Moving

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What are your Options with Options?

Basically with options you have 4 choices. You can Buy a Put, Sell a Put, Buy a Call, and Sell a Call.

Basically if you “Buy” a call or a put, you are paying for the privilege having the option of buying (call) or selling (put) at a future date. For example let’s look at buying a call option.
Say you pay $1 per share for a call (2 months later) option of ABC stock with a current price of $12 / share. In two months if the share price is less than $12 /share you won’t bother buying them, you are out your $1 x the number of options you bought. If they are valued at over $12/share you buy them for $12 and then either sell them immediately for a profit of Current price - $12 (purchase price) - $1 (option price)… basically if the share value is greater than the share price ($12) + the option price ($1) you have made a profit.

Selling a call option is basically the opposite. You want the share price to go down, and your profit is $1 x the number of shares the person bought off you. In this case your losses are theoretically infinite. Realistically you will probably sell a call and buy the shares at the beginning, so really if the stock price goes up all you are losing is the profit you would have made off the stocks themselves.

Buying a put gives you the option of forcing someone to buy shares you own at a later date… if the stock goes down you force them to buy the stock at the set price ($12 in the example) making a profit of $12 – the current price - $1… >Selling a put gives someone the option of forcing you to buy a stock at a later date at a set price… the maximum you can lose is the full value of the set price ($12) - the option price ($1)…

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Diversification - Smart move or dumbing down your portfolio? - Response to Questions

Quoted from Cupcake
so your idea is to invest in some riskier shorts, and plant some cash in some solid stocks correct? how do you equate how much you put where?

First off I think you're misusing the term "shorts"... when it comes to investing shorting is when you borrow a stock, sell it, and then in the future you buy one and give it back... essentially you want to stock price to go lower.
What I'm recommending is finding 2 (or more) industries you think are going to experience growth, or even that you just know a fair bit about. One of them should be a safer industry, my example was banks, one of them should be a riskier industry, probably that you find more interesting and don't mind researching; your choice of technology was a good example. Invest (Hold on to long term) in the safer industry, and trade (buy and sell regularly and speculatively) in the riskier more exciting industry.

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Diversification - Smart move or dumbing down your portfolio?

In response to some questions by an investor on the site I decided to do a blog entry about portfolio diversification, when it should be used, and where it is useless.
The point of diversifying your portfolio is to hedge against risk (reduce). The thinking being that some stocks may go down even if they are good stocks, but the majority should go up, thus increasing your money.
There is more than one way to diversify. One of the best means of diversification (the way the is the greatest reduction to risk) is investing in 2 or more industries that are inversely related (when one gets stronger the other weakens). Overall however the market should grow. Of course there are no perfectly inverse relationships.
Investing in more than one country is also a good way to diversify your investments. Spreading your money over many economies is inherently less risky than investing in one economy.
What is the cost of risk reduction?
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Hedging - Not Just Useful In The Garden

Something I am learning a lot about right now is hedging of risk. I’m taking a class at school about financial institutions, and it’s pretty much what they do. We always however seem to come across things that I think are stupid, why would someone want to (100% hedge risk when it eliminates 100% potential for profit) but when I really think of the concept behind these matter I always seem to find decently practical applications.

Today I’m going to talk about hedging risk through shorting, and then I’m going to talk about the only real world scenario I can think of where it is useful.

Basically the theory behind short selling to hedge risk is that in taking a long position and short position, your profit has a perfectly negative correlation. When one goes up the other goes down at exactly the same rate.

For example if you own 100 ABC shares valued at $50 (Cost = 5,000) then you short 100 of the ABC shares (Take in = 5,000) no matter what you do your portfolio would stay at the same value. Sound stupid? Why wouldn’t you just not buy ABC, or if you already owned it and wanted to hedge the risk completely just sell it? That’s what I said too… It makes a lot of sense to do that under normal circumstances for sure.

Then I got thinking about a friend of mine who was asking about a company stock ownership plan. The company offers a very nice return to employees who buy stock, something like 35% over two years. The only risk is if the stock price going down, and if the stock goes up all the better. My friend was also a little concerned about the fact that he wouldn’t be able to use his money, as you have to keep it invested to keep getting the bonuses. Maybe you have something better to do with your money then invest it in the company you work for and hate, maybe you think the stock price in your company will decline over the next few years, maybe you just don’t feel the return your company offers is as much as you could make playing the market with the same amount of cash. DON’T BE STUPID (like I would have been a week or so ago). Buy the stock, take full advantage of any stock ownership plan your company offers you, and then short the hell out of it.

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Lets Talk About Arbitrage Baby

This week I’m going to talk about Arbitrage (or something very similar to it). In it’s normal sense to take advantage of if you need to have access to 2 (or more) exchanges in different countries who charge virtually 0 commission, but I believe you can take some advantage of it with just 2 accounts in different countries, brokerage fees aside. It should also help hedge against risk from fluctuations in the currency markets.

There are 3 things you need for Pure Arbitrage, which very rarely, if ever, occurs.
- Something for sale in 2 places at different prices
- The same item must be exchanged
- The item must be bought and sold instantaneously

What I would propose is somewhat of a modified Arbitrage. I’ll first explain what you need, need to do, and then give an example.

You need: Access to two different exchanges in different countries. You might need two brokers for this, but it doesn’t really matter. You need to locate a stock you are interested in purchasing which is listed on two different exchanges. You need to know the comparative values of the currency of the exchanges you are using.

What to do: 1) Take the Bid & Ask prices from the two exchanges and 2) put them in comparative terms (common currency). 3) Which one has the lower Ask price? That is the exchange you are obviously going to buy the stock on, why pay more for something somewhere when you can buy it somewhere else for cheaper. 4) (Aside from my recommended use) In real Arbitrage you would immediately turn around and sell the stock you have on the higher priced exchange, making a profit, but realistically this isn’t possible (I’ll display why in the example). Anyway, as you can see in my use, your savings is the difference between the two ask prices times the number of shares you purchase. It’s not a huge difference, but let’s fact it, in today’s market everything is slim margins.

Example:

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Commodoties are hot and will stay hot...

Companies with major ownership of almost any non-renueable natural resource are worth giving a 2nd look... Mining companies are a great example of a solid play... sure alternatives come out all the time... but there will always be uses for metals and oil, and such...

Oil may actually be something you want to look away from, for a while at least... Oil companies' stocks have shot up in price... They are argueably at the peak of what people are willing to pay for... and there are alternatives being discovered every day... the price should settle before it goes up again significantly...

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Investing in Companies Emerging from Bankrupsy Protection

One word you hate to hear in the investing enviroment (unless you're into shorts) in bankrupsy... Theres not really anythign good about it... or is there...

There are a few reasons to consider why companies that are imerging from bankrupsy protection may be a good idea to consider... Lets look at a few of them...

Contracts with Employees/Unions
- When a company is losing money its pretty hard to press for raises or more benifits...
- When a company is in such a bad place it is teatering on the brink of extisction its not unlikley that you can manage to get a new and better (from the company and shareholders standpoint) contract from your workforce... sure they might not like it a whole bunch... but when given the choice between a smaller pay check or none at all the choice isnt that hard
- Debt Loads- If your in bankrupsy protection lenders will start to cut their losses... Companies who emerge from bankrupsy protection come out with a much ligher debt load, and better agreements from lenders... who wouldnt love to be able to borrow money... have the goverment tell everyone you borroewed from to leave you alone... and then pay back 1/2 of it... I know i would...

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Picking Companies Based on Geography

Picking winning companies by where they are located may sound stupid, but its a huge factor in the success of many business'.

The #1 rule when implementing this "strategy" is picking states (or geographic regions) with growing economies and low tax burdens... States without personal income tax tend to attract population (rich population) and thus growth...

No PI Tax States:
Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming
New Hampshire and Tennessee tax only dividends and interest

This is anouther one of those things that certainly can't make or break a company but it can help

Growing economies are also a big plus when you look at geography
Top Growth States:

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