Build securities risk
insurance business in 38 hours
Think of various types of insurance products like whole life policy, term life, health coverage, home insurance and more. Providing protection and mitigating risks is the simple motive of getting insurance cover.
Think about all the premiums you pay for every year and the payouts (if any) you have received. You will realise most of the times premiums exceed payouts.
Don't you think it is a good business model? If you have some capital to invest, would you be interested in setting up such business of your own?
Is it possible for an individual to become an insurance provider?
Yes, it is possible for a small entrepreneur to get into this business.
Financial trading marketplaces can help you set up this type of business. Instead of selling health, life, or auto insurance, you can sell risk insurance.
We have all heard of options. Options are simple but generally are not well understood.
Options is such a product which is used both by speculators and non-speculators for hedging, protection, leverage etc.
Options are a form of financial insurance. Options are all about the buying or selling of volatility risk. A buyer of options can pass the risk by paying the risk-taker cash up front. The risk taker is none other than a seller of options.
Yes, you can make money out of handling risk. Similar to what an insurance company does. You assume the role of an insurance provider and provide a volatility insurance risk cover to a buyer. Consider yourself not to be a trader, investor or speculator in the traditional sense while trading on the derivatives markets.
Options do not require buying or selling of a currency or any financial instrument. A buyer is paying some down-payment or a fee, known as option premium, upfront to a seller asking for a guarantee to deliver the asset value or price difference at a price agreed on in the future.
Term Insurance is most lucrative segment of underwriting risk
Term Insurance is known to contribute maximum to the profitability of life insurance providers. According to industry experts, only 1% of term policies actually pay out; the remainder expires worthless. It is not easy to find such sensitive information publicly. I am reproducing a comment from an industry insider confirming the information.
Futures and Options
Futures are an obligation.
An example: Currently cement is selling at HK$692 per tonne. You think that due to seasonal changes, there is a likelihood of prices going up after 3 months. You are constructing a house and after 3 months you’ll need 1, 000 tonnes of cement. You want to have some price guarantee. As a buyer, you enter into a contract with a seller to purchase cement at $695 per tonne in future at $3 higher price.
After three months, the price of cement could be $715 or $690 per tonne. You never know.
If the market price after three months rises to $ 710, you have saved $15 per tonne or $15,000 overall. Price agreed was $695.
If the market price after three months drops to $690, you still have to buy at $695. You stand to lose $5 per tonne. Total loss is $5,000.
As you can see, Futures is a linear contract. For every $1 price movement of cement, you make or lose $1 per unit.
Options are a right, not an obligation
As a buyer of the options, you agree that after contracted time, you will honour the deal. Only if it favours you. And for this privilege, you pay a small premium now.
In the same example of cement deal, if the buyer pays $3 as a fee to deliver the cement at the agreed price of $695, you keep your options of whether to buy or not cement in future. Your cost goes up to $698 because you paid the seller a fee of $3.
If after three months, the price increases to $710, you stand to gain $12 per tonne based on your cost of $698. You will surely exercise the option of buying the cement.
Instead of the price rising, if it has dropped to $690, you will not exercise your right to get cement at $695. You will be better off foregoing $3 premium as a loss and buy from the market at a price of $690, still saving you $2 from the price of $692 three months ago.
Another example: You bought a health insurance policy. In case of an illness, you don’t want to end up paying for the entire hospital bill. On receipt of a premium from you, the insurance company has agreed to cover any hospital bill over exceeding HK$ 10,000.
Now if you have had minor illness not requiring you to go to a hospital or incur any bill more than $ 10,000, you've lost your $1000 premium. But in case of a major surgical operation with a hospital bill for $50,000, you pay $10,000 and the insurance company pays $40,000. You gain $39,000 after having paid $1,000 as the cost of the premium.
In effect, your investment was $11, 000 while the return of gains is $39,000.
A buyer can only lose the premium, but make a lot of money. Thus, options are non-linear instruments.
If the insurance company has collected premiums from 2,000 people and only 1 person has lodged claimed, the insurance company still makes money. The insurance company has done its homework and has statistics on an average rate of people requiring costly hospital care. It is, therefore, willing to take the risk.
A seller can make limited money restricted to premium value only.
In short, options are all about the buying or selling of risk. A buyer of options can pass the risk to another party by paying cash upfront.
You can treat options trading as a business that makes money out of handling risk similar to what an insurance company does. You assume the role of an insurance provider rather than treating yourself to be a trader, investor or speculator in the traditional sense while selling on the derivatives markets.
You do not need any prior experience in Financial Trading and Portfolio Management to conduct this business. All you require is a basic level of common sense and arithmetic ability.
My approach towards currency options is like nothing you have ever seen before. I was formerly an exporter and trader of consumer products and I am well aware of the risks exporters take in extending credit to overseas customers.
As a business person, I am used to taking high risks. I have provided credit facilities to international customers without accepting any collateral or conducting any formal credit checks. In case of defaults of payment, I have lost money, most of the time 100%.
The business I am doing now does not require sourcing of buyers. I am on a good wicket. I am getting paid in full upfront, so not to worry about payment defaults any more. Earlier, I was taking risks. Now also I am taking risks.
I will teach you everything you need to know from my hands-on experience. It does not matter whether you are a beginner or an experienced financial trader.
It is simply different from the way it is traditionally taught in universities.
I have no agenda to make any money from you. I am not a currency broker or introducer. Nor I have anything to sell. I am not affiliated with any organisation that wants to sell something.
The only thing is I can teach you is how to fish. There is a Chinese proverb, which says "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime."
There is also an idiom saying "You can lead a horse to water but can't make him drink." I can show you the way but it is you who have to make an effort.
I am 70 and at this stage of life, I do want to share my experience without any monetary reward expectation. Particularly with the students, retirees and housewives.
Through this website and a mini boot camp, you will be provided learning material - practically everything that is needed to start this business in a couple of days. And in a language you understand.
Options can be traded both for speculation and non-speculation purpose.
Selling largely involves using options without speculating. Options trading does not involve buying or selling a currency or any financial asset. A buyer is paying full payment (option premium) upfront to a seller asking for a guarantee to deliver the market price value of the asset (not the asset itself) at the end of a certain period in future and at the price agreed now. In other words, the option seller receives a premium for writing or selling insurance to a buyer who has own reasons to buy the insurance.
Options can be risky, but they don’t have to be. Options can be less risky or more risky, depending on your risk tolerance.
Do you have a Growth Mindset?
This business model will suit people who feel comfortable in taking risks, like me, and have provided credit facilities to customers in the past. This enterprise involves the use of:
- leveraging and intelligent use of capital to generate better returns;
- cash flow management,
- market volatility and liquidity.
Most of us are aware that in today's digital world, income can be generated without anyone having to set up own bricks-and-mortar operation.
For instance, in the case of consumer product business, Amazon and some B2B marketplaces are a boon for entrepreneurs who conduct business from their homes.
For financial traders, CME Group provides diverse derivatives marketplace, made up of four exchanges, Chicago Mercantile Exchange (CME), CBOT, NYMEX and COMEX. Those who have money can conduct both speculative and non-speculative business at these marketplaces.
Speculative trading needs an investor mindset. It needs a skill set which requires a speculator to basically forecast the direction of the financial market and aim for high returns.
Non-speculative trading, typically, is a form of financial insurance which is as useful as property and health insurance. It needs a skill-set that involves managing risks and generating regular income and be content with limited returns.
At this website, the focus is on non-speculative use of Currency Futures options. The main business objective is to provide insurance cover to speculators and hedgers. Of course, there is no free lunch.
Why Currency Options?
The learning curve is short. A maximum of 38 hours is required to understand just one financial instrument and conduct required self-directed execution operations. You can acquire information on all the skills that you need from this website alone. You don't have to attend any theoretical course. Options educators offer courses ranging from Hk$150,000 to HK$400,000. You are getting it free.
Without self-practising or without supervision, you should not attempt this business venture.
Anyone can start with as little as US$25,000 as capital.
Leverage is provided by a regulated Exchange on payment of 5% of the contract value in cash as collateral (good faith deposit) with simple documentation. You can really put your capital to work harder. You don't have to approach any bank for an overdraft or credit facilities.
You get paid upfront for assuming the risks of speculators and hedgers.
Let us term it as a Financial Risk Insurance business that requires:
- No business or professional licence
- No office
- No staff to deal with customers and payouts
- No need for customer acquisition
- No laptop or desktop computer. Smart-phone will be used.
What is required is an understanding of a few concepts.
- Underwriting: Understanding and assessing risks
- Pricing: How it is influenced by market forces of demand and supply
- Reinsurance: Minimising or transferring unwanted risk
- Locating income opportunity in the course of daily monitoring: Earning an additional income to augment cash flow and reserves.
Do I need to have any knowledge of analyzing charts, indicators, trends or market sentiment?
No, It is not essential unless you want to get involved in Speculation business as well.
You really don't have to watch price charts or analyse fundamental events or spare time to learn technical analysis.
How much investment is required?
It is risky business and returns will match the degree of risk you want to take. Like any other business, there is no guarantee of you making a profit any or all the time.
The minimum capital required is US$25,000, half of which remains as a cushion for risk management. Your income goals will determine the total capital required. It should roughly be in the multiples of $5,000 beyond $25,000.
In order to give you confidence that you can execute transactions online, I will conduct live trading at a mini boot camp as well as post my own trading records on this website on a regular basis. By the end of three months of observation, you will be able to understand how this business is done and how much income is generated. You will be in a position to set your own money income goals. I will give access to my live trades for three months free of cost.
Like any other business, there is, of course, no guarantee that you will make a profit from each and every transaction. You could even lose money.
What will be the business activities?
1. Giving insurance cover to traders speculating on the regulated forex markets by collecting premium from them and assuming their risks. Basically selling currency options.
2. Providing hedging cover to investors and businesses who want to reduce the risk of an existing investment at times of adverse movements in the market or those who want to lock-in profits. Again, this involves selling currency options.
3. Selling options will largely be the principal business activity. At times, you may have to transfer your risk - as an insurance provider does by working with re-insurance companies. It would require some adjustments and rolling over the positions as part of risk management practice.
Who sources buyers for you?
Currency Options (OTC) are commonly used by private big investors and large businesses to hedge open or future deals either with banks or institutions in a bilateral contract arrangement.
Very few retail brokers provide an online platform for OTC options.
OTC currency options are expensive and not worth the try for a regular income.
A regulated Futures Exchange like CME provides a 23-hour (HK time 5 am - 4 am Monday to Friday) online platform, called Globex, to attract buyers and sellers.
The CME currency futures options market is very liquid, the costs of buying and selling (spread) are at least 80% cheaper than the banks or online broker's platforms offering OTC options.
We will be using CME platform for the business and dealing with an authorised broker for CME. A number of brokers offer connection with CME platform.
How much time do I need to get trained as a professional?
Training can be done in two ways depending on whether you are a beginner or intermediate learner.
Learn, do and earn together
If your mindset is willing to accept this kind of training process, then you will need a mentor.
You can acquire skills by trial and error methods while having a mentor beside you. If you have some experience in currency market trading, then the learning curve will be short. Not more than 8 hours to understand the transaction execution process.
Learn first and do later
If you are a self-motivated person and want to learn by trial and error on your own, you can go through a simulated trading environment by doing some dummy transactions before launching the live business.
An intermediate learner who has done any kind of financial trading will need a couple of hours to understand the whole self-directed transactions process.
A beginner might take 3 days to start executing transactions on a paper (dummy) trading account.
It is really not necessary to spend money on expensive courses. Just follow this website and follow my live trading records and try not to get overwhelmed by the information available on various websites. Information overload will impair your learning and decision-making process.
How do I train myself to be a self-directed trader?
Like any business, a new venture requires dedication and time. It should be undertaken in stages. You may fail frequently as part of a natural growth process.
As part of the training, you would need:
1. A glossary of essential terms, preferably restricted to 20 in number. Technical terms should be learned in layman's language. See Glossary Page.
2. An understanding of the concepts of
* Insurance and investment
* Profit, loss and expenses
* Cash Flow management
* Taking Risks and managing them
3. To practise the execution of transactions on a mobile phone or tablet trading platform. You really don't have to be tech-savvy to do this job.
4. An inclination to understand how the Chicago Mercantile Exchange (CME) works like an Amazon marketplace for the derivatives.
5. Discipline to acquire essential knowledge and skills without overloading yourself with unnecessary information. A beginner should be prepared to spend not more than 8 hours on understanding how financial markets work in general and the Currency market in particular.
6. Must have self-awareness about your psychology of money and the role played by fear, risk, loss, and unreal expectations bordering on greed in influencing business decisions. As long as you don't treat the business as financial speculation, you will do fine. Speculators need different kind of preparation and training which is not the subject of the training plan.
What are Currency options?
Option buyers pay a premium to the sellers to hedge their assets. How high the premium will depend on how volatile the currency is and how long will the protection be available.
In effect, sellers of Options provide a type of insurance against price changes in underlying assets such as currencies, stocks, bonds, commodities, etc.
A 1999 study by the Chicago Mercantile Exchange, "CME Exercised/Expired Recap for Expired Contract Report", determined that approximately 76.5% of all put options and 74.9% of call expire worthless. Latest figures are unavailable but generally, it is assumed sellers continue to have an edge and 80% of all options expire without any value for the buyer.
Buyers pay premiums depending on the anticipated volatility of the market. Many a time, even if the market moves in the favour of a buyer, the trader may only break-even or lose money because of higher premium paid to seek protection against adverse price movement.
In short, when anyone buys options on an asset, the asset has to move in the right direction and move far enough in time for the buyer to make any money.
Choosing the premiums requires experience and an assessment of the market.
As a seller, you have to analyse whether it is worth taking the risk and whether you are capable of handling the risk.
Currency option contracts are traded every week, month and quarter. Only Quarterly contracts provide risk insurance income opportunities. Besides, by focussing on the longer duration options, the business can be conducted at a leisurely pace.
Like Amazon, CME provides a marketplace and you can choose the instruments you want to trade. Basic analysis is to be done to find out whether you are being paid enough to take the risk.
You can then decide which option contract (or combination or contracts) you should take on so as to minimize the risks.
As each day goes by towards the quarterly expiration — you automatically collect some money.
Let’s say a $4,500 currency future option has roughly $1,250 of time value. The rest is intrinsic value.
Each day, the option loses a few cents of value just because time passes by.
Once the quarterly expiration arrives, all of that $1,250 will be gone and you’ll be left with $3,250 — as long as the other market conditions (variables) don't change dramatically.
There are a lot more details, of course, but that’s the basic idea. Sell option contracts when you believe the currency pair won’t move that much and you’ll make some extra money.
Based on my experience, I can say trading of currency futures options can be learned in less than 38 hours or 3 days and the risks can be managed effortlessly.
Unlike equity options, you can understand the product easily. Equity options require a big learning curve as well as deeper pockets.