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Posted by Martin September 16, 2013
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How to Refinance Your Home Mortgage

How to Refinance Your Home Mortgage

In tough economic situations, it becomes extremely difficult to make payment on your home mortgage without any delays. With constantly rising interest rates, meeting your monthly mortgage installments may become tougher than what you have expected. If you find yourself in such a tough situation then it might be a time to consider refinancing. But the real danger in refinancing your home mortgage lies in ignorance. Without appropriate knowledge, refinance may hurt you financially, by increasing interest rate instead of lowering it. Here are some useful tips on refinancing home mortgage which will definitely help you to achieve best possible deal available in the market.

Refinance to Cut Your Mortgage Payments

Refinancing your home mortgage at slightly lower interest rate will help you to reduce your installments thereby saving you thousands of dollars in long term. Lowering your mortgage installments means you can invest your savings in any of the suitable investment products to multiply your money. Though refinancing your home mortgage could result in longer term of a loan, it can save you significant amount over the period.

Refinance to Cash out the Home Equity

It’s a very ideal proposition to cash out some part of the home equity by refinancing the home. It can be an effective financial move in tough financial circumstances. For example, it makes much sense to cash out appropriate part of your home equity to start a new business or purchase a new property. It mainly depends on your long term financial goal and whether you are capable of managing your all the debts responsibly.

Can Refinancing Help You to Achieve Your Goals?

Before taking an important decision of refinancing your home mortgage, make a proper list of your financial goals. Ask yourself some very important questions like – Do you wish to pay off your mortgage immediately and get rid of debt faster? Do you want to reduce your monthly home mortgage installments? The person who can give answer to all these important questions is nothing but you.

Identify Processing Fees and Closing Costs

Depending upon what kind of loan you are opting for, you may have to compensate hundreds of dollars in the form of additional fees. So, it is extremely essential to take entire processing fees and closing costs into consideration. Sometimes, it may take a decade or more in order to recover the overall cost of refinancing so it is extremely crucial to recognize your ‘break-even’ point and plan according to that. If you are planning to shift to some other location in near term, then it doesn’t make any sense in refinancing your home mortgage at all.

Opt for an Upfront Mortgage Lender

Most of the Upfront Mortgage Lenders (UMLs) available in the market disclose their processing fees upfront and you can shop anonymously without entering much personal information to mortgage lender. This makes your refinancing process extremely less stressful and it also help you to get away from refinancing solicitors. However, before selecting your mortgage lender, make sure to verify all the credentials of the company. Remember to check whether the terms and conditions given by mortgage lender are up-to-date with the current regulations.

Don’t Over-Emphasize Your Mortgage Payments

What you owe is more important as compared to what you pay every month. Most of the times, it is extremely easy to get tempted by lower monthly mortgage payments. So make sure to consider some other important aspects like long term cost and extended payment period.

Can Refinancing Reduce Your Debt?

Refinancing can save you significant amount money in long run by lowering your monthly payments but it can’t happen quickly. It can’t get you rid of your existing debt because it just restructures your debt. So it is extremely crucial to weight your savings against the period it will take to recoup your refinancing cost which usually ranges from 3 to 5 percent. There is wide range of refinance calculators available on the internet which can help you to such kind of calculation.

Utilize Your Negotiation Power

As there are so many mortgage lenders available in the market, which are providing low interest rates, you will definitely get strong negotiation power to fetch the best deal. Federal law mandates mortgage lenders to offer you a detail estimate of the fees which they are going to charge you. By analyzing this estimate properly, you can get rid of some unnecessary charges such as wire transfer fees, rate-lock fees and documentation fees to lower the overall cost of your home mortgage.

Consider Loan Mergers

Refinancing helps you to consolidate your other home equity loan with your existing loan. This lets you to save significant amount of funds by allowing you to pay single rate on the overall amount instead of lower payments on your primary loan and higher on other mortgages.

Conclusion

Real estate and debt management experts believe that for homeowners refinancing mortgage is effective idea but there is high risk to consider at present situation. A borrower’s credit situation, the age of his current mortgage and his job prospects everything should be considered before taking the final decision of refinancing home mortgage. Rely on your own assessment of your existing loan relative to the recent quotes which you have obtained and analyze all the numbers properly to determine which loan makes more sense considering your both short term and long term financial goals.




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Posted by Martin September 15, 2013
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Are you in debt vicious circle and how to get out?

Are you in debt vicious circle and how to get out?

Have you experienced a situation when you received your paycheck, then paid all your regular bills and your credit card bills and your checking account was empty the very same moment? When that happens to you, you are in a serious debt issue and you need to act now.

This is actually what happened to me recently and I realized I must act now before the debt problem becomes worse. When you are in this situation, no traditional advice will work for you. Here are some of the tips, which will not help you out of the circle:

  1. Stop using the credit cards and use cash only. This advice will not help you at all. If you end up broke by paying all your bills and debt payments the very next day you receive your paycheck, you are forced to go and borrow again. You are in a vicious circle of paying debt, but borrowing again.

  2. Pay more than minimums to get out of the debt. This is actually what gets you in the trouble. If you pay more than the minimum you have nothing left, when you pay minimums, you will most likely never get out of the debt.

  3. Use debt snowball strategy. Although this is a great strategy, at this phase it won’t help you. You still have nothing left to perform such strategy and avoid borrowing more money to live on.

So what can we do in this situation to actually get out of the debt?

Budget

This is a very common advice you will hear first. You really need to sit down and create an assessment of all your finances. At first start with your credit cards. List them all down, put down the name of the lender, amount you owe and interest rate you pay. Then list all your other regular bills you have to pay such as utilities, rent or mortgage, etc. Write down everything. If you do not know where your money goes, start tracking them. Create a list in spreadsheet or just in a notebook and track your money for at least three months. Write down everything you receive and spend. Write down a reason for an expenditure as well.

After about three months you should be able to find out where your money goes and do some planning. Find out what expenditures could be cut down and don’t spend the money anymore.

And the most important thing? You must do all this with your whole family. Explain all members that you have a debt situation and that the whole family must help.

Saving or paying the debt off?

RefinanceWell, if you are in the vicious debt circle, you must stop all leaks in your valet. Saving and investing must go aside. But here again you must sit down and make an assessment what savings must continue and which can be stopped. If you are, like me, saving for an annual expense such as insurance or any other annual bills, see details about this savings here you must continue to do so. However if you are saving for a vacation, you can stop such saving and keep the cash.

Although I hate to say it, investing is another activity you will have to postpone. You still can keep already saved and invested account, but stop all new contributions. Keep the cash.

What about your already saved emergency account or other savings? Keep it. Do not touch it. Stop contributing, but do not withdraw unless such withdrawal is absolutely necessary. You can use the money only as reserves to pay the bills or credit card payments.

Get help, counseling, or refinance

CounselingWere you able to find some savings in your budget and savings schedule? If so great, you can skip this portion. If not, you need to go deeper to the bone of the problem. What helped me was a refinance strategy. I applied for several credit cards with zero introductory APR on balance transfers. Many of the cards had up to 18 months introductory rate. Transfer your balances to the new cards. You will be surprised how significant savings you can get with zero interest.

On my Bank of America credit card I used to pay $88 monthly minimum payment. After transferring to a different card my minimum payments dropped to $45 monthly. I suddenly had $43 monthly available.

I also applied for refinancing loans at Prosper and Lending Club. I was able to combine several high interest cards loans into one smaller monthly payment. My original debt on credit cards had an interest rate at 23%, I could get a loan from Prosper at 12%. Huge savings! I also was able to eliminate high payments on my American Express card. Instead of paying $1200 monthly thru their “pay in time” program I now pay only $500 monthly. Huge savings again.

You may also contact your lenders and ask for help, lower your interest rate, refinance thru them or you can contact any of the counseling firms and get help thru them. Your ultimate goal is to release some cash to get out of the debt.

Get a second job

This can be very tough. I did this myself for a couple of months. I have a regular job, working as a mechanical engineer, but I also applied for a night work at our local Walmart. Every day, for four months I went to may regular work at 8:30 am, worked until 5:30, then I went home to sleep. I woke up at 10 pm and went to Walmart for my night shift. I worked there until 8 am and then moved to my regular job. It was very hard and after 4 months I had to quit, but it helped a lot in eliminating my debt.

You can do something similar. Even a short period of time will help you.

Now use the debt snowball plan

Once you were able to release some cash by applying some of the tips above, you should be able to execute the snowball strategy. If you paid more than minimums on all your cards, stop this on all of your cards but one. Chose the card which has the smallest balance and maximize payments to it. Take all your other cards, put them in a Ziploc bag, fill it with water and put it on the bottom of the freezer. Literally freeze those cards. Keep only one card out for emergency (ideally the one which has a zero interest introductory rate).

  • Now you should have some money left due to your budget assessment.
  • You should have some money left due to debt refinancing.
  • You should have some money left due to stopping unnecessary savings and investing contributions.
  • You should have some money left due to eliminating more than minimum payments on all your cards.

With that savings you should be able, thru your budget, to find out how much money you need for your regular spending and how much money you can pay towards the debt elimination project.

Be and stay frugal

FrugalThis is important. Once you go thru all this and save money, do not spend it! I made that mistake once. I refinanced all my debt and that made me think that I was out of the trouble and I could continue in my spending habit. I suddenly could handle the debt and had some cash available, so no big deal. Well, dude, yes it still was a big deal. It was a huge deal, duh! Some benefits I got from refinancing expired and I was exactly where I was at the beginning. I realized I had to start all over!

So do not repeat the same mistake, continue in a frugal life, weight every purchase you need to make before you make it. Although you got some relief, you are not out of the forest yet.

Visualize your debt

If you are like me, you may want to make your debt visual. When I put my debt into a chart or any sort of a graph I become competitive and seeing the chart makes it a challenge in which I want to excel.

Here is my own visualization of my debt:

Having those charts in front of me all the time and track balances every month is helping me to see the debt and fight it effectively. I once again see my situation positively and working hard towards final debt elimination. If everything goes well, I should be debt free in about 2 years.




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Posted by Martin September 10, 2013
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My inspiration in the last week #36

My inspiration in the last week #36

I was working last weekend being extremely busy. Actually I was very busy last couple of weeks and unable to pay attention to blogging too much. I still was able to watch my investments and do some reading, but I wasn’t able to perform my regular weekly links posted every Sunday. So I do so tonight.

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

Please, if you are considering opening an IRA, ROTH IRA or taxable account, consider Motif Investing

which will allow you creating a portfolio of 30 stocks of your own and invest by buying the whole portfolio as one piece keeping you highly diversified from the beginning. By using the banner below for opening your new account, you will receive $150 bonus and help this blog:

 

 



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Posted by Martin September 10, 2013
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Realty Income declares its 73rd dividend increase, so why the stock fell?


Realty Income
 
 
We are pleased that our Board of Directors have once again determined that we are able to increase the amount of the monthly dividend we pay to our shareholders. With the payment of the October dividend, we will have made 519 consecutive monthly dividend payments and paid over $2.6 billion in dividends throughout our 44-year operating history.”

This was the announcement from a new CEO John P. Case today morning. Realty Income is once again proving that the management is shareholder friendly and dedicated to be a company retired investors can rely on.

So if the company increased its dividend payout, why the heck it fell today by 1.13%? Shouldn’t investors be celebrating this move and cheering up in joy? This great company will be paying you more income and first pay day will be in October 2013.

It is hard to find out why investors are buying or dumping stocks. Many times you will be dealing with irrational behavior at the edge of idiocy but today the reason was obvious.

Although the company continues in its great dividend policy of long term monthly paying dividends it appears this increase disappointed investors.

The company increased its new annual dividend from $2.179 a share to $2.182 a share. It is only a 0.14% increase. On annual basis this encrease doesn’t keep up with inflation and in my opinion this was a disappointment to investors who seek not only a stable dividend income, but also an income which will be increasing annually at least at the same pace as inflation and ideally better than that.

I am fine with this company and I will continue investing in it. The reason is that I am still in accumulation phase and strictly reinvest all dividends buying shares of other stocks and Realty income is a great help paying me monthly dividend which can be reused right away. This would speed up my accumulation process.

The next reason is that I still have circa 20 years of investing in front of me and this lackluster increase doesn’t bother me as long as it doesn’t become a standard. As I will be approaching closer to my retirement age, I would grow cautious with a dividend growth like this. Today I get the dividends and reinvest them (mostly into companies which have a better record), but I also actively use (or started using) Realty Income options trading to boost my income from this stock.

About the Company

Realty Income, The Monthly Dividend Company®, is a New York Stock Exchange real estate company dedicated to providing shareholders with dependable monthly income. To date the company has declared 519 consecutive common stock monthly dividends throughout its 44-year operating history and increased the dividend 73 times since Realty Income’s listing on the New York Stock Exchange in 1994. The monthly income is supported by the cash flow from over 3,600 properties owned under long-term lease agreements with regional and national retail chains and other commercial enterprises. The company is an active buyer of net-leased properties nationwide. Additional information about the company can be obtained from the corporate website at www.realtyincome.com or www.twitter.com/realtyincome.




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Posted by Martin September 08, 2013
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Portfolio Diversification to Manage your Investment Risk

Portfolio Diversification to Manage your Investment Risk

You must have heard the famous saying in your life – Do not put all your eggs in single basket! This fact is very true, especially when it comes to investing and diversification is a real key to successful investing. It is one of the important tools in your investment arsenal which lets you to take calculated risks in order to build your wealth in risk-free way. The research has shown that investors who have diversified their portfolio usually earn more consistent returns on their investment than individuals who invest in only one product. Go through following points to know about importance of diversification and how to manage your risk by diversifying your portfolio –

Asset Allocation

Asset allocation is important tactic followed in portfolio diversification. By having products of diverse investment classes in your portfolio such as stocks, mutual fund, bonds, gold, real estate and commodities, you can protect your investments from losing their value in both short and long term.

Pick Your Stocks Judiciously

Equity products possess potential of delivering high returns, but don’t put your entire money in only one sector or one stock. You can think of creating virtual mutual fund by investing in different companies from diverse sectors. You can choose handful of companies which you trust and perhaps you use their product in everyday life. Most of the individuals believe that investing in companies which you know is a very average approach but it can be highly safe strategy which can give you stable returns in long term.

Think of Index or Bond Funds      

Make sure to add fixed income or index fund to your investment kitty. Investing in securities which track different indexes can develop a most effective diversification strategy for your portfolio. By considering some fixed income solutions, you can also hedge your investment portfolio against volatility in the market.

Deciding Number of Asset Classes

The exact number of asset classes needed to achieve the ideal level of portfolio diversification mainly depends on the degree of correlation among asset classes which are added in your investment universe. The lesser the degree of correlation, the higher the potential of diversification and lower the number of asset classes needed to achieve an ideal level of portfolio diversification.

Limit your Exposure to Highly Risky Investments

Be careful when investing in ‘junk’ bonds, emerging market and volatile commodities such as silver and oil. Before taking a vital decision of adding these highly volatile investments in your portfolio understand overall risk behind investing in such products. Do some research or seek help from professional financial advisor to balance your portfolio properly.

Avoid Over Diversification

Over-diversification may arise when two or more investment assets overlap. It can create problem if it’s done unintentionally. Most of the investors allocate higher exposure to few sectors and try to create over-diversification by creating overlap in the portfolio. Though this technique is contrary to basic financial theory, premeditated overlap is matter of investor’s choice and most of the investors consider it as an effective investment strategy.

Rebalancing is Essential

Diversifying your investments is alone not enough. Once you have selected your investment avenues, keep track on it by doing periodic checkups. If you fail to rebalance your portfolio at right time then a volatile run in market may expose your portfolio to risk level which is inconsistent with your financial objective and strategy.

Moderate the Impact of Individual Asset Class

Moderating the impact of individual asset classes on your portfolio is one more advantage of portfolio diversification. This is required because lower the variance of your investment portfolio, higher the certainty of its return over the period of time. It is extremely important as you may have to liquidate all or some part of your assets for emergency reasons.  So the low variance will definitely reduce your panic and stress related with investments.

Selecting Right Asset Class

It doesn’t matter how you define your asset class, the crucial thing is that you must hold variety of investment products which are not correlated with each other. Assets which not correlated with each other are referred as complementary products as they complement with one another forming a unit which is less susceptible to market risk.

Keeping Feasible Expectations

The common fact of the life is that everything has its ups and down and stock market is not exception to this. So work out what kind of returns you are expecting in stable as well as volatile economy. With a well diversified portfolio in hand, you can expect returns which range from conservative 5% to aggressive 15%.

Spread your Risk

Spread your risk geographically so that you will not be susceptible to natural disasters which will impact your business at the same time. Not all geographic locations react in a similar way to changing market conditions. So in order to reduce your location specific risk, you can add some international investment products in your portfolio.

Conclusion

Having multiple products in your portfolio can’t prevent one of your holdings to go into bankruptcy. But you can definitely lower the potential loss in relative terms because multiple products in your portfolio means less risk attached to each one of them. Investing can be a fun as well as rewarding even in the worst times, if you follow disciplined approach and stick to diversification. Above mentioned suggestions will definitely help you to get most out of your holdings by diversifying your investment in different sectors and by safeguarding your investments against market volatility.




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Posted by Martin September 01, 2013
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My inspiration in the last week #35

My inspiration in the last week #35

I often browse the internet to find ideas about investing, trading stocks, options, investing opportunities and strategies. I like to read about investors and what their investing/trading approach to create income you can live on is.

 
 

Please, if you are considering opening an IRA, ROTH IRA or taxable account, consider Motif Investing
which will allow you creating a portfolio of 30 stocks of your own and invest by buying the whole portfolio as one piece keeping you highly diversified from the beginning. By using the banner below for opening your new account, you will receive $150 bonus and help this blog:

 

 




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Posted by Martin September 01, 2013
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Personal Finance Tips for Young Students

Personal Finance Tips for Young Students

Unfortunately, personal finance management has not become a compulsory topic in course curriculum of college or high school yet. So most of the young adults remain almost clueless on how to manage their money when they out in the nasty financial world for the very first time. If you are a youngster and you think that managing your finances is extremely difficult then you are completely wrong. The only thing it requires to get started on right path is the eagerness to do a bit of research and you don’t need to be very good at math. In order to assist you in getting started we have listed some vital things to know about personal finance if you aspire to live a prosperous and comfortable life.

Have a Self Control

In case you are lucky, your parents may have taught you this important skill of self control when you were in school. If not, then sooner you discover the art of self control, the easier you will find to manage your finances in proper order. Though you may get tempted to buy any item on credit at the moment you see it but it is always better to wait until you accumulate the exact amount of money. If you don’t learn techniques to manage your financials then some other people will find way to exploit opportunity by mismanaging your money. Most of these individuals are nothing but unscrupulous financial advisors who intend to earn heavy commissions on your investments.

Contribute for Emergency Fund

No matter, how much you have to contribute towards credit card debt or student loans, it always recommended to save some part of the income amount for emergency fund each month. Having decent amount of money to use in case of emergency will help you to get rid of financial troubles and you don’t have to worry about your rainy days. If you get used to the habit of saving significant amount of money towards emergency fund every month then very soon you will have money for vacation, retirement or home down payment.

Understand your Tax Liabilities

It is extremely essential to learn how income taxes work well before you obtain your first salary check. When your employer provides you a salary, you have to do some important calculations to figure out how much income you will have after paying taxes in order to meet your financial obligations. Fortunately, there are several online calculators available which helps you to determine your payroll taxes and estimate exact figures of your gross pay.

Learn How to Bargain

If you want to save some amount of money while meeting your luxurious needs then you have to learn how to bargain. If you are successful in learning some important bargain tactics while shopping then you can definitely purchase items at very low price. Before buying anything, you can also check out whether any special discounts or coupon schemes are available which can help you to fetch most profitable deals.

Keep your Financial Information Secure

Be extra cautious when giving out your financial information such as bank account, credit card details and Social Security Number over online or phone until you check authenticity of other party. Monitor your account properly and report to service provider immediately if you come to know any unauthorized or suspicious purchases from your account. In case, you think that your identity has been stolen by someone then get in touch with local police department immediately.

Start Saving for Retirement

Just as your parents sent you to kindergarten in a hope that you will prepare yourself in advance to face the competition when you get into school, you have to prepare for retirement well in advance. The way concept of compound interest works, the earlier you begin saving, the lesser principal amount you have to invest in order to accumulate the sufficient funds for your retirement.

Take Scholarships/Grants more seriously

Do yourself some favor and confirm with financial aid department of your school or college to see what scholarships and grants available for you. You can also do some quick research online in order to figure out the eligibility criteria of these scholarships/Grants. There are various companies available in the market, which claim that they will help you to obtain scholarships or grants and charge you some fees in order to do so. Before taking help from such companies, make sure you check the credibility of such companies and try to search for solution on your own.

User your Credit Judiciously

If used wisely, credit can be extremely helpful; if not then credit can incur an enormous financial burden on you. No matter what kind of credit card or loan you are applying for, understand all the terms and conditions thoroughly. Realize the implications of missing a bill payment or making late payments. Know all the ins and outs related with credit report and its implications on your credit score. Because your credit score plays vital role in deciding whether you will be eligible for future loans or mortgages or not?

Conclusion:

Heading off to school or college is an important gateway and exciting time for young students to become financially independent. Young student suffer from lot of financial heat because of their poor personal finance management. Remember you don’t need any special background or costly degrees to become expert in managing your finances. Learning personal finance management is long term journey and it is never too let to start. If you stick to all the above discussed personal financial rules in your life then you can become financially prosperous as equal to guy with a MBA degree in Finance.




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Posted by Martin August 30, 2013
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New Trade – Realty Income (O) – put selling

New Trade - Realty Income (O) - put selling

Realty Income stock was among REITs companies beaten down recently and that is a reason for me buying shares of this company but recently I decided to take a few option trades on the paper. I believe the sell off of this company isn’t deserved.

If all the sell off of REITs these days is due to FED tampering and interest rates increasing which is bringing mREITs into trouble, why Realty Income is participating at this sell off?

Why I think this stock is a great deal

This company has nothing to do with mortgage REITs. This company is an equity REIT. It owns properties all over the country. It invest into real estate properties and make money renting those properties to private and institutional clients. Interest rates don’t affect this company in the same effect as mREITs, if at all.

The only risk I can see is that with higher interest rate this company can be purchasing new estate with higher rates which may slow them down in growth. Since the company was successful prior to the crisis when the interest rates were high, the drop in rates we saw a few years back was a cherry on top of the cake. The company which is dedicated to providing a reliable growing dividend income will definitely survive this uptrend in rates easily.

The 30% drop of the stock price isn’t deserved and in my opinion there is no reason for it. I believe the investors (mostly ignorant) are dumping this stock because they have no clue how this company is making money. They just think: “It is a REIT, let’s sell it since everybody is selling and REITs are in trouble.”

Do you remember Visa a few years ago? The government or some other regulatory agency decided to put a fee cap on credit card transactions what the issuer of the card could charge the merchant whenever you swiped the card. The investors back then slammed Visa frantically selling it although Visa had nothing to do with setting swap fees. It was the banks and credit card issuers who had a problem, not Visa.

Yet investors proved again how ignorant they were investing into businesses and having absolutely no grasp of the business model of that company. A history repeats itself.

As a long term investor I believe this company will shine (as long as those ignorants out there find out) and I want to take an advantage of it. In short time frame this company still may be quite volatile tethering around $40 a share, it may even fall lower to $38 a share or even $30 a share, but in long term this stock will go higher.

I decided to sell a long term put contract (March 2014 expiration) to give this stock room to prove my case. I collected $321 premium and I am willing to buy shares of this great company if this trade goes against me. I will be also saving cash for the case that this stock would go lower to $38 or even $30 a share (the latter is very unlikely) where I plan on buying more shares into my portfolio and even open more put trades.

Trade detail

Right now I opened the following trade:

08/29/2013 12:10:05 Sold 1 O Mar 22 2014 40.0 Put @ 3.21

No matter what happens, I will keep the premium and worse case scenario I will end up buying a company I love :)

If the put expires worthless I will realize 8.03% or 14.73% annualized profit.




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Posted by Martin August 29, 2013
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Trade exit – Kodiak Oil & Gas Corp (KOG) covered call unwind (13.54% profit)

Trade exit - Kodiak Oil & Gas Corp (KOG) covered call unwind (13.54% profit)

I had two reasons to exit my covered call against Kodiak Oil & Gas Corp (KOG) early. The first reason was that I wanted to release cash for another trade and KOG is quite volatile that I wasn’t sure it would grow and stay above the strike price. The second reason was that I wanted to practice a strategy called unwind.

What is Unwind and when you want to use it?

Unwind is a strategy allowing you to liquidate your covered call when the underlying stocks passed your strike by a large amount and your option is deep in the money. In this situation you can liquidate your covered call and take your money off of the table.

If your call is deep in the money, you have the following options:
 

  1. Wait until expiration, get assigned and collect your profit. You will be forced to sell your shares, make profit on the stock and on the option premium.
  2. If you do not want to lose your shares, you may evaluate rolling your call option higher and further in time. With this option you may be able to roll for free (the new higher strike and time value option will pay fully for buying back the old option), but from my experience this is quite rare situation. In most cases you will end up paying for this transaction.
  3. If you do not want to lose your shares but cannot find any suitable higher option, you can take a loss and buy back the call option.
  4. If your plan was to get assigned anyway and you still have a few weeks left until expiration, you may decide to use unwinding the position and liquidate earlier.

How you find out whether unwinding will be profitable or you should rather stay until expiration?

It is quite easy. First find out how many weeks you have left until expiration. Then calculate your total risk and total gain of the trade for its whole life span. Find out how much you are typically making per week with this contract.

Here is an example of my Kodiag trade.

I calculated how many weeks the whole trade from initiation until expiration would last. It was 37 weeks.

Then I calculated that over this period of time, the whole trade if called away would bring me $134 overall profit. That is a profit of $3.59 per week.

From the initiation of the trade until today, the trade brought in 117.90 (this is what the trade made me so far for the past 33 weeks – $3.59 x 33 weeks). So there is only $16.54 left until expiration.

Of course the current number would be a lot higher if the stock got deeper in the money than what KOG actually did. The profit by unwinding would actually be a lot larger than it was. I only took out $149.44 at the time of liquidation of this trade, but still more than if I waited until expiration (it would only be $134.44).

Trade detail

Since unwinding was profitable I decided to end the trade earlier and release my cash and collected 13.54% or 35.64% annualized profit.

08/28/2013 15:36:52 Bought 1 KOG Sep 21 2013 10.0 Call @ 0.45
08/28/2013 15:36:52 Sold 100 KOG @ 10.15

This trade released cash for my next trade in Realty Income.




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Posted by Martin August 28, 2013
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New trade – Realty Income (O) – covered call #2

New trade - Realty Income (O) - covered call #2

My previous covered call trade against Realty Income stock I hold in my account ended profitable. The trade was a partial return trade, which mean I try to open the trade so the stock isn’t called away from me. I try to collect premiums only and want the call option expire worthless.

Of course, there still is risk that the stock will be called away or it will surpass my strike price and I get exercised. However I am trying to minimize this risk by having a plan for each possible scenario.

Have a plan for each trade, know what to do

PlanIf you know what you need to do or what may happen over time of your trade lifespan and have a plan what to do when that happens, your potential for profits is a lot better. Even when the trade goes against you, with a plan for that situation you can prepare a strategy how to end the trade profitable:
 

  • You can end the trade with minimum loss or even get out break-even.
  • You can roll out the call.
  • You can unwind the call trade.
  • Or you can even convert it into a different trade such as call spreads, butterflies or similar
  • You can accept assignment and immediately buy the stock back with proceeds, etc.

Just to complete the list I need to add a note or disclaimer that converting your call into a spread will not prevent your position from being assigned. It still can happen.

Whenever you plan opening a trade, sit down a bit and do some planning. Think about all possible outcomes which may happen and think about strategies you would do when those outcomes happen.

If you cannot find anything which would help your trade in each scenario, do not take that trade!

This was the case of Realty Income. I wanted to repeat the covered call and be succesful once again. But the trade didn’t look good to me. The stock was rising and this is a stock which I do not want to lose. So I was waiting for the right time when the stock reverses and panic over mREITs returns.

I believe this time has arrived.

What’s the stock telling me

Let’s take a look at the chart first:

Realty Income

The stock recently broke below its long term trend line. The yellow line represents 5 year trend and a few days ago the stock broke below it. It then reversed and continued back up. It was the time when I was watching this stock wanting to open a new covered call trade.

But I wasn’t comfortable in doing so. The stock was rising and taking a new trade wouldn’t work. It then hit its 5 year long term trend and bounced of it back down.

When the new selling of REITs gained momentum I decided to open a new covered call trade. From the chart above I do not see any buying and it seems that we still may see more selling pressure in this stock (for which I am happy, since I am planning on buying more shares!)

Both arrows in the chart show those moments I am referring to.

Of course, this trade still may go wrong. The stock may reverse and continue back up and I can get assigned prematurely.

What is my plan?

As I wrote above you need a plan what would happen in each possible cases. Here was my thinking:
 

  1. The stock will continue down, the covered call expires worthless; I keep the premium and will wait for another opportunity.
  2. The stock reverses and circa a week before expiration it stays above call strike. I will review two possible actions to do: unwind the position or roll it over and further in time.
  3. The stock will skyrocket making rollover impossible. I will unwind or take a loss.
  4. I will suffer early assignment. In that case I will collect all gains and buy the stock immediately back.

Trade detail

Knowing what to do I took the trade today:

08/28/2013 10:25:27 Sold 1 O Sep 21 2013 40.0 Call @ 0.7

I collected $70 premium. If the stock stays flat, which is what I hope for by the time of expiration I should have 1.49% profit on this trade (or 25.18% annualized profit). If I get called away, I will suffer a small loss (I will have $71.79 or 1.77% loss).

Let’s wait until September’s expiration day.




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