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Thursday, January 29, 2009
Wednesday, May 28, 2008
The Art of The "Covered Call"---the "Grandmother's Option"---
Covered Call Writing is called the Grandmother's Option, because it is so conservative---one is in the "Banker's positon" versus a gambler. The odds for the astute trader can be quite high for success. It does take practice to get the swing of it however.
Consider the following example.; You have bought 100 shares of AAPL at 130 and it has risen to 190. You really do not want to sell, but on the other hand, you would like some income from the investment. You are older and in a perfect world you could get excellent income and then leave the stock for the grandkids. You bet that in the summer doldrums it will not move higher. After all---it has risen from 130 to 190 in just months. You remember the famous "bathing suit rule"-----when summer approaches, the traders are thinking of what? bathing suits. As anyone who has been to Wall Street is aware of---when Friday comes, most have left town to sail in cooler lakes. Trading volume is usually low.
You also know that the summer quarter is the slowest for high tech stocks usually----and you have noticed that few people are on their computers in the heat of the summer. And that translates to low purchases of tech stuff and that in turn might translate into lower earnings.
So---you look at the call option table.: (May 22, 2008
You decide that selling the July 200 Call priced at $540 is attractive ---ie at the strike price of $200 or if Apple stocks gets to 200 between now and July 18 you would sell it for $200 and keep the $540 or buy back the call, which would cost say for example purposes, $800.
The way this works ideally is that Apple stock holds even or drops and the call price gradually drops to zero or you buy it back for $50 say and then repeat the process, and sell a call for october 2008 for another $500----This process creates continuing income and hence provides a method of a senior who does not want to cash in one's "chips" and suffer the capital gains from such a huge capital gain, to get continuing monthly income.
As an investor, you are saying "Show Me" to the market optimists---show me that the market can move higher in the current situation of rising commodity prices and rising unemployment and recession. The covered call writer is the essence of the conservative investor.
Stay tuned for another episode of the Traders little black book which will cover "Short Interest---and why it is not interest in short people. Stay tuned.
Consider the following example.; You have bought 100 shares of AAPL at 130 and it has risen to 190. You really do not want to sell, but on the other hand, you would like some income from the investment. You are older and in a perfect world you could get excellent income and then leave the stock for the grandkids. You bet that in the summer doldrums it will not move higher. After all---it has risen from 130 to 190 in just months. You remember the famous "bathing suit rule"-----when summer approaches, the traders are thinking of what? bathing suits. As anyone who has been to Wall Street is aware of---when Friday comes, most have left town to sail in cooler lakes. Trading volume is usually low.
You also know that the summer quarter is the slowest for high tech stocks usually----and you have noticed that few people are on their computers in the heat of the summer. And that translates to low purchases of tech stuff and that in turn might translate into lower earnings.
So---you look at the call option table.: (May 22, 2008
You decide that selling the July 200 Call priced at $540 is attractive ---ie at the strike price of $200 or if Apple stocks gets to 200 between now and July 18 you would sell it for $200 and keep the $540 or buy back the call, which would cost say for example purposes, $800.
The way this works ideally is that Apple stock holds even or drops and the call price gradually drops to zero or you buy it back for $50 say and then repeat the process, and sell a call for october 2008 for another $500----This process creates continuing income and hence provides a method of a senior who does not want to cash in one's "chips" and suffer the capital gains from such a huge capital gain, to get continuing monthly income.
As an investor, you are saying "Show Me" to the market optimists---show me that the market can move higher in the current situation of rising commodity prices and rising unemployment and recession. The covered call writer is the essence of the conservative investor.
Stay tuned for another episode of the Traders little black book which will cover "Short Interest---and why it is not interest in short people. Stay tuned.
Tuesday, February 5, 2008
"Cold Calling Cowboy"----The Wild West ; The Deregulation of Wall Street
Over the past thirty years there has been a transition from a structured investment environment to one that is "deregulated"---it has been marked by the end of the era of salaried brokers with higher commissions and research, to a world of $7 trades and computer simulations. It has been a movement from wise older traders to young, churn and burn robots.
"Where has been the saving,?" you might ask. I like to compare the situation to the airline industry. Years ago, when airfares were higher, and Northwest Airlines had ZERO debt, the transportation industry and financial services industry was seen as a public sector, where the government had a say in an organized and supervised code of conduct for all participants----those days are gone. When I fly, I always feel more comfortable when I know there has been maintanance done on the engines. The cheapest fare is not consoling if I see flames coming from the engines. Ditto for the financial services industry.
When investment just becomes a transaction, when people just become a transaction, and when "churn and burn" becomes the overriding element in business, the customer always loses. Consequently, I reject the notion that nostalgia for the good old days of regulation is senile and old fashioned. I believe it just makes economic sense for the investor.
Recently a lone French trader for a bank, using "proprietary trading funds", in the throes of breaking up with his girlfriend, took enormous options risk and....despite the bank even knowing about his risks, but not understanding it or choosing to ignore it for fear they would impede some gains, caused a 7 billion dollar loss.
Imagine what would happen worldwide if just a dozen or so financial professionals broke up with their girlfriends. Yes. Girls that is something to consider. You may think you are just breaking up....but you might just be causing a global catastrophe. Be True to your man....o.k.
In summary. The incredible catastrophe of ENRON was not just ENRON. The real catastrophe was that as a nation we have modeled our financial institutions on ENRON. And we have the major tactic of DELAY, the verb, not the noun.
"Where has been the saving,?" you might ask. I like to compare the situation to the airline industry. Years ago, when airfares were higher, and Northwest Airlines had ZERO debt, the transportation industry and financial services industry was seen as a public sector, where the government had a say in an organized and supervised code of conduct for all participants----those days are gone. When I fly, I always feel more comfortable when I know there has been maintanance done on the engines. The cheapest fare is not consoling if I see flames coming from the engines. Ditto for the financial services industry.
When investment just becomes a transaction, when people just become a transaction, and when "churn and burn" becomes the overriding element in business, the customer always loses. Consequently, I reject the notion that nostalgia for the good old days of regulation is senile and old fashioned. I believe it just makes economic sense for the investor.
Recently a lone French trader for a bank, using "proprietary trading funds", in the throes of breaking up with his girlfriend, took enormous options risk and....despite the bank even knowing about his risks, but not understanding it or choosing to ignore it for fear they would impede some gains, caused a 7 billion dollar loss.
Imagine what would happen worldwide if just a dozen or so financial professionals broke up with their girlfriends. Yes. Girls that is something to consider. You may think you are just breaking up....but you might just be causing a global catastrophe. Be True to your man....o.k.
In summary. The incredible catastrophe of ENRON was not just ENRON. The real catastrophe was that as a nation we have modeled our financial institutions on ENRON. And we have the major tactic of DELAY, the verb, not the noun.
"The Syndicate"---or why you never can get the hot issues; On Allocation Rules, Theory and Practice
When a brokerage firm, through competitive bidding, has secured part of a "syndicate" to sell an IPO, it also secures for the firm, should it choose, to elect to keep some shares in lieu of commission, allocate shares to the preferred investors of the branch etc. These rules have been in some dispute over the years, and usually the dispute occurs on an initial public offering where the stock is a very popular offering that the public might bid up the stock right away and lots of money could be made quickly---the rules of allocation tend to favor those investors that have been the "best customers" of the firm, or have generated the most commissions. So. One way of testing this is to identify a public offering that you think will be very hot, and then try to get some of the stock. You might be frustrated with the fact that this might be very difficult to do, and you might be in line, and a very long line.
The IPO' or "Stop Reading and Start Selling" a true story
One of the glorious days for a corporation is the day it begins trading on the New York Stock Exchange or the NASDAQ. All the years of private financing and struggle to succeed come to a high point---and a big payday for original founders hopefully.
The essential facts of the IPO, or Initial Public Offering can be found in a google search. However, on an initial offering, there is no specific commission charge listed----it is paid by the offeror and the customer sometimes thinks it is a special deal. Not so.
Because of the lack of history on the new company, the stock exchange has rules that a prospectus must be prepared that details all the risks to the investor of purchase. One might think that this would be pretty educational....reading all the prospectuses and such. It is. However, one could spend all day reading them. The brokerage business is 99.99 about selling and .01% about analysis and reflection. I always loved reading the tech stocks prospectuses since there was usually some interesting stuff revealed that was heretofore not public knowledge.
The group of brokerage firms that have bid to handle the IPO are called the "syndicate." I have always loved that little info bit. There are so many ways the word syndicate can be used. In fact, if there is a really, really hot stock, you as a customer will probably never get your hands on any of that stock...cause it has been secured by the "syndicate", s slightly different meaning. More on that later.
The essential facts of the IPO, or Initial Public Offering can be found in a google search. However, on an initial offering, there is no specific commission charge listed----it is paid by the offeror and the customer sometimes thinks it is a special deal. Not so.
Because of the lack of history on the new company, the stock exchange has rules that a prospectus must be prepared that details all the risks to the investor of purchase. One might think that this would be pretty educational....reading all the prospectuses and such. It is. However, one could spend all day reading them. The brokerage business is 99.99 about selling and .01% about analysis and reflection. I always loved reading the tech stocks prospectuses since there was usually some interesting stuff revealed that was heretofore not public knowledge.
The group of brokerage firms that have bid to handle the IPO are called the "syndicate." I have always loved that little info bit. There are so many ways the word syndicate can be used. In fact, if there is a really, really hot stock, you as a customer will probably never get your hands on any of that stock...cause it has been secured by the "syndicate", s slightly different meaning. More on that later.
On Day Trading: The Football Game in Overtime
Some years ago, there was a craze among middle aged men. The video ads promised a course available by cassettee or cds that would teach the art of day trading---and furthermore, the promise was held out that you too could be truly independent through day trading.
Remember. I said it was a craze. The reality as I see it is that the average American does three roundtrip (6) trades a year. The average active day trader does 3 roundtrip or six trades a DAY.
Whether you are a writer, a musician, or a surgeon, repetition is important, and there is a learning curve with day trading. One gets better with experience, hopefully. It is an art that requires dedication, skill, speed and intelligence.....oh yes and nerves of steel. And it requires one to be prepared to be wrong 50% of the time....or more.
The most I have daytraded is 300 trades in one year. These were very small trades and done for educational purposes. To test out the odds of being right, and the odds of being wrong. My conclusion is that options and day trading are for the very rare few. The notion in the popular media that both these strategies are appropriate for the masses seems to be wrongheaded in the least and misrepresentation at the worst.
Remember. I said it was a craze. The reality as I see it is that the average American does three roundtrip (6) trades a year. The average active day trader does 3 roundtrip or six trades a DAY.
Whether you are a writer, a musician, or a surgeon, repetition is important, and there is a learning curve with day trading. One gets better with experience, hopefully. It is an art that requires dedication, skill, speed and intelligence.....oh yes and nerves of steel. And it requires one to be prepared to be wrong 50% of the time....or more.
The most I have daytraded is 300 trades in one year. These were very small trades and done for educational purposes. To test out the odds of being right, and the odds of being wrong. My conclusion is that options and day trading are for the very rare few. The notion in the popular media that both these strategies are appropriate for the masses seems to be wrongheaded in the least and misrepresentation at the worst.
On Investing; The football game
Last week was the Super Bowl. (2008) The entire week was filled with analysis and speculation. Lots of statistics on past. Line play. Passes attempted and completed. Psychological analysis. And yes the usual hype. There was not too much dispute really. The New England Patriots were destined to win the game...very clearly.
The Giants won.
The reason was simple. The game was played in the future not the past. And on that night, the Giants were better.
The question I have. Why so much analysis on football, and so little analysis by most folks in investments? Investing has all the same elements. And. I would suggest that a little less fanaticism on football and a little more on trading...would produce dramatically better trading results.
The Giants won.
The reason was simple. The game was played in the future not the past. And on that night, the Giants were better.
The question I have. Why so much analysis on football, and so little analysis by most folks in investments? Investing has all the same elements. And. I would suggest that a little less fanaticism on football and a little more on trading...would produce dramatically better trading results.
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