About twenty years ago, one of the hallmark technical indicators that folks looked at was the P/E ratio, or the price/earnings ratio. It was one of the key things folks talked about. Then, as has happened in every boom since the 1920's, it became inconvenient to look at the number. People were in the frenzy. They needed a new thing to concentrate on. So---they looked at future PE ratio and made up dreams of future earnings to justify buying higher and higher, and higher.
One of the stocks that comes to mind in this regard is QCOM, or Qualcomm. They were manufacturing, or in the process of developing the technology for the current cell phones that could transmit video and pictures. The P/E as I recall was 85 times earnings. The pundits always said that that was no longer important.
When the tech stocks imploded, everyone learned the rest of the story. P/E does matter. In every mania, the tendency is for folks to deny what has always been accepted valuation, and in time, those very folks become shocked when they discover that the old rules do matter.
Saturday, February 2, 2008
The Covered Call---the grandmother's option
Ed.note: The following is just a reflection and not a recommendation or advice in any way.)
Option trading is for the few. I say that even though in today's media pronouncements on options, mostly hyped by the options exchanges themselves, one would think that anyone who could lift a beer glass could also trade options. From my experience, options are for the young, the wealthy, and those with steel cold nerves.
As a person who was licensed in options, I quickly realized my background of midwest conservatism did not qualify me as an extreme risk taker. Yes. There was the thing about steel nerves, and even yes...age. Anyway. I wanted a way to learn about options and the way to do that was "The grandmother's option, or formally, "The covered call."
One trainer explained it me this way: On the opposite of every trade is a different risk. On the other side of the gambler is either the banker or the "grandmother." In the covered call, you are the grandmother. It is a calculated conservative risk. Yet it can be played aggressively and one can get the sense of the fast paced world of options.
The first part of the investment is the stock. You own the stock. Hopefully, you own it bought at a lower price. And it is a high quality stock. That is key. If it is a stock with three letters----it is a New York stock and that always meant higher liquidity for me. Another part of the game is that is is fun if the stock is one where there is some mystery about the future--maybe a buyout or such. And maybe there have been recurrent rumors over the past years, and the stock has spiked up and then down. When the stock has gone down, you buy the stock. And when it spikes up, you sell the covered call and get some money for the call. Then you buy the call back when the stock comes down and pocket the difference, or just let the call expire. For every call option there is a strike price and a month and year. Time and price interact daily on each call value.
The effect of playing with covered calls is kind of like riding a surf board. One has to judge the waves and time the transactions. You are never betting the farm on any transaction.
So. If you are conservative. And if you are not a wild gambler. You may have the temperment for the covered call. Any options exchange booklet can explain the details. Enjoy.
Option trading is for the few. I say that even though in today's media pronouncements on options, mostly hyped by the options exchanges themselves, one would think that anyone who could lift a beer glass could also trade options. From my experience, options are for the young, the wealthy, and those with steel cold nerves.
As a person who was licensed in options, I quickly realized my background of midwest conservatism did not qualify me as an extreme risk taker. Yes. There was the thing about steel nerves, and even yes...age. Anyway. I wanted a way to learn about options and the way to do that was "The grandmother's option, or formally, "The covered call."
One trainer explained it me this way: On the opposite of every trade is a different risk. On the other side of the gambler is either the banker or the "grandmother." In the covered call, you are the grandmother. It is a calculated conservative risk. Yet it can be played aggressively and one can get the sense of the fast paced world of options.
The first part of the investment is the stock. You own the stock. Hopefully, you own it bought at a lower price. And it is a high quality stock. That is key. If it is a stock with three letters----it is a New York stock and that always meant higher liquidity for me. Another part of the game is that is is fun if the stock is one where there is some mystery about the future--maybe a buyout or such. And maybe there have been recurrent rumors over the past years, and the stock has spiked up and then down. When the stock has gone down, you buy the stock. And when it spikes up, you sell the covered call and get some money for the call. Then you buy the call back when the stock comes down and pocket the difference, or just let the call expire. For every call option there is a strike price and a month and year. Time and price interact daily on each call value.
The effect of playing with covered calls is kind of like riding a surf board. One has to judge the waves and time the transactions. You are never betting the farm on any transaction.
So. If you are conservative. And if you are not a wild gambler. You may have the temperment for the covered call. Any options exchange booklet can explain the details. Enjoy.
An Introduction to Power
It was a hot Saturday night in New York in 1985. The young brokers in training were in second week of three, and mostly their money had run out---the suite of rooms at the swank mid town Manhatten hotel were paid for, but the real test of toughness was surviving on the small allowance. The very first day had been the eye opener. Flush at surviving the subway system returning from Battery Park, the brokers had ventured to have a quick cocktail at the Hyatt on the way home. After getting the bill, we realized.....at $10 a glass, the living allowance was going to last a week at that pace. So....beginning the third week, we were cooking spagetti in our room.
Hours afterward, as the brokers were getting ready for bed, the lone broker who had gone to the Broadway theatre came in----we all knew that somehow he had managed to pay the ticket price and now as he walked through the door, we noticed a stunning blond on his arm. He introduced her quickly as one of the actresses in the play he had seen. Then a quick hushed conversation with one of the brokers, and the two headed to the corner suite.
The broker was all smiles as he explained that this guy had given him $200 to sleep on the couch. Wow. What a windfall.
Just when I was about to ask who this guy thought he was, one of the guys told me.....he was the son of the owner of the World Trade Center. Over the years, the scene has made more and more sense to me.
Hours afterward, as the brokers were getting ready for bed, the lone broker who had gone to the Broadway theatre came in----we all knew that somehow he had managed to pay the ticket price and now as he walked through the door, we noticed a stunning blond on his arm. He introduced her quickly as one of the actresses in the play he had seen. Then a quick hushed conversation with one of the brokers, and the two headed to the corner suite.
The broker was all smiles as he explained that this guy had given him $200 to sleep on the couch. Wow. What a windfall.
Just when I was about to ask who this guy thought he was, one of the guys told me.....he was the son of the owner of the World Trade Center. Over the years, the scene has made more and more sense to me.
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