Selling Covered Calls

As a general rule I think options are a terrible idea for the casual investor.  For those who are simply trying to match the markets without spending a tremendous time watching their investments, options represent a significant danger.  Even for those who have experience with options, understanding all the implications of buying or selling an option can be confusing.  Covered calls however, may have a useful place in the typical investor’s portfolio.

Option Terminology

Options are defined by several values.  For the purposes of discussing options here we will assume we’re talking about an options contract on a stock, which is not always the case.  First of all, be aware that an options contract is for 100 shares of the stock.  Thus you don’t deal in tremendously small lots when dealing with options.

Each option is either a call or a put.  A call option is an option to buy a stock at a particular price on or before a particular date.  A put option is an option to sell a stock at a particular price on or before a particular date.  In both cases the date by which the decision must be made is the expiration date and the price at which you have the option to buy or sell is called the strike price.  These options also have a price which is listed in terms of a price per share.  So for example if you see a price quoted as $0.25, that means twenty-five cents per share, or $25 for the full contract, since contracts are for 100 shares.

If all of this sounds confusing let’s look at an example:

Supposing we have a stock X which is currently trading at $35 per share and it is currently January 1^st.  Now suppose I buy 10 call contracts on this stock with a strike price of $37.50 and an expiration date of February 23^rd (Note that expiration dates are the third Friday of a month).  Let’s suppose I pay a price $1 per share for each of these options ($100 total for each and $1,000 total since I’m buying 10 contracts) and look at what happens depending on how stock X’s price changes in that time.

If stock X does not exceed $37.50 before February 23^rd my options will expire as worthless and I will lose 100 percent of my investment, assuming I do not sell the contracts before then.  If on February 23^rd the price of the stock is higher than $37.50, I will be able to buy the stock at a discount, which will hopefully exceed my $1,000 investment.  So for example if the stock is at $42.00 I will make $4.50 per share on the 100 shares per contract for 10 contracts, thus making $4,500 less my initial $1,000 investment.  This means I made $3,500 on a $1,000 investment.  As you can see, options have a high risk and high reward.

In general, people often close their position before the expiration date, which of course affects the economics as well.  If I have a call option, for example, with some time left before the expiration date and the option is already “in the money” (meaning the share price is higher than the strike price for a call), then I will probably be able to sell it at a premium to the difference in the prices, because of the potential to make more money before the expiration date.

Covered Calls

So now let’s suppose instead that I want to sell a call on stock X.  (more…)

How to Choose a Savings Account

Photo Credit: WWarby

Today’s post is a guest post by Fred Schebesta who writes for Savings Account Finder where he helps people to choose the best savings account and term deposits.

While it is easy to spend all the money which comes in from your wages, and then some, today is the day you will start a savings plan and start using your money more wisely, for two reasons – firstly you’ll see how important it is to have a savings plan, and secondly you’ll see how easy it is to open a dedicated high interest saving account which practically manages and runs your savings plan for you.

Who Needs a Savings Account?

Not everyone needs a savings account, for example if you have a mortgage you should be directing your extra funds to pay off your debt before you start trying to earn interest on a savings account. Similarly if you are nearing retirement then an approved Retirement Savings Account will offer you better tax benefits and more attractive fee structures than a typical high interest savings account could offer in your situation. Instead, a savings account can benefit:

• · Children learning to save. Opening a savings account for your child can be the best gift you will ever give them as you are starting them on the road to financial knowledge and stability. Learning to save is an important skill and the earlier you teach your children about making regular deposits and how compounding interest is calculated, the sooner they will be in control of their money, rather than having it control them in the form of credit card and uncontrollable debt.
• · Young people saving for a house. A new home is a big investment and usually requires a big deposit too. Therefore, opening a high interest savings account can help you achieve the goal of a house deposit a lot sooner, as you can set up automatic transfers from your transaction account when your wages arrive so you are paying yourself first and allowing your house fund to regularly increase. You’ll also be earning a high rate of interest which is calculated daily and paid monthly so the more regular deposits you make, the more interest you will be able to earn on top of your own contributions.
• Families looking for more fun. When you are managing the family funds it can seem like there is never enough to go around. Unfortunately this could mean missing out on family holidays, trips to the movies or new bikes for Christmas. Whatever your family’s goals are, a dedicated high interest savings account can help make them a reality because your savings account safely guards your funds, adds interest to them and makes for a simple place for your family to save together and achieve their goals.
• · You there, with your dream purchase. If you have a dream purchase in mind, big or small, a high interest savings account can help make it a reality. By separating your savings from your everyday funds you are less tempted to spend the money you have so carefully saved, and you can instead watch it grow, contribute or reinvest it all online.

Features of the Best Savings Account
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Gifts for Investment Nerds

As a finance nerd who is very hard to shop for, I thought I might take some time to give some hints to those of you who have to shop for people like me. Here are some clues of gifts you can get for boring folks who only like to talk about the stock market and economics:

A Subscription to the Economist – I have had subscriptions before, but I can’t ever get through them in a week so pretty soon I have a pile in my entryway.  That being said it’s SO much cheaper to get a subscription and if you giftee is a frequent reader of the Economist it could be a very appreciated gift.

A copy of Thomas Sowell’s Basic Economics – This is a great read for someone who is interested in economics.  While he occasionally dabbles in partisan politics, this book is much less “agenda driven” than many of his other books, particularly Economic Facts and Fallacies.

A Single Share of Stock Cerificate – Most of us trade almost completely electronically anymore and we almost never actually get to hold any physical symbol of our interests. You can get these from OneShare.com. Right now you can get $20 Off Complete Framed Stock: Use code HOLIDAY09.

Gold Coins – Much like the stock certificate, this gives us something physical to represent what we spend so much of our time doing.

Classic Books – Even if they’ve already read them, it can be nice to own a copy of something like one of Peter Lynch’s classics, or the Intelligent Investor.

Stress Relief – Get something to take the edge off during the trading day.  I like stress balls, but there are tons of options.

Report or Newsletter Subscriptions – If you’ve ever heard them mention a newletter or a research service they’d like a subscription for, this can be a great gift.  I’d never go out and buy one myself, but if I got one as a gift I’d use it.

Of course, in the end we know that we’re hard to shop for and will be happy with whatever you give us.  Especially if it’s not depreciating rapidly!

Four Ways To Focus Your Finances Tomorrow

For so many of us, the problems in our life can be attributed to insufficient attention. One of the most important things we can do to solve a problem is to stop ignoring it. Financial problems are no exception. In fact, getting focused on your finances can often be the difference between success and frustration.

The key is to get started immediately. Don’t wait. Start tomorrow. Here are four things you can do tomorrow to start focusing your attention on your finances and start getting them in order:

1.) Have a family meeting
Get everyone on the same page. You can’t do anything until you’ve discussed how financial issues affect your family. Your family can tell you what they think is going wrong and you can also share your thoughts with them. This consensus and making sure the whole family understands, and is on board with, the financial goals can be the tipping point for success.
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Why a Clawback Might Be In Order

Photo by: Wildcat Dunny

When the financial crisis was in high gear I argued that the pitchforks and torches being raised against AIG were counter-productive.  I felt like it was a feel-good symbolic gesture that was more for making people feel vengeful than getting at sound economic policy.  I still stand by that idea, however in the face of record profits from companies like Goldman Sachs, one has to reconsider whether the idea of clawbacks don’t have a place in the banking discussion.

A clawback would be some kind of tax levied against the companies that took bailout money, or maybe more broadly to the financial industry as a whole.  While the legality of such a tax may be in question, there are some reasons to consider whether this is a reasonable course of action.  Many of these banks have paid back, or are paying back, the money they borrowed from the government, but that debt doesn’t fully quantify the advantages that financial institutions received from the government.

The first example of this is the asymmetry introduced by preventing various stocks from being shorted during the crisis.  This is obviously beneficial to leveraged companies that are using this stock as an asset to offset their liabilities.  This is on top of the benefits that come from being able to borrow money from the Federal Reserve Bank essentially for free, and the money that is being funneled into the stock market by the low interest rates. (more…)