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Posted by Martin November 08, 2013
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Market inflated artificially by FED and how to defend your portfolio


Money machineToday the stock market proved to be artificially inflated by FEDs policy. It was apparent how weird it works when the central bank influences market and economy and how dangerous such interventions can be to the free market.

It looks like we no longer enjoy the free market and although I tend to say there has been nothing new in the markets FED’s bad influence might be a new normal.

I wonder how FED wants to get out of this mess they started themselves.

What is going on?

To taper, or not to taper, that is the question. FED trapped in a vicious circle.

Since Ben Bernanke started his infamous QE interventions markets enjoyed the run up. We recovered the losses from 2008 and exceeded the peak of S&P 500 from 2007.

 
(MORE: Why You Shouldn’t Follow The Trend When You Invest)
 

One would say great, well done.

But the picture behind is more dark and frightening.

What happened today? We enjoyed new employment data coming out today. The economy gained 204,000 new jobs and at first the markets turn red! Asian markets even lost value the day before!

The reason? Renewed fears that FED would taper its QE stimulus.

 

Later during the morning markets turned back up and ended significantly high. Not the REIT sector however.

REITs continued its slump down and many REIT stocks were losing more than 3%.

What a backwards, weird behavior! The markets posted good results (and I do not want to speculate here how bad or good the added jobs were) showing some improvement and markets freak out that FED may stop QE which would send stocks from their inflated levels.

 
 
 
(MORE: U.S. rates futures fall after strong payrolls data)
 

There is nothing to envy the new FED chairman Janet Yellen. If she stops QE, the entire phony artificially inflated economy will collapse along with the stock market. If she continues QE it will worsen the FED balance sheet, inflate the bubble even more and potentially send the US into another recession.

Use dividend growth investing strategy to outperform sideways and dropping markets

How can an investor protect her portfolio against this potential threat?

The way how you can protect your investment is to be defensive. You want your portfolio be independent on such mess and fluctuations. The best strategy to reach this independence is dividend growth strategy. Investing in dividend stocks your primary task would be dividend income. You want everlasting, sustainable and growing stream of income.

Once you build an account based on this strategy then your primary task will be dividends and not account value. You will no longer have sleepless nights or be frustrated seeing your retirement account shrinking during market decline.

If during retirement you will be relying on 4% rule such market volatility will brings butterflies to your stomach and many times you will have a headache wondering whether your account would survive any coming crisis.

 
(MORE: Dividend Investors Should Ignore Market Fluctuations)
 

With dividend income your stream of income will stay intact (in most cases) and as Dividend Growth Investor says, if the market closes now, your portfolio still will be generating income.

My investing plan is not dependent on market fluctuations. In fact, even if they closed the market tomorrow, I would not care. That is because most my stocks would keep sending me quarterly dividend checks (some do monthly and a few do it annually), with the only issue being that I won’t be able to reinvest distributions into more shares.

My account is quite exposed to REIT stocks, so it declined significantly today. Am I afraid or concerned about my stocks falling? Yes I am concerned, but only in a manner of seeing another great opportunity to add more shares to my portfolio.

Use cost averaging to squeeze more profit and lower your cost basis

BuyI still see great value in those stocks. Everybody is dumping them on fears of FED tapering its QE. No one looks at ending the QE as a good thing anymore. But they look only into the near future, short term impact. I am looking on a 20 year investment time horizon. From this perspective, today’s push down is yet another opportunity to take advantage from the FED’s mess.

What else can you do to protect your investments besides choosing the right strategy such as dividend investing? As Ben from A Wealth of Common Sense says, divide you available investing cash into equal pieces and invest in smaller fraction in a longer period of time.

I do that. I never invest all available money at once. I always invest a 1,000 dollar increments (I cannot afford more right now) in a stock in a longer time span. After the first purchase I wait. When the stock is rapidly growing up I choose a different stock which is not moving up or wait when the movement stops and the stock reverses for correction. Then I add another $1,000 increment and so on.

 
(MORE: Wait for a Crash or Put My Money Back to Work?)
 

There is no rush in buying stocks right now. You can wait. And the dollar cost averaging will help you mitigate fluctuations and loses in your portfolio.

If you trade or invest in other than dividend growth stocks or large cap blue chips, the dollar cost averaging strategy can become a very dangerous endeavor. It would be as the old adage says: trying to catch the falling knife. With dividend paying stocks however, the price fluctuations are your friend and not enemy. Use it and average your cost basis down to improve your investing results.

Stick to your plan

Once you create a strategy stick to it. But make the plan. It is surprising how many investors have no plan, no strategy and no clue what to invest, when to invest and when to stay out, and what money management to use when investing.

But there are also many investors who passed thru this and created their own plan or strategy, but after a first drop in prices they run away and start searching for another, better strategy out there. If you have a strategy, trust it and follow it.

 
 




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Posted by Martin November 07, 2013
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Why I will no longer invest in Lending Club


Lending ClubEvery great story will end one day. This is the case of my investments in Lending Club. Yes I am closing my account (or significantly reducing my exposure) with Lending Club and moving all available cash to equities.

The reason? Recent changes in trading platform which now prevent me from effectively manage and protect my investments.

What are those changes about?

Some investors and gurus call it a loophole and I am fine with it. For me it was an edge to protect my investments.

Lending club was processing notes in a certain time frame and there was a time or day limit when the notes were supposed to be processed. If it didn’t happen I sold the note in the secondary market with a discount before the note turned into a grace period status.

This is no longer possible. Now during note processing it will not be possible to sell the notes. When the processing is over you will be able to sell the notes as long as they are in current status. If the notes during that period changes into Grace period or late, you won’t be able to sell. You are locked in a bad note.

 
(MORE: Major Changes to the Lending Club Trading Platform Today)
 

My first reaction was that it was similar to NYSE or NASDAQ preventing you selling stocks which are declining and allowing you to sell them only when they are rising.Mad man

Normally I would be OK with this procedure in LC trading platform if I had a lot better filtering options and enough time to evaluate the notes. Right now in today’s environment investors in LC were buying using phony filters and mostly had no time to use them unless they automated the process.

Now trading in LC becomes more risky to me and I am not willing to take that risk.

As Peter Renton says, for some investors this will be a major blow:

There is a little loophole/trick that some investors have exploited to offload their notes that are about to go late…that allowed investors to sell a note the day before it went into In Grace Period if they knew how to exploit it.
That loophole has now been closed. Investors will no longer be able to list a note for sale once Lending Club has begun processing the payment…For most investors this will be an inconvenience and for some it will be a major blow because the loophole will now be closed.

Yes, I must admit, I was one of the investors using this process to my advantage. Not anymore. Thus it is time to say good bye.

What’s next?

My next steps will be unwinding the positions and selling whatever I can without loses. I am also expecting some late notes starting to show up in my account.

As of today, my NAR reached 16.28% and my XIRR 11.60%

It was nice experience and great returns. In the future I may use LC with very little money (up to $1000 but not more) if I see the trading platform improves and be providing more valuable information to investors so we can see to whom we are really lending our money, whether it is an honest borower or a scammer.

 
(MORE: My Returns at Lending Club & Prosper for 2013Q3 – 13.89% ROI)
 

At this point I would prefer investing into small businesses rather than to consumer credit which seems to me less risky. An example would be U-haul company which allows you to lend them money on their website the similar way as you did in LC. They will use the loan to expand their business by buying equipment. the interest rates are smaller than with Lending Club, but the loans seem to be safer since there is a company behind it with some assets which can be used to satisfy investors.

You still will be able to see my Lending Club results at my Lending Club holdings page, but I will no longer update the page. You would be able to see the result up to today.

I loved it, but this story reached its end.
 
 




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Posted by Martin November 03, 2013
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Why you should have gold in your portfolio


There has been a merciless war out there between investors who are in favor with gold (gold bugs) and those who oppose them and believe that gold has no value, utility, create no value, and as such should be avoided.

They say that the recent substantial decline in gold price is an evidence of their argument and they predict gold going even lower to $800 an ounce levels.

To me it looks like those who are opposing holding gold in a portfolio either on purpose, intentionally or unintentionally try to defy the law of physics in financial world.

If you haven’t lived on a rock recently and watched what FED has been doing to the dollar and economy in the last 5 years, you would agree with me that you should be buying gold when it is this low before it surges up.

Owning gold is not an investment and it will never be. On that I agree with gold critics. Investors shouldn’t be buying gold as an investment, but as a hedge against the dollar, faltering economy and increasing inflation. As Peter Schiff says, you should be buying an asset which cannot be destroyed by any government.

Gold and silver are those assets.

All the gold panic decline started by Goldman Sachs who issued a recommendation on shorting gold in December 2012 and reiterated that recommendation April 2013. The gold then declined from 1700 an ounce level down to today’s 1200 level.

 
(MORE: Gold Bug Schiff Counters Goldman Sachs on First Drop Since 2000)
 

In my opinion, all the fall in gold is artificial and it will potentially turn against those who are shorting it in a long run. I even think it is pushed down by big players for them to buy it cheaper in expectation of near future troubles the US economy is facing. Push the gold down today, buy it from scared retail investors and wait.

It is not small investors who are selling however, but big banks shorting it!

Does gold have value or not?

One subject of the gold war is whether gold has value or not. Warren Buffett says:

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

I agree with Warren Buffett on many things, but this one. Gold deniers, seems to me, are evaluating gold as a standalone asset. They look at its absolute value only and then deny it as fiction.

I believe, it is a wrong point of view. Gold’s value is always relative. Its value is always relative to something – relative to dollar, Japanese yen, British pound, Euro, or relative to economy.

It is same as a gallon of milk in the store before you drink it. Its value is also relative to other factors such as cost of production.

 
(MORE: Buffett Is Right On Gold Investing)
 

That said, yes the gold absolute value may be same all over its whole thousand year history. But its relative value fluctuates as the value of the dollar, Euro, US, or world economy fluctuates.

At one point you get more currency for gold at other time you get less. As inflation pops out (and it will, believe me) the value of currency will go down.

Relative to it the gold’s relative value will go higher.

Why I believe gold will rise again

As Peter Shiff says, the dollar and gold work together. When the dollar rises, gold declines and vice versa. We see the strength in dollar. But in my opinion this strength is not supported by the US or (western) world economy.

A strong dollar is not an interest of FED as well as of some significant players. I am pointing at George Soros now, who is constantly bearish on dollar.

FED’s printing speed and quantity is at a huge scale ever seen in the entire US history. It will pop up one day as a rapidly growing inflation. I do not know the reason why inflation wasn’t rising yet and why it recently was actually declining (which puzzles economic experts too). but this situation will not last forever. The economic pendulum will always try to find the equilibrium no matter how much FED is going to fight it.

 
(MORE: Why Isn’t There More Inflation?)
 

I think the reasons would be that the money FED is pumping into the economy are not used (banks hold them in reserves and in better yielding instruments), the US dollar is used as a world reserve currency and many countries keep dollars in reserves as well expecting worse crisis coming (lack of spending dollar reserves except where forced by the economic situation such as Greece), and last, but not least, the consumers are not spending money.

Americans are actually paying off the debt and saving. That’s something FED wasn’t expecting. They wanted us to borrow more money and spend them. It is not happening.

Yet one day, all these will occur and the inflation will boost up.

Recently, economic experts start believing that inflation would help to move the stagnant economy. Even FED policy makers feel they should ignite higher inflation in order to help economic growth and lower unemployment. We may soon see the right opposite of today’s environment and the FED may unleash another beast which will take a toll on many investors’ portfolios.

 
(MORE: In Fed and Out, Many Now Think Inflation Helps)
 

Gold may help you to prevent devaluation of dollar in the future and protect your portfolio against declining dollar. And I am not speaking about a few days, months or years, but the entire length of your retirement savings phase. Even if there will be no staggering inflation, even 4% annual inflation for 30 years will destroy the value of the dollar. Therefore investors should hold between 5% and 15% of their assets in gold.

I do not think you need to be buying physical gold unless you expect even gloomy and apocalyptic outcome. I think buying GLD ETF is sufficient value protection.
 
 




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Posted by Martin November 03, 2013
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8 Golden Rules of Investing

8 Golden Rules of Investing

The greed of huge amount of money has always put most of the investors into the lap of risky financial products. Making money from such risky financial instruments is not a cakewalk. It demands lot of discipline and patience from an investor along with a huge research and deep understanding of the financial market. Apart from this, the economic instability in last few years has left many investors in states of deep confusion. Many investors have been still pondering on whether to invest, hold or liquidate their financial investments. Here is a list of some golden rules of investing which will help you to get out of the financial dilemma and it will assist you in making wise investing decisions.

Avoid the Haste Mentality

Most of the time, an investor’s decision is largely influenced by the actions of his relatives, neighbors and friends. An investor gets persuaded to invest in a specific financial product, if people around him have invested in the similar product. If you don’t want to squander away your hard earned money then you have to invest it only after considering your own financial objectives and priorities rather than following people around you.

Make Informed Decision

An investor has to do comprehensive research before adding any financial product to his portfolio. But most of the people avoid this and they usually go by the historic performance of the product which always put them in difficult situation. This is definitely not a right method to put your money into any financial avenue. If you don’t possess right temperament and proper sources for studying the financial market then you can seek advice from an expert advisor.

Do proper Asset Allocation

A large number of studies have demonstrated that proper asset allocation is a key driver for high returns on investing. The amount of money you invest in a particular financial product makes great difference than the kind of product you invest in. Unfortunately, most of the investors spend bulk of the time on figuring out which fund or which stock they wish to purchase instead of giving focus on asset class. Deciding how much amount to invest in real estate, bonds, equities and commodities must be the important step while constructing your portfolio. An investor has to spend significant amount on asset allocation as it is an important factor which can make great difference.

Stick to Fundamentals, Not Sentiments

Short term movements in any financial product are mainly driven by investor’s sentiments while long term returns are result of strong fundamentals. So, while adding any of the financial products to your portfolio, give high focus on valuation and not on sentiment. Rather than listening to the market noise, give some time to research on financials and growth prospect of the company. Remember, if you are investing in shares of particular company then it is financial earning of that company which will drive the returns in the long term.

Diversify your Risk

Having an investment portfolio with lower correlation can assist you to diversify you risk associated to various asset classes. It also protects you from some other factors such as inflation which may lower significant part of your return. Real estate, bonds, mutual fund, shares and commodities react differently in diverse conditions and opting for multiple asset classes can make sure that your investments will not rise and fall at similar time.

Invest in Products You Understand

Though a well diversified portfolio can deliver higher returns for an investor, it is important to invest in products which you understand. Most of the investors incur permanent losses when they invest money in an asset class which behaves in surprising way. That’s the reason why being an investor you should give adequate time to understand about the investment product you are planning to invest in.

Focus on Your Actual ROR

No matter what investment approach you select, it is extremely important to focus on your actual rate of return (ROR). Taxation, inflation and fees (associated with dealing and managing investments) are three crucial factors which can influence ROR on your investments in long term. There are some alternatives available such as inflation protected instruments which can help you to lower your cost significantly.

Stick to Disciplined Investment Techniques

Most of the investors lose significant amount in stock market as they get succumb to their emotions, especially greed and fear. So it is always a wise thing to follow disciplined investment approach and have enough patience while keeping broader picture in your mind. Most of the times, the panic in the market becomes reason for investors to lose their money despite of ‘bull run’ in the market. An investor who puts his money in systematic way in right financial products and hold on to them for long term can earn outstanding returns.

Conclusion

Half of the battle of right investing can be won by avoiding any minute errors available in your financial portfolio. If you work on all the pitfalls in your investment portfolio and concentrate on right areas then there are high chances of earning decent returns in long term. An investor who invests his money for long term has good chances of achieving his goals than an investors looking to ‘gamble the market’ in order to earn higher profits in less time.




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Posted by Martin October 29, 2013
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New Trade – Taser Int. (TASR) put selling for income

New Trade - Taser Int. (TASR) put selling for income

I opened a new trade against TASR last week on October 24th. The main reason was that:

  1. I like the stock and their product.
  2. I am OK to own the stock.
  3. I believe it has a good growth potential
  4. I want to generate income before I buy it.

TASR manufactures tasers, you know those fake pistols called in an ornamental language an electronic control device used by police and military enforcement mainly in areas where people believe guns kill people. Not humans, guns do.

So as the society will get weaker and sissier TASR will profit from it unless they screw up.

10/24/2013 12:33:14 Sold 1 TASR Mar 22 2014 15.0 Put @ 2

I sold this option contract before I decided to try creating my option ladder, so this trade didn’t follow that effort yet. But that doesn’t bother me that much.

What are two possible outcomes of this trade?

  1. The stock will trade above $15 a share at expiration on March 22, 2014 and the put expires worthless. I will keep my premium and will decide whether to repeat the trade or not.
  2. The stock will trade below $15 a share at expiration. I can decide to either roll the option to a lower strike and longer expiration or let the stock be assigned to me (I will buy 100 shares of TASR at $15 a share, but I still keep my $2 premium).

Happy Trading!

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Posted by Martin October 25, 2013
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Options ladder. What ladder?


Options ladderA few years ago when banks paid 3, 4, 5 or even more per cent interest on deposits such as CDs (Certificate of Deposit) or some savings accounts people were creating ladders. It was a quite popular method of creating an income stream.

If you had a substantial amount of money, you could spread them among long term CDs and then lived off of it. For example, if you had 100,000 dollars available, you would split them into 5 smaller amounts of $20,000 each and bought one 5 year CD the first year. The next year you would purchase the next 5 year CD and so on. After 5 years you would have your ladder constructed. The sixth year your very first CD would have matured. You could take your principal and reinvested it into the next 5 year CD. You kept the interest and spent it for living. Of course you would have needed a lot more than 100k, but you get the idea. Many people have used this strategy during their retirement.

If you are somewhat advanced in finances, you know what the ladder strategy is and how to construct it. If not, read the article How To Create A Laddered CD Portfolio for more information.

Years of dreaming

Image courtesy of David Castillo Dominici / FreeDigitalPhotos.net
Dreaming boy

It was a strategy I always admired. As a kid I wanted to have a stream of income. I wanted my money working for me and bring me more money. But I didn’t want to invest my allowances and then wait 20 years to enjoy the results of my investments. I wanted to enjoy my investment now! Every month I wanted at least few pennies available in my pocket and spend them whenever I wanted and for whatever reason and yet knowing that the next month I would have another payday of a few pennies available to spend them. It was a great feeling. I didn’t have to ask my parents for more money. They were flowing into my little savings account themselves.

Jesse Livermore, a great investor of the 20th century always said that if you make a profit, withdraw 50% of it and spend it anyway you want. Enjoy the result of your successful business.

I liked that idea a lot. I do not do it yet since I reinvest all my proceedings, but I really look forward the day, when I start withdrawing 50% or more of my proceedings and spend them the way I want.

A little banker growing

I was a special kid in case of finances. As soon as I started receiving allowances I was saving it all. I kept a record book of all my money. I always recorded when and from whom I got the cash, be it my mother or grandparents. I was 10 years old.

A little league workforce

As soon as I could work part time, which was when I turned 16 (and since we lived in a small town I could actually start earlier as the employer pretended I was older), I started working for the postal service during the summer break. Every payday I went to the nearby bank branch and deposited my money to my very first savings account.

I counted every penny I received as an interest and I was watching my little account growing. It was at the times, when saving money in these products such as savings accounts, CDs, or money market accounts made sence. At today’s low interest environment investors have very little opportunities.

Joining the dividend growth club

And that’s why I decided to go for and love dividend investing. The dividend investing strategy accomplishes exactly my childhood dream of everlasting and growing income. The dividend investing fascinated me for this exact reason of passive income. But in my early years I didn’t understand dividends. When I was depositing my hard earned cash to my savings account bearing 10% interest, I considered 3% dividend a losers (suckers) game.

I completely missed the power of dividend growth and compounding. But I learned.

A birth of a ladder

The other day I was reviewing my tracking system and stumbled upon my calendar. Recently, I opened a new trade and I sold a put contract against Taser International and received a nice premium.

This trade made me thinking about my options trading. I was staring at this calendar at the same time:

When thinking about my other recent trade of put selling against Safeway comparing it to TASR trade and comparing it with my decision selling puts every month reaping only 30 – 40 dollars because I didn’t want to wait 5 or 6 months for expiration I got an idea.

Can you see the pattern here? It suddenly struck me. Why I have a few trades expiring at the same time while I can spread them across the whole year and create a ladder?

I liked the idea and decided to try it. I will be now selling my puts so I will have at least one put contract expiring each month. This strategy would also allow me taking a long term expiration and thus bringing in a lot larger premium than just 30 to 40 dollars per contract. Now it can be $100 – $300 premiums. The risk will be the same or maybe smaller since the stock will have more time to act and I also will have more time to react and it will be a nice game for me.

It will keep me busy :)

What is your opinion?

What do you think? Will the options ladder be a good and working strategy? Would you apply it yourself?
 
 




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Posted by Martin October 24, 2013
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Another milestone reached! My account reached 10k!

Another milestone reached! My account reached 10k!

I reached my goal for 2013 today!!

My goal for 2013 was to recover my TD account after I almost wiped it out and reach 10,000 dollars balance.

A few months ago I haven’t expected reaching this goal at all. Since I decided to pay off my debt first I stopped contributing to my TD account regularly. I couldn’t see a way how to reach this goal.

But it happened.

Goals 2013

What’s next?

Although I understand that the value of my TD account may fluctuate and even drop below my 10k mark due to the market volatility, it may always recover back in some sort. This is why officially I stop contributing to TD account and focus fully to my ROTH account.

Since I trade on margin in my TD account I will only contribute from reserves to avoid maintenance or margin calls.

My next plan for the rest of the year will be to continue paying off the debt and contributing as much as I can to ROTH IRA account.

Once I finish with my debt I will contribute as much available cash as possible to ROTH IRA and continue purchasing dividend paying stocks as well as building cash for option trading. I will contribute as long as I reach the ROTH limit (currently $5500 annually) and if I still have available cash I will contribute that remaining cash to TD account and Lending Club.

I wish all of you happy investing and hope you also reached your goals. Did you have a goal or plan which you haven’t thought you would accomplish but it yet happened?




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Posted by Martin October 21, 2013
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How to sell put options – new trade – Safeway (SWY)

How to sell put options - new trade - Safeway (SWY)

Why do I sell put options and covered calls when I am a dividend growth investor? The answer is simple. I want income.

When I was looking for a strategy about a year ago after I nearly destroyed my account, I asked myself a question: “what do you want from your investment? What your account should accomplish?”

Of course, there are a plenty of answers, such as enough money for retirement, growth, hit the home run, income, value, etc.

I wanted income. Some people say that you want income when you are already retired, before you should strive for growth. And if possible aggressive growth.

But recessions, corrections and high volatility in the past convinced me that once I receive the income, it is mine. No one can take it from you. You can spend it, lose it, or reinvest it. I wanted income which I can add to my contributions and reinvest even more money.

Income source #1 – dividends

What stocks can bring you income? Cash on hand which you can withdraw anytime you want? Of course it is dividend paying stocks which can do that for you. So I decided to start buying high quality stocks, which pay dividends, have sustainable dividend growth and great dividend history.

But when I received my first dividend it was only 12 or 20 dollars per quarter. My small account couldn’t generate more cash. What can you do then?

Income source #2 – options

My next choice was trading options. Previously I had a great experience with options so I knew what options could do for any investor, not just me. But from my previous trading I also knew that it would not be any advanced option trading I wanted. I still didn’t want the “prediction” part in trading advanced options.

So what trading would be the best? Simple basic options strategies such as naked puts or covered calls.

Why selling options? When you sell options, you receive cash on hand right away. Nobody can take it away from you. These type of options are called credit trades, because you receive cash – credit.

This credit is an additional income I can put on top of my dividends, spend it, lose it, or reinvest it. And no one can take it away.

Since March 2013 I made $1919.74 in options trading of additional income. That equals to 38.39% gain or 108.31% annualized profit. I could take that money and reinvest.

Do you remember what my goal is? My goal is to pay off the debt first. So I suspended any cash contributions to my account. All growth and new investments are made only from profits made in dividends and selling options.

How you can sell put options? Here are some important steps.

Step #1 – sell put options only against stocks you are OK to buy

When I was learning how to sell puts, I had problem with this rule. I didn’t want to be assigned to the stock ownership because I didn’t want the stock.

It was crucial for me to realize that I have to sell options only against stocks I would normally buy. Stocks I want to own. If the trade goes against you, the worst case scenario will actually be your best one – you will buy 100 shares of a stock you like and you want. This gives you a great peace of mind!

Example: I like many stocks I want to own, but I chose Safeway as the stock for my put selling. I will be selling puts as long as I can or have enough money. And if the worst happen I will be forced to buy 100 shares of this stock. Will that be a tragedy? Of course not!

Step #2 – select safe strike price

To chose the correct strike price for your option you would need to be in tune with the stock, have knowledge of technical analysis and partially a fundamental analysis too.

Let’s take a look at the example. I looked at SWY chart to see where the potential support for the stock price could be.

Safeway

At the chart I can see two potential supports, one at $32 a share and the second at $30 a share. To select the proper support will be determined by the time of your option and the credit you can receive. So let’s take a look at the option chain to see what options are available around these levels.

Step #3 – select your expiration time

Open an options chain in your brokerage account to see what strikes and what prices are available:

Options chain

I want monthly income from my trades as I do not want to be waiting 5 months for expiration. If I select monthly income and will be able to collect 0.40 (or $40) dollars monthly, in 5 months I can collect $200 dollars. If you take a look at March 22 2014 put option I will only be able to collect 1.70 (or $170) for the same period and I am taking larger risk hoping the stock will remain above $31 strike in 5 months.

So I decided to check the November 16, 2013 options chain.

Then take a look at the Puts table and since we will be selling puts our corresponding column is called Bid.

When I was selling this put option the stock was above #33 a share. Today, when writing this report the stock is below $33 a share. Thus $33 strike is already In-the-money.

Do you remember what supports I was looking at? It was either $30 a share or $32 a share. Yesterday the 32 strike was out-of the-money while today it is at-the-money. Since the 30 strike offers only $10 for the contract, this trade doesn’t make sense. The 31 strike offers $25 per contract which can be considerable, but 32 strike offers 50 dollars per contract (yesterday when I was opening the trade it was 40 dollars.

I chose to open November 16, 2013 32 strike put.

Step #4 – have your plan in place before opening the trade

This is a very important step! The previous steps were just technicalities, but this step is the heart of your trade. Without it you end up blind and paralyzed to act when the trade turns against you.

Before you open a trade you must ask and answer the question – what everything can happen with my trade and what I can do to fix it?

So what are the outcomes of this trade? There are only three possible outcomes, but several possible steps to take to react properly.

  1. The stock will end above the 32 strike at expiration – November 16, 2013
  2. The stock will end below the 32 strike at expiration – November 16, 2013
  3. You will get an early exercise

The stock ends up above 32 at expiration

This is the best outcome in this trade. If that happens the option expires worthless. It will be removed from your account, your maintenance deposit will be released, you keep your credit and you can repeat the trade.

The stock ends below 32 at expiration

If this happens you have the following options:

  1. Roll the trade further in time and lower strike
  2. Close it and take the loss
  3. Let the option be exercised and buy 100 shares at $32 a share

I would opt for rolling the option farther in time and lower strike. For example, if the stock falls down to $30 a share I will buy my option back and sell January or March 2014 30 strike put option. This transaction will most likely be a wash. That means that I will use the credit received to buy back the in the money option. So this trade will cost me nothing.

If however rolling the option in time and strike won’t help, I may decide to take a loss and close the contract by buying it back. But that is not an option for me as I would do whatever it takes to fix the trade and get out either break even or with a small gain.

The third option is to get exercised. And here comes my advice #1 from above – sell puts only against stocks you are OK to own. If this happens you will be forced to purchase 100 shares of Safeway at 32 dollars a share no matter where the stock price is.

But this isn’t as bad as it looks. From the strike of 32 dollars you have to subtract the premium we received before. In my trade example it was 0.40 per contract. Thus my cost basis will actually be $31.60 (break even) per share and not $32.

Since I already collected several premiums from my previously sold put contracts, my cost basis would actually be as follows:

– $2.20 premium collected in March
– $0.35 premium collected in September
– $0.40 premium collected in October
+ $32.00 strike – stock purchase price
——————————————
= 29.05 break even – actual cost basis

As you can see, if I get exercised, I will be purchasing at $32 a share, but my actual cost basis will be $29.05 a share. Will the stock drop that deep? Of course it may happen, but if no turbulence, panic or company disaster shows up, the stock shouldn’t experience such a deep drop and even if I get exercised I will own the stock still relatively cheap.

Any questions?

Hope this step by step process on selling a put option against a stock and collect additional income was helpful. If you still have questions or need help do not hesitate to ask. I will gladly help you with your own trade.

 

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New Trade – fixing Demand Media (DMD) – put selling

New Trade - fixing Demand Media (DMD) - put selling

My covered call trade against Demand Media DMD turned to be a stinky trade. It turned against me when the stock dropped significantly leaving me with a large loss. Is there a way to repair it? I believe so.

What is Demand Media and why it sucks?

I must admit that when I was opening this trade I didn’t do my homework diligently. I failed to understand what Demand Media was and what was their business model. Now, with the hint-side it is clear, back then when I was opening this trade, it wasn’t that obvious.

So what is DMD? It is an internet company which relied on ranking in Google‘s search positions. This type of business is called a content farm. The company was producing a huge amount of content and relied on high-ranking which allowed them selling advertisement from great traffic.

The company also owns several other well known websites in their portfolio such as eHow, Stronger, Creativebug, and eNom domain names registrar. However their business model was based on junk content pushed forward ahead of any other content. Demand was hiring cheap freelancers to provide with junk content, videos and photographs.

When everything was OK, Demand media was generating 73 millions unique visitors monthly.

But then Google stroke them down. Google changed the ranking algorithm recently and the main outcome was to punish junk content. That had a great impact on Demand media. Soon after the monthly visitors dropped to 53 millions. The revenue followed soon after.

The stock lost almost 50% soon after.

How to fix this trade?

At this point my goal will be to close this trade at least break even. The company isn’t finished and based on the news it seems the management has learned their lesson. They will by progressing towards creating more loyal audience returning to their site and recover their ranking. As the now former CEO Rosenblatt said in his statement: “We’re not betting the farm on the old model.”

This may stabilise the company and its stock price.

I am betting on this and believe the stock reached its bottom. I only have two possible options what to do with this trade:

  1. Close the trade, take the loss and move on.
  2. Continue selling covered calls and puts against the stock to lower the cost basis and then liquidate the trade.

I decided to go for the second option. Here is my reasoning.

I already sold several covered calls against this stock lowering my cost basis and I am almost break even, see the following trades:

+ $9.50 initial purchase of 100 shares
– $0.60 sold covered call
+ $0.05 bought back covered call
– $0.45 sold covered call
– $1.20 sold covered call
– $0.50 sold naked put
—————————————
= $6.80 new cost basis
= $5.20 current stock price

As you can see, my cost basis is close to the current stock price and in my opinion it makes sense to continue selling options against this stock to further lower the cost basis although I am taking more risk, mainly with puts.

On Friday I sold put against this stock to further lower the cost basis:

10/18/2013 12:09:09 Sold 1 DMD Feb 22 2014 5.0 Put @ 0.5

In November my covered call against this stock expires and I will continue selling calls as long as I get assigned.




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Posted by Martin October 20, 2013
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Ten Commandments of Personal Finance

Ten Commandments of Personal Finance

For most of the people, getting their personal finances on right track is more challenging than walking on desert for 10 years. But managing your finances is not impossible and it doesn’t demand any miracle from you side. Most of the people are afraid to take some essential steps to manage their finances this is because they don’t sure whether they will succeed or not.  If you are looking for some important suggestions then here is a list of top 10 commandments of personal finance to guide you.

Stop Spending more than You Earn

An individual can’t progress if he is consistently spending more money than what he is earning each month. Living below one’s means is the key step towards achieving financial freedom. So an individual must focus on trimming his budget and try to bring the expenses below his monthly income.

Differentiate Between Your Needs and Wants

Being able to differentiate between your needs and wants is directly related to your ability to manage personal responsibility. At the very basis level, an individual has a primary needs such as food, clothing, healthcare, shelter and transportation. Anything except these is considered as a want. An individual must earn sufficient amount to meet his needs and should not spend excessive amount to meet his wants.

Don’t Show off

Don’t try to demonstrate something you are not. Spending money on unnecessary things in order to impress someone will only hurt you in long term. The majority of millionaires became rich by saving their money instead of trying to make people believe that they are wealthy. An individual who spends his money in order to enhance his status or impress other people has higher chances of incurring a bankruptcy.

Don’t Involve in Gambling

Try to grow your money in fair manner. The schemes like Get-rich-quick and gambling are a mode of earning money at the expense of losing of it from other individual. It may turn into an addiction which can take your hard earned money away from you in a less time. Most of the individuals even after facing bankruptcy, keep themselves attached with these schemes as they don’t want to give up their chance of striking it big.

Don’t Leave your Family Financially Unprotected

If you have dependent family members then nothing can damage their financial security than losing you because of disability or death. If you lose your ability to earn income during tough time then it can only create a heart wrenching situation for you which is difficult to bear. Enrolling for any form of insurance such as disability and life at a right time will help you to create provision so as to face emergency situations.

Remember to Pay Yourself First

The only method through which millionaire individuals became rich is that they kept their expenses so low that they could invest large amount in themselves. So invest a decent amount in yourself before paying for your expenses. This can be achieved through retirement savings, emergency fund or anything else. Consider it as first task of the month and you will be stunned to know that how you made it by lowering the amount on your discretionary spending.

Don’t Borrow On Depreciating Items

Avoid borrowing excessive money on any depreciating items such as boats, cars and ATVs. When you borrow excessive amount of money on any items which fall in value, you will be suffering from a double hit. Most of the people see their financials going upside down because they have to pay interest on items which have been depreciating their value significantly.

Set Realistic Financial Goals

In order to bring your financials on right track, you need to determine your financial goals. Nobody can figure out your financial goals except you. You have to give some decent amount of time to determine what your short term and long term financial goals are so that you can take some necessary steps to achieve them. If you haven’t worked on determining your financial objective for current year, next year and after 5 years then you should take some immediate steps to create them.

Avoid Using Excessive Credit

Debt is kind of slavery as it obligates you to financial lender for long duration and this obligation can take your financial freedom away from you. Therefore, if you are looking something like financial independency then you should avoid using excessive credit. Though using credit cards is unavoidable, you can definitely take some vital steps to take control on its use.

Involve yourself in Philanthropy

Once you get complete hold on your financials, you should show some generosity towards needy people. Philanthropy is a great source of happiness and the ecstasy it will bring will always keep you on proper path financially. For most of the people, being able to serve their own family and individuals who are in need is one of the vital reasons why they aspire for financial freedom.

Conclusion:

If you are wishing for your finances to come on track then simply wishing is not enough. If you want to succeed financially, then you have to stop doing things which can harm your finances and focus on things which are efficient. Bringing your finances on right track could be toughest thing. Above mentioned commandments of personal finance will definitely help you to make personal financial planning as one of your key objective in life.




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