How I am Making Money on Options Right Now

Retirement Investing, Options 2 Comments »

The last couple of posts have been dealing with trying to give a base line knowledge of options. Today I will get down to how I have been making money on the call side. I will try to continue with some posts on puts and eventually how I have been making money on puts too.
What is the Market Doing?
This is the question that drives investment. However, with options, I can control, not own, more shares for a limited time with less risk. My first recommendation would be to go to any of the major websites that offer financial information and create a portfolio. I use yahoo finance. I have a fairly broad selection of stocks in mine. This gives me a quick snapshot at what the market is doing for that day. I do not have a lot of time usually to continually check the market.

What am I Looking for in Picking a Stock?
In one word, VOLATILITY. If I can find a stock that I think is going to move, I can make money on it. So if I see some big movers in my portfolio, I have learned what their average range is just by watching them for awhile. I will also typically look at the 6 month to a year chart to see where that stock is in its’ natural curve. If it is on the low end of its’ average range, I will click on the options tab to see how much the premium is on usually a month to two months out. This gives the stock time to move to my target range. The reason that I like the one to two month range is that they are cheaper than farther out options because of what I wrote yesterday about time value.
If the stock goes up as I expected, then I will sell the calls that I purchase. This is called selling to close.
So back to our example from 2 days ago (Options are a Viable Option Right Now) where stock XYZ closed at almost $27, I wanted to buy 10 contracts. So why didn’t I?
Remember when I said that options expire on the 3rd Friday of the month? Well, tomorrow is the 16th (or the 3rd Friday) and the November strike prices will all expire. This is the primary reason why I didn’t purchase the $30 December calls. Typically the Monday after an expiration, the prices go down because investors realize that time is starting to run short on the next month’s options. So if stock XYZ hasn’t gone up significantly, I will look at buying the January $30 calls probably on Tuesday. I guess only time will tell if this is a good investment.

We will continue on in the next couple of days, and I will try to explain puts, vertical spreads, and straddles. Again, these are more complex strategies that require extensive knowledge to trade. I would highly recommend using a website like Think or Swim to paper trade. This will give you valuable experience in executing these trades while using fake or paper money. Again, feel free to ask questions. These are complicated issues. When it comes to investing, remember the old saying, “Time is Money.”


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More Option Basics and the Covered Call

Retirement Investing, Options No Comments »

Okay, so yesterday may have been a little much for some readers that are new to the option world. So I will back track just a little. Options are traded in increments of $5 strike prices for stocks over $25. For stocks under $25, they are traded in $2.50 increments. That means that you can usually buy the $20 strike price, the $22.50 strike price, the $25, $30, $35, etc for any given month. The market value of each option is based on 2 things. The first is intrinsic value, or what the difference is between the strike price and the market price. So what is a $30 call worth if the market value is $33. Intrinsically, it is worth $3 because I can call it from someone at $30 and sell it for $33. The second value is time value. So the further away the expiration date, the higher the time value is.
One thing to remember, options for a given month expire on the 3rd Friday of the month.

The Covered Call
This is probably the most basic form of trading options. This type is often times what brokerage firms will allow you to trade with out any options experience. Selling a covered call is generally seen as having very little risk, and it is even allowed in your Roth IRA or Traditional IRA.
The fundamental of this trade is that you own the underlying stock. You are then selling someone else the right to buy that stock from you at a certain price (strike price) on or before a certain date (expiration date). Of course for this privilege, you will charge a premium. The premium can fluctuate as often as the stock price. If the stock price goes above the strike price before the expiration, someone will call the the stock away from you. You get to keep the premium, and you sell the shares of stock at the agreed upon price (strike price). If the stock stays below or at the strike price, the call expires worthless, and you keep the premium and the stock.
Example Time:
Say I own 1,000 shares of ZYX stock, which is currently valued at $27.50. The $30 Dec call option is currently valued at $.55. So to execute the covered call trade, I would sell 10 contracts (each contract equals 100 shares) at $.55 a share. This would equal the premium that someone would give me in exchange for the right to call those 1,000 shares away from me at any point until 21 December (the expiration date). So my total premium would be $.55 x 1000 = $550.
Question: What happens if the stock goes to $31 before December 21st?
Answer: The purchaser of my call option would call the shares from me for $30 a share. So I would get the $30,000 for the sale of the stock plus keep the $550 for a total of $30,550.
Question: What happens if the stock stays below $30 a share until December 21st?
Answer: I would keep the 1,000 shares and the $550. I could then sale the January or February options to continue making a profit.
This option is usually used when you believe that a stock that you currently own is not going to increase in value beyond the strike price before the expiration date.

In my next post, I will continue deeper into our endeavor of potential ways to make money through options in this volatile market. Feel free to continue asking questions and posting comments.


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Options are a Viable Option Right Now!

Paying Off Debt, Student Loans, Tax Planning, Paying for College, Options 3 Comments »

by guest author Nicholas

This is the beginning of a multi-part series because options are generally thought of as complex transactions. Do you think options are risky? Options were originally created to reduce risk. I preface the next few days postings by saying, do not rush out to invest in options until you understand the risks involved.

What is an Option?
An option is a contract to buy or sell a specific financial product officially known as the option’s underlying instrument. The underlying instrument that I will focus on is a stock. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised. It has an expiration date. Upon expiration, it no longer has value and no longer exists.

What does an Option Consist of?
An option is either a call or a put.
A call gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
A put gives the owner the right to sell the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock if the option is assigned.

What does that Mean?
I will start today by only discussing call options from the buyers point of view. Let’s take an example. Say I want to purchase 1000 shares of XYZ stock. XYZ closed today at $26.95. I could purchase those 1000 shares, and I would pay $26,950.
Question: Why does anyone buy a stock?
Answer: Because they think it will move up.
With options, the question that I have to ask myself is when will it move?
I personally believe that XYZ stock will go up to $31.00 by the middle of December. So instead of risking my $26,950, I could buy 10 call contracts (one contract equals 100 shares of the underlying instrument) of the $30 December strike price. Each December call is currently valued at $0.65 per share. These expire on the 21st of December. So if each call is $0.65 and I want 10 contracts of 100 shares each, I will pay $0.65 x 1000 for a total of $650. So I now control, that is not to say own, 1000 shares of XYZ until the 21st of December.
Looking to the future if:
XYZ goes down to $22.00: my 10 calls will expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, it would be worth $22,000, and I would have lost $4,950.

XYZ goes up to $34.00: my 10 calls give me the right to buy those 1000 shares at $30, and I could sell them on the open market for $34. The calls are then worth at least $4 per share. So I sell them for $4 a share x 1000 shares for a total of $4,000. I subtract my $650 for a gain of $3,350 or a 515% return on my money.
Had I bought the stock, the 1000 shares would be worth $34,000 minus my initial $26,950 for a gain of $7,050 or a 26% return on my money.

XYZ stays at $26.95: my 10 calls expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, the 1000 shares would be worth $26,950, and I lose nothing other than the time value of money.

Tomorrow I will continue the discussion, but from the above example, one can see how an option will allow you control over a certain amount of shares of a stock for a specific time with a limited amount of money required, relative to buying the stock. The upside is that it is possible to execute many of these trades with the same amount of money required to purchase one stock. The downside is that the option is only valid for a specific amount of time.
Stay tuned for more. Feel free to ask questions, and I will answer them as best as possible.


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Keep On Keepin’ On Toward Your Financial Goals

Budgeting No Comments »

Just a quick update and moral support on a Friday night. Focus on tracking all expenses, resist your urge to go to the vending machine to get a soda/snack, and concentrate on saving money. If you can, avoid going out to eat and taking long trips; conserve that gas money and lost dollars on high priced meals. Take advantage of coupons that you see coming in the mail for the grocery store, and also for some of your favorite fast food places.

You don’t have to pay full price for anything! I just bought a laptop online that is a brand new Lenovo (Lenovo bought IBM’s laptop business recently) for $644.99. Expensive you think? Not for a Pentium Core Duo 2.0 GHz, 1 GB DDR RAM, 120 GB hard disk, 15.4″ glossy screen, webcam, fingerprint reader, built-in blue tooth, and wireless LAN. I bought it on eBay completely new with a full one year warranty (I verified it with Lenovo), and it showed up in the mail 3 days later. I own a Dell Inspiron 6400 currently, but now that I have quit my job, I needed another laptop so that my wife and I can push forward on websites, real estate and other en devours simultaneously.

So guys, just to reiterate, keep plugin, focus on your long term goals, and invest, invest, invest!


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Repossessed Mobile Home Offers

Real Estate Investing No Comments »

Buying into mobile homes have made real estate investors millions of dollars. Just because it may seem that the class of renters/buyers you would be working with are lower class and thus more trouble, you may be wrong. Most of the folks that would rent or buy a mobile home do not make a lot of money, however often they are less demanding than a middle class savvy home buyer. The mobile home buyer/renter is looking almost exclusively at price, and thus, if you can fit their budget, it becomes an easy sale.

For example, I purchased a double wide mobile home with the land in an outlying area of the town I live in. It was a HUD repossessed mobile home, and I purchased it for $26,500. It is a 2002 Palm Harbor 3 bedroom, 2 bathroom home about 1,150 square feet. I found the property on bidselect.com, and made my offer. We lived in the home for close to a year, and bought into another property in town. My total PITI on the property is roughly $350 per month.

After moving out, I was able to rent the property for $600 per month. Not a bad deal at all, considering that the mortgage is only for 10 years, and I only had to put up about $6,000-7,000 up front to close the property, and to build a nice shed for storage. So in a nutshell, buying into mobile homes, especially repossessed mobile homes, can be very profitable, with a limited amount of risk.

But let me give you a couple of websites you can use to find deals on repossessed mobile homes:

  1. bidselect.com (my favorite for all residential types of properties)
  2. vmfrepos.com
  3. 21strepos.com

These are just three sources to browse available mobile homes in your area. But not only for real estate investing, but just for finding a low priced dwelling in your area.

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Why are Gas Prices so High?

Budgeting No Comments »

No doubt about it, gas prices are high these days. But what is the problem, why are gas prices so high? Well it started with Hurricane Katrina. Most of the petroleum refineries in the U.S. are in the gulf coast region. When the hurricane hit, it wiped out many of those refineries, thus drastically shifting the supply of gasoline. With a shortened supply and no dramatic effect in demand for gasoline, prices soared. The U.S. refineries still haven’t recovered, but here is the most amazing part - U.S. citizens did not lower their demand for gas.

Question: But gasoline is a must have, how can I lower my demand / consumption of it?

Answer: By buying a more fuel efficient car and reducing unnecessary travel.

But the problem is, most Americans do not know how to downgrade. We think that we should always increase, and never decrease. Over the last 2-3 years, there has been no significant change in the sale of large automobiles such as full sized trucks and SUVs. Commercialism and the media have pounded it into our heads that must, absolutely buy the best and largest car we can (and usually cannot) afford. All advertisements focus on payment and interest rate only, nothing about maintenance, gasoline consumption, or longevity. So we as Americans just blindly follow the herd, trying to “keep up with the Jones’s” and buying that vehicle that is way too big, and way too costly.

I witnessed a news story that reported the answers that people gave to being questioned about their vacations and trips during a summer with expected increases in gasoline prices, and must responded by saying they would just grit and bear it. We must wake up if we are ever going to see any real changes. I know you have to buy gas, but limit your trips and joyriding. If we all cut back, then gas prices will fall to encourage more buying.

Political Problems

Another problem that is facing the gasoline market is potential pressures issued by democratic politicians. These politicians hope to reverse the tax break given to companies for oil exploration. Currently, most of the exploration expense can be depreciated over just a few years, giving companies an advantage to seek out new oil, and bring it to the market. But the democrats want to take this away to “”preserve the Eco-system”". This is ridiculous, and will cause oil producers to stop seeking out new oil deposits, and drive the price of gas through the roof!! We must not let this sort of legislation pass. Contact your representatives, and get the scoop on the latest legislation that is anti-oil and tell them you want low gas prices, not to save some species no one has ever heard about before.


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Financing a Car for College

Budgeting, Car Finance, Car Shopping No Comments »

Teenagers are great, all they think about (especially if they are boys) is 4 spinning wheels. They all have high aspirations for the expensive car, with the souped up engine, NOS (nitrous oxide) booster, and titanium alloy rims. They want it to go 100+ mph and have a hot, shiny finish. But they are ignorant, and do not count the cost of a vehicle. Many teens today have parents that will buy them most any car they want, along with keeping the gas tank full and paying for insurance. This is one of the worst things you can do to your child. They need to learn responsibility, and respect for the things that they own.

I am reminded of one of the teens that is a member of our Church. He was looking at an F-150 full size truck. The price wasn’t too bad, about $2,000, but it was full size truck, eg a gas guzzler. He decided to put a couple hundred bucks down on it and to finance the rest with the bank. Not a bad idea for one his age, use the loan on the vehicle to build a little credit before going on to college.

The Good

As eluded to previously, the positives related to this purchase are as follows:

  1. Low price. It was a used vehicle, and long term, the better way to go. See Should I Buy a New Car or a Used Car? for more details.
  2. Credit Building. Taking out a short term loan (1-3 years) on a used car at this price is an excellent way for first time borrowers to build credit without getting in too deep. Credit will be invaluable to him later.
  3. Utility. As we all know, having a truck will allow you to do all kinds of work and moving, that a car will not allow. This will come in handy as he moves out of state to go to college.

The Bad

Now let’s look at some reasons why this is not a good purchase:

  1. Gas Mileage. After the issue of price has been settled, gas mileage is the most important factor for teen. They have no money and therefore have to take steps to keeping the gas budget down, especially with the price of gasoline here in Texas approaching $3/gallon. With the F150 getting less than 20 mpg even on the highway, this teenager is facing an enormous cost of gas per month.
  2. Standard Maintenance. Oil changes and air filters won’t be much different for this teen, but when he needs to replace the tires, he is in for a rude awakening. 13 inch radial tires for a small car may cost as little as $30-40 a piece, but he will be lucky to get decent tires for his truck for less than $100 a piece.
  3. Insurance. This is the real downside to financing a car for college, or for any other reason. Banks will not lend money on a vehicle without full coverage, and the cost of full coverage vs liability only coverage is staggering.

The Ugly

F-O-R-D (Found On Road Dead). Ford’s are terrible vehicles, especially the F150, their most notorious flop. Do not, I repeat, do not buy a Ford F-150. They are among the worst vehicles on the road. If you do, expect high, high maintenance costs, as they love to break down. Also, and I’ll throw this in for free, Ford is one of the largest financial supporters of the homosexual cause. The company is tearing at the heart of Christianity, and I have added my name to AFA’s boycotter list.

To close, I recommended to the youngster that he not buy the truck. However, against my counsel, he bought the truck anyway. I have talked to these teen boys for a long time about buying a small car that is cheap and gets excellent gas mileage, but they just will not listen. I guess they want to make their own mistakes. Only time will tell…

———————-

A home based business is often not enough to get a car auto insurance. Ideally, one should get free insurance quotes prior to committing to anyone. With luck, one can get instant loans as well. People having health insurance jobs usually of sort such deals instead.


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Retirement Savings vs Paying Down Your Debt

Paying Off Debt, Retirement Investing, Credit Cards, Tax Planning No Comments »

I love to interact with my readers/subscribers. So don’t hesitate to send in a question and ask me to post about it. Personal Finance Resources is all about helping you with your home finance situations. In this post, we are going to address a few questions posed by one of you, on the topic of Retirement Savings vs Paying Down Your Debt. Here is the email communication:

“I happened to stumble upon your extremely valuable info while researching methods to pay off my credit cards. Don’t know if you’ll have time to answer my question, but here goes: I’m 28, have $20,000 cc debt (@ ~15%), and approx $50,000 in a Traditional IRA and Roth IRA accounts. Do I take the penalty and pay off the CC? I no longer have any need for CC now that I’m out of school, so I’m not worried about this situation reoccurring. Problem is, that compound interest down the road is just so tasty! I figure the future money to be gained is greater than the cc debt with interest, but I need to repair my 611 credit score so i can at least think about buying a house and getting a business loan within a reasonable period of time. Any suggestions?

I’ve been thinking about this one for some time now and your help is greatly appreciated. I am working and will be in the 25%, possibly 28% tax bracket, and have been paying $400 to $500 a month in credit card payments. I’m not sure what my penalties for early withdrawal would be, but if I can invest those $400/month into my accounts instead of losing it to the credit card companies, I think I will be able to compensate for the loss. As it stands now, I have not been able to, nor will be able to put any new funds towards my investments with these current credit card payments. What would be my total withdrawal (including penalties) if I were to pay off the credit cards completely, or would it be wiser to pay off 75% of the credit card debt and continue to pay smaller credit card payments while adding small amounts to my retirement funds? I figure there is a good cost/benefit ratio, but my extreme desire to purge myself of the credit card parasites has clouded my reasonable judgment. “

Possible Solution

The first, and from what I can deduce as the most important question posed here is whether or not to take a tax penalty and pay off the credit cards. If you read my post on Credit Card Secured by Roth IRA, you will notice that in addition to paying income tax on an IRA withdrawal, you will also likely be penalized with an additional 10% tax. So in this case, the total tax on a withdrawal might be as high as 38%. So, to be able to pay off the $20,000 owed to credit cards, a withdrawal of between $30,000 - $33,000 would have to be made. That would be the better part of the IRA account held.

The positive side of this equation is that the $400-500 a month spent in credit cards could be put into the retirement fund as an investment for the future. But it would take at least 4-5 years to replenish the money withdrawn from the retirement account.

The simple fact of the matter is, we need to put our money where it will earn us the most (or cost us the least). If it were not for the serious tax implication of early retirement withdrawal, it may be better to pay off the credit cards, depending on how great your return is on your investments. If it is less than the 15% being spent on credit card interest, than it would make sense.

The Personal Finance Resources Solution(s)

If possible, I would attempt to work out a secured or unsecured loan with my bank at a lower rate of interest. Try to get it down to 10% or less. If you had a house, this would be an excellent situation to use a Home Equity Line of Credit. If you are unable to obtain a consolidation loan, then use the debt stacking method to maximize your payments over the offending credit cards. Then I would stop any contributions to my retirement account, stop going out to eat, cut the cable TV off for several months, and put the maximum amount of money possible into paying off the debt.

With regard to repairing your credit score (611 should be enough to obtain an FHA loan for a house, by the way), credit card companies are mostly interested in a continuous stream of punctual payments. So paying off the cards now would help your credit score, but long term, you will build your credit better if you make some payments. I am not saying to make minimum payments, but make several months of large (as large as you can) payments to increase your credit score while getting the balance down.

I hope this solution was helpful. Consider signing up for my RSS feed so that you don’t miss out on any of the upcoming personal finance issues and solutions.

———————-

There are quite a few adverse effects of cheap insurance. They might be a temporary debt help, but what is the use of such help that will in turn contribute to more debt piling. This consequently contributes to public debt. Turning to such resort is a common occurrence amongst people who work at home. True, that there are edges to best work at home, but ones oft left ignorant.


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The Decision to Retire Young

Blogging 1 Comment »

It comes as a tragedy, I know. But I am finally going to go for my dream. I want to have time and money for the ministry of the gospel of Christ, and working a full time Just-Over-Broke will not allow me to do so. I have some steady income with rental properties, property management, a technical service contract, and a few websites, and am ready to step it up to the next level. I figure that I will have a short fall of somewhere around $500-1000 per month. I have some cash reserved, and can survive for at least a few months while trying to up my income.

I have always strove to own and operate my own business, or businesses. Multiple streams of income in different markets is a very attractive proposition. Lose one, you still have the others. I can remember as a young teen, I think I was maybe 15 or 16 years old, being introduced to the concept of your own business and the chance at financial freedom. It is time I try my hand. So on November 9th, 2007 I will end my job, and head out on my own.

I am an entrepreneur at heart, and welcome any ideas from the Personal Finance Resources user community. I know there are other real estate investors out there like me, and your ideas and opinions are invaluable. If there are any webmasters looking for a trade, a link, or any other type of deal, feel free to use the email link to the left and drop me a line.


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Renting Properties in a Buyer’s Market

Real Estate Investing, Buying a Home No Comments »

by guest author Nicholas

I have recently moved to a mid-size Arizona market. This market is rapidly starting to feel the down-turn in the housing market that Jeffry mentioned in his latest post on Smaller Texas Real Estate Markets Doing Well. The houses that are for sale are staying on the market longer and longer. I am planning on being in this area for 6-9 months before moving out of Arizona, so I will discuss two options that are available to me.

Renting

This is the easy choice. No money down, no homeowners insurance, and very few worries (other than making the monthly rent payment). Those are the benefits. You already know the downfall, throwing that cash away every month without gaining any equity. You also have to abide by any rules that the owner of the house decides to impose.

Buying

So I mention to most people that I am considering buying even though I am only going to be here for 6 months, and they are appalled. Why would you do that, especially in a slowing market for such a short time? The answer: Property Management Firms. So the situation would go like this, I would buy a house, live in it for the six months I am here, move out of state, and establish a contract with a property management firm.

These firms will show your house to perspective renters, do credit checks, ensure employment, conduct minor maintenance on the house, and collect the rent money each month. They typically charge 9% to 12% of the monthly check to manage your property. Most times, you as the owner even get to approve potential renters. Hold the property until the market goes back up and sell or just keep it as another potential source of income. This is just another possible way to invest in a buyer’s real estate market. Good luck!


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