There's been a lot of talk over the years about the trade deficit as concerns imports and exports. I understand that concept - we buy more than we sell, so money is leaving the country. I also understand, roughly, that that's a bad thing. Well, I used to understand that. Looking at a section of the previous link, there seem to be a lot of smart people that think trade deficits could be a good thing. That may be a topic for later.
I've been curious as to whether money is actually leaving the country, overall. This balance of trade really only covers the import and export of physical goods and real services, as near as I can tell. I can find no indication that the portion of treasury auctions purchased by foreign entities counts as either an export or import. This statistic also doesn't count profits and losses from stock trades, bonds, forex trades, etc.
Awesomely enough, some of that data can be found. It looks like I could spend a few years sifting through the data at the Treasury International Capital (TIC) site. It took me most of a day to read the FAQ! But, there's some absolutely great data, such as this grand total table of foreign transactions. And these grand total tables of foreign liabilities and foreign claims. And this other table of derivatives contracts stuff. There's a lot of information to read on how to use all this information. Then there's this table of everything (Flow of Funds Accounts) over at the Federal Reserve statistics site.
Perhaps you can see why I said I found a lot more information than I expected to. I still don't think this covers everything. For one, the FAQ says there are a lot of errors due to a variety of factors. And even with all these statistics being complete, I don't think they would be able to answer my question. I'm still not sure if these show any profitability in all these trades, and I'm almost positive they don't cover forex transactions, since that has an average daily volume of $3.98 trillion, and I don't see any figures with large enough values to cover that. I have to admit that I'm tired of looking into it at the moment. However, if anyone has the answer, or even just another piece of the puzzle, please do let me know in the comments!
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Friday, October 22, 2010
Thursday, December 3, 2009
Q&A: Investment and Tax Strategies Across Accounts
The different tax structures of the various account types - traditional, Roth, and regular taxed brokerage accounts - should be taken into consideration when planning your investment strategies. How do we take advantage of these different account types, all while maintaining a balanced portfolio? The answer is to break up your asset classes into each type of account, rather than trying to make each one roughly balanced. It can be advantageous to hold certain asset types in each account type. I'm going to keep things relatively simple and talk just about stocks, bonds, mutual funds, and ETFs (and a bit about options, I suppose, but not commodities or specifics on market capitalizations and whatnot).
With our asset types defined, we can now match them with their ideal account type. First, let's take a quick look at how much of your portfolio each should be. Unfortunately, there's no single answer. Each investor has to decide for themselves what level of risk they are willing to accept in their pursuit of returns. Common stock/bond ratios are 80/20, 70/30, and 60/40. This can be achieved through mutual funds and/or ETFs, or directly through individual stocks and bonds - with individual stocks and bonds being more risky. The percentage of your portfolio invested in bonds usually increases as you approach retirement, as well. Because I am young and have time to make up any losses I might suffer, I have decided to be risky and have nearly 100% stocks, including some individual stocks. I also use some options trading, which has definitely been risky.
So, to summarize, I would like my Roth accounts to contain mostly aggressive stocks and mutual funds, my traditional accounts to hold mostly bonds and bond-like mutual funds, and my brokerage accounts to contain mostly stable stocks and ETFs, or tax-exempt bonds/mutual funds. Of course, it's not always easy to allocate things between traditional and Roth accounts. For example, my 401(k) plan has a limited number of investment options - all mutual funds (or IBM stock). To make things more challenging, my 401(k) does not make it easy to consolidate information on which assets are in traditional versus Roth accounts, and managing separate investment allocations between pre and post-tax accounts is not automatic. Thus, I have not implemented any special treatment for the traditional side of my 401(k) as of yet. If your IRA account is through a financial planner, they may only offer mutual funds, or hands-on trading may be impractical. It was for the latter reason that I transferred my Roth IRA to E*TRADE. This gave me access to thousands of mutual funds and ETFs, along with individual stocks and bonds. It also let me take advantage of options trading opportunities tax free.
In my next post, I will take a look at the relative priority of each type of account, and my thoughts on spacing contributions throughout the year.
- Stocks - Your basic stock has dividends and stock price appreciation. While some stocks are chosen for their dividend yield, when we talk about stocks, we usually are focused on stock price appreciation as a goal. For stocks that are held longer than a year, we expect/hope that the majority of our profits are the result of stock price appreciation. This will result in long term capital gains, which is always taxed at a lower rate than regular income tax.
- Bonds - Bonds have coupons and price, which taken together produce a yield. Because the coupon (the interest rate) doesn't change, price and yield are inversely proportional. While the price may go up and down while you hold the bond, your yield is locked in when you buy the bond. We are usually focused on this yield, which provides a steady stream of income (and is taxed as such). Bonds are a more conservative investment, where yields are expected to be lower than the average return of stocks, but with less risk.
- Mutual funds - Mutual funds provide a convenient way of diversification. Owning a share of a mutual fund gives you an ownership stake in all assets the fund holds. You also own a share of the profits, and the taxes due on those profits. The form of those profits - short term or long term - are mostly under the control of the fund manager, and may not be ideal for your current tax situation. Some funds are actively managed and change their assets often (have high turnover). These funds tend to have a lot of realized gains every year, and behave more like bonds, tax-wise. Other funds are passively managed, or tax managed, and do their best to avoid gains that have to be passed on to the shareholders. These funds tend to have fewer realized gains per year, and behave more like stocks, tax-wise. The performance of mutual funds depends on the assets it invests in.
- ETFs - Exchange-traded funds (ETFs) are like mutual funds, but all ETFs follow an index, and so are like passively managed mutual funds. They also don't have to buy or sell their underlying stocks as often as mutual funds, and instead do in-kind trades, which the IRS doesn't tax. So, ETFs generally behave more like stocks, tax-wise, than mutual funds, but there are a few ETFs that aren't as tax-efficient as their mutual fund peers, but these tend to be mutual funds that themselves already behave as stocks. More information, for anyone who wants it.
- Options - Options include your two basic types of options contracts - puts and calls. A put option is merely a contract to buy a block of shares (usually 100) at a given price. Similarly, a call option is a contract to sell a block of shares at a given price. Most options trades are for short term contracts, and are therefore short term gains taxed at high rates. For example, so far all of my options profits and losses have been short term. Options can be used to add extra value to owned stocks, insure an equity position, or put cash to use, but either way, gains (and/or losses) are expected to be relatively large.
With our asset types defined, we can now match them with their ideal account type. First, let's take a quick look at how much of your portfolio each should be. Unfortunately, there's no single answer. Each investor has to decide for themselves what level of risk they are willing to accept in their pursuit of returns. Common stock/bond ratios are 80/20, 70/30, and 60/40. This can be achieved through mutual funds and/or ETFs, or directly through individual stocks and bonds - with individual stocks and bonds being more risky. The percentage of your portfolio invested in bonds usually increases as you approach retirement, as well. Because I am young and have time to make up any losses I might suffer, I have decided to be risky and have nearly 100% stocks, including some individual stocks. I also use some options trading, which has definitely been risky.
- Brokerage accounts - Regular brokerage accounts are taxed as often as possible. Every trade in the account is subject to income or capital gains taxes, as applicable. They are not tax advantaged at all. Consequently, brokerage accounts lend themselves to few trades that result in long term gain. From above, that would be ETFs and stocks - specifically stocks that are good buy-and-hold stocks.
- Traditional accounts - Traditional retirement accounts are taxed as regular income when you take the money out, but grow tax free. I think traditional accounts are ideal for the bond portion of your portfolio. Bonds are full of short term gains that we can avoid the tax on, and aren't expected to produce returns as large as other investment types, which means our tax at retirement will be lower. Perfect!
- Roth accounts - Since Roth accounts grow tax free and end tax free, I find them to be ideal for my more aggressive investments. As I said, most of my portfolio is made up of stocks, but if I did have bonds, I would try to keep them out of my Roth accounts. Also whenever possible, I do my options trading in a Roth account.
So, to summarize, I would like my Roth accounts to contain mostly aggressive stocks and mutual funds, my traditional accounts to hold mostly bonds and bond-like mutual funds, and my brokerage accounts to contain mostly stable stocks and ETFs, or tax-exempt bonds/mutual funds. Of course, it's not always easy to allocate things between traditional and Roth accounts. For example, my 401(k) plan has a limited number of investment options - all mutual funds (or IBM stock). To make things more challenging, my 401(k) does not make it easy to consolidate information on which assets are in traditional versus Roth accounts, and managing separate investment allocations between pre and post-tax accounts is not automatic. Thus, I have not implemented any special treatment for the traditional side of my 401(k) as of yet. If your IRA account is through a financial planner, they may only offer mutual funds, or hands-on trading may be impractical. It was for the latter reason that I transferred my Roth IRA to E*TRADE. This gave me access to thousands of mutual funds and ETFs, along with individual stocks and bonds. It also let me take advantage of options trading opportunities tax free.
In my next post, I will take a look at the relative priority of each type of account, and my thoughts on spacing contributions throughout the year.
Sunday, January 20, 2008
Plea for help
In case you haven't noticed, the stock market hasn't been doing so hot in the last few days/weeks/months. But you know what's cool? You can help! You can go out and buy something right now and improve the economy. You want to help even more, you say? Well, you're in luck! You can go buy something, break it right away, and buy it again!
Recommended products to buy: Garmin GPS devices, AMD/ATI computer parts, E*TRADE financial services/products.
Thanks guys!
Recommended products to buy: Garmin GPS devices, AMD/ATI computer parts, E*TRADE financial services/products.
Thanks guys!
Sunday, December 16, 2007
Options Update: Savient (SVNT) (again)
Whatever news Savient (SVNT) released on Thursday ended up being good news. I only skimmed the release and saw something about gout. Gout didn't seem to be a big deal in the episode of House M.D. that it played a role in. Oh well, the important thing is that SVNT is up to $18.90, which is well above the $12.50 it needs to be at in order for my shares to be called away and for me to be done with this. I don't particularly like being invested in a company I know nothing about. But for a 25% return in a few weeks, I'm willing to make an exception every so often.
Tuesday, November 6, 2007
Small Company Earnings
HYTM was listed as releasing it's earnings yesterday, November 5. Instead, their expected earnings release date was pushed back until November 12. I think this is a phenomenon pretty much unique to small companies. I can't imagine Google, IBM, or Apple getting away with a week's delay in releasing financial information.
In fact, HYTM hasn't really gotten away with it. The past couple of days have seen HYTM drop down to $4.71 so far. Incidentally, this puts me fairly deep in the red. We'll just have to see what the implied volatility does after earnings. It may still be worth holding on to if I can still get >5% a month in options premiums. Or perhaps earnings will beat analyst estimates and I'll get my shares called away after all.
In other news, Garmin (GRMN) is down below $100 again. I think if I had $10,000 or multiples thereof, I would buy some GRMN shares and write more out of the money covered calls. Garmin seems to be down on fears of a TeleAtlas bidding war with TomTom (TOM2.as). However, I see this as both a good move and temporary. Garmin has about $1B cash on hand and is worth >$20B, while TomTom probably has less on hand and is worth ~$6.3B.
Garmin used to be in a position of having TeleAtlas in the hands of TomTom and Navteq in the hands of Nokia, meaning they might face an increase in mapping costs. Garmin has either put TomTom in this position, or forced them to go deeper in debt by upping the price of TeleAtlas. If Garmin gets stuck buying the company, they at least have the advantage of being able to afford it, and they have a longer history of acquisitions, which implies to me a better ability to integrate TeleAtlas. It will be interesting to see how this develops. Unfortunately, I'll be watching from the sidelines.
In fact, HYTM hasn't really gotten away with it. The past couple of days have seen HYTM drop down to $4.71 so far. Incidentally, this puts me fairly deep in the red. We'll just have to see what the implied volatility does after earnings. It may still be worth holding on to if I can still get >5% a month in options premiums. Or perhaps earnings will beat analyst estimates and I'll get my shares called away after all.
In other news, Garmin (GRMN) is down below $100 again. I think if I had $10,000 or multiples thereof, I would buy some GRMN shares and write more out of the money covered calls. Garmin seems to be down on fears of a TeleAtlas bidding war with TomTom (TOM2.as). However, I see this as both a good move and temporary. Garmin has about $1B cash on hand and is worth >$20B, while TomTom probably has less on hand and is worth ~$6.3B.
Garmin used to be in a position of having TeleAtlas in the hands of TomTom and Navteq in the hands of Nokia, meaning they might face an increase in mapping costs. Garmin has either put TomTom in this position, or forced them to go deeper in debt by upping the price of TeleAtlas. If Garmin gets stuck buying the company, they at least have the advantage of being able to afford it, and they have a longer history of acquisitions, which implies to me a better ability to integrate TeleAtlas. It will be interesting to see how this develops. Unfortunately, I'll be watching from the sidelines.
Wednesday, October 31, 2007
Implied Volatility (updated)
I've been continuing my research into options strategies. Earnings season is here again, which always causes a spike in implied volatility. GRMN released it's earnings this morning. Yesterday, the implied volatility of at the money calls were in the 80s and 90s. Today, they are in the 60s. I suspect they will continue to fall for a couple more days.
Implied volatility is the free-market version of statistical volatility. SI indicates how much the underlying stock actually fluctuates, while VI indicates how much people expect it to move. What's this mean for options? Before major events, like earnings releases, IV spikes, as do options prices. Thus, much of the movement people expect is already priced into the option. In general, right before earnings is a bad time to buy options. However, if you own shares in the underlying stock, writing covered call options is very good, or if you have cash on hand, you can make a quick 2-4% by writing cash secured puts.
Anyway, in my research, I found a great site for finding highly volatile options: http://www.schaeffersresearch.com/streetools/filters/implied_vol_filter.aspx
Here, you can specify a minimum stock price, minimum open interest, and a % out of money maximum something that I don't understand. I don't know exactly what all the filters in the Power Tools tab do, this one included, but I like sorting by the 'Call Implied' column. Unfortunately, the filter is confused by recently split stocks, where a $10 stock with a $20 strike will trade at $2 (the $20 strike option was written before the split, and the options trading house hasn't fully updated everything), so it looks like the $20 strike is trading abnormally high, when in actuality, you can't really trade it. It will also show a lot of $5 stocks with a $7.50 strike trading at $0.10. This isn't a high enough price to make much money writing options, sadly. To avoid the latter problem, I like to specify a minimum stock price of $6. Higher priced stocks have closer strike prices.
Using the sorted 'Call Implied' column, though, I've found HYTM. I don't quite know what to make of it, yet, but it's a $6.50 stock with a $7.50 November 2007 call option price of about $0.70. That means people are willing to pay a 10% premium betting on a 15% move in one month. Admittedly, HYTM's earnings is on November 5, so I don't know what the long-term IV is like. This may be a stock only worth writing options against this one time. Also, Google Finance's stock page for HYTM shows a news story where the state of Washington kicked out HYTM's drug rehabilitation cocktail because it didn't work. Collecting a 10% premium isn't a good idea if the underlying company goes broke.
Either way, I went ahead and bought 1200 shares and wrote 12 call options for $6.45 and $0.65, respectively. After commissions, I made about 9.7%, which I will fully realize on November 17. Then I'll be able to see how much a regular month's option is worth. I may end up bailing out after that time. Or, I may get my shares called away at $7.50, giving me a total profit of ~25%, instead. I can live with that.
Updated at 3:00pm
HYTM announced a double blind study, so the stock price shot up to $7.30 (+0.85 over purchase price), and DXUKU (Nov $7.5 calls) are now at $1.10. So, I missed out on some options premium profit, but at this rate, it's looking like that 25% profit on November 17 will be happening. I can still live with that.
Implied volatility is the free-market version of statistical volatility. SI indicates how much the underlying stock actually fluctuates, while VI indicates how much people expect it to move. What's this mean for options? Before major events, like earnings releases, IV spikes, as do options prices. Thus, much of the movement people expect is already priced into the option. In general, right before earnings is a bad time to buy options. However, if you own shares in the underlying stock, writing covered call options is very good, or if you have cash on hand, you can make a quick 2-4% by writing cash secured puts.
Anyway, in my research, I found a great site for finding highly volatile options: http://www.schaeffersresearch.com/streetools/filters/implied_vol_filter.aspx
Here, you can specify a minimum stock price, minimum open interest, and a % out of money maximum something that I don't understand. I don't know exactly what all the filters in the Power Tools tab do, this one included, but I like sorting by the 'Call Implied' column. Unfortunately, the filter is confused by recently split stocks, where a $10 stock with a $20 strike will trade at $2 (the $20 strike option was written before the split, and the options trading house hasn't fully updated everything), so it looks like the $20 strike is trading abnormally high, when in actuality, you can't really trade it. It will also show a lot of $5 stocks with a $7.50 strike trading at $0.10. This isn't a high enough price to make much money writing options, sadly. To avoid the latter problem, I like to specify a minimum stock price of $6. Higher priced stocks have closer strike prices.
Using the sorted 'Call Implied' column, though, I've found HYTM. I don't quite know what to make of it, yet, but it's a $6.50 stock with a $7.50 November 2007 call option price of about $0.70. That means people are willing to pay a 10% premium betting on a 15% move in one month. Admittedly, HYTM's earnings is on November 5, so I don't know what the long-term IV is like. This may be a stock only worth writing options against this one time. Also, Google Finance's stock page for HYTM shows a news story where the state of Washington kicked out HYTM's drug rehabilitation cocktail because it didn't work. Collecting a 10% premium isn't a good idea if the underlying company goes broke.
Either way, I went ahead and bought 1200 shares and wrote 12 call options for $6.45 and $0.65, respectively. After commissions, I made about 9.7%, which I will fully realize on November 17. Then I'll be able to see how much a regular month's option is worth. I may end up bailing out after that time. Or, I may get my shares called away at $7.50, giving me a total profit of ~25%, instead. I can live with that.
Updated at 3:00pm
HYTM announced a double blind study, so the stock price shot up to $7.30 (+0.85 over purchase price), and DXUKU (Nov $7.5 calls) are now at $1.10. So, I missed out on some options premium profit, but at this rate, it's looking like that 25% profit on November 17 will be happening. I can still live with that.
Thursday, August 16, 2007
Earnings Strategy: The Aftermath
So, Earnings for Google (GOOG), Apple (AAPL), Garmin (GRMN), AMD (AMD), Amazon (AMZN), and Akamai (AKAM) were all done by August 1. I've delayed writing about my findings because I've been highly distracted by Harry Potter. I'm done with that now, though, so here it goes.
Even though GOOG moved down 30-40 points after earnings, no reasonable combination of 540-560 strike price options make money. For AAPL, I tried looking at further out of the money options. Once again, the movement wasn't large enough to make money. GRMN was interesting in that it had a spike up after earnings, but then kept rising another 10 points. I don't think I would have made money off the initial movement, though. I didn't do any real analysis of AKAM, but after the fact, I think it's movement of 20% would have resulted in some profit. AMD barely moved at all (meaning a large loss in strangle options), which I found surprising given it lost another $600M last quarter.
So, what did I learn? First, I learned a bit of new terminology. When you buy a put and a call option at the same strike price, that's called a straddle. When you buy a put and a call, both out of the money, it's called a strangle. Second, I learned that a very large price change is required to make either of these work through earnings. Third, my previous talk of increased volatility was mostly wrong. It turns out that statistical volatility will indeed increase, but implied volatility (IV) will plummet. Thus, options tend to lose half their value right after earnings, everything else being equal. Bummer.
In the future, then, I'm going to analyze longer-term options, which tend not to have such high IV shifts because of earnings. I'm also going to look at what is required to write both a put and call option to take advantage of the IV crush. Normally, to write a call, you have to have the 100 shares in your account. To write a put, you have to have the cash available to buy 100 shares at the strike price. I'm not sure what assets I need, exactly, to buy both, as I'd think they'd cancel each other out to some extent.
For now, my overall earnings strategy is GET THE HELL AWAY! Things are just too wild around earnings season. Now I just need the overall market to improve so I have money to invest again.
Even though GOOG moved down 30-40 points after earnings, no reasonable combination of 540-560 strike price options make money. For AAPL, I tried looking at further out of the money options. Once again, the movement wasn't large enough to make money. GRMN was interesting in that it had a spike up after earnings, but then kept rising another 10 points. I don't think I would have made money off the initial movement, though. I didn't do any real analysis of AKAM, but after the fact, I think it's movement of 20% would have resulted in some profit. AMD barely moved at all (meaning a large loss in strangle options), which I found surprising given it lost another $600M last quarter.
So, what did I learn? First, I learned a bit of new terminology. When you buy a put and a call option at the same strike price, that's called a straddle. When you buy a put and a call, both out of the money, it's called a strangle. Second, I learned that a very large price change is required to make either of these work through earnings. Third, my previous talk of increased volatility was mostly wrong. It turns out that statistical volatility will indeed increase, but implied volatility (IV) will plummet. Thus, options tend to lose half their value right after earnings, everything else being equal. Bummer.
In the future, then, I'm going to analyze longer-term options, which tend not to have such high IV shifts because of earnings. I'm also going to look at what is required to write both a put and call option to take advantage of the IV crush. Normally, to write a call, you have to have the 100 shares in your account. To write a put, you have to have the cash available to buy 100 shares at the strike price. I'm not sure what assets I need, exactly, to buy both, as I'd think they'd cancel each other out to some extent.
For now, my overall earnings strategy is GET THE HELL AWAY! Things are just too wild around earnings season. Now I just need the overall market to improve so I have money to invest again.
Wednesday, July 18, 2007
Earnings strategy
For this quarter, I plan on evaluating a few strategies on investing. I definitely want to research this quite a bit more before I bet real money on it. Earnings is a notoriously volatile time for stocks. A company can have profits increase by 50% and still have a stock price drop of 15% because revenues were 1% lower than expected. It really makes little sense.
Anyway, the companies I watch tend to react violently one way or the other. It's fairly rare that the stock doesn't move considerably up or down. We'll start out by looking at Google (GOOG), because it's closing price on Tuesday of $555.00 is ideally suited to such an analysis, being halfway between two strike prices.
So, GOOG earnings is July 19. I wouldn't want to buy options for July, as those expire on the 21st. Chances are that I'd lose everything. Instead, I'll look at August contracts.
As you can see, puts are relatively cheaper, meaning people expect Google to rise. I tend to agree with this prediction, but that's not the exercise at hand. I'm trying to figure out what exactly will happen if I purchase both calls and puts right before earnings. I will definitely lose a day of time value, which is a fairly significant portion of the month of time remaining.
If the stock price rises, the calls will gain value and the puts will lose value. The delta (change in option premium for every dollar change in underlying stock price) gets higher as options get more valuable, though. This ends up keeping the premium at least as high as the stock price - strike price (for calls). What this means is that as the stock moves in one direction, the profitable contract should theoretically start to gain value faster than the losing contract loses value. Also, if there is a significant move one way or the other, the volatility will increase, further improving the profitable contract's price while padding the fall of the losing contract.
Now, if the stock doesn't move much, then the time value lost will outweigh any of the above considerations. I estimate this to be well under a 5% loss for the day, though. I also need to look at the effect of trailing stop orders and regular stop orders. For GOOG, I'm currently thinking something along the lines of a trailing stop on the call that would trigger a trailing stop on the put. I'm hoping this would make the call's spike right after earnings result in maximum profits and then trigger an order to take advantage of any overcorrection or profit taking.
Over the next week or two, I'll do some virtual trading and see how things work in practice with various stocks/options. I'll keep you posted.
Anyway, the companies I watch tend to react violently one way or the other. It's fairly rare that the stock doesn't move considerably up or down. We'll start out by looking at Google (GOOG), because it's closing price on Tuesday of $555.00 is ideally suited to such an analysis, being halfway between two strike prices.
So, GOOG earnings is July 19. I wouldn't want to buy options for July, as those expire on the 21st. Chances are that I'd lose everything. Instead, I'll look at August contracts.
| Strike | Call | Put |
| 550 | 24.90 | 17.30 |
| 560 | 19.80 | 22.30 |
As you can see, puts are relatively cheaper, meaning people expect Google to rise. I tend to agree with this prediction, but that's not the exercise at hand. I'm trying to figure out what exactly will happen if I purchase both calls and puts right before earnings. I will definitely lose a day of time value, which is a fairly significant portion of the month of time remaining.
If the stock price rises, the calls will gain value and the puts will lose value. The delta (change in option premium for every dollar change in underlying stock price) gets higher as options get more valuable, though. This ends up keeping the premium at least as high as the stock price - strike price (for calls). What this means is that as the stock moves in one direction, the profitable contract should theoretically start to gain value faster than the losing contract loses value. Also, if there is a significant move one way or the other, the volatility will increase, further improving the profitable contract's price while padding the fall of the losing contract.
Now, if the stock doesn't move much, then the time value lost will outweigh any of the above considerations. I estimate this to be well under a 5% loss for the day, though. I also need to look at the effect of trailing stop orders and regular stop orders. For GOOG, I'm currently thinking something along the lines of a trailing stop on the call that would trigger a trailing stop on the put. I'm hoping this would make the call's spike right after earnings result in maximum profits and then trigger an order to take advantage of any overcorrection or profit taking.
Over the next week or two, I'll do some virtual trading and see how things work in practice with various stocks/options. I'll keep you posted.
Thursday, July 12, 2007
Limit Orders
Similar to my previous post on the financial-benefits-to-homeownership, I am now making a list of the benefits of limit orders:
- The market sometimes behaves irrationally - a large institution buying or selling stock can significantly affect the price in the short term. You can place buy limit orders to take advantage of spikes downward in the market and sell limit orders to take advantage of upward spikes in the market. For regular purchasing or selling, this also makes sure you don't get taken for a ride between the time you get a stock quote and the time you press the 'Place Order' button.
- Options are priced based on the underlying stock value, but they tend to move in $0.10 increments. A buy limit order of $3.50/share will theoretically be executed as soon as that jump takes place, meaning the stock has to move back a smaller amount before it rises to $3.60 (again, theoretically. Also, this doesn't equate to profitability, as there is the ask/bid price spread). A sell limit order has the opposite property, but is still a good thing due to the previous point.
- Limit vs Trailing Stop: a trailing stop order can result in higher profits if the stop price rises above the limit price. However, the actual execution of the order is a market order, which means it could execute at any price. For instance, I tried a trailing stop on some Google options. The stop value got up to $9.50, but when it finally executed, I only got $9.33. A limit order may miss more profits than a trailing stop order, but the profits are more predictable.
- Limit orders may not execute, which can be both bad and good. First, you may not have your order execute and your money will sit idle (or you will still own a stock you may not want). But, this makes them ideally suited to conditional orders like one-cancels-all. For example, let's say I have $10,000 to invest. I can place a one-cancels-all order on three different stocks - 20 shares of GOOG @ $500, 133 shares of GRMN @ 75, or 100 shares of IBM @ $100. Given today's closing prices of $544.47, $79.69, and $109.10, none of these are likely to execute - I chose the prices for easy calculations in my head. But, if any of these stocks suddenly (even if only briefly!) becomes an amazing deal, I'd be able to take advantage.
Tuesday, June 5, 2007
Spiels I like to give
I have a couple things planned out to say whenever the occasion arises. I figure I should write them down before I become senile and forget about them. This means that some of you will be bored by this post, as you've already heard these.
Stocks: I really don't understand what a stock is. If I went back in time and had to modernize an economy, I wouldn't know how to describe the concept of a stock. A company decides it wants to bring in some money, so it issues some pieces of paper to the public. These pieces of paper allow you to vote in shareholder meetings, but the founders of the company typically give themselves a majority holding to start out with, so this isn't a very useful thing. The company is then under no obligation to buy back the shares, pay dividends, or in any other way make your stock valuable. What you hope will happen is that someone will look at this company and decide that they really want this worthless piece of paper and buy it from you. It just makes no sense. And then there's the fact that money is never created in the stock market. For every gain there is a loss somewhere along the line. Stocks just give us with too much money something more to buy than goods and services.
Peeing: For some reason, men like to stand when they pee. At a urinal, this makes sense, because there is no where to sit. However, it makes absolutely no sense to stand and pee into a regular toilet. Let's look at this for a moment: Why do women yell at you to lift the seat up before you pee? Because you miss and/or splatter and urine gets on the toilet seat. Now, why is it ok for this splatter to land on the rim of the toilet bowl and surrounding floor? It's just plain nasty.
Stocks: I really don't understand what a stock is. If I went back in time and had to modernize an economy, I wouldn't know how to describe the concept of a stock. A company decides it wants to bring in some money, so it issues some pieces of paper to the public. These pieces of paper allow you to vote in shareholder meetings, but the founders of the company typically give themselves a majority holding to start out with, so this isn't a very useful thing. The company is then under no obligation to buy back the shares, pay dividends, or in any other way make your stock valuable. What you hope will happen is that someone will look at this company and decide that they really want this worthless piece of paper and buy it from you. It just makes no sense. And then there's the fact that money is never created in the stock market. For every gain there is a loss somewhere along the line. Stocks just give us with too much money something more to buy than goods and services.
Peeing: For some reason, men like to stand when they pee. At a urinal, this makes sense, because there is no where to sit. However, it makes absolutely no sense to stand and pee into a regular toilet. Let's look at this for a moment: Why do women yell at you to lift the seat up before you pee? Because you miss and/or splatter and urine gets on the toilet seat. Now, why is it ok for this splatter to land on the rim of the toilet bowl and surrounding floor? It's just plain nasty.
Monday, April 23, 2007
AMD Options Assigned
As I discussed in an earlier post, I bought 300 shares of AMD at $13.00 each, and wrote 3 options contracts to sell at $14.00 with a $0.30 premium. Well, on Friday AMD closed at $14.16, which is more than $0.05 in the money (the most common automatic exercise threshold). Not surprisingly, then, my contracts were assigned.
So, I automatically sold 300 shares of AMD at $14.00 with a $20.06 commission. I'm not sure how the commission is computed, honestly. But, I made $300 - $20.06 in the sale, plus $90 - $15.24, minus the original purchase commission of $12.99. All together this is a profit of $341.77, which is an 8.76% profit on my initial $3900 investment under a month ago. Not too bad.
Even better, I really do think AMD will go down in price again, and I don't think I would have sold my shares otherwise. So, I'm locking in some profit that would otherwise have been likely to disappear in the near future. This is a short term capital gain, however. Also, I'm more impressed with the rate of return than the actual dollar value of the profit. Still, $350 is most of a washing machine.
So, I automatically sold 300 shares of AMD at $14.00 with a $20.06 commission. I'm not sure how the commission is computed, honestly. But, I made $300 - $20.06 in the sale, plus $90 - $15.24, minus the original purchase commission of $12.99. All together this is a profit of $341.77, which is an 8.76% profit on my initial $3900 investment under a month ago. Not too bad.
Even better, I really do think AMD will go down in price again, and I don't think I would have sold my shares otherwise. So, I'm locking in some profit that would otherwise have been likely to disappear in the near future. This is a short term capital gain, however. Also, I'm more impressed with the rate of return than the actual dollar value of the profit. Still, $350 is most of a washing machine.
Tuesday, April 10, 2007
AMD and Call Options
Today, AMD spiked up as high as 13.61, from a previous close of 12.86. This spike prompted me to go ahead and write 3 April $14.00 call options. Since no one else knows what I'm talking about, I'll explain a bit. A call option allows the holder to buy shares of a stock at a given price (the strike price). Option contracts are typically for 100 shares. The writer of a call option owns these 100 shares, but promises to sell them whenever the option holder asks for them. For this right to buy stock at a set price, the option holder pays the option writer a premium (quoted per share).
A little while ago I bought 300 shares of AMD at $13.00. Thus, I can cover 3 contracts worth of call options. That is precisely what I did. April's expiration date is the 21st. This means I sold the option to buy 300 shares of AMD at $14.00 at any time before the 21st of April. Someone paid me $0.30 per share for this honor. So, I made $90 today, minus $15.24 of commission ($12.99 + $0.75/contract). So, $74.76 in profit. Since I paid $3912.99 (including commission again), I made 74.76/3912.99 = 1.91%. This is also immediately available cash - not just a paper gain.
When these options expire, I will either have sold my shares of AMD for a 7.7% profit (in about 3 weeks), or I will have the shares and be able to write more call options for May. I see the latter as far more likely. AMD got a boost today by saying they won't lose as much money as everyone feared, and that they'll be restructuring the company to cut costs. I don't see this as a lasting price increase, yet. This month is a risky month for options writers, though. AMD releases their 1Q results on the 17th. If they did better than people expected, the price could spike, and I may have to sell. Still, 7.7% (plus the 1.9% made today!) is very acceptable.
A little while ago I bought 300 shares of AMD at $13.00. Thus, I can cover 3 contracts worth of call options. That is precisely what I did. April's expiration date is the 21st. This means I sold the option to buy 300 shares of AMD at $14.00 at any time before the 21st of April. Someone paid me $0.30 per share for this honor. So, I made $90 today, minus $15.24 of commission ($12.99 + $0.75/contract). So, $74.76 in profit. Since I paid $3912.99 (including commission again), I made 74.76/3912.99 = 1.91%. This is also immediately available cash - not just a paper gain.
When these options expire, I will either have sold my shares of AMD for a 7.7% profit (in about 3 weeks), or I will have the shares and be able to write more call options for May. I see the latter as far more likely. AMD got a boost today by saying they won't lose as much money as everyone feared, and that they'll be restructuring the company to cut costs. I don't see this as a lasting price increase, yet. This month is a risky month for options writers, though. AMD releases their 1Q results on the 17th. If they did better than people expected, the price could spike, and I may have to sell. Still, 7.7% (plus the 1.9% made today!) is very acceptable.
Wednesday, March 14, 2007
Stock Options
I've been thinking about writing some covered calls, lately. I've been trying to figure out the general strategy I'd like to take, running a few numbers, and asking a few questions of the Internet.
Let's take AMD, for instance. AMD's closing price today was 14.13.
The two main choices I was considering were monthly calls, or yearly. If I wrote a covered call every month, I could make about 1.4% per month in premiums. For instance, April $16.00 calls are $0.23/share. 0.23/14.13 = 1.63%. Then take off a bit for the fact that there are 37 days left instead of 30 and that I'd have to pay a commission. But, 1.4% per month is not a bad return. That ends up at 17% for the year. This is in addition to any stock appreciation!
A January 2008 $17.50 call is 1.29/share. 1.29/14.13 = 9.13%. This looks substantially lower than 17%. There are still other things to consider, though. Let's say AMD releases their Barcelona CPUs and R600 graphics cards early, and Intel doesn't immediately have an answer. AMD could shoot up in price and my option contract may be exercised. In the monthly case, I will make the 0.23/share premium, plus 1.87 in stock appreciation. A nice round $2.10/share. In the yearly case, I'll make the 1.29/share premium, plus 3.37 in stock appreciation. We now have a $4.66/share profit. Still, this is only a fair comparison if AMD surpasses $17.50 in the first month. If it doesn't, the monthly option writing catches up pretty quickly, depending on stock price movement.
It's far less likely that an AMD option will be in the money within a month than it is that it will be in the money within a year. So, writing monthly call options makes me more likely to hold on to my underlying shares. I also have more flexibility to adjust to changing market conditions. Some of the links below also mention that covered calls are more conservative than outright stock ownership.
The premium received does offer some downside protection. With AMD, I see a company that will eventually have a higher stock price. I feel comfortable owning AMD shares long term. I view it as making shares appreciate more. Instead of just getting stock appreciation, I also get option premiums. And I risk the loss of huge profits should AMD skyrocket. I don't see that happening, though. Practically speaking, I'm gaining income, gaining downside protection, and at the worst, only making a significant profit on stock appreciation, rather than a huge profit. I have made it more likely that AMD will be a moneymaker for me. I don't have access to many probabilities, but intuitively, I see my expected return going up at the expense of potentially missing an unlikely surge in stock price.
I'm think I'm going to do it, once I figure out what my AMD target purchase price is.
----
E-trade options tutorial
Options
Options and Leverage (old and short)
Options and Leverage (new and long)
Covered Calls
Let's take AMD, for instance. AMD's closing price today was 14.13.
The two main choices I was considering were monthly calls, or yearly. If I wrote a covered call every month, I could make about 1.4% per month in premiums. For instance, April $16.00 calls are $0.23/share. 0.23/14.13 = 1.63%. Then take off a bit for the fact that there are 37 days left instead of 30 and that I'd have to pay a commission. But, 1.4% per month is not a bad return. That ends up at 17% for the year. This is in addition to any stock appreciation!
A January 2008 $17.50 call is 1.29/share. 1.29/14.13 = 9.13%. This looks substantially lower than 17%. There are still other things to consider, though. Let's say AMD releases their Barcelona CPUs and R600 graphics cards early, and Intel doesn't immediately have an answer. AMD could shoot up in price and my option contract may be exercised. In the monthly case, I will make the 0.23/share premium, plus 1.87 in stock appreciation. A nice round $2.10/share. In the yearly case, I'll make the 1.29/share premium, plus 3.37 in stock appreciation. We now have a $4.66/share profit. Still, this is only a fair comparison if AMD surpasses $17.50 in the first month. If it doesn't, the monthly option writing catches up pretty quickly, depending on stock price movement.
It's far less likely that an AMD option will be in the money within a month than it is that it will be in the money within a year. So, writing monthly call options makes me more likely to hold on to my underlying shares. I also have more flexibility to adjust to changing market conditions. Some of the links below also mention that covered calls are more conservative than outright stock ownership.
The premium received does offer some downside protection. With AMD, I see a company that will eventually have a higher stock price. I feel comfortable owning AMD shares long term. I view it as making shares appreciate more. Instead of just getting stock appreciation, I also get option premiums. And I risk the loss of huge profits should AMD skyrocket. I don't see that happening, though. Practically speaking, I'm gaining income, gaining downside protection, and at the worst, only making a significant profit on stock appreciation, rather than a huge profit. I have made it more likely that AMD will be a moneymaker for me. I don't have access to many probabilities, but intuitively, I see my expected return going up at the expense of potentially missing an unlikely surge in stock price.
I'm think I'm going to do it, once I figure out what my AMD target purchase price is.
----
E-trade options tutorial
Options
Options and Leverage (old and short)
Options and Leverage (new and long)
Covered Calls
Subscribe to:
Posts (Atom)