Financial Trend Blog

A buyer’s risks are limited to the premium cost; depending on how many points a stock moves up, a call seller’s losses can be much higher.

When you take a short position in a call, the decision to exercise belongs to the buyer. You need to be able and willing to deliver 100 shares in the event that the call is exercised, no matter how high current market value has gone. If you do not already own 100 shares, you will be required upon exercise to buy 100 shares at current market value and deliver them at the striking price of the call. The difference in these prices could be significant.

There are basically two ways to value stocks: (1) By the calculation of an “intrinsic value” (that is, a proper, fair, or correct price for the stock); and (2) valuation ratios.

Intrinsic value calculations have been used at least since Benjamin Graham and David Dodd’s classic book, Security Analysis (1934). Nowadays, they are almost always based on discounted cash flow analysis, which incorporates scores of assumptions about the company, its “cost of capital,” and likely future events to arrive at a fair price for the stock.

Stock options are the most well-known form of long-term compensation motivations for executives in leading companies. Because of this, stock options are currently being provided to a lot of employees in many companies. Here are some things you need to know about stock options.

1) Stock options are appropriate for: small companies where growth is anticipated, and publicly-owned companies that want to provide company ownership to its employees.

2) Stock options are still popular. This is according to the National Center for Employee Ownership who reported that there are 9 million employees who participate in approximately 4,000 plans. This is in comparison to the 1 million participants a decade ago.

Advertising is a large industry found in the equity Service sector with market-cap giants such as Yahoo! and Omnicom. These companies, through the advances of new technology continuously poor money into capital expenditures to gain market share against industry competitors. As advertising will continue to be a profitable service, even mid-cap companies like Catalina, R H Donnelley and aQuantive will generate business among other industries to market a variety of goods and services. While the aforementioned companies each have respective strengths and weaknesses, one mid-size company, ValueClick (VCLK), not only constructs and carries on a tremendous business model, but engenders financial figures, transcending into capital gains for investor portfolios.

Successful forex trading involves the proper use of pivot points. Finding a trend early and riding it when forex trading is the key to success. We have all heard that the trend is your friend but good friends are hard to come by in forex trading. Anyone who has read several of my articles is aware that I love Pivot points. The problem most face when trying to use pivot point and ride a trend to profits in forex trading is knowing when to go long or short a currency pair. When to follow a strong trend and when that ship has sailed.

In this example, you trade exposure on 100 shares of stock for exposure on 300 shares, but you avoid or delay exercise as well. At the same time, you net out additional cash profits, which reduces your overall basis in the stock. This makes exercise more acceptable later on. Of course, you can continue to use rolling techniques to avoid exercise. Another important point worth evaluating is the potential tax advantage or consequence. Options are taxed in the year that positions are closed; so when you roll forward, you recognize a loss in the original call transaction, which can be deducted on your current year’s federal income tax return. At the same time, by rolling forward you receive a net payment while deferring profits, perhaps to the following year. However, because the roll forward may involve in-the-money positions, the stock profit may revert to a short-term gain instead of the more favorable long-term gain.

Strategy 1: Gaining Leverage

There is value in the leverage gained using the put. With a limited amount of capital, the potential for profits is greater for put buyers than through stock short selling, and with considerably less risk.

Example: Safer than Shorting Stock: A stock currently is valued at $60 per share. If you sell short 100 shares and the stock drops five points, you can close the position and take a profit of $500. However, rather than selling short, you could buy 12 puts at 5, for a total investment of $6,000. A five-point drop in this case would produce a profit of $6,000, a 100 percent gain (assuming no change in time value). So by investing the same amount in puts, you could earn a 100 percent profit, compared to an 8.3 percent profit through short selling.

How fortunate are the children who grow up financially literate with solid financial values. How much more productive, efficient and enjoyable will their lives be without added financial stress. This topic is certainly an entire book all on its own. Recently there have been some great books, although this is an area of personal finance that could use further development. The following are some key ideas that have been taken from several books specifically on the subject, and adapted to incorporate some of my own thoughts and research from an adult environment.

At the beginning of 1975 the S&P 500 Index was at 68.56. Since that time the S&P 500 Index has experienced an impressive growth rate to its current level around 1500. During that time the S&P 500 Index has had 25 years of positive gains and 7 years of negative returns. The best three years (1975, 1995, and 1997) were all greater than a 30% return, with the best year being 1995 resulting in a 34.11% return. Only four years (1977, 2000, 2001, and 2002) resulted in a double digit loss with the worst year being 2002 which resulted in a 23.37% drop.

One of two things needs to happen in this situation. Either the stock’s current market value needs to rise quickly so that your call premium will be greater than the 5 you paid, or the stock’s market value has to rise enough points by expiration to offset time value (3 points) plus grow beyond the intrinsic value level.

This shows how option buyers need to evaluate risk. In the example, time value represents three-fifths of the total premium. If expiration comes up quickly, the stock will need to increase significantly in a short period of time to produce a profit. In thinking about whether it makes sense to buy such a call, consider these alternatives, especially if you believe that the stock will rise in value: