Is The Bear Here?

Is the bear here? Have six years of solid yields in the stock market going to be wiped away by a massive correction? Should you be worried?

I have no idea, but I’m prepared to a certain extent whether or not a bear yields its ugly face. You can do the same, as long as you are approved for options trading.

 

Strategy #1: Make sure you have put options covering or exceeding the amount of shares you have in companies – for example if you are holding 100 shares of Apple which is worth around $106.25 after falling almost 7% in the past five days, you should hold at least one put option of Apple. The strike price for the put option is where a lot of the magic comes into play, as if you buy a put option with a strike price above Apple’s current market value you are making a very conservative play that will be handsomely rewarded if Apple stock price falls but costs a moderate amount more than an option with a strike price around $100 for example.

In my real-price example I will use the March 20th, 2015 expiration date. The Put option with strike price of $110 (above the market price of AAPL which is $106.25) costs $850. The put option for $100 costs $370. The difference is $480, which is less than the difference in share price for a given options “basket” which is $625. That means that It makes more sense to buy the more expensive put option if the stock falls, because even if it falls past the lower strike price you will be making more money.

Let’s say Apple falls to $90 per share by March 20th – with the more expensive put option you make $20 per share in your basket minus the commission which comes out to a profit of $1150. If you had purchased the cheaper lower strike price option you would make $630. Of course you stand to lose more if Apple goes up by March with the first option, which is why options being supported by a long ownership of Apple makes sense.

Strategy #2: Short the stock market. Sell  shares of a company you don’t own with the intent of buying them back later at a lower price. This is a highly risky strategy as shorting a stock makes you liable to pay any dividends they issue from your account and without a call option to secure the short position the loss potential is astronomical. One company that is heavily shorted is Herbalife Ltd., which some hedge fund managers consider to be a pyramid scheme soon to be busted by the government. If you short the stock market you will make money in a bear market.

Strategy #3: Sell all of your stocks and invest in corporate bonds or bank CDs. This is sort of like giving up on high yield investing, find a bond that suits your risk level or go with a municipal bond that may offer tax savings at the state level. Even more risk averse you can put money into T-Bills, which is what countries like China have done to protect the value of their huge cash surplus.

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.

How to Weather the Storm

Are you fearful of a market crash? Do you want to prevent what happened to your portfolio in 2008 and 2002? The simplest and fastest way to protect yourself from a market crash is to sell all of your stocks and wait – the only problem with this is that you are not making any returns on your cash, another more sophisticated way of buying “insurance” is to buy call options for negative ETFs or buying put options for stocks you own.

The first example could mean buying call options for such ETFs as “DOG”, “SH”, etc. (You can look these up later)

Buying put options will yield you much greater returns as these would take the maintenance cost of inverse ETF’s out of the equation. In fact, buying put options for positive ETF’s is probably an even better strategy since that would be putting the downward pressure from fund maintenance in your favor.

For example, if you owned 100 shares of Apple (Ticker AAPL), you could write a single put option for AAPL that expires next year with a strike price of $90 per share. That means if you’re holding Apple stock and it drops below $90 per share you won’t have to sell your stock but instead you would be gaining for every cent below $90 may fall by the time your option expires. That means you can also hold your shares without worrying until next year about how Apple stock price performs if you are in it for the long haul.

The only disadvantage to using options is that they expire, so the worst timing would be if they expire right before a huge market crash. To avoid this you can continue to buy put options as long as you hold shares – you need to pay for these options but doing so will insure you from the possibility of a even larger loss.

If you do the math many times this strategy will still yield more returns than holding cash but will offer a sort of insurance. The actual price today for a put option that expires in January for AAPL is $160. If Apple falls to $80 per share by that time, you will have made ($10 * 100 shares) – $160 investment, or $840 dollars. As you can see, you may also use this strategy to aggressively bet against the stock – something I do not subscribe to but something that would have paid off considerably in previous stock market pullbacks.

Below is a profit/loss chart for a $90 put option of Apple, as of September 27th. If we see a bear market or if Apple stock in particular falls, you will see the price for the option increase over time and you have the ability to sell your option up until it expires.

profit loss chart

 

Keep in mind that historically the stock market will continue to rise, but given it’s 2013 leap and uncertainty about the world economy and prime interest rates it doesn’t hurt to keep your bases covered.

How To Avoid Pump and Dump Schemes

On September 11, 2014, 8 traders were indicted on duping almost $300 million out of mom and pop investors [1]. How do you avoid this trickery and avoid buying stocks for companies that are “shells”?

The answer is simple- look at the company’s market capitalisation. These fraudster’s companies usually have a very small amount of market capitalization if any reported and shown, such as less than two million dollars. Any major fraud involving the stock price of a multi billion dollar company is rare and will get news coverage equivalent to what Enron or MCI Worldcom received in the 90’s and early 2000’s. My rule of thumb is to never invest in companies with less than 300 million in market capitalisation. Looking at the integrity of the company’s website is not a sure way of knowing if you are dealing with a legitimate company. After market capitalisation, you should avoid buying shares ‘Over The Market’ – instead stick with companies listed on the Dow Jones or Nasdaq.

One of the websites they channelled their spam through was called ‘pennypic.com’, and of course now the website is offline. In order to research what type of stocks these fraudsters had I used the WayBackMachine on web.archive.org.

Take a look at XUII, it was the symbol blaring on their unbecoming website as their “Monster Pick”, it now trades at $0.0003 per share on the over the counter market (a.k.a. bankrupt) – take a look at it’s price history starting on June 13th when they were advertised.

Scammers inflate the price to draw more people in along with sending spam, then they dump the stock.

Scammers inflate the price to draw more people in along with sending spam, then they dump the stock.

As you can see the price was 23 cents on June 13th, and inflated to almost 68 cents when the scammers started selling – pushing the stock down to 6 cents in just two months.

 

[1] Rosenburg, Rebecca. “8 Traders Indicted in $300M Pump and Dump.” New York Post. New York Post, 11 Sept. 2014. Web. 11 Sept. 2014.

Wartime Investments

How can you protect your financial assets in times of war? This depends first of all on which country you’re in and how is involved in the war.

If your country is the one being invaded then the best way to protect your assets would first of all be keeping it all in international bank accounts so that they cannot be physically taken from you and stashing up food and another vital supplies.

On the other side if you are in a aggressor country be prepared to put your money into inflation secure investments as most likely your country is funding your war with debt, something that ultimately results in increased inflation.

War commodities include petroleum/oil-based products, metals, and rubber to name a few – keep this in mind if you’re a commodities trader. The equity angle to this would be to invest in producers of the above products. There are also ways to invest in commodity futures through exchange traded funds (ETFs) that can closely follow the price of a future or even double the price change each day. Such funds that double the price are called ‘Ultra ETFs’, they are leveraged and carry a higher risk/reward – it is not recommended to hold these for extended periods of time based on their average upkeep. A recommended Ultra that may prove profitable during wartime or even a military buildup (due to speculation) is UCO.

Some straightforward investments that often beat the market during wartime include DoD contractors, both service and hardware providers. Notable stocks that fall into this category include Lockheed Martin (LMT), General Dynamics (GD), Boeing (BA), and Raytheon (RTN). The more conservative investors may consider buying gold, which will protect them from price inflation but is still subject to demand.

Most importantly, invest in your own health and well being during times of war.

Call Options for Dummies

What is a call option, and why should you know about them? A call option is a investment tool used to in essence bet on the price of a stock in the future – read some more details about this type of transaction here. People buy and sell these because they can get a huge return for a small investment or receive small payouts for holding shares of a company with the risk of having to sell the stock at a certain price.

Simple example below for buying a call option using real prices as of today.

You buy a call option for Google that expires the middle of next month (October 19th, 2013). The strike price for which you buy the option is $900 and you pay $14.60 per share for the option (options are bundled into stacks of 100 shares so you will pay $1,460 total). The person who sold the option to you immediately receives around $1460 for their holding of 100 shares currently valued at $860 per share or $86,000. This means they immediately get almost 1.7% of their entire holding of the stock in cash.

Why would anyone pay $1460 for this option? See the three example outcomes below:

Google goes up to $950 by October 19th – the buyer of the call option will receive $50 per share for his option ($950 – $900). That means he will have made $5,000 minus what he paid for it ($1,460) for a total of $3,540 in profit. That equates to more than 340% returns on investment, a hefty profit indeed. The seller of the option will be forced to sell the stock at $900 per share, so he is losing out on $5,000 but still has to consider what he made from writing the option ($1,460) which puts him at losing the potential $3,540. Luckily, he is still making money since the stock has risen above $860 so he makes $40 per share plus the price he wrote the call option for totaling $5460.

Google remains at $860 by October 19th – the buyer of the call option loses everything, since the option did not reach the strike price. The writer of the option keeps what he made from writing the call option ($1,460). The writer also does not need to sell his stocks.

Google plunges to $500 per share – the buyer of the call option is only out what he put in ($1,460). The writer of the call option did not sell his shares since he has a option on his holdings and doing so before he buys back his call option puts him at infinite risk. He gains $1,460 more than if he had held the shares and not wrote the option, but has lost $36,000. His total losses are $34,540.

Now, consider the optimal situation for the writer of the call option – The stock climbs to $949 per share before expiration, a dollar short of the strike price. If this happens the seller can go ahead and write another call option for the same shares for the next month!

The optimal situation for the buyer of the call option is for the stock to skyrocket of course, so he can make profits on his investment.

The lose-lose situation is if the stock plummets, although you may argue that the writer of the call option still comes out better than if he didn’t write the call option if he was going to retain the stock either way.