Locking In Gains with Put Options

Are you too scared to sell the stocks that have made over 50% in the past year or two? Is it because you want to hold off on cashing in and paying a heft amount of capital gains tax? How about doing what the big banks do, buy put options! Put options go up and make money if the price of a stock goes below a certain amount by a certain time. That means if you buy put options for your most profitable stocks you will be essentially locking in profits while not having to sell these stocks which might be paying dividends.

The downside with put options is you must pay a price to buy the put option from an available seller and put options expire based on what their expiration date is. The longer the expiration on a put the more expensive it will be. Let’s say you were lucky enough to be able to purchase Alibaba at IPO pricing – $68 per share. Currently BABA trades at $106, so you’ve made $38 per share, not too shabby. However, you foresee or have fear that BABA may fall below $100 and want to make sure you lock in those profits while not making a short term sell. What you can do is buy put options to cover your stocks until October 2015. Or if you want to save some money you could also buy put options now to cover you until March and then re-evaluate your “options”.

Options are cheaper than their underlying security because they are worthless if they aren’t “in the money” when they expire – to understand these options concepts if your a newbie please read this, this, or this.

What’s a Bull Spread?

A bull spread is a type of call option that aims to profit off of a underlying security that has a specified percent increase. Most of the time investors aim for moderate or low price increase.

An example of a bull spread is to buy a call option for Apple for a expiring three months from now for a strike price of $130 per share. Apple trades at $113.99 as of right now (premarket 12/29/2014). The call option costs $1.37 market price, so for a single option you will be paying $137 (options come in stacks of 100). If you wanted to lower that cost all you’d have to do is sell another call option for Apple for say $140. You’ll get 50 cents for this, so you’ll lower your total cost for this “play” to 87 cents. So pay $87 rather than $137 to make at MOST $10 per share, or $1,000.

I personally am not a fan of the bull spread because of the fact that you’re limiting your winnings, it’s like buying insurance on your winnings. I must prefer having unlimited UPSIDE potential with a put option in place as INSURANCE. Even so, when you’re hedging your investments you are limiting your profit potential.

You can also do what I call a “bear spread” by buying a put option and then selling a put option for a even lower strike price. This would be in anticipation for a moderate downfall in the price of an underlying security. I would personally never do this, it would almost take a wizard or oracle to predict such a price fall to such a degree. You’re better off shorting a stock then paying such hefty premiums for these options.

If you’re interested in seeing what a bull spread looks like on a profit-loss graph here it is below:

Call option March 20 leg 1 buy $130, leg 2 sell $140

Call option March 20 leg 1 buy $130, leg 2 sell $140

Cybersecurity And You

Cybersecurity means protection for data. It means protecting machines involved in storing data and methods of communication to keep data from being intercepted and decrypted. With the recent revelation of a massive hack of Sony Entertainment and the resulting cancellation of a multi-million dollar movie release it is more important than ever that you as an individual also keep your data secure as to avoid any theft of information or funds from your accounts. While many banks and credit card companies provide fraud protection, and will reimburse losses, some will not do so if it is determined that gross negligence has occurred. Gross negligence is extreme carelessness – read below to keep yourself from getting yourself in trouble.

1. Protect your passwords – make sure to never share your password with anyone who might be careless with it. It’s better not to write down your password. Also, try to keep your password 10 digits or more if allowed, including upper-case, lower-case, numbers, and special characters. Ensure your password is not in a dictionary! Avoid using credit cards overseas in shady areas, as some ATMs or card readers may have been hijacked and installed with secondary card readers which will read your number and security code. Do not use the same password for multiple things, for example if your registering for some reward card the website may not encrypt your password so if there is internal fraud or a data breach for that company hackers will surely try to use those credentials in more important areas such as banking.

2. Do not access unprotected wireless access points – whenever you connect to the internet through wifi make sure you know that you are connecting to a genuine hotspot. Hackers can easily set up hotspots where all data is routed through their “packet sniffing” software and they will have access to all unencrypted communications and with the right tools may be able to hack some of your encrypted data.

3. Never let someone else use your machine – if you log into a laptop and let someone else use it, they may be able to install keylogging software in less than a minute which can report keys typed to themselves without you ever seeing this program. Even if you are logging into a secure site the hackers will be able to know which website you are on along with which keys you pressed – from there it’s easy to get your password.

4. Use two factor authentication – two factor authentication usually means a password and some phrase that is generated over time semi-randomly based on a time based key. The code might be accessible through a device you keep on your keychain or sometimes emailed to you. This means just knowing the password will not allow a hacker to get into your information.

5. Set up country specific blocks – if you know you’ll never log into your computer or access your data from Nigeria or Brazil (For example), some websites allow for country specific blocking. This will not keep sophisticated hackers from using proxy servers to try to hack into your account, but should keep a few unwanteds out. You can also call your credit card company and should be able to disable all transactions from outside your home country.

With these five steps in your pocket I’m sure you will feel a bit more secure while letting your nest-egg grow.

When Politics Influences the Stock Market

Politics ALWAYS influence the stock market. Higher taxes usually means lower returns for companies and a falling stock market. Low interest rates means cheaper capital for companies as well as lower return alternatives for investors which drives stocks up. Why put money in a 0.1% interest account when you can be investing in a stock that pays 3% in dividends every quarter? Below is an example if you’re doubtful:

3% Dividends four times a year

3% Dividends four times a year

Higher regulations on the coal industry during the Obama administration have virtually killed coal stocks such as ABX which fell from over $73 in 2008 to its current price of $1.93. I’m not here to state a value judgement, but a pure stock price judgement – so make sure you pay close attention to campaign promises of politicians. Here’s a video of Obama basically promising to bankrupt coal companies. Whether you like it or not, industries change and the President or other politicians can help spur this change.

From $73 to $1.93 in the past six years

From $73 to $1.93 in the past six years

Keep a close eye on what the media and politicians say about regulation on the soft drink or tobacco industry, as well as the budget set aside for defense and even our space agency NASA. Oil prices are largely affected by conflicts in the Middle East, and trade protectionism also is something to watch out for.

Is DCA Right For You?

Dollar cost averaging is sometimes boasted as the best way to invest your money – over time in order to avoid investing a lump sum at a time of over-inflated prices. If you contribute to a 401k plan every pay check you are involved in this investment strategy, however the benefits of such a strategy are largely focused on investor’s emotions rather than being the statistically right choice.

If you want to eliminate the seasonal trends of the stock market, then a DCA over a period of one year might be right for you – for example investing $100,000 into the stock market by adding $8,333.33 to your portfolio each month. Some folks take a different stance and invest around November and sell their investments in April – based on a historical trend of stocks rising in these months more than the others. This is called the “Best 6 Months” strategy.

However, the best 6 months strategy when applied to taxable investments will always result in short term capital gains which are taxed more heavily than long term capital gains (See Stocks for more information). Also keep in mind that you are losing out on dividends when you don’t hold shares. If you are planning a six month strategy I suggest doing so in a tax-free account such as a Roth IRA using a mutual fund to capture a large portion of the market.

Most folks engage in DCA through regular 401k contributions, many companies match a portion of this contribution. It would be foolish to not contribute up to the employer match.