you may not remember a world without
computers, and maybe not even a world
without cell phones or the Internet. You
might take it for granted, but you certainly
have faster access to more information than
any generation in the history of humankind.
And, at the risk of oversimplifying, you’re
also more aware of the larger world, and you
like your own brains, researching everything you can to a fault—diet, fitness, work,
finance, romance, and more. Wow. Considering your social creds, you could be the greatest investing generation ever. Or not.
Word has it millennials aren’t investing
like other generations for one simple reason:
trust. In your lifetime, you’ve processed the
crash and listened to your parents disseminate Wall Street horror stories. You may not
trust others to manage your money. And you
want to be sure you can put your hands on
your cash when you need it.
SLAY THE MONSTERS
UNDER THE BED
Lots of folks who came before you have
orchestrated a secure retirement—and many
haven’t. You’d prefer not to end up like the
latter. So, you might skip the investing game
altogether and take no chances. But you’ll
also reap no potential reward.
The fear factor aside, you have one
gigantic advantage over previous gen-
erations—awesome technology, like the
thinkorswim® platform from
TD Ameritrade. When you
engage tech wisely, while
learning the investing ropes,
over time you’ll come to
make informed decisions.
And with much trial and
error and trusting your
own choices, you just might
morph from cautious millennial to self-di-
rected investor. Let’s deconstruct the fear
arguments one by one.
You don’t trust the “Street” and
prefer to manage your own money.
The silver-screen version of Wall Street boils
down to evildoers smoking cigars, bragging
about huge kills, and fleecing the little guy out
of hard-earned savings. But that’s Hollywood.
In real life, online brokers may boast a few
cigar smokers in their ranks. But in general,
they don’t trade your money, they don’t speculate against you, and your financial success
is naturally in their best interest. In point
of fact, many online brokerage firms invest
tremendous resources in support and education, plus technology upgrades to protect a
quality investing experience.
What can you expect? With most online brokers, nearly every aspect of your
account remains transparent so you can
monitor activity details, large and small,
in real time. At the least, profit/loss is calculated for every trade and investment to
gauge performance. It’s wise to log into
your online brokerage account every day
to review your account statement. There
you’ll find your various transactions—order
history, trade history, commissions, fees,
deposits, and withdrawals.
You’re afraid of losing your money &
fear it won’t be there when you need it.
Naturally, there’s no guarantee you won’t lose
money trading. But how big that loss might be
is something you can often manage. “Defined
risk” is a term we use to describe an options
trade whose maximum potential loss can actually be known before you route the trade. No
matter what the stock price does, an options
trade with defined risk can’t lose more than a
precise amount. There are tools that can help
you reduce the uncertainty of trading and
calculate a trade’s maximum loss. One is the
Order Entry Tools function in thinkorswim.
Fire up the platform, then:
1. From the Trade page, create an order by
clicking on the bid price (to create a sell
order), the ask price (to create a buy order),
or right-click to create a spread order, like a
vertical (Figure 1).
2. This loads up the options and/or stock in
the Order Entry Tools on the lower part of
the Trade page. If you click the “Confirm and
Send” button—don’t worry, you’re not sending the order yet—you’ll see details about
the trade, including its max loss. (Only when
you click on the “Send” button on the Order
Confirmation Dialog box will you route it.)
As an experiment, create an order to short a
naked call. The order confirmation box will
show an “infinite” max loss. That’s because
a stock doesn’t have an upper limit on how
high its price might go. So, the loss on a short
call has no upper limit, either. A naked short
call, then, is not a defined-risk trade.
Next, create an order to short a naked put.
The max loss might be fairly large because
it’s the strike price of the put, minus the
credit you get for selling it short. The max
loss occurs if the stock price goes to zero. Although the max loss on a short naked put can
be identified, it may be too large for you to be
comfortable calling it a defined-risk strategy.
Finally, right-click an option and select
“Sell,” then “Vertical.” That creates an order
for a short vertical spread. Note that its max
loss is the difference between the strike
prices, minus the credit for shorting the
vertical (Figure 2). When you look at the
max loss on the Order Confirmation Dialog
box, it’s not “infinite” like with a short call.
And it might be much smaller than for a
short put. Note that multi-leg strategies like
this can entail substantial transaction costs
(compared to single-leg strategies), in-
If you’re a