarcity of live cattle due to ranchers culling their herds.

How Great Is the Risk of a US Screwworm Outbreak?

While there are currently no screwworm cases in the USA, there are in Mexico where they deal with it by introducing sterile males into the population. The cases in Mexico have been progressively farther North and closer to the US border. When a case was reported in the Mexican state of Nuevo Leon only 120 miles from the US border is when live cattle futures popped up nearly 3% recently. While Mexican agricultural authorities are dealing with any outbreaks, the screwworm fly does not know any national borders and could simply keep moving North which could be a disaster for the US cattle industry and an opportunity for those interested in trading live cattle futures.

Why Buffett Did Not Favor Tech Stocks

It was back in the 1980s when one of the original NASA astronauts was asked about what the next great thing in tech would be for investors. He gave an engineer’s answer. He said that it was hard to predict how a new technology would earn profits in the short term because in those days it commonly took five years to adapt new tech and create useful products. He was thinking, like Buffett, in terms of company cash flow and profits as they contribute to the intrinsic value of a stock. When asked by he did not have a lot of tech investments Buffett said that in the modern world technology moves so rapidly that one company that leads a field can lose their lead and see a lower stock price the next year because of new tech or new applications by another company.

Predictability and Investing

In many ways the most predictable thing about the stock market and many stocks is the constant up and down fluctuation as traders jump in and out of stocks or ETFs that track large segments of the market. For a long term profitable investment you want to be able to analyze forward looking cash flow and know that that cash flow will endure over time. For short term profits one often does well to predict what the Federal Reserve will do with interest rates, which are a major driver or short term market pricing. For the long term, investors are interested in how well a company is being managed and will be managed in future years as well as whether or not it has a strong brand such as with Coca Cola or Apple.

Why Would You Ever Sell IBM?

It was in the early 1980s and this writer was attending an investment seminar. A question put to the speaker was when to take profits from IBM. IBM was the dominant force in business computers with their giant mainframes. Its stock went up year after year and it paid a healthy dividend. It was, in fact, a classic widow and orphan stock. The person who asked the question simply wanted some guidance regarding taking a short term profit on this highly predictable stock. The answer to the question was, in turn, a question. “Why would you sell IBM?” This was the time when Jobs and Wasniack had invented the first personal computer and shortly before IBM realized that it had dropped the ball on a sea change in computing. IBM stock fell in response to their failure to get ahead in the microcomputer market. They subsequently offered their own personal computer using software the Bill Gates had purchased and repackaged laying the groundwork for Microsoft to become a giant in the computer software world. IBM is still a strong company across the world but not the single dominant force that it once was. Their story is a good lesson for long term investors who assume that companies and the market will continue as they have in previous years.

As you think about your investing for 2026 and beyond consider what the Fed will be doing and whether or not the bond and stock markets will continue to react as they have to Fed rate changes for your short term investing. Try to get a handle on the many coming uses of artificial intelligence and the disruptions it will cause in employment and the economy for the long term.

Options Trading Benefits

The first thing one generally thinks of with options is that they help you hedge your risk. However, they also offer an opportunity to leverage your investment and trading capital. Here is how.

Options Trading Benefits

Let us say that you think stock XYZ is about to go up in price. You buy the stock. It may go up, stay the same, or fall in price. If it goes up you have a more valuable stock which you could hold on to or sell. You will have paid fees and commissions to buy the stock. If it does not budge in price you are still out the fees and commissions and still have the stock. If the price goes down subsequent to you purchase you are out fees and commissions and have lost money on the stock should you decide to sell it at the current price. What happens if you use options? If you buy a call option on the stock you will only end up buying it if the price goes up to the price of the options contract. This will cost you the premium as well as fees and commissions. However, you will purchase the sfock at a price less than the now current market value. If you choose to simply sell your now more valuable options contract you will earn something very similar to having bought and sold the stock but will have only invested the premium and not the price of the stock itself. This is your leverage!

Options to Limit Trading Risk

If in the previous example your stock went down in price instead of up, you will have save a significant amount of money because you would not have purchased the stock but simply would have paid a premium for the option to do so, which you obviously did not do. Over time one makes money buying call options if they choose stocks wisely in regard to the stock’s potential for appreciation and in regard to the price of the premium

Bull Call Spread Payout Diagram

How Professionals Trade Options

One is not limited to trading one type of option at a set price for a given stock. Professionals buy and sell options on a stock at the same time. They may choose different contract prices as well. Many times they are not looking to hit a home run with a given trade but to improve their odds of reliably making money each and every time that they compose a set of options trades. As a rule selling options is more profitable than buying them. A typical approach is the Bull Call Spread as noted above. In this case, a professional will typically balance a complex trade by adding a purchase to protect against even the remote possibility of huge loss in case a stock unexpectedly plummets in value. Nobody with any sense just sells options routinely without a offsetting purchase to protect themselves against catastrophic loss.