Personal Finance Resources

So I mentioned call spreads a few times in my last few posts. What are those you might be asking? As I mentioned in my earlier posting titled Options are a Viable Option Right Now, options were created to reduce risk. Call spreads and put spreads (sometimes called vertical spreads) are the next step.
When options are referred to, they are referred to in one of a couple ways. They are either “in the money” or “out of the money.” As you can probably guess, “in the money” means that the stock has intrinsic or real value (i.e. a $25 call when the underlying stock’s market price is $28.) An “out of the money” derives its’ only value from the time value (i.e. a $50 call when the underlying stock is valued at $46.)
We have talked about buying calls and puts. Today we will move into the category of both buying and selling calls of different strike prices at the same time. So the call spread is buying a call close to the money and selling a call further away.
For example:
A stock is currently valued at $25.92. The JAN $27.50 call price is priced at $1.30 while the JAN $30 call is valued at $0.55.
Wait a minute….I thought you said that options are in $5 increments only? Mostly true, most stocks offer $2.50 increments up to $30 or $40.
So back to the example, I will buy 10 contracts of the JAN $27.50 for $1.30 and sell 10 contracts of the JAN $30 for $0.55 at the same time. So purchasing the call would cost me 10 contracts x 100 shares per contract x $1.30 for each for a total of $1,300. At the same time, since I am selling the JAN $30, I will receive 10 x 100 x $0.55 for a total of $550. So I pay $1,300 and receive $550 for a total cost of entering the trade of $750.
So let’s say the stock goes up to $30 at expiration, my $27.50 calls are now worth $2.50 and the $30 calls that I sold are worth nothing. I sell the $27.50 calls for $2.50 a piece for a total of $2,500, subtract my initial investment of $750 for a total profit of $1,750. That is a 233% return on my money. Not bad.
Now let’s say the stock goes to $35 at expiration, my $27.50 call is now worth $7.50 each, but my $30 call that I sold is worth $5.00 a piece. So I sell my $27.50 calls for the $7,500 and re-buy my $30 calls for $5,000 for a difference of $2,500. I then subtract the $750 that it cost to enter the trade for the same return.
If the stock stays at or below $27.50, then both the calls I bought and sold expire worthless, and I lose my $750.
If the stock expires at $28.25,then my $27.50 call is now worth $0.75. So after I sell my $27.50 calls for $750, I do not make or lose money on the trade.
The Pros: If the stock goes in the direction that I think it will go, I make a great return on investment. My bottom line on a $2.50 call spread (what I explained above) is that I will risk $0.75 to make $1.75. On a $5.00 call spread (say buying the $25 and selling the $30,) I will risk $1.50 to make $3.50 if the stock goes the way I want it too. The other big pro, I limit my risk by recouping some of my initial investment.
The Con: If the stock goes a long way in the direction I think it will, I limit my upside to either $1.75 or $3.50 depending on whether I buy a $2.50 or $5.00 call spread.
Again, these are more advanced options investing. Many brokerage firms will not allow beginners to do these trades because they think they are too risky. Why? They do not understand the nature or original reason for options. The trades are also sometimes hard to find, but they too are out there. Good Luck!

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So, if there is a way to make money when the market goes up, there must be a way to make money when the market is going down. The way for me is puts. As I defined earlier, a put is nothing more than buy the option to put a stock to someone at a certain price on or before a certain date.
So if we go back to our portfolio that we created, we can again see the big movers. Now looking at the chart of a volatile stock, we might find that it is at historical highs or on the high side of its’ normal range. I used to see this and say, well maybe I can buy into that one in a few months if it comes down.
NOT ANYMORE!! Now I look at it and say, this is a potential candidate for buying a put option on it. I again generally stay within the 1 1/2 to 2 month time frame. This gives that stock the time to have that downward move that I am expecting. If I think that it is going to take longer than that to drop, then I will put it on my watch list and wait for the right time. On to a new example.

I have been watching a stock for a while now that is currently at $35.63. The 52 week high is $38 and the low is $12. So I am checking the chart and it seems that it is in its high cycle. After looking through the information available online, I believe that the price will fall to around the $28 in the next 6-8 weeks. So I am looking at the Jan 08 expiration date at the $30 put. They are trading today for $1.15. I am going to wait until Monday or Tuesday of next week and will probably buy 10 of those contracts. I am guessing that the price will drop by then to approximately $0.95. So my initial investment will be $950 ($0.95 x 100shares per contract x 10 contracts) plus commission.
If the stock goes up or stays the same, I lose my investment. However, if the stock goes down to $28 like I think it will, that option will be worth at least $2. When I sell those 10 contracts for $2, it will be worth $2,000 ($2 x 1000shares).

I will continue posting a few more articles on this topic in the near future. Notice that I will not give out recommendations or stocks that I trade. This is purely because I do not believe in giving or taking tips. If I give a tip and one of my friends executes that and it loses money, I stand the risk of him being upset. However, all of the examples that I use are real stocks, real prices and many of them are trades that I am executing in my portfolio. Good luck on all your investments.

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The last couple of posts have been dealing with trying to give a base line knowledge of options. Today I will get down to how I have been making money on the call side. I will try to continue with some posts on puts and eventually how I have been making money on puts too.
What is the Market Doing?
This is the question that drives investment. However, with options, I can control, not own, more shares for a limited time with less risk. My first recommendation would be to go to any of the major websites that offer financial information and create a portfolio. I use yahoo finance. I have a fairly broad selection of stocks in mine. This gives me a quick snapshot at what the market is doing for that day. I do not have a lot of time usually to continually check the market.

What am I Looking for in Picking a Stock?
In one word, VOLATILITY. If I can find a stock that I think is going to move, I can make money on it. So if I see some big movers in my portfolio, I have learned what their average range is just by watching them for awhile. I will also typically look at the 6 month to a year chart to see where that stock is in its’ natural curve. If it is on the low end of its’ average range, I will click on the options tab to see how much the premium is on usually a month to two months out. This gives the stock time to move to my target range. The reason that I like the one to two month range is that they are cheaper than farther out options because of what I wrote yesterday about time value.
If the stock goes up as I expected, then I will sell the calls that I purchase. This is called selling to close.
So back to our example from 2 days ago (Options are a Viable Option Right Now) where stock XYZ closed at almost $27, I wanted to buy 10 contracts. So why didn’t I?
Remember when I said that options expire on the 3rd Friday of the month? Well, tomorrow is the 16th (or the 3rd Friday) and the November strike prices will all expire. This is the primary reason why I didn’t purchase the $30 December calls. Typically the Monday after an expiration, the prices go down because investors realize that time is starting to run short on the next month’s options. So if stock XYZ hasn’t gone up significantly, I will look at buying the January $30 calls probably on Tuesday. I guess only time will tell if this is a good investment.

We will continue on in the next couple of days, and I will try to explain puts, vertical spreads, and straddles. Again, these are more complex strategies that require extensive knowledge to trade. I would highly recommend using a website like Think or Swim to paper trade. This will give you valuable experience in executing these trades while using fake or paper money. Again, feel free to ask questions. These are complicated issues. When it comes to investing, remember the old saying, “Time is Money.”

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Okay, so yesterday may have been a little much for some readers that are new to the option world. So I will back track just a little. Options are traded in increments of $5 strike prices for stocks over $25. For stocks under $25, they are traded in $2.50 increments. That means that you can usually buy the $20 strike price, the $22.50 strike price, the $25, $30, $35, etc for any given month. The market value of each option is based on 2 things. The first is intrinsic value, or what the difference is between the strike price and the market price. So what is a $30 call worth if the market value is $33. Intrinsically, it is worth $3 because I can call it from someone at $30 and sell it for $33. The second value is time value. So the further away the expiration date, the higher the time value is.
One thing to remember, options for a given month expire on the 3rd Friday of the month.

The Covered Call
This is probably the most basic form of trading options. This type is often times what brokerage firms will allow you to trade with out any options experience. Selling a covered call is generally seen as having very little risk, and it is even allowed in your Roth IRA or Traditional IRA.
The fundamental of this trade is that you own the underlying stock. You are then selling someone else the right to buy that stock from you at a certain price (strike price) on or before a certain date (expiration date). Of course for this privilege, you will charge a premium. The premium can fluctuate as often as the stock price. If the stock price goes above the strike price before the expiration, someone will call the the stock away from you. You get to keep the premium, and you sell the shares of stock at the agreed upon price (strike price). If the stock stays below or at the strike price, the call expires worthless, and you keep the premium and the stock.
Example Time:
Say I own 1,000 shares of ZYX stock, which is currently valued at $27.50. The $30 Dec call option is currently valued at $.55. So to execute the covered call trade, I would sell 10 contracts (each contract equals 100 shares) at $.55 a share. This would equal the premium that someone would give me in exchange for the right to call those 1,000 shares away from me at any point until 21 December (the expiration date). So my total premium would be $.55 x 1000 = $550.
Question: What happens if the stock goes to $31 before December 21st?
Answer: The purchaser of my call option would call the shares from me for $30 a share. So I would get the $30,000 for the sale of the stock plus keep the $550 for a total of $30,550.
Question: What happens if the stock stays below $30 a share until December 21st?
Answer: I would keep the 1,000 shares and the $550. I could then sale the January or February options to continue making a profit.
This option is usually used when you believe that a stock that you currently own is not going to increase in value beyond the strike price before the expiration date.

In my next post, I will continue deeper into our endeavor of potential ways to make money through options in this volatile market. Feel free to continue asking questions and posting comments.

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by guest author Nicholas

This is the beginning of a multi-part series because options are generally thought of as complex transactions. Do you think options are risky? Options were originally created to reduce risk. I preface the next few days postings by saying, do not rush out to invest in options until you understand the risks involved.

What is an Option?
An option is a contract to buy or sell a specific financial product officially known as the option’s underlying instrument. The underlying instrument that I will focus on is a stock. The contract itself is very precise. It establishes a specific price, called the strike price, at which the contract may be exercised. It has an expiration date. Upon expiration, it no longer has value and no longer exists.

What does an Option Consist of?
An option is either a call or a put.
A call gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
A put gives the owner the right to sell the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock if the option is assigned.

What does that Mean?
I will start today by only discussing call options from the buyers point of view. Let’s take an example. Say I want to purchase 1000 shares of XYZ stock. XYZ closed today at $26.95. I could purchase those 1000 shares, and I would pay $26,950.
Question: Why does anyone buy a stock?
Answer: Because they think it will move up.
With options, the question that I have to ask myself is when will it move?
I personally believe that XYZ stock will go up to $31.00 by the middle of December. So instead of risking my $26,950, I could buy 10 call contracts (one contract equals 100 shares of the underlying instrument) of the $30 December strike price. Each December call is currently valued at $0.65 per share. These expire on the 21st of December. So if each call is $0.65 and I want 10 contracts of 100 shares each, I will pay $0.65 x 1000 for a total of $650. So I now control, that is not to say own, 1000 shares of XYZ until the 21st of December.
Looking to the future if:
XYZ goes down to $22.00: my 10 calls will expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, it would be worth $22,000, and I would have lost $4,950.

XYZ goes up to $34.00: my 10 calls give me the right to buy those 1000 shares at $30, and I could sell them on the open market for $34. The calls are then worth at least $4 per share. So I sell them for $4 a share x 1000 shares for a total of $4,000. I subtract my $650 for a gain of $3,350 or a 515% return on my money.
Had I bought the stock, the 1000 shares would be worth $34,000 minus my initial $26,950 for a gain of $7,050 or a 26% return on my money.

XYZ stays at $26.95: my 10 calls expire worthless, and I lose my $650 had I bought the options.
Had I bought the stock, the 1000 shares would be worth $26,950, and I lose nothing other than the time value of money.

Tomorrow I will continue the discussion, but from the above example, one can see how an option will allow you control over a certain amount of shares of a stock for a specific time with a limited amount of money required, relative to buying the stock. The upside is that it is possible to execute many of these trades with the same amount of money required to purchase one stock. The downside is that the option is only valid for a specific amount of time.
Stay tuned for more. Feel free to ask questions, and I will answer them as best as possible.

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Just a quick update and moral support on a Friday night. Focus on tracking all expenses, resist your urge to go to the vending machine to get a soda/snack, and concentrate on saving money. If you can, avoid going out to eat and taking long trips; conserve that gas money and lost dollars on high priced meals. Take advantage of coupons that you see coming in the mail for the grocery store, and also for some of your favorite fast food places.

You don’t have to pay full price for anything! I just bought a laptop online that is a brand new Lenovo (Lenovo bought IBM’s laptop business recently) for $644.99. Expensive you think? Not for a Pentium Core Duo 2.0 GHz, 1 GB DDR RAM, 120 GB hard disk, 15.4″ glossy screen, webcam, fingerprint reader, built-in blue tooth, and wireless LAN. I bought it on eBay completely new with a full one year warranty (I verified it with Lenovo), and it showed up in the mail 3 days later. I own a Dell Inspiron 6400 currently, but now that I have quit my job, I needed another laptop so that my wife and I can push forward on websites, real estate and other en devours simultaneously.

So guys, just to reiterate, keep plugin, focus on your long term goals, and invest, invest, invest!

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Buying into mobile homes have made real estate investors millions of dollars. Just because it may seem that the class of renters/buyers you would be working with are lower class and thus more trouble, you may be wrong. Most of the folks that would rent or buy a mobile home do not make a lot of money, however often they are less demanding than a middle class savvy home buyer. The mobile home buyer/renter is looking almost exclusively at price, and thus, if you can fit their budget, it becomes an easy sale.

For example, I purchased a double wide mobile home with the land in an outlying area of the town I live in. It was a HUD repossessed mobile home, and I purchased it for $26,500. It is a 2002 Palm Harbor 3 bedroom, 2 bathroom home about 1,150 square feet. I found the property on bidselect.com, and made my offer. We lived in the home for close to a year, and bought into another property in town. My total PITI on the property is roughly $350 per month.

After moving out, I was able to rent the property for $600 per month. Not a bad deal at all, considering that the mortgage is only for 10 years, and I only had to put up about $6,000-7,000 up front to close the property, and to build a nice shed for storage. So in a nutshell, buying into mobile homes, especially repossessed mobile homes, can be very profitable, with a limited amount of risk.

But let me give you a couple of websites you can use to find deals on repossessed mobile homes:

1. bidselect.com (my favorite for all residential types of properties)
2. vmfrepos.com
3. 21strepos.com

These are just three sources to browse available mobile homes in your area. But not only for real estate investing, but just for finding a low priced dwelling in your area.

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No doubt about it, gas prices are high these days. But what is the problem, why are gas prices so high? Well it started with Hurricane Katrina. Most of the petroleum refineries in the U.S. are in the gulf coast region. When the hurricane hit, it wiped out many of those refineries, thus drastically shifting the supply of gasoline. With a shortened supply and no dramatic effect in demand for gasoline, prices soared. The U.S. refineries still haven’t recovered, but here is the most amazing part - U.S. citizens did not lower their demand for gas.

Question: But gasoline is a must have, how can I lower my demand / consumption of it?

Answer: By buying a more fuel efficient car and reducing unnecessary travel.

But the problem is, most Americans do not know how to downgrade. We think that we should always increase, and never decrease. Over the last 2-3 years, there has been no significant change in the sale of large automobiles such as full sized trucks and SUVs. Commercialism and the media have pounded it into our heads that must, absolutely buy the best and largest car we can (and usually cannot) afford. All advertisements focus on payment and interest rate only, nothing about maintenance, gasoline consumption, or longevity. So we as Americans just blindly follow the herd, trying to “keep up with the Jones’s” and buying that vehicle that is way too big, and way too costly.

I witnessed a news story that reported the answers that people gave to being questioned about their vacations and trips during a summer with expected increases in gasoline prices, and must responded by saying they would just grit and bear it. We must wake up if we are ever going to see any real changes. I know you have to buy gas, but limit your trips and joyriding. If we all cut back, then gas prices will fall to encourage more buying.

Political Problems

Another problem that is facing the gasoline market is potential pressures issued by democratic politicians. These politicians hope to reverse the tax break given to companies for oil exploration. Currently, most of the exploration expense can be depreciated over just a few years, giving companies an advantage to seek out new oil, and bring it to the market. But the democrats want to take this away to “”preserve the Eco-system”". This is ridiculous, and will cause oil producers to stop seeking out new oil deposits, and drive the price of gas through the roof!! We must not let this sort of legislation pass. Contact your representatives, and get the scoop on the latest legislation that is anti-oil and tell them you want low gas prices, not to save some species no one has ever heard about before.

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Teenagers are great, all they think about (especially if they are boys) is 4 spinning wheels. They all have high aspirations for the expensive car, with the souped up engine, NOS (nitrous oxide) booster, and titanium alloy rims. They want it to go 100+ mph and have a hot, shiny finish. But they are ignorant, and do not count the cost of a vehicle. Many teens today have parents that will buy them most any car they want, along with keeping the gas tank full and paying for insurance. This is one of the worst things you can do to your child. They need to learn responsibility, and respect for the things that they own.

I am reminded of one of the teens that is a member of our Church. He was looking at an F-150 full size truck. The price wasn’t too bad, about $2,000, but it was full size truck, eg a gas guzzler. He decided to put a couple hundred bucks down on it and to finance the rest with the bank. Not a bad idea for one his age, use the loan on the vehicle to build a little credit before going on to college.

The Good

As eluded to previously, the positives related to this purchase are as follows:

1. Low price. It was a used vehicle, and long term, the better way to go. See Should I Buy a New Car or a Used Car? for more details.
2. Credit Building. Taking out a short term loan (1-3 years) on a used car at this price is an excellent way for first time borrowers to build credit without getting in too deep. Credit will be invaluable to him later.
3. Utility. As we all know, having a truck will allow you to do all kinds of work and moving, that a car will not allow. This will come in handy as he moves out of state to go to college.

The Bad

Now let’s look at some reasons why this is not a good purchase:

1. Gas Mileage. After the issue of price has been settled, gas mileage is the most important factor for teen. They have no money and therefore have to take steps to keeping the gas budget down, especially with the price of gasoline here in Texas approaching $3/gallon. With the F150 getting less than 20 mpg even on the highway, this teenager is facing an enormous cost of gas per month.
2. Standard Maintenance. Oil changes and air filters won’t be much different for this teen, but when he needs to replace the tires, he is in for a rude awakening. 13 inch radial tires for a small car may cost as little as $30-40 a piece, but he will be lucky to get decent tires for his truck for less than $100 a piece.
3. Insurance. This is the real downside to financing a car for college, or for any other reason. Banks will not lend money on a vehicle without full coverage, and the cost of full coverage vs liability only coverage is staggering.

The Ugly

F-O-R-D (Found On Road Dead). Ford’s are terrible vehicles, especially the F150, their most notorious flop. Do not, I repeat, do not buy a Ford F-150. They are among the worst vehicles on the road. If you do, expect high, high maintenance costs, as they love to break down. Also, and I’ll throw this in for free, Ford is one of the largest financial supporters of the homosexual cause. The company is tearing at the heart of Christianity, and I have added my name to AFA’s boycotter list.

To close, I recommended to the youngster that he not buy the truck. However, against my counsel, he bought the truck anyway. I have talked to these teen boys for a long time about buying a small car that is cheap and gets excellent gas mileage, but they just will not listen. I guess they want to make their own mistakes. Only time will tell…

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A home based business is often not enough to get a car auto insurance. Ideally, one should get free insurance quotes prior to committing to anyone. With luck, one can get instant loans as well. People having health insurance jobs usually of sort such deals instead.

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