Miracle in Internet

Indonesian paypal wish list

2010-02-14T23:17:00.001+07:00

This is a good news. Paypal.com has a good offer. Now you can earn up to $100 from PayPal Wishlist. What is Paypal Wishlist? It is facebook application ease people to buy product on their wishlist. In this program, PayPal will give you up to $100.

Itâ€™s easy to start this promo event. You just register to Paypal Wishlist program, then youâ€™ll generate $1 directly to your earning. After that what you need to do is just referring your friend to do the same thing, and youâ€™ll get $1 for everybody registered through your referral link. Through this way, you can earn up to $100. Easy way right?

Here is simply details on How it works:

1. You should have Facebook account.
2. Click HERE to join PayPal WishList application
3. Submit your Paypal email address at the form provided.
4. You get $1 after joining Paypal Wishlist
5. Create and share your wishlist to your friends
6. Youâ€™ll earn $1 for every friend you refer who add Paypal Wishlist application
6. Youâ€™ve got money

In order to qualify for this Program, you must follow their Terms & Condition:

1. Successfully complete registration for a new PayPal account within the Promotion Period or already have an existing PayPal account prior to the Promotion Period. If you donâ€™t have Paypal account, just make one through Paypal.Com
2. Submit to PayPal via the Paypal Wishlist and within the Promotion Period, the email address to which your PayPal account is linked;
3. Be at least of 18 years of age, and have a PayPal account with a valid registration address in relation thereto located in India, Thailand, Malaysia, Korea, Vietnam, Philippines, Indonesia or Singapore (â€œEligible Countriesâ€�.
4. Have a PayPal account in Good Standing, with current contact information throughout the Promotion Period. In order for an account to be deemed in Good Standing as that term is used herein, the account must not have a hold status and/or be suspended or past due as of December 31st, 2009; and
5. Complete the downloading of the Paypal Wishlist, and use the same to create a PayPal WishList, within the Promotion Period.

You will be entitled to $1 USD for your own Paypal Wishlist, plus an additional $1 USD per friend who uses your invitation to create his or her own PayPal WishList, provided your friend has a PayPal account. Each person is only entitled to create one (1) PayPal WishList. For the avoidance of doubt, in the event your friend receives more than one invitation, only the person whose invitation is used to create the formerâ€™s PayPal WishList, will be entitled to the $1 USD.

You will be notified by PayPal no later than February 28th, 2010, via email or any other method as PayPal may from time to time determine, of how much you have earned.

Prizes will be credited to your PayPal account as per your submission to PayPal via the Paypal Wishlist, no later than February 28th, 2010. If you do not provide Paypal.com with this, Paypal will not be able to deposit your earnings.

To submit the PayPal email address you would like linked to your PayPal WishList, go to the Paypal Wishlist and click the link below to the â€™submit your email addressâ€™ in the upper left side of the page. Any cash prizes to be paid to your PayPal account, will be credited in the currency as set out herein and currency conversion fees (if applicable) or any other related fees, will be borne solely by you.

Kaskus

2009-09-20T22:57:00.000+07:00

Kaskus is an Indonesian internet forum site which is widely considered as the largest Indonesian online community. It ranks as the 10th most popular website in Indonesia and is one of two local sites in the top 10 (detik.com at 9th), positioning at 503th worldwide according to Alexa.com. It was established on November 6, 2000, by three Indonesian students (Andrew Darwis, RS, and BD) in the United States. As of April 30, 2009, Kaskus has more than 1,000,000 members. In August 2005 and September 2006, PC Magazine Indonesia voted Kaskus as The Best Indonesian communities twice (2005 & 2006).[1] Registration is required for new users to participate in the community, and every registered member has the privilege to access more than twenty sub-forums on various subjects. The community runs on the vBulletin forum software.

On May 23, 2006, the internet domain has been changed from .com to .us in response to a computer virus called Brontok that attacked the servers

Name

"KASKUS" is also an acronym from "KASak KUSuk" which translated to be "gossiping" in English. The administrator of the community chose this name so that when people are in a rush for a chat, they can go to Kaskus.

Sub-forums

As of Feb 4, 2009, Kaskus has the following forums and sub-forums:

* CAS-CIS-CUS, which is a forum where users can devolve with the current hot issues happening around the world. The CAS-CIS-CUS has sub-forums such as: Welcome to Kaskus, The Lounge, Surat Pembaca, Berita & Politik, Business Board, Can You Solve This Game, Debate Club, Disturbing Picture, Education, English, Girls & Boys Corner, Heart to Heart, and Jokes & Cartoon.

* LOE-KE-LOE, which is a forum where users can really find their suitable community based on hobbies, lifestyle and the likes. The LOE-KE-LOE has sub-forums such as: All About Design, AMH (Anime Manga Haven), Arsitektur, Computer Stuff, Cooking mencooking + restaurant guide, Fitness & Health Body, Gadget & Gizmo, Games, Handphone & PDA, Health & Medical, Lifestyle, Model Kit & R/C, Movies, Music, My Pets, Otomotif, Outdoor Adventures & Nature Club, Photography, Sports, Supranatural, Tanaman, Travellers, and Wedding.

* FORUM JUAL BELI (FJB), perhaps one of the most active sub-forums in Kaskus, it is fast becoming the Indonesian Craigslist where members post pseudonymous ads selling (and looking for) everything from Rp 50.000 (±US$ 5) USB flash disks to Rp 150.000.000.000 (± US$ 150.000) land rights.

KaskusRadio

KaskusRadio is an Indonesian Internet radio operated by Kaskus. It has more than 20 DJs and serves many kind of music.

facebook for Business

2009-09-20T22:52:00.000+07:00

Facebook’s not just for keeping tabs on friends and filling out quizzes — it can also be used as a highly effective business tool. It’s great for marketing your products, landing gigs and connecting with your customers.

Here are 32 ways to use Facebook in your business.

Manage Your Profile

1. Fill out your profile completely to earn trust.
2. Establish a business account if you don’t already have one.
3. Stay out of trouble by reading the Facebook rules regarding business accounts.
4. Install appropriate applications to integrate feeds from your blog and other social media accounts into your Facebook profile. (Although you should be careful before integrating your Twitter feed into your Faceboook profile, as a stream of tweets can seem overwhelming to your contacts.)
5. Keep any personal parts of your profile private through Settings.
6. Create friends lists such as “Work,” “Family” and “Limited Profile” for finer-grained control over your profile privacy.
7. Post a professional or business casual photos of yourself to reinforce your brand.
8. Limit business contacts’ access to personal photos.
9. Post your newsletter subscription information and archives somewhere in your profile.

Connect and share with others
10. Obtain a Facebook vanity URL so that people can find you easily.
11. Add your Facebok URL to your email signature and any marketing collateral (business cards, etc.) so prospects can learn more about you.
12. Post business updates on your wall. Focus on business activities, such as “Working with ABC Company on web site redesign.”
13. Share useful articles and links to presentation and valuable resources that interest customers and prospects on your wall, to establish credibility.
14. Combine Facebook with other social media tools like Twitter. For example, when someone asks question on Twitter, you can respond in detail in a blog post and link to it from Facebook.
15. Before traveling, check contacts locations so you can meet with those in the city where you’re heading.
16. Research prospects before meeting or contacting them.
17. Upload your contacts from your email client to find more connections.
18. Use Find Friends for suggestions of other people you may know to expand your network even further.
19. Look for mutual contacts on your contacts’ friends lists.
20. Find experts in your field and invite them as a guest blogger on your blog or speaker at your event.
21. Market your products by posting discounts and package deals.
22. Share survey or research data to gain credibility.
23. Use Facebook Connect to add social networking features to your web site.
24. Suggest Friends to clients and colleagues — by helping them, you establish trust.
25. Buy Facebook ads to target your exact audience.
26. Read up on Facebook Beacon to see if it might be useful for you.

Use Network, Group and Fan Pages
27. Start a group or fan page for product, brand or business. Unless you or your business is already a household name, a group is usually the better choice.
28. Add basic information to the group or fan page such as links to company site, newsletter subscription information and newsletter archives.
29. Post upcoming events including webinars, conferences and other programs where you or someone from your company will be present.
30. Update your group or fan page on a regular basis with helpful information and answers to questions.
31. Join network, industry and alumni groups related to your business.
32. Use search to find groups and fan pages related to your business by industry, location and career.

Blogger Mobile

2009-09-20T22:51:00.001+07:00

Post from anywhere!

When you send texts to BLOGGR (256447) or photos to go@blogger.com from your mobile device they're automatically posted to your new blog.
How it works
MMS

* First send an MMS or email with the word 'REGISTER' to go@blogger.com.
* We'll reply with the address of your new mobile blog, plus a claim code.
* Post to your new mobile blog, or use the claim code to link your phone to a different blog.
* To unlink your device from Blogger, send an MMS or email with word 'UNREGISTER' to go@blogger.com.

or use SMS

* First send an SMS with the word 'REGISTER' to BLOGGR (256447).
* We'll reply with the address of your new mobile blog, plus a claim code.
* Post to your new mobile blog, or use the claim code to link your phone to a different blog.
* To opt out of receiving SMS messages to your phone, text STOP to BLOGGR (256447)
* To get help from your mobile device, text HELP to BLOGGR (256447)
* To unlink your device from Blogger, text UNREGISTER to BLOGGR (256447).
* Sending text messages to BLOGGR (256447) is currently available for US phone numbers only.

Devices and more

Blogger Mobile works with any device that can send texts via SMS, or email via MMS. Google does not charge for this service. Standard message charges apply.

Blogger Mobile is also built into some Sony Ericsson cameraphones, so you can post to your blog with just a few clicks.
Sony Ericsson

For more about mobile blogging, see: How does Blogger Mobile work?

iPhone users: Phones without MMS can still post to Blogger with SMS, or via email with Mail2Blogger.

Google Chrome

2009-08-28T00:13:00.000+07:00

Chrome is Google's attempt to make the browser disappear and to focus on the applications and pages users are viewing, rather than on the border with its tools. Some of Chrome's basic underpinnings are quite novel, but people will recognize other features as they exist in other, open-source browsers on the market today.

Currently only for Windows, Chrome is blazingly fast and is easily the quickest browser available. Based on Webkit, the same open-source engine that powers Apple Safari and Google's Android mobile platform, Chrome's interface is a drastic departure from other browsers. Instead of the traditional toolbar, Chrome puts its tabs on top. Moreover, the tabs are detachable: "tabs" and "windows" are interchangeable here. Detached tabs can be dragged and dropped into the browser, and tabs can be rearranged at any time. By isolating each tab's processes, when one site crashes, the browser does not.

Within each tab are individual controls, such as forward and back buttons. The search box and the address bar have been fused into a hybrid "Omnibox." The Omnibox includes not only suggestions for URLs culled from your browser's history, it also includes search suggestions from your search engine, and remembers site-specific search engine results. There's also Application Shortcuts, a feature that allows you to create desktop icons for Web-only applications, such as Gmail or Calendar. The stealth mode, Incognito, lets you surf without the history recording cookies.

Chrome lacks plug-ins, and there's the potential for high memory usage given that each tab is its own process. If you're addicted to Web apps and a need for speed, though, Chrome just might be the shine your browsing experience has been looking for.

Rebound time for your investment

2009-08-28T00:07:00.001+07:00

Many experts advise that the best investment candidates are stocks that have already outperformed the market. There's plenty of research to back up that "buy high -- sell higher" philosophy, but following that strategy is not as easy as it sounds.

No stock goes straight up. Even the hottest stocks hit cold spots when they might dip 20%, 25% or even more before they resume their climb. For instance, juice and soft-drink maker Hansen Natural (HANS, news, msgs), with a 185% gain, was one of the best performers over the past 12 months. But Hansen hit a rough spot in June 2004, sending its share price tumbling a nerve-shattering 33% in less than one month for no apparent reason.

Unfortunately, I have on occasion jumped on a hot stock just before it hit one of those bumps. I don't know about you, but no matter how great a stock looks on paper, it's hard to stay the course when you're 33% underwater.

The last time that happened, I vowed to figure out how to pick up these stocks after they've dipped, rather than before. The hard part, of course, is discerning the difference between a temporary dip and the start of a death plunge.

Here's a screen I devised for spotting hot stocks that have dipped but are good candidates to recover and continue their winning ways. These may be stocks that reported results below analysts' forecasts, are in a sector that is temporarily out of favor, or have been downgraded by analysts due to valuation.

First I'll identify hot stocks that have recently dipped; then I'll add fundamental factors to isolate the likely winners.
Spotting hot
I start by requiring at least 25% price appreciation over the past 12 months. That doesn't sound like much, but I'm interested in stocks that have room to run, not rockets that have already blasted off. In line with that thought, I exclude stocks that have doubled in price over the past 12 months. Increase that limit if it's too conservative for your tastes.

* Screening parameter: % Price Change Last Year => 25

* Screening parameter: % Price Change Last Year =< 100

When I say I'm looking for a dip, I mean a recent dip. I don't want strong performers from 10 or 12 months ago that have been heading down ever since. So I ditch those losers by stipulating that passing stocks must be trading no lower than they were six months ago. And I preclude stocks that have moved up too fast during the past six months. There's no way to precisely define how much is too much, so I arbitrarily set the maximum six-month price appreciation at 75%. Increase that figure if you feel adventurous.

* Screening parameter: % Price Change Last 6 Months => 0

* Screening parameter: % Price Change Last 6 Months =< 75

Finding the dip
Defining the dip is straightforward. I require that the current stock price must be at least 10% off its recent high.

* Screening parameter: Last Price <= 0.9* 52-Week High

(Due to my previous restrictions, the 52-week high typically occurred during the past two to three months.)

When researching the concept, I've found that the bigger the dip, the greater the chance that the stock won't recover. So I limit the drop to 25% off the recent high.

* Screening parameter: Last Price >= 0.75* 52-Week High

If you think that's too conservative, try increasing the maximum dip to 30% or 35% (0.70* 52-Week High or 0.65* 52-Week High).

Most of the stocks meeting my price-action requirements will likely see their dips turn into long-term downtrends. So, next, I added several fundamental factors to tilt the odds in my favor.
Keep the earnings coming
Changes in earnings forecasts usually move share prices. Downtrending forecasts are often your best clue that a dip could turn into something worse. Conversely, steady or increasing forecasts signal that the problems are likely short term.

Thus, I want to avoid stocks with downtrending earnings forecasts. The screener includes a parameter specifically for detecting changes in the current quarter's earnings forecasts.

* Screening parameter: Earnings Estimate Decreased Not Since (in the last quarter)

In English, that convoluted statement means that Wall Street analyst's consensus earnings forecasts for a company must not have decreased in the past three months.

Strong earnings-growth forecasts and strong price charts usually go hand in hand. Conversely, weak growth forecasts increase the odds that the dip could turn into a disaster. Many investors consider 15% as the minimum annual earnings growth for a growth stock. Consequently, I require at least 15% year-over-year forecast earnings growth for the next fiscal year. Try increasing the 15% minimum if you get too many hits, but I don't advise lowering it.

* Screening parameter: EPS Growth Next Year >= 15

Keep good company
Because of the pull that comes with generating huge trading commissions, institutional money managers -- mutual funds, pension plans and the like -- are more clued into the market buzz than we'll ever be. There is no stock they haven't heard of. If these pros don't own a stock, it's because they don't think they can make money on it. We can improve our chances of picking right by sticking with stocks owned by institutions.

Institutional ownership is the percentage of a company's outstanding shares owned by the big boys. The figure can run as high as 99%. How much is enough? I've had my best results sticking with stocks with at least 35% institutional ownership, and the higher the better.

* Screening parameter: % Institutional Ownership >=35

The profitability gauge
Profitability is a better predictor of a company's ultimate success than reported earnings because it measures how efficiently a company uses its assets to generate income. Return on equity (ROE) -- the most frequently used profitability gauge -- compares net income to shareholder equity, also known as book value.

ROE will be negative for companies reporting losses, but typically ranges between 5% and 20% for profitable companies. Most investors look for ROEs of at least 5%, and some pros require 15%. I set my minimum at 10%, which, in my view, is sufficient for this application.

* Screening parameter: Return on Equity >= 10

Keeping valuations reasonable
The most obvious problem with stocks that have already made a big move up is that buyers got carried away and the share price has outrun the fundamentals. However, in-favor stocks always seem expensive when you compare them to the market. Instead, I compare each stock's current valuation to its own history, and, to be safe, rule out stocks with price/earnings ratios higher than 90% of their historic five-year high.

* Screening parameter: P/E Ratio: Current <= 0/9*P/E Ratio: 5-Year High

This is a fast-changing screen. The first time I ran it last week, eight qualified stocks turned up. The next day, the screen listed nine stocks, but four were new. Three of the first day's stocks had disappeared from the list because they had moved up and no longer met the 10% minimum dip requirement.

Here's the list of the nine stocks from the second day's screen. Interestingly, each of the stocks represents a different industry.

Keep in mind that, given its fast-changing nature, you'll have to run your own screen to see the current list.

The stocks dipped for the same reasons I listed earlier. Some, such as Nabors Industries (NBR, news, msgs), dropped when their industry rotated out of favor with the market. Others, such as Knight Transportation (KNX, news, msgs), dropped when management reduced its sales or earnings forecasts, or reported earnings below analysts' expectations. Some, such as Cognizant Technology Solutions (CTSH, news, msgs), dipped on an analyst downgrade based on valuation.

Purchasing property without the use of your own capital

2009-08-28T00:02:00.000+07:00

Purchasing property without the use of your own capital is not difficult as long as you are able to learn different strategies.

Typically, the easiest property to buy no money down is the one which has been on the market for a long term. Long term here would mean several months. Generally, the longer the period of time a property has been on the market for, the more motivated the seller becomes. Hence, it becomes easier to negotiate a lower price and hence get a good deal.

When negotiating with the vendor of a below market value property, the buyer should prove to the vendor that he has sufficient funds for the purchase of that property. This can be done by showing bank statements or any documents evidencing credit status. In this way, the seller will be assured that his loan will be satisfied from the resale of his property.

The buyer should also check the sellers mortgage statements to ensure that his offer price is able to meet this obligation. If the offer price is less than the mortgage amount, the mortgagee will not be satisfied on completion of the sale and hence the sale will not be allowed to proceed.

Several parties are involved in the no money down buying process. Firstly, a surveyor will value the property you are considering purchasing. If the price you are buying the property for is truly less than the true value of that property, this will be reflected in the surveyors valuation figures. Solicitors and financiers are also involved in ensuring the deal goes ahead as planned.

The property purchasing funds that you apply for need to be based on the valuation figure and not the purchase figure of that property. This way, your mortgagee may be able to lend you the entire amount of the purchase. Often, if the discount is big enough, you can also receive cash back from this type of deal. Again, this depends on the purchase, price, valuation figures and the mortgagee who is lending to you. Rental calculations are also taken into account especially if you are purchasing the property as a rental investment.

For a truly no money down deal, none of your money should be used for that transaction. This would also include monies required for conveyancing and surveyor fees etc. These additional expenses can be paid for using interest free credit cards and low interest loans. You can repay these loans later on using the equity in your property especially if the market is rising. Obviously, in a falling market, some of these strategies become more difficult to implement and you may need to use other methods. This is why it is so important for you to keep your eyes on the ball and ensure that you remain educated to the latest techniques and standards.

Online Shop only for U$ 50

2009-08-27T23:59:00.001+07:00

Dear friend,

Yesterday I just found a company focused in designing and developing website to fulfill our clients need. We also offer you a cheap and instant, CMS based Online Store. With only IDR 500,000.00 a year you can get an online store, your domain name (.com, .net, or .org) and hosting space.

This company also offer a complete Accounting system for a private company with over 200 report and general ledger only for IDR 2.000.000,- (in Indonesian language)

Anybody which is interested in this cheap product please contact me via email to Henky_k@yahoo.com.sg

Mutual Funds

2009-07-20T16:41:00.001+07:00

Exchange-traded grantor trusts

An exchange-traded grantor trust share represents a direct interest in a static basket of stocks selected from a particular industry. The leading example is Holding Company Depositary Receipts, or HOLDRS, a proprietary Merrill Lynch product. HOLDRS are neither index funds nor actively-managed; rather, the investor has a direct interest in specific underlying stocks. While HOLDRS have some qualities in common with ETFs, including low costs, low turnover, and tax efficiency, many observers consider HOLDRS to be a separate product from ETFs.[7][23]

[edit] Hedge Fund ETFs

Hedge fund ETFs are a new type of an ETF. A hedge fund ETF tracks a hedge fund and follow a group of hedge fund's activity. These new Hedge Fund ETF's are offered by IndexIQ they include IQ Hedge Multi-Strategy Composite, IQ Hedge Global Macro, IQ Hedge Long/Short Equity, IQ Hedge Event-Driven and IQ Hedge Market Neutral

Each of these hedge fund ETF's follows a general hedge fund strategy (Event-Driven, Market Neutral ect...).[24]

[edit] Leveraged ETFs

A leveraged exchange-traded fund, or simply leveraged ETF, is a special type of ETF that attempts to achieve returns that are more sensitive to market movements than a non-leveraged ETF.[25] Leveraged index ETFs are often marketed as bull or bear funds. A bull ETF fund might for example attempt to achieve daily returns that are 2.0 times more pronounced than the Dow Jones Industrial Average or the S & P 500. A bear fund on the other hand may attempt to achieve returns that are -2.0 times the daily index return, meaning that it will gain twice the loss of the market. Leveraged ETFs require the use of financial engineering techniques, including the use of equity swaps, derivatives and rebalancing to achieve the desired return.[26]. The most common way to construct leveraged ETFs is by trading future contracts.

History

Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, it had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds represented less than $10 million in 1924.

The stock market crash of 1929 hindered the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the Securities and Exchange Commission (SEC) and provide prospective investors with a prospectus that contains required disclosures about the fund, the securities themselves, and fund manager. The SEC helped draft the Investment Company Act of 1940, which sets forth the guidelines with which all SEC-registered funds today must comply.

With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s, there were approximately 270 funds with $48 billion in assets. The first retail index fund, First Index Investment Trust, was formed in 1976 and headed by John Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior thesis at Princeton University[2]. It is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets.

A key factor in mutual-fund growth was the 1975 change in the Internal Revenue Code allowing individuals to open individual retirement accounts (IRAs). Even people already enrolled in corporate pension plans could contribute a limited amount (at the time, up to $2,000 a year). Mutual funds are now popular in employer-sponsored "defined-contribution" retirement plans such as (401(k)s) and 403(b)s as well as IRAs including Roth IRAs.

As of October 2007, there are 8,015 mutual funds that belong to the Investment Company Institute (ICI), a national trade association of investment companies in the United States, with combined assets of $12.356 trillion.[3] In early 2008, the worldwide value of all mutual funds totaled more than $26 trillion.[4]

Usage

Since the Investment Company Act of 1940, a mutual fund is one of three basic types of investment companies available in the United States.[5]

Mutual funds can invest in many kinds of securities. The most common are cash instruments, stock, and bonds, but there are hundreds of sub-categories. Stock funds, for instance, can invest primarily in the shares of a particular industry, such as technology or utilities. These are known as sector funds. Bond funds can vary according to risk (e.g., high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g., government agencies, corporations, or municipalities), or maturity of the bonds (short- or long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds), both U.S. and foreign securities (global funds), or primarily foreign securities (international funds).

Most mutual funds' investment portfolios are continually adjusted under the supervision of a professional manager, who forecasts cash flows into and out of the fund by investors, as well as the future performance of investments appropriate for the fund and chooses those which he or she believes will most closely match the fund's stated investment objective. A mutual fund is administered under an advisory contract with a management company, which may hire or fire fund managers.

Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In the U.S., unlike most other types of business entities, they are not taxed on their income as long as they distribute 90% of it to their shareholders and the funds meet certain diversification requirements in the Internal Revenue Code. Also, the type of income they earn is often unchanged as it passes through to the shareholders. Mutual fund distributions of tax-free municipal bond income are tax-free to the shareholder. Taxable distributions can be either ordinary income or capital gains, depending on how the fund earned those distributions. Net losses are not distributed or passed through to fund investors.

Net asset value
Main article: Net asset value

The net asset value, or NAV, is the current market value of a fund's holdings, less the fund's liabilities, usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

Average Annual Return

US mutual funds use SEC form N-1A to report the average annual compounded rates of return for 1-year, 5-year and 10-year periods as the "average annual total return" for each fund. The following formula is used:[6]

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $1,000.

T = average annual total return.

n = number of years.

ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).

Turnover

Turnover is a measure of the fund's securities transactions, usually calculated over a year's time, and usually expressed as a percentage of net asset value.

This value is usually calculated as the value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and another one bought as one "turnover". Thus turnover measures the replacement of holdings.

In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio is calculated based on the lesser of purchases or sales divided by the average size of the portfolio (including cash).

ETF

2009-07-20T16:37:00.002+07:00

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.[1][2]

Only so-called authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from/to the fund manager, and then only in creation units, large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets.[3] Other investors, such as individuals using a retail brokerage, trade ETF shares on this secondary market.

An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.[3]

Structure

ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a securities exchange through a broker-dealer. Unlike traditional mutual funds, ETFs do not sell or redeem their individual shares at net asset value, or NAV. Instead, financial institutions purchase and redeem ETF shares directly from the ETF, but only in large blocks, varying in size by ETF from 25,000 to 200,000 shares, called "creation units." Purchases and redemptions of the creation units generally are in kind, with the institutional investor contributing or receiving a basket of securities of the same type and proportion held by the ETF, although some ETFs may require or permit a purchasing or redeeming shareholder to substitute cash for some or all of the securities in the basket of assets.[3]

The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares. Existing ETFs have transparent portfolios, so institutional investors will know exactly what portfolio assets they must assemble if they wish to purchase a creation unit, and the exchange disseminates the updated net asset value of the shares throughout the trading day, typically at 15-second intervals.[3] If there is strong investor demand for an ETF, its share price will (temporarily) rise above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF and sell the component ETF shares in the open market. The additional supply of ETF shares increases the ETF's market capitalization and reduces the market price per share, generally eliminating the premium over net asset value. A similar process applies when there is weak demand for an ETF and its shares trade at a discount from net asset value.

In the United States, most ETFs are structured as open-end management investment companies (the same structure used by mutual funds and money market funds), although a few ETFs, including some of the largest ones, are structured as unit investment trusts. ETFs structured as open-end funds have greater flexibility in constructing a portfolio and are not prohibited from participating in securities lending programs or from using futures and options in achieving their investment objectives.[4] Under existing regulations, a new ETF must receive an order from the Securities and Exchange Commission, or SEC, giving it relief from provisions of the Investment Company Act of 1940 that would not otherwise allow the ETF structure. In 2008, however, the SEC proposed rules that would allow the creation of ETFs without the need for exemptive orders. Under the SEC proposal, an ETF would be defined as a registered open-end management investment company that:

* Issues (or redeems) creation units in exchange for the deposit (or delivery) of basket assets the current value of which is disseminated on a per share basis by a national securities exchange at regular intervals during the trading day;
* Identifies itself as an ETF in any sales literature;
* Issues shares that are approved for listing and trading on a securities exchange;
* Discloses each business day on its publicly available web site the prior business day's net asset value and closing market price of the fund's shares, and the premium or discount of the closing market price against the net asset value of the fund's shares as a percentage of net asset value; and
* Either is an index fund, or discloses each business day on its publicly available web site the identities and weighting of the component securities and other assets held by the fund.[3]

The SEC rule proposal would allow ETFs either to be index funds or to be fully transparent actively managed funds. Historically, all ETFs in the United States have been index funds. In 2008, however, the SEC began issuing exemptive orders to fully transparent actively managed ETFs. The first such order was to PowerShares Actively Managed Exchange-Traded Fund Trust,[5] and the first actively managed ETF in the United States was the Bear Stearns Current Yield Fund, a short-term income fund that began trading on the American Stock Exchange under the symbol YYY on 25 March 2008.[6] The SEC rule proposal indicates that the SEC is not suggesting that it will not consider future applications for exemptive orders for actively managed ETFs that do not satisfy the proposed rule's transparency requirements.[3]

Some ETFs invest primarily in commodities or commodity-based instruments, such as crude oil and precious metals. Although these commodity ETFs are similar in practice to ETFs that invest in securities, they are not "investment companies" under the Investment Company Act of 1940.[3]

Publicly traded grantor trusts, such as Merrill Lynch's HOLDRS securities, are sometimes considered to be ETFs, although they lack many of the characteristics of other ETFs. Investors in a grantor trust have a direct interest in the underlying basket of securities, which does not change except to reflect corporate actions such as stock splits and mergers. Funds of this type are not "investment companies" under the Investment Company Act of 1940.[7]

History

ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States.[8]

A similar product, Toronto Index Participation Shares, started trading on the Toronto Stock Exchange in 1990. The shares, which tracked the TSE 35 and later the TSE 100 stocks, proved to be popular. The popularity of these products led the American Stock Exchange to try to develop something that would satisfy SEC regulation in the United States.[8]

Nathan Most, an executive with the exchange, developed Standard & Poor's Depositary Receipts (AMEX: SPY), which were introduced in January 1993.[9] Known as SPDRs or "Spiders," the fund became the largest ETF in the world. In May 1995 they introduced the MidCap SPDRs (AMEX: MDY).

Barclays Global Investors, a subsidiary of Barclays plc, entered the fray in 1996 with World Equity Benchmark Shares, or WEBS, subsequently renamed iShares MSCI Index Fund Shares. WEBS tracked MSCI country indexes, originally 17, of the funds' index provider, Morgan Stanley. WEBS were particularly innovative because they gave casual investors easy access to foreign markets. While SPDRs were organized as unit investment trusts, WEBS were set up as a mutual fund, the first of their kind.[10] [11]

In 1998, State Street Global Advisors introduced the "Sector Spiders", which follow the nine sectors of the S&P 500.[12] In 1999, the influential "cubes" (NASDAQ: QQQQ) were launched.

Since then ETFs have proliferated, tailored to an increasingly specific array of regions, sectors, commodities, bonds, futures, and other asset classes. As of May 2008, there were 680 ETFs in the U.S., with $610 billion in assets, an increase of $125 billion over the previous twelve months.[13]

Investment uses

ETFs generally provide the easy diversification, low expense ratios, and tax efficiency of index funds, while still maintaining all the features of ordinary stock, such as limit orders, short selling, and options. Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement market timing investment strategies.[4] Among the advantages of ETFs are the following:[7][14]

* Lower costs - ETFs generally have lower costs than other investment products because most ETFs are not actively managed and because ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower marketing, distribution and accounting expenses, and most ETFs do not have 12b-1 fees.

* Buying and selling flexibility - ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.

* Tax efficiency - ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.

* Market exposure and diversification - ETFs provide an economical way to rebalance portfolio allocations and to "equitize" cash by investing it quickly. An index ETF inherently provides diversification across an entire index. ETFs offer exposure to a diverse variety of markets, including broad-based indexes, broad-based international and country-specific indexes, industry sector-specific indexes, bond indexes, and commodities.

* Transparency - ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.

Some of these advantages derive from the status of most ETFs as index funds.

Types of ETFs

Index ETFs

Most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. [4] Some index ETFs, known as leveraged ETFs or short ETFs, use investments in derivatives to seek a return that corresponds to a multiple of, or the inverse (opposite) of, the daily performance of the index.[15] As of February 2008, index ETFs in the United States included 415 domestic equity ETFs, with assets of $350 billion; 160 global/international equity ETFs, with assets of $169 billion; and 53 bond ETFs, with assets of $40 billion.[16]

Some index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called "replication." Other index ETFs use "representative sampling," investing 80% to 95% of their assets in the securities of an underlying index and investing the remaining 5% to 20% of their assets in other holdings, such as futures, option and swap contracts, and securities not in the underlying index, that the fund's adviser believes will help the ETF to achieve its investment objective. For index ETFs that invest in indexes with thousands of underlying securities, some index ETFs employ "aggressive sampling" and invest in only a tiny percentage of the underlying securities.[17]

Commodity ETFs or ETCs (Exchange Traded Commodities)

Commodity ETFs invest in commodities, such as precious metals and futures. Among the first commodity ETFs were gold exchange-traded funds, which have been offered in a number of countries. The first gold exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003. Commodity ETFs generally are index funds, but track non-securities indexes. Because they do not invest in securities, commodity ETFs are not regulated as investment companies under the Investment Company Act of 1940 in the United States, although their public offering is subject to SEC review and they need an SEC no-action letter under the Securities Exchange Act of 1934. They may, however, be subject to regulation by the Commodity Futures Trading Commission.[18]

Exchange Traded Commodities (ETCs) are investment vehicles (asset backed bonds, fully collateralised) that track the performance of an underlying commodity index including total return indices based on a single commodity. Similar to Exchange Traded Funds (ETFs) and traded and settled exactly like normal shares on their own dedicated segment, ETCs have market maker support with guaranteed liquidity, enabling investors to gain exposure to commodities, on-Exchange, during market hours.

ETCs trade just like shares, are simple and efficient and provide exposure to an ever-increasing range of commodities and commodity indices, including energy, metals, softs and agriculture. However, it is important for an investor to realize that there are often other factors that affect the price of a commodity ETF that might not be immediately apparent; for example, buyers of an oil ETF such as USO might think that as long as oil goes up, they will profit roughly linearly. What isn't clear to the non-professional investor is the method that these funds gain exposure to their underlying commodities. In the case of many commodity funds, they simply roll so-called front-month futures contracts from month to month. This does give exposure to the commodity, but subjects the investor to risks involved in different prices along the term structure, such as a high cost to roll.

Bond ETFs

Exchange-traded funds that invest in U.S. Government bonds -- like the iShares Barclays 20+ Year Treasury Bond Fund, [NYSE: TLT], are known as Bond ETFs. They thrive during economic recessions because investors pull their money out of the stock market and into U.S. Treasuries. Because of this cause and effect relationship, the performance of Bond ETFs may be indicative of broader economic conditions.[19] There are several advantages to Bond ETFs such as the reasonable trading commissions they generate, but this benefit can be negatively offset by trading fees if bought and sold through a third party.[20]

Currency ETFs

In 2005, Rydex Investments launched the first ever currency ETF called the Euro Currency Trust (NYSE: FXE) in New York. Since then Rydex has launched a series of funds tracking all major currencies under their brand CurrencyShares. In 2007 Deutsche Bank's db x-trackers launched EONIA Total Return Index ETF in Frankfurt tracking the euro, and later in 2008 the Sterling Money Market ETF (LSE: XGBP) and US Dollar Money Market ETF (LSE: XUSD) in London.

Actively managed ETFs

Actively managed ETFs are quite recent in the United States. The first one was offered in March 2008 but was liquidated in October 2008. The actively managed ETFs approved to date are fully transparent, publishing their current securities portfolios on their web sites daily. However, the SEC has indicated that it is willing to consider allowing actively managed ETFs that are not fully transparent in the future.[3]

The fully transparent nature of existing ETFs means that an actively managed ETF is at risk from arbitrage activities by market participants who might choose to front-run its trades[citation needed]. The initial actively traded equity ETFs have addressed this problem by trading only weekly or monthly. Actively traded debt ETFs, which are less susceptible to front-running, trade their holdings more frequently.[21]

The initial actively managed ETFs have received a lukewarm response and have been far less successful at gathering assets than were other novel ETFs. Among the reasons suggested for the initial lack of market interest are the steps required to avoid front-running, the time needed to build performance records, and the failure of actively managed ETFs to give investors new ways to make hard-to-place bets.[22]

Exchange-traded grantor trusts

An exchange-traded grantor trust share represents a direct interest in a static basket of stocks selected from a particular industry. The leading example is Holding Company Depositary Receipts, or HOLDRS, a proprietary Merrill Lynch product. HOLDRS are neither index funds nor actively-managed; rather, the investor has a direct interest in specific underlying stocks. While HOLDRS have some qualities in common with ETFs, including low costs, low turnover, and tax efficiency, many observers consider HOLDRS to be a separate product from ETFs.[7][23]

Hedge Fund ETFs

Hedge fund ETFs are a new type of an ETF. A hedge fund ETF tracks a hedge fund and follow a group of hedge fund's activity. These new Hedge Fund ETF's are offered by IndexIQ they include IQ Hedge Multi-Strategy Composite, IQ Hedge Global Macro, IQ Hedge Long/Short Equity, IQ Hedge Event-Driven and IQ Hedge Market Neutral

Each of these hedge fund ETF's follows a general hedge fund strategy (Event-Driven, Market Neutral ect...).[24]

Leveraged ETFs

A leveraged exchange-traded fund, or simply leveraged ETF, is a special type of ETF that attempts to achieve returns that are more sensitive to market movements than a non-leveraged ETF.[25] Leveraged index ETFs are often marketed as bull or bear funds. A bull ETF fund might for example attempt to achieve daily returns that are 2.0 times more pronounced than the Dow Jones Industrial Average or the S & P 500. A bear fund on the other hand may attempt to achieve returns that are -2.0 times the daily index return, meaning that it will gain twice the loss of the market. Leveraged ETFs require the use of financial engineering techniques, including the use of equity swaps, derivatives and rebalancing to achieve the desired return.[26]. The most common way to construct leveraged ETFs is by trading future contracts.

Google Analytics Account

2009-06-21T22:11:00.004+07:00

For the past few months, more and more Analytics users have been invited to integrate their Analytics and AdSense accounts. Today that feature has become available to everyone. That means if you have an AdSense account, it's time to get it linked! Here's how:

Linking your Analytics and AdSense Accounts

1. Log in to AdSense
2. Click the link that says "Integrate your AdSense account with Google Analytics" on the Reports > Overview tab
3. Follow the on-screen instructions

You'll also notice that other sections of your Analytics account will show a new "AdSense Revenue" tab. You'll be able to compare how much of your AdSense revenue is coming from new visitors versus existing ones, and view revenue based on user language.

Enjoy your new data, and be sure to visit the Help Center if you have other questions about linking your accounts or reviewing your reports.

Adsense Payment

2009-06-21T22:07:00.002+07:00

Payments Guide

Are you wondering when your AdSense payment will arrive? Trying to figure out whether you'll be paid this month, or next month? We've put together this guide to explain our payment process - from the five critical steps to setting up your account, to an overview of the life of a payment, everything you need to know is here.

1. 5 Steps to Getting Paid
2. Tracking Earnings
3. Payment Timelines or, "When am I paid?"
4. Holding Payments

5 Steps to getting paid

You must complete all the steps below to get your account set for your first AdSense payment. Keep in mind that your earnings will need to reach the appropriate thresholds before you can provide your tax details, select a payment method, and enter your PIN or phone verification number.

1. Check your address

Since payments and Personal Identification Numbers, which we'll describe below, are sent to the mailing address in your account, it's important to confirm the accuracy of your payment address and payee name. Keep in mind, especially, that checks and Western Union payments are made out to the payee name exactly as entered in your account.

If you need to correct any information, follow the instructions in our Help Center.

2. Provide your tax information

Depending on your location, we may be required to collect tax-related information from you. If you're required to provide tax information, you can do so on the Tax Information page, under the My Account tab. Our interface will help guide you to the appropriate forms and requirements for your particular situation.

Go to your Tax Information page now

3. Select your payment method

Depending on your payment address, there may be a number of payment options available to you, including checks, Electronic Funds Transfer, and Western Union Quick Cash. The easiest way to find out your payment options is to visit your Account Settings page and click the Payment Information [edit] link.

If you're already an approved publisher, choose your payment method now

4. Enter your PIN and phone verification number

When your earnings reach the verification threshold, we'll mail a Personal Identification Number to the payment address in your account. You'll need to enter this PIN into your account before we can send any payments to you. Your PIN will be sent by standard post and will take 2-3 weeks to arrive.

Depending on your location, you may also be asked to verify your phone number. As part of this process, our system will call you at a pre-arranged time, and you'll be required to dial in a verification number that appears in your AdSense account.

5. Reach the payment threshold in earnings

When your total unpaid earnings reach the payment threshold, we'll send you a payment at the end of the next month. This threshold varies depending on the reporting currency in your account.

Let's say, for example, that the payment threshold for your account is US$100. In this case, if your total unpaid earnings reached $100 during January and you completed the 4 steps above, we would send you a payment at the end of February.

If your total unpaid earnings haven't yet reached the payment threshold, they'll roll over to the next month and accrue until they meet the threshold.

Payments are sent within approximately 30 days of the end of the month. See the timeline of our payment cycle in the Payment Timelines section below.

Tracking Earnings

You can track your AdSense performance and earnings from the Reports tab of your account. The Reports tab includes two important sub-tabs: Overview and Advanced Reports, which will display day-to-day details about how much you're earning from AdSense. There's also important information included in the Payment History page, which is linked from the Overview as well as the My Account tab.

The Payment History page tracks the status of previously issued payments, as well as monthly account calculations. You can click the Earnings details link for any month to view your total earnings, as well as any adjustments made to your account. Once you've qualified for a payment, and your payment has been made, you'll see it listed on this page as Payment issued. Click on the link to see the payment details as well as the exchange rate used to calculate your local currency payment, if applicable.

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Payment Timelines or, "When am I paid?"

One of the most common questions we receive at AdSense support is, "when am I paid?" It's certainly an appropriate question, since you probably joined AdSense to earn money and not just because you like how pretty our ads are. So this section describes how the AdSense payment cycle operates throughout the month, to give you a good idea of when and how your payment will arrive.

Earnings calculated: On the last day of each month, our system identifies all accounts that have reached the payment threshold. All the accounts that have reached the threshold are then sent for approval. Within the first few days of the month, a link with specific earnings details will be posted to your Payment History page within the first few days of the month.

Payment issued: Within the next few weeks, a Payment issued line will be posted to your Payment History page, indicating your payment has been calculated. At this time, we'll have your payment processed and sent to you.

Payment arrives: The time it takes for your payment to arrive depends on form of payment you have selected.

* Standard delivery checks: generally arrive within 1-2 weeks of the mailing date in the U.S.; outside of the U.S. typically arrive in 2-3 weeks.
* Secure Delivery checks: generally arrive in 5-7 days.
* EFT payments: should arrive in your bank account within 2-4 days.
* Western Union Quick Cash payments: available for pick-up at a local agent the following day.
* Rapida payments: available for pickup at your local post branch two business days after they are sent.

If there are any problems with your payment, a notice will be posted on your Payment History page. If you haven't received your payment by the 25th of the next month, you can request a reissue.

Holding Payments

If you'd prefer not to receive payments for a while, we're happy to hold payments for you. Just set up a payment self-hold in your account.

Setting a hold will stop payments and your account will continue to accrue earnings. After you remove your hold, we'll send you a single consolidated payment for all your unpaid earnings. To set or remove a hold, follow these instructions.

Please note that all changes to your hold preferences should be made by the 15th of the month. Changes made to these settings after the 15th of the month may apply to either the current or next payment cycle.

Online Store with Wordpress

2009-06-21T22:05:00.001+07:00

If you use Wordpress.org as your application for your blog, you may have ever heard a plug in that can make your blog as an Online Store. Can a blog at blogger.com be made as an Online Store too? Well, there is interesting information for those who use blogger as the application because a developer has created JavaScript that can make your blog as an Online Store, this script named simpleCart(js) + Paypal. With simpleCart(js) + Paypal, you can build your business by using blogger application.

Economic Recovery

2009-06-21T22:01:00.000+07:00

In the midst of the deepest recession in the experience of most Americans, many professional forecasters are optimistically heading into the new year declaring that the worst may soon be over.

For this rosy picture to play out, they are counting on the Obama administration and Congress to come through with a substantial stimulus package, at least $675 billion over two years.

They say that will get the economy moving again in the face of persistently weak spending by consumers and businesses, not to mention banks that are reluctant to extend credit.

If the dominoes fall the right way, the economy should bottom out and start growing again in small steps by July, according to the December survey of 50 professional forecasters by Blue Chip Economic Indicators. Investors seemed to be in a similarly optimistic mood on Friday, bidding up stocks by about 3 percent.

But in the absence of that government stimulus, the grim economic headlines of 2008 will probably continue for some time, these forecasters acknowledge.

“Without this federal largess, the consensus forecast for 2009 is for the recession to continue through most of the year,” said Randell E. Moore, executive editor of Blue Chip Economic Indicators, which conducts the monthly survey of forecasters.

Many economists are more pessimistic, of course. Nouriel Roubini at New York University, who called the 2008 market disaster correctly, wrote in a recent commentary on Bloomberg News that he foresees “a deep and protracted contraction lasting at least through the end of 2009.”

Even in 2010, he added, the recovery may be so weak “that it will feel terrible even if the recession is technically over.”

But Mr. Roubini is not among the economists surveyed by Blue Chip Economic Indicators. These professional forecasters are typically employed by investment banks, trade associations and big corporations.

They base their forecasts on computer models that tend to see the American economy as basically sound, even in the worst of times. That makes these forecasters generally a more optimistic lot than the likes of Mr. Roubini.

Their credibility suffered for it last year. They did not see a recession until late summer. One reason they were blindsided: their computer models do not easily account for emotional factors like the shock from the credit crisis and falling housing prices that have so hindered borrowing and spending.

Those models also take as a given that the natural state of a market economy like America’s is a high level of economic activity, and that it will rebound almost reflexively to that high level from a recession.

But that assumes that banks and other lenders are not holding back on loans, as they are today, depriving the nation of the credit necessary for a vigorous economy.

“Most of our models are structured in a way that the economy is self-righting,” said Nigel Gault, chief domestic economist for IHS Global Insight, a consulting and forecasting firm in Lexington, Mass.

Even if the economy begins to right itself by this summer, the recession would still be the longest since the 1930s, which was the last time the government engaged in widespread public spending to overcome the persistent inertia in consumer and business spending.

“The consensus says we are in the deepest part of the recession now,” Mr. Moore said. “But the stimulus package and much lower gasoline prices are expected to somewhat restore consumer confidence and personal spending and that will put us on the road back.”

There is a psychological factor that Robert Shiller, a Yale economist, hopes will come into play.

“If we have massive infrastructure spending and people feel that it is working, it could create a sense that we are O.K. and people will go back to normal,” he said. “The real problem is that we are on hold. Everyone is.”

The expectation of most forecasters, several report, is that most of the Obama administration’s stimulus will go for public works projects and tax cuts.

With this sort of stimulus, the gross domestic product, the chief measure of the nation’s output, should begin to rise — if not in the third quarter, then certainly in the fourth, the forecasters say, and the unemployment rate will finally peak at 8 to 9 percent by early next year.

“The job insecurity is very serious; that is the worst aspect of all this,” said Albert Wojnilower, a consulting forecaster at Craig Drill Capital. “But most upturns in the economy have begun with upturns in consumption, when people who still have jobs stop worrying about losing them.”

Adsense Optimized Wordpress Themes to Maximize your Contextual Ad Earnings

2009-05-09T22:28:00.002+07:00

I wanted a Wordpress theme with distinct ad blocks so I can easily blend contextual or other types of affiliate ads alongside my main content.

As you probably know, effective ad placement is critical if you plan to make any significant amounts of money through Google Adsense or other contextual ad systems.

Using a blog template with distinct ad blocks and optimized ad placements will very likely help you increase your Click through rates and affiliate conversions. These customized blog designs are also known as Adsense Ready themes.
How are Adsense Ready Themes different from other blog templates?

A key element that is central to all Adsense Ready themes is their focus on integrating contextual ads around content. As you will notice, the ads and link units are carefully placed above, beside and below each individual post to maximize exposure and their click through potential.

Several themes will also allow you to easily place blocks of square ads within each post, which is one of the proven ways to receive the highest amount of ad clicks from the average blog visitor.

Here are some general characteristics of most Adsense Optimized themes:

* Built in Adsense blocks for easy ad insertion.

* Ads are active once the Adsense Publisher ID is inserted or changed

* Optimized Ad placement, colors and types according to Google’s guidelines

* Adsense linkunits and search are already included.

* Search Engine Friendly. Post and category titles are used for page titles etc.

Why should I use Adsense Ready Templates?

The main reason why you should use an Adsense ready theme is convenience. You don’t have to sift through too much code and there’s no need to make major adjustments to the template’s form.

In many instances, all you need is to insert your Adsense publisher ID and you’re done. This will probably only take a few minutes, which can be a huge time and effort saver.

You can probably hack any other Wordpress template to include ads but they can be a hassle if you are unfamiliar with how to optimize your ad placement. Most of these templates are not terribly attractive but I think they are functional and their ad placement is pretty decent.

I think Adsense Ready templates are very useful when you own dozens or hundreds of niche websites which use credited feeds or free content. Niche websites with high paying keywords will be naturally more profitable when you use templates with optimized ad placements.

Dosh Dosh’s List of 18 Adsense Optimized Wordpress Themes

As far as I know, this collection of Adsense Ready themes is the largest online. I’ve included a link to each theme’s home page and as well as a direct download link for your convenience.

Some of the screen shots were taken from the websites referenced and others were screen grabs of blogs running the specific theme. If you know of any other Adsense themes I’ve missed, leave a comment and I’ll add it to the list.

All of the themes should be compatible with Wordpress 2.0+. Feel free to check the theme’s homepage for more information on compatibility and installation.

Recommendations:

All of the themes are pretty similar in function, but I’ve had particularly high click-through rates and ad earnings with several of them and so I’ll like to highly recommend ProSense (#1) and BlueSense (#2).

This post will be updated often and I suggest that you subscribe to my blog feed in order to receive free notifications when new themes are added.

Adsense on twitter

2009-05-09T22:16:00.000+07:00

Adding your AdSense code to HootSuite doesn't place ads on your Twitter profile page.

Ads are displayed on any links you tweet out that have been shortened via the ow.ly URL shortener.

Try this:

1) On Google AdSense, create a new ad that is a 234x60 half-banner.

2) In HootSuite, click on Settings and paste the AdSense code. Then choose which Twitter profiles you'd like to display ads for.

3) In HootSuite, create a new tweet. Add a link to this tweet by entering in a URL and clicking "Shrink it!" -- the URL will be shortened via the ow.ly URL shortener.

4) When you send the tweet, any users who click on the ow.ly link will be shown an AdSense ad in the top banner. With each click, there's a 50% chance it will show your AdSense code, and a 50% chance it will show HootSuite's AdSense ads.

5) Send out more tweets and start monetizing your links!

When you send a tweet with an ow.ly URL, you can also track clickthrough stats in HootSuite -- check out the "Stats" page.

If you choose not to show any AdSense ads for a Twitter profile, no ads will be displayed on ow.ly links sent out from that profile.

Adsense on facebook

2009-05-09T22:06:00.000+07:00

Is Google-the-Goliath sneaking into the Facebook building — via the basement?

Google is actively recruiting third-party developers with applications on Facebook to run Adsense ads within applications pages, VentureBeat has learned.

These aren’t just any old Adsense ads, according to our sources — developers have been inserting plain-vanilla Adsense into Facebook applications since the developer platform launched in May. Now, Google is specifically building this network for advertisers who want to be on Facebook, and will let advertisers run their ads across all Facebook apps that sign up for it.

Facebook has been clear about letting third-party developers sell ads on their own “canvas” pages on the site and keep all the revenue — a loophole that the Google seems to fit through just fine. See sample screenshots of what the Google ads will look like, taken here from Fantasy Stock Exchange and South Park Character Creator (and no, I don’t regularly use either app):

fantasy-stock-exchange-1.png

south-park-characters-1.png

Microsoft has already inked an exclusive deal with Facebook to sell ads on Facebook pages within the US. By selling ads on third-party applications, Google is doing an end-run around this deal.

When it comes to Facebook and social networking, Google is apparently firing on all fronts.

Building relationships with Facebook advertisers also allows Google to test how to successfully monetize third party applications before it introduces its own developer platform. Google is apparently set to make an announcement on November 5 that it will give third party developers access to user data in Orkut, its own social network which is popular in Brazil and India but not in most other countries. To this end, it is also actively recruiting third-party developers on Facebook to develop on Orkut, we are told.

Google is also rumored to be in a three-way competition with Microsoft and Yahoo to sell ads on Facebook’s own pages outside of the US. Like its two competitors, it is also rumored to be trying to buy a chunk of Facebook.

So far, only third-party startups that have launched ad networks for applications on Facebook, including those run by RockYou, VideoEgg, Social Media, Lookery and others. Some of these networks sell contextual text and video ads within an application’s pages. Some even sell ads on popular Facebook applications for less popular applications, so the latter group can try to convince Facebook users to add their application as well. Also of note: We’ve also been hearing rumors that Facebook is working on its own ad network for applications within Facebook.

Whether anyone can make big bucks from third-party applications is another question. We’re hearing from developers that all of these ad networks work about the same. We’re hearing some — those with 50,000 active users or more - are even getting enough to pay for their servers, room and board. That’s enough to avoid taking on funding while you work out your long-term business strategy.

Google has responded with the usual “no comment.”

6 Ways to Make Money Online with Facebook

2009-05-09T21:51:00.000+07:00

If you’re wondering how you can monetise Facebook, then here are some ideas for you -

1. Find new business clients. Whether you’re a consultant, a writer, a photographer, an illustrator, or any other kind of freelance or online business worker, you can find new clients using this popular social networking site. Read more about finding clients on different sites.

2. Use various apps that enable you to make money. Some examples include: MarketLodge or TwitCash. You might also want to include apps by other money making ventures like Tradebit. Check some services or affiliate programmes and see if they have a Facebook app that you can use.

3. Use Facebook’s Marketplace. The Marketplace offers you ways to sell your stuff - either old or new. You can even look for jobs.

4. Advertise your business or service using Facebook’s Classified Ads. Although you’re not allowed to advertise your business or service in the Marketplace, you can still advertise them using their Facebook’s ad service.

5. Promote links to your blogs or website. This way, you can attract people to whatever you’re selling or promoting on your blog or site.

6. Be a Facebook App Developer. If you have skills in developing online applications (like those popular apps like Warbook, SuperPoke, Graffiti, etc), you might want to consider promoting your services to individuals or companies who might want their own Facebook app.

So, how do you use Facebook? Do you try to make money online through this social networking site?

Ad Review Center available to all publishers

2009-04-09T16:44:00.000+07:00

Many of you have been eagerly waiting for the Ad Review Center to arrive in your accounts, and we're happy to tell you that this feature is now available for all publishers. By enabling you to review all ads placement-targeted to your site, the Ad Review Center gives you more transparency and control, and ensures that ads are relevant to your site's content and users.

We wanted to share a publisher's thoughts about the Ad Review Center, so we chatted with Jennifer McDonald, Account Manager at RealNetworks for sites such as rollingstone.com and film.com. Before using it, Jennifer says that "the concerns Real had... were mainly concerns about running competitive ads on our sites." But she says that by using the Ad Review Center, her team has been able to keep competitive ads from running. As she notes, "We are able to quickly review the ads before they run on our sites and block any ads that are considered competitive to our services."

The Ad Review Center is now available for all publishers utilizing placement targeting. You can get started with this feature by visiting your 'Competitive Ad Filter' page, located under the 'AdSense Setup' tab.

Before getting started, we strongly recommend keeping your review preference set to the default of 'Run ads immediately.' This will let you allow or block ads after they have run. If you choose the other option of 'Hold ads,' the ads will await review for 24 hours before being allowed to run automatically. Using the 'Hold ads' setting will keep ads from participating in the auction while they await review, potentially lowering winning bids and your AdSense earnings. Ads that you have blocked can't compete in the auction either, so we ask that you keep in mind the revenue impact of blocking ads or switching from the 'Run ads immediately' setting.

For more information about using the Ad Review Center, please visit our Help Center, and to start using it, please log in to your account.

Earning revenue from youtube videos just got easier

2009-04-09T16:41:00.000+07:00

We'd like to let you know about two recent improvements to video units that make them more easy and appealing to place on your sites. First, we've partnered with some new content providers that we'd like to highlight. These partners have signed on to let AdSense publishers embed their videos and share in the ad revenue.

Broadbandtv: "Broadbandtv is partnering with YouTube to bring the very best video program lineup to a growing and engaged online audience. Broadbandtv shows include hits from Fashion, Celebrity News, Sports, Technology, Comedy and Travel to top notch Spanish-language TV series like Somos Tu y Yo."
Canadian Broadcasting Corporation: "CBC/Radio-Canada is Canada's national public broadcaster and one of its largest cultural institutions. CBC/Radio-Canada is available how, where, and when Canadians want it."
The Orchard: "A global leader in digital music, video, new media and brand services, The Orchard offers family content like Gumby, Mr. Bill, My Favorite Martian, and other categories of content like music and comedy."

To give you a better idea of the videos that are available for syndication to your site, we've also created a gallery of some featured video units content partners. Note that to choose any of these content providers for your video unit, you should get their YouTube username by visiting their YouTube channel, and then put this username into the "Channel" field when choosing content for your unit.

Second, we're happy to announce that video units now support 728x90 and 160x600 formats to more easily fit into your site. These two new formats will feature five video thumbnails - when a user clicks on one of the thumbnails, a full sized video unit will appear, along with accompanying ads:

728x90 video unit

728x90 video unit, expanded

160x600 video unit, expanded

You'll generate earnings for valid clicks or impressions on the ads which appear. To use the new formats, you'll need to create new video units by visiting your AdSense Setup tab. To choose the new content for your video units, you can edit any of your players or set up new video units dedicated to this new content. Please keep in mind that video units are currently only supported for English or Japanese-language accounts in the following regions:

Australia, Canada, France, Ireland, Italy, Japan, Netherlands, New Zealand, Poland, Spain, United Kingdom, United States

Finally, if you haven't edited or made a new video unit recently, you may not have noticed that you can now preview the kinds of video that will show up in the unit, based on the filtering choices you've made. We heard that you wanted more insight into the types of content that would display, and we think this will help.

While you can use video units like any other ad, they're also a great addition to the content of your page. So we encourage you to use video units as you may have used embedded YouTube videos in the past - to add variety and interest for your users.

Make a date with data in Google Analytics

2009-04-09T16:38:00.000+07:00

Here in AdSense, we’re big on data. From spreadsheets and graphs to weekly reports and metrics, we constantly turn to numbers when running our business. In a similar vein, we've heard your requests for more data to help you run your AdSense websites, which is why we’re excited to announce the integration of one of our personal favorite reporting tools, Google Analytics, with AdSense. We're gradually rolling out this functionality to publishers, and you'll see an invitation link at the top of your 'Overview' and 'Advanced Reports' pages when it's been enabled for your account.

By integrating your AdSense account with a new or existing Analytics account, you’ll have access to in-depth reports about user activity on your site. In addition to the wealth of metrics already available in Analytics such as unique visitors and visitor language, you'll now have access to granular reports that break down AdSense performance both by page and by referring site. Armed with this new data about user behavior, you’ll be able to make more informed decisions on how to improve the user experience on your site and optimize your AdSense units to increase your revenue potential.

We've highlighted a few ways to use the integrated metrics below, but we encourage you to be creative! Come up with your own to discover how useful (and fun) new data can be:

Discover untapped markets. Use the geographies report to determine which regions are under-represented in your site’s user base. Optimize your site’s content to attract more of these under-represented users.
Drive high-earning traffic to your site. Use the 'Referring sites' report to determine where the users who are making you the most money are coming from. Focus your efforts on getting traffic from these sources.
Delve deeper into AdSense reports. Use the visualization feature to look at trends in your site's AdSense performance over time, or by time of day.

Again, this feature is not yet available to all our publishers, but please keep checking your account for an invitation. In the meantime, you can take a look at our demo to learn more about the reports you'll have access to:

Posted by Vineesha Malkani - AdSense Publisher Support

Wednesday, October 22, 2008 at 11:04:00 AM

Maximizing revenue by exposing your channels to the right advertisers

As you may know, you can set up your custom channels so that they're targetable by advertisers - these targetable custom channels are known as ad placements. By selecting the 'Allow advertisers to target this channel' checkbox on the channel creation page, you can enable brand advertisers to target their content to your audience directly on a CPM or CPC basis.

Creating ad placements allows them to show up in AdWords, so that advertisers who create placement-targeted campaigns can include your content directly. What many publishers don't know is that this also makes your content available to Google's internal sales teams, who work closely with many advertisers looking to target a certain audience or type of content. With this in mind, we thought it would be important to mention a few best practices which will help advertisers and our internal sales teams target your content to help you maximize revenue:

First, take time to make sure your channel names and descriptions accurately describe your content and audience. By including descriptions that closely reflect your content, you'll also attract advertisers from those areas. Naming and descriptions are important.

On that note, our second tip: be very careful about changing the name of an ad placement. If an advertiser has already targeted one of your specific channels, the channel will become unavailable to the advertiser once you change its name. If you wish to rename a channel, we recommend creating a second channel with the new name, and then attaching both channels to your ad unit. Remember, you can attach up to five custom channels to an ad unit.

Third, use the 300x250 medium rectangle, opted in to both text and image ads. This is one type of targetable ad unit that's in high demand by Google's CPM advertisers. We recommend placing these units in line with your content, and describing them as they relate to the content. This combination of format and placement enables advertisers to use image, text, or rich media (including gadget ads) effectively. In feeds, we recommend opting in to both image and text in all ad units, as many of these advertisers only target with image ads into feeds.

Finally, as always, the most important tip for maximizing revenue from your ad placements is to create quality content that is visually appealing and attracts a quality audience. Many brand advertisers look at all placements before placing an advertising order to make sure the destination sites are in line with their brand and attract the type of audience they wish to target for a particular campaign.

Which Option Strike Price Should I Trade?

2009-03-04T12:31:00.001+07:00

Option Trading Question

Can you blog about the strategies that you use to pick the option strike price and expiration month once you have identified a possible stock? Also are there any tools out there one can use to identify possible profit and loss and probability of success for option trading?

Option Trading Answer

Throughout my blog you will find that your option strategy is a function of your opinion. You have to nail down the direction, duration and magnitude of the move. Then you need to assess your confidence in; the market, your analysis and your recent performance. All of these factors will lead you to the optimal strategy and trade size.

If I have a long term grinding move in a stable stock and the market is neutral, I would probably opt for an ITM call that has a few months of life. I will be buying intrinsic value and the option will move point for point with the underlying. This gives me the latitude to take profits along the way. This is almost like a surrogate stock position.

If I am looking for an explosive move in a short period of time, I will buy a front month OTM option. That will give me the biggest bang for my buck and I can buy more contracts.

If I am fairly confident in the stock’s strength, but the market is volatile (like now), I might consider selling an OTM put credit spread. This strategy will give me more cushion. If the market moves against me, the stock should hold up well and the puts will expire. If the market falls apart I should have time to buy back my put spread before things get ugly.

I trade relative strength and weakness within the market - that is my edge.

As for software, OptionVue has very good scenario analysis software. It will calculate your P&L based on many different outcomes. For most traders, this software is overkill. I like to keep things simple.

Know your stop before you place the trade. If your forecast was wrong, get out. When a trade is profitable, start getting out when the move stalls. Predetermined targets will often leave too much money on the table and you need to let your winners run as long as they are behaving.

Adsense for Domain

2009-03-04T12:24:00.001+07:00

The Inside Adsense Blog has just announced that Adsense for Domains is now available to all publishers who owns several domains which are not really live sites. Whereas previously the only way that domain owners can earn from their registered dormant sites was to let third-party publishers to run their ads on those and then earn a miniscule of earnings. But with the Adsense for Domains open to all publishers, everyone can now run Adsense on their dormant domains regardless of whether they own only one or two domains.

By being available to “all publishers”, Google meant only those who are located in the U.S. Google Adsense is yet to roll this out to “all publishers” worldwide.

Although this would not make domain owners ultra-rich with revenues, it is however a better deal than letting other advertisers not connected with Adsense run their ads on those domains. This is for the simple reason that Adsense assumingly pays better.

If you opt to join Adsense for Domains, which you can do so by visiting your Adsense account, Google will run ads, links and search results on the dormant domains and will add more useful information in the near future.

This is a good way of making use of domains we bought but we haven’t really had the time to develop. Instead of paying them for nothing and hoping someday that somebody would buy it a high price, might as well run Adsense for Domain there.

Celebrity adsense

2009-02-20T14:57:00.000+07:00

I have never been much satisfied with Adsense for celebrity sites anyways. Since last 5-6 months Google Adsense has been paying a cent or two for every click i get on my celebrity sites network. Believe me, i have lot of traffic on those sites and i really do get lot of clicks there. An average 100 clicks give me $2.00 only. I mean, this really is insane. Isn’t it? Is that what the advertisers at adwords are really paying for celebrity sites? I feel totally looted here!

Anyways, recently i was browsing my Adsense account and there in those green highlighted pointers it was written that verifying your website via Google Webmaster Tools will help us serve you better. Well, i thought this is it. Much targeted ads, much more money and much better revenue for the celebrity sites. So i readily added and verified all my celebrity websites. So what do you think? Problem solved? Am i earning more now?

Lol Not really. It’s even worse! Now an average 100 clicks give me $0.50 to $0.75. There you are Google Adsense. You really are brilliant with getting much more targeted ads.

My Dear God. Who in the world pays less than 1 cent per click to any advertiser program in the whole wide world?

I checked the ads running on my sites. Just reading the url and opening them in new windows. Each and every site is Made for Adsense (MFA). And they look worse. With absolutely no content. For God sake even blogspot blogs are being advertised by Adsense! Where is the Google TOS of “good landing page” being applied? I just want to ask, why is Google so dumb with their advertisers? And yet they come out brave and merciless when it comes to paid advertising on other sites which we have, by deindexing and banning and PR ripping things. What is it with you Google? Why don’t you get a life? Why can’t you live your own life and let live others their own?

Fact is, Google won’t let you sell advertising on your sites and blah blah blah, because they want people to use Adsense instead. But hey, they will not let you earn with Adsense either. Because they can’t filter MFA’s from their advertiser program.

So there you have it. Google Adsense vs. Celebrity Sites. You clearly know who the winner is! Don’t ruin your life. Get some better publisher advertisement programs on your celebrity sites.

Option Trading Books

2009-02-05T15:31:00.000+07:00

ere are many option trading books worth reading. Before you consider one, you should have a basic understanding of technical and fundamental analysis. I believe you need to be a good stock trader before you can become a good option trader.

Here are a few of my favorite option trading books in order of complexity.

Options: Essential Concepts, Third Edition by The Options Institute. The Options Institute was formed by the various option trading exchanges to educate retail and institutional clients. This option trading book gives an overview on the history, pricing, strategies, floor operations and Market Making. It is easy to read and it provides an excellent foundation.

Options for the Stock Investor, by James Bittman. This option trading book goes through many of the basic option trading concepts and the terminology. James is an instructor at The Options Institute and he has decades of experience. He is one of the most knowledgeable authors in the industry.

Options As a Strategic Investment, by Lawrence McMillan. In short, this book is known by many as the "option trading Bible". I have read it cover-to-cover many times. It is detailed and comprehensive. It explains every option trading strategy and every option pricing concept. If you read it and understand half of it, you will know more than 90% of the people engaged in option trading.

McMillan on Options, Second Edition by Lawrence McMillan. Larry is one of the foremost authorities on option trading. In this option trading book he rolls up his sleeves and dives into some of his favorite option trading strategies. He uses examples to illustrate his approach.

Option Volatility and Pricing: Advance Trading Strategies and Techniques, by Sheldon Natenberg. This option trading book gets into serious option trading strategies and you need to have a good understanding of the basics.

As I mentioned before, to be a good option trader, you need to be a good stock trader first. Start with basic books on technical and fundamental stock analysis and then work your way up.

Index Trading vs Individual Stocks

2009-02-05T15:30:00.000+07:00

Option Trading Question

Today Lloyd R. asks "I understand why someone would want to be long options, but why not use indexes for credit spreads? Stocks are so unpredictable and a news event (takeover, earnings pre-announcement, law suit...) can come at any time. The penalties are extreme"

Option Trading Answer

Great question. Stocks do carry a surprise component and obviously, when you are long premium you want that to a degree. You don’t want random surprises where you are continually blindsided. Indexes are diversified and consequently they do not have “unsystemic risk”. They only have “market risk”. There is a statistical advantage to selling out of the money put spreads, on indexes and I do like that trade under the right circumstances. With the market near a seven month low and the implied volatilities (IV’s) spiking - that trade is setting up.

As you know from my prior blogs, I do not advocate Iron Condors or neutral trading strategies. There is too much slippage and one big market move can strip away half a year’s profits. These are very popular “seminar” strategies and they are typically index based. At $3000 per seminar, they’re the ones making the money.

On the topic of index call credit spreads, I do not feel I’m properly being compensated for the risk. As the market rallies, the IVs collapse and you have to get too close to the money to get any premium. Look at the OEX July 600 calls and the 530 puts. Both are 35 points out-of-the-money (OTM) and one trades for $.70 and the other trades for $4.40. The risk reward ratio is not there on the call side.

Indexes have so many eyes focused on them that I don’t feel I have an edge. Every large institution is analyzing the SPY, OEX, SPX and they are executing baskets of stocks and futures against their option positions. I won’t pretend that I know more than Goldman Sachs and its 50 Floor Traders. There is no edge for me. I could tell you stories about the sophisticated trading tactics I witnessed in the OEX pit 15 years ago. If ever there was “fair value” it’s the exact price of that product at any moment. In the end, when I trade indexes I’m forced to predict what the market is/isn’t going to do.

My edge lies in my ability to find relative strength and weakness within the market and I have a proprietary program that helps me find that. There are opportunities that large institutions are not interested in. They can’t get the size done to justify trading it. There is a large advantage to trading a balanced long/short portfolio of stocks with relative strength/weakness. Choose well and the strong stocks gain more than the weak stocks lose when the market goes up and vice versa. This strategy helps me reduce my market risk. I also feel that I can identify supply/demand imbalances in a stock and I know when someone is trying to move “size”. That comes from my chart reading skills and I like to shadow them. In a crowded arena like an index, that trail is masked by “noise”.

I have found that careful research and selection can help me navigate news events. For instance, I don’t do credit spreads on biotech stocks. The chance of a material, unscheduled news event is too high. When all of my research has been conducted only a quarter of my trades translate into option trades for liquidity reasons.

Getting back to selling options, when the stock or the market are uncertain, the IVs are high and I’m rewarded for selling premium. The credit helps me distance myself from the trade and I can keep my objectivity. The key is to watch for upcoming news events and to get intimate with the stock. Know what’s driving it. Just as I would go long or short a stock, the credit spreads are no more than a directional trade with a built-in buffer. Another way to throttle risk is to size the position accordingly.

Never start your search by looking for stocks with high IVs. That is suicide. Those big premiums are there for a reason. There’s a very high likelihood that a lightly publicized event is forthcoming.

How I Use Technical Analysis to Find Stocks!

2009-02-05T15:28:00.000+07:00

In today’s option trading blog I will discuss why I rely heavily on fundamental analysis in the latter stages of my research. I don’t start with fundamentals because I don’t want to wait around for five years while market figures out that AAPL is a good stock. That company was sitting at $15 with a pile of cash for years. Once it broke out in 2004, it was time to consider it. That pretty much explains why I start my research with technical analysis.

I want to make sure the stock is on the move so that I can make my money and get out. After all, as an individual, that is my edge. Large firms can’t be in and out of a stock so they rely heavily on fundamental analysis. They tour the company and attend shareholder meetings knowing that they’re in for the long haul.

I start my technical analysis by programming long-term indicators into proprietary searches. Without getting too specific, having a a 200-Day moving average that is higher today than it was 20 days ago is of interest if I’m looking for a bullish stock. Having an ADX that is over 35 and rising is also of interest. Finding a stock where the 20 day average daily volume is higher today than it was 10 days ago is also of interest. These are a few examples of the technical analysis that is built into my research before I even look at a chart. Most of my studies are based on relative value (where the indicator is now, relative to where it was a month or two ago). This filters out the vast majority of stocks on macro basis. As my analysis zooms in on the present, my searches target four basic set-ups I like to trade. On average, about 300 stocks make the list on a daily basis (bullish and bearish).

I trade break-outs/break-downs, gaps, trends and greenlines/redlines. These set-ups represent recent price action. A break-out/break-down is a 10-day high/low. A gap up is defined as stock with a low today that is greater than the prior day’s high (inverse for gap down). I like gaps so much that I even look at two and three day old gaps. A trend is defined as three or more consecutive closes in one direction. A greenline is defined as an open near the low (no gap) and a close near the high (inverse for redline). To recap, my proprietary searches start with macro indicators and end with the tail-end of the chart – the most recent price action.

There is a dilemma that every programmer faces. Searches can be too open (valuable time wasted sifting through symbols) or they can be too restrictive (most good trades are eliminated). I have found an optimal balance. The majority of stocks are filtered out by my search engine and the final step of the process uses the most powerful tool I know – a trained eye. I have and interface that allows me to quickly flip through charts. If a chart looks good I zoom out to a one month view. If it still looks good, I zoom out to a 1-Year chart.

When I perform visual technical analysis I look for nice tight price patterns. Once I have a handful of solid candidates that I really want to explore, I keep my tools pretty basic. I look at moving averages (20, 50, 100, 200), volume, trend lines and horizontal support/resistance levels. At this juncture I use the logic that if every other trader feels the level is important, so do I. If I can spot it so can they. If it is breaks, the event is significant because it will affect the demand/supply.

I am not a big fan of Oscillators, Fibonacci Lines, Elliott Wave… It’s not that they don’t work, they don’t work for me. There are a gamut of other indicators. Some are leading and some lagging. I’m certain a case can be made for all of them. Once a stock is in front of me all I want to do is measure it’s relative strength/weakness to the market. I do that by watching it trade. This is not the right way, it’s just my way. You have to find what works for you.

Once all of the technical analysis is done, I review the fundamentals of the company. This part of my research gives me “staying power”. I’m intimate with the company and I know what’s driving the stock. I also know if there are any news events on the horizon. The resulting “piece of mind” helps me take a little heat on the position without the fear that I’ve missed something.

All of my trade ideas come from my searches. Want to check out six of my bullish proprietary searches? Click Here. You’re bound to see some good stocks.

Bear Put Spread

2009-02-05T13:01:00.000+07:00

When your feeling on a stock is generally negative, bear spreads are nice low risk, low reward strategies. One of the easiest way to create a bear spread is by using put options at or near the current market price of the stock.

Like bear call spreads, bear put spreads profit when the price of the underlying stock decreases. Bear put spreads are typically created by buying at-the-money puts and selling out-of-the-money puts.

Example

Using Altria Group , we can create a bear put spread using in-the-money options. With MO Trading at $56.78 in May, you might buy ten of the JUL 60 puts and sell ten JUL 55 puts.

In this case, the maximum profit would be the difference between the strike prices less the $3,000 it cost to put on the position. In this case, the maximum profit works out to $2,000 ((60 - 55 x 1,000) - $3,000). In contrast, the maximum loss would be limited to the $3,000 spent initiating the trade. Once again, this maximum loss is the amount used to calculate the ROI.

MO trading @ $56.89
Buy 10	JUL 60 Put @ $4.00	$4,000
Sell 10	JUL 55 Put @ $1.00	($1,000)
Cost of Trade		$3,000

If you like the idea behind the bear put spread, be sure to check out bull call spreads and bear call spreads. These can be comparable strategies depending on your objectives.

Bear Call Spread

2009-01-01T14:57:00.003+07:00

When your feeling on a stock is generally negative, bear spreads are nice low risk, low reward strategies. One of the easiest way to create a bear spread is by using call options at or near the current market price of the stock.

Like bear put spreads, bear call spreads profit when the price of the underlying stock decreases. Bear call spreads are typically created by selling at-the-money calls and buying out-of-the-money calls.

Example

Using the Nasdaq-100 Index Tracking Stock, we can create a bear call spread using in-the-money options. With QQQQ Trading at $30.11 in May, you might buy ten of the JUL 32 calls and sell ten JUL 30 calls.

With the underlying stock trading near $30, you'd sell the 30 calls for $1.85 and buy the 32 calls for $1. This way, you'd initiate the spread for a credit of $850, your maximum profit. If the stock moves lower, both calls will expire worthless and you'll keep the $850 premium you collected when you initiated the position.

QQQQ trading @ $30.11
Buy 10	JUL 32 Calls @ $1.00	$1,000
Sell 10	JUL 30 Calls @ $1.85	($1,850)
Credit from Trade		($850)

If you like the idea behind the bear call spread, be sure to check out bull call spreads and bear put spreads. These can be comparable strategies depending on your objectives.

Put Back Spread

2009-01-01T14:57:00.001+07:00

Put back spreads are great strategies when you are expecting big downward moves in already volatile stocks. The trade itself involves selling a put at a higher strike and buying a greater number of puts at a lower strike price.

Ideally, this trade will be initiated for a minimal debit or possibly a small credit. This way, if the stock gains ground, you won't suffer much either way. On the other hand, if the stock drops as you hope, the profit potential will be significant because you have more long than short puts. To maximize the potential for this position, many traders use in-the-money options because they have a higher likelihood of finishing in-the-money.

Example

Using Intel (INTC), we can create a put backspread using in-the-money options. With INTC Trading at $30 in April, you might buy two of the May 30 puts at $1.25 and sell one May 32.5 put at $2.70.

In this example, you would receive $20 for putting on the trade. If the stock jumped above 30, you would profit $20. However, the real money would be made if the stock made a big move to the downside. The downside breakeven for this trade would be 27.50. At this price, the 30 puts would be worth $2.50 while the 32.5 puts would be worth $5. Below $27.50 the profit potential increases dramatically.

INTC trading @ $30.06
Buy 2	May 30 Put @ $1.25	$250
Sell 1	May 32.5 Put @ $2.70	($270)
Credit from Trade		($20)
Option requirements to maintain position		250

The profit/loss above does not factor in commissions, interest, or tax considerations.

Calculating the Breakeven

The easiest way to calculate the downside breakeven is by using the following formula:

Downside Breakeven = Long strike price - [(Long strike - short strike) * # of short contracts] + net credit/100 (or - net debit)

Using the data for this example, the breakeven calculation looks like this:

30 - [(30-32.5) * 1] - 20/100

Simplified, the equation becomes:

30 - [(2.30)] = 27.70

Learn more about pricing options.

Long Puts

2009-01-01T14:55:00.002+07:00

Now let's imagine that you have a strong feeling a particular stock is about to move lower.

Before puts came into existence, your only alternative was to short sell the stock. Short selling stock is an incredibly risky strategy. Should the stock move higher, your loss would be theoretically unlimited. Rather than opening yourself to enormous risk, you could buy puts (the right to sell the stock at a fixed price).

Example

Let's look at an example option. Cisco is trading at $16.07. The JUN 15 puts are trading for $0.55. For $55 you could buy one JUN 15 put (100 shares x $0.55). Since each contract controls 100 shares, you now have the right to sell 100 shares at $15 per share. If the stock stays at or above $15.00 before the option expires, the most you could lose is your initial investment of $55.

On the other hand, if the stock falls to $11 at expiration, the JUN 15 put will be worth $4 (strike price: $15 � current stock price: $11). At this point, your put is worth $400 ($4 x 100 shares). After subtracting the cost of the premium paid and before commissions your gain is $345, a 627% gain on your investment.

To achieve the same percentage gain on a typical stock trade, a $100 stock would have to increase in value to nearly $800 per share. Needless to say, that doesn't happen every day.

To better see the leverage of options, let's look again at the returns on a percentage basis.

	Purchase $	Sale $	Profit (L)	%Gain (L)
Stock Price	$15.90	$11.00	$4.90	30.8%
Short 100 Shares	$1,590.00	$1,100.00	$490.00	30.8%
1 Jun 15 Put	$55.00	$490.00	$430.00	716.7%

Now, let's see what happens if the stock unexpectedly rises.

	Purchase $	Sale $	Profit (L)	%Gain (L)
Stock Price	$15.90	$20.00	($4.10)	(25.8%)
Short 100 Shares	$1,590.00	$2,000.00	($410.00)	(25.8%)
1 Jun 15 Put	$55.00	$0.00	($55.00)	(100%)

If you sold the stock short at $15, thinking it would go down, and it rose quickly to $20, you can buy the stock and limit your losses. In this case, you would lose $500 (100 shares x $5 share). It's also easy to see that this could get worse. The stock could continue climbing indefinitely. Had you purchased the puts rather than sold the stock short, your loss would be limited to the price of the puts-in this case $55.

To make a profit, the buyer of these options has to be right about the price movement of the stock and the time frame in which it will occur. If the stock doesn't make its move before the options expire, they will expire worthless. While a stockholder is concerned with market direction, the timeframe isn't as critical because stock doesn't have an expiration date. You can hold a stock for decades. You can't do the same with options. With the exception of LEAPS (long-term option contracts), most options expire in a matter of months.

The Condor

2009-01-01T14:55:00.001+07:00

Using the same option and stock prices we used for the , we can examine a similar position known as a condor.

The Long Condor

The condor takes the body of the butterfly � two options at the middle strike � and splits it between two middle strikes rather than just one. In this sense, the condor is basically a butterfly stretched over four strike prices instead of three.

Long 70 call, Short 75 call
Short 80 call, Long 85 call

You can also view a condor as a combination of a bull and bear call spread.

Long 70 call, short 75 call (bull call spread)
Short 80 call, long 85 call (bear call spread)

The long condor can be a great strategy to use when your feeling on a stock is generally neutral because it's been trading in a narrow range. Like the butterfly, the condor is a limited risk, limited reward strategy that profits in stagnant markets.

Imagine that a stock trading at $75 has been relatively flat for some time. If you think the situation is unlikely to change, you can sell one 75 call and one 80 call. At the same time, you'd buy one 70 call and one 85 call as a hedge in case the market moved against you. This combination of options creates the long condor. The position is considered "long" because it requires a net cash outlay to initiate.

Long Condor
Sell	1 75 Call @ $6.00	($600) (condor body)
Sell	1 80 Call@ $4.00	($400) (condor body)
Buy	1 70 Call @ $9.00	$900 (wing)
Buy	1 85 Call @ $2.00	$200 (wing)
Cost of Trade		$100 ($1,100-$1,000)

* Note: the same position can be established using puts.
The profit/loss above does not factor in commissions, interest, or tax considerations.

In this case, the maximum profit is achieved at expiration with the stock between 75 and 80. At $75, the 75, 80, and 85 calls would expire worthless and the 70 calls would be worth $500. Thus, you would achieve your maximum profit of $400 ($500 - $100 initial debit). Between 75 and 80, the loss on the short 75 calls is more than offset by the 70 calls. Since the 80 and 85 calls would again expire worthless, the value at expiration is the same as the value of the 70/75 bull call spread ($5).

At any price above $85 or below $70, you would experience the maximum loss of $100.

If you like the idea behind the condor, be sure to check out long butterflies and short butterflies. These can be comparable strategies depending on your objectives.

Ratio Spread

2008-12-12T14:34:00.002+07:00

Ratio spreads are neutral in the sense that you don't want the market to move much either way once you make the trade.

While call and put ratio spreads can be effective strategies when you are expecting relatively stable prices over the short term, they are not without risk. By definition, a ratio spread involves more short than long options. If the trade moves against you, the extra short option(s) expose you to unlimited risk.

(You might want to also review a call back spread, which is a ratio spread that involves more long than short options. As such, it is a limited risk, unlimited reward strategy.)
Put Ratio Spread

To create a put ratio spread, you would buy puts at a higher strike and sell a greater number of puts at a lower strike. Ideally, this trade will be initiated for a minimal debit or, if possible, a small credit. This way, if the stock jumps, you won't suffer much because all of the puts will expire worthless. However, if the stock plummets, you have unlimited risk to the downside because you will have sold more options than you bought. For maximum profitability, you want the stock price to stay at the strike price where you are short options.
Example

Using Merrill Lynch (MER), we can create a put ratio spread using in-the-money options. With MER Trading at $39.68 in May, you might sell three of the JUL 40 puts and buy one JUL 50 put.
MER trading @ $39.68
Buy 1 MER JUL 50 Put @ $10.60 $1,060
Sell 3 MER JUL 40 Put @ $2.40 ($720)
Cost/Proceeds $340

The profit/loss above does not factor in commissions, interest, or tax considerations.
Ratio Spread Chart Ratio Spread Graph

In this case, you would pay a $340 debit for putting on the trade. If the stock jumped above 60, you would only lose the $340 paid for the spread. However, the real money would be made if the stock stayed right around $40. Here, the short 40 puts would expire worthless and the long 50 put would be worth $10. The value of the 50 put, minus the initial $340 debit would bring the net profit up to $660.

A big move to the downside in this case would spell trouble. The downside breakeven point occurs when the stock price equals 36.70, below this point the risk of losses exceeds $7,000.

The Butterfly

2008-12-12T14:34:00.001+07:00

The long butterfly spread is a three-leg strategy that is appropriate for a neutral forecast � when you expect the underlying stock price (or index level) to change very little over the life of the options. A butterfly can be implemented using either call or put options. For simplicity, the following explanation discusses the strategy using call options.

A long call butterfly spread consists of three legs with a total of four options: long one call with a lower strike, short two calls with a middle strike and long one call of a higher strike. All the calls have the same expiration, and the middle strike is halfway between the lower and the higher strikes. The position is considered "long" because it requires a net cash outlay to initiate.

When a butterfly spread is implemented properly, the potential gain is higher than the potential loss, but both the potential gain and loss will be limited.

The total cost of a long butterfly spread is calculated by multiplying the net debit (cost) of the strategy by the number of shares each contract represents. A butterfly will break-even at expiration if the price of the underlying is equal to one of two values. The first break-even value is calculated by adding the net debit to the lowest strike price. The second break-even value is calculated by subtracting the net debit from the highest strike price. The maximum profit potential of a long butterfly is calculated by subtracting the net debit from the difference between the middle and lower strike prices. The maximum risk is limited to the net debit paid for the position.

Butterfly spreads achieve their maxim profit potential at expiration if the price of the underlying is equal to the middle strike price. The maximum loss is realized when the price of the underlying is below the lowest strike or above the highest strike at expiration.

As with all advanced option strategies, butterfly spreads can be broken down into less complex components. The long call butterfly spread has two parts, a bull call spread and a bear call spread. The following example, which uses options on the Dow Jones Industrial Average (DJX), illustrates this point.
DJX trading @ $75.28
Buy 1 DJX 72 Call @ $6.10 x 100 $610 (wing)
Sell 2 DJX 75 Call @ $4.10 x 100 ($820) (butterfly body)
Buy 1 DJX 78 Call @ $2.60 x 100 $260 (wing)
Net Debit from Trade $50 ($870 - $820)

In this example the total cost of the butterfly is the net debit ($.50) x the number of shares per contract (100). This equals $50, not including commissions. Please note that this is a three-legged trade, and there will be a commission charged for each leg of the trade.

An expiration profit and loss graph for this strategy is displayed below.
Butterfly Chart Butterfly Graph

*The profit/loss above does not factor in commissions, interest, tax, or margin considerations.

This profit and loss graph allows us to easily see the break-even points, maximum profit and loss potential at expiration in dollar terms. The calculations are presented below.

The two break-even points occur when the underlying equals 72.50 and 77.50. On the graph these two points turn out to be where the profit and loss line crosses the x-axis.
First Break-even Point = Lowest Strike (72) + Net Debit (.50) = 72.50
Second Break-even Point = Highest Strike (78) - Net Debit (.50) = 77.50

The maximum profit can only be reached if the DJX is equal to the middle strike (75) on expiration. If the underlying equals 75 on expiration, the profit will be $250 less the commissions paid.
Maximum Profit = Middle Strike (75) - Lower Strike (72) - Net Debit (.50) = 2.50

$2.50 x Number of Shares per Contract (100) = $250 less commissions

The maximum loss, in this example, results if the DJX is below the lower strike (72) or above the higher strike (78) on expiration. If the underlying is less than 72 or greater than 78 the loss will be $50 plus the commissions paid.
Maximum Loss = Net Debit (.50)

$.50 x Number of Shares per Contract (100) = $50 plus commissions

By looking at the components of the total position, it is easy to see the two spreads that make up the butterfly.

Bull call spread: Long 1 of the November 72 calls & Short one of the November 75 calls

Bear call spread: Short one of the November 75 calls & Long 1 on the November 78 calls
Summary

A long butterfly spread is used by investors who forecast a narrow trading range for the underlying security, and who are not comfortable with the unlimited risk that is involved with being short a straddle. The long butterfly is a strategy that takes advantage of the time premium erosion of an option contract, but still allows the investor to have a limited and known risk.

Naked Call

2008-12-12T14:33:00.001+07:00

Calendar spreads are also known as time or horizontal spreads because they involve options with different expiration months. In this case, "horizontal" refers to the fact that option months were originally listed on the board at the exchange from left to right. At the same time, strike prices were listed from top to bottom. For this reason, options with different strike prices and the same expiration are often referred to as vertical spreads.

In simplest terms, a long calendar spread involves buying an option with a longer expiration and selling an option with the same strike price and a shorter expiration. For example, imagine that Dell Computer (DELL) is trading for $45 per share. To initiate a calendar spread, you might sell the Dell June 45 calls and buy the July 45 calls.
DELL trading @ $45

June

July
Dell 45 Calls 4.50 6.50
Time to Expiration 2 months 3 months
Spread value: $2 (6.50 - 4.50)

Like most long positions, there is a cost to put on this trade. In this case, the cost is $2. For the time spread to work, the June option must lose its time premium faster than the July option. If the stock price remains relatively stable as the June expiration approaches, the value of the spread should increase. With only one month remaining before the June expiration, the option prices might look like this.
DELL trading @ $45

June

July
Dell 45 Calls 1.50 4.50
Time to Expiration 1 months 2 months
Spread value: $3 (4.50 - 1.50)

In this case, the position could be closed for a one-point profit by selling the July calls and buying back the June calls.

For long calendar spreads to work, the underlying stock price must remain relatively stable. Any swings in either direction will negatively impact the time value of both options causing the spread to lose value.

Calender Spread

2008-12-12T14:32:00.000+07:00

The Strangle

2008-12-12T14:31:00.000+07:00

A Word on Strangles as Neutral Strategies

Although long and short strangles differ in their response to market movement, we have chosen to list both as neutral strategies. In a pure sense, the short strangle is a neutral strategy because it achieves maximum profit in a market that moves sideways. In contrast, the long strangle benefits from market movement in either direction. However, since a $10 move in either direction will have the same impact on profit, the trader doesn't necessarily have a preference which way the market moves. In this sense, the trader is neutral about market direction--as long as movement occurs.
Long Strangles

Long strangles are comparable to long straddles in that they profit from market movement in either direction. From a cash outlay standpoint, strangles are less risky than straddles because they are usually initiated with less expensive, near-the-money rather than at-the-money options.

Like long straddles, they have unlimited profit potential on both the upside and downside. For example, let's imagine that a particular stock is trading at $65 per share. The following chart shows where the near-the-money and at-the-money options are trading.

Stock @ $65
Strike Price Calls Puts
60 7 2.25
65 5.25 5
70 2.50 6.75

Calls and puts used in strangles have the same expiration.
Long Strangle
Buy 1 60 Put @ $2.25 $225
Buy 1 70 Call @ $2.50 $250

If we opted for the strangle, we could buy the 60 put for 2.25 and the 70 call for 2.50. Thus, our out-of-pocket cost-and maximum loss-would be 4.75 plus commissions. With the stock anywhere between $60 and $70, we would incur the maximum loss of $475 (4.75 x 100). Anywhere below $55 or above $75, the position will begin to show a profit.

Value at Expiration:
Stock Price Profit (Loss)
$50 $525
$55.25 $0
$60 ($475)
$65 ($475)
$70 ($475)
$74.75 $0
$80 $525

The profit/loss above does not factor in commissions, interest, or tax considerations.

The long strangle can also be created using in-the-money options. Using the example above, this would involve the following:
Long Strangle (less common alternative)

Buy one 60 call @ $7
Buy one 70 put @ $6 3/4

This is an interesting position for a number of reasons. First, it's guaranteed to have some value at expiration because at any price at least one of the options will have intrinsic value. More specifically, with the stock between $60 and $70, the position will be worth $10. Thus, the maximum loss will be 3.75 (13.75 - 10).

It's also worth noticing that the maximum loss using in-the-money options is lower (3.75 vs. 4.75) even though the out-of-pocket cost to initiate the position is much higher. The reason for this is that generally speaking, the time premium for in-the-money options is lower than it is for out-of-the money options. In the first example, neither the 70 call nor the 60 put had any intrinsic value with the stock at $65. Thus, the price of the options was primarily time premium.

In the second example, the 60 call and the 70 put each had $5 of intrinsic value with the stock at $65. When you subtract the intrinsic value from the total price of the options, you see that the time premium for these in-the-money options is lower than the time premium for options equidistant from the current stock price but out-of-the-money.

The Straddle

2008-12-12T14:29:00.002+07:00

A Word on Straddles as Neutral Strategies

Although long and short straddles differ in their response to market movement, we have chosen to list both as neutral strategies. In a pure sense, the short straddle is a neutral strategy because it achieves maximum profit in a market that moves sideways. In contrast, the long straddle benefits from market movement in either direction. However, since a $10 move in either direction will have the same impact on profit, the trader doesn't necessarily have a preference which way the market moves. In this sense, the trader is neutral about market direction--as long as movement occurs.

Long Straddles

Have you ever had the feeling that a stock was about to make a big move, but you weren't sure which way? For stockholders, this is exactly the kind of scenario that creates ulcers. For option traders, these feelings in the stomach are the butterflies of opportunity. By simultaneously buying the same number of puts and calls at the current stock price, option traders can capitalize on large moves in either direction.

Here's how this works. Let's imagine a stock is trading around $80 per share. To prepare for a big move in either direction, you would buy both the 80 calls and the 80 puts. If the stock drops to $50 by expiration, the puts will be worth $30 and the calls will be worth $0. If the stock gaps up to $110, the calls will be worth $30 and the puts will be worth $0.

The greatest risk in this case is that the stock remains at $80 where both options expire worthless.

Here's what the trade might look like:

Long Straddle
Buy	1 80 Call @ $7.50	$750
Buy	1 80 Put @ $7.00	$700

At these prices, every straddle will cost about 14.50. Since you are buying two options, a call and a put, you might get a slightly better price than the offer for each individual option. But, to keep it simple, we'll assume the prices listed above are the best available for the straddle. The 14.50 or $1,450 you pay for the straddle will also be the most you can lose if the price remains close to $80. Since the position profits from big moves in either direction, it has both an up- and a downside breakeven point calculated as follows:

Upside breakeven: Straddle Strike + Cost of Straddle

80 + 14.5 = 94.5

Downside breakeven: Straddle Strike - Cost of Straddle

80 - 14.5 = 65.5

Given this, the position will show a profit as long as the stock moves above 94.5 or below 65.5. Between those prices, the position will show a range of losses with the maximum lost right at the strike price where neither option has any value.

* The profit/loss above does not factor in commissions, interest, or tax considerations.

The Collar

2008-12-12T14:29:00.001+07:00

To protect an existing stock position, some traders will put on a position known as a collar. The collar is also known as a fence or cylinder.

Protecting a Long Stock Position

When the stock position is long, the collar is created by combining covered calls and protective puts. From a profitability standpoint, the collar behaves just like a bull spread. The upside potential is limited beyond the strike price of the short call while the downside is protected by the long put.

Example

Suppose you purchased 100 shares of Network Appliance (NTAP) at $12.84 in May and would like a way to protect your downside with little or no cost. You would create a collar by buying one JUL 10 Put at $0.60 and selling one JUL 15 Call at $0.80.

The long stock behaves the same as any long stock position--it gains when the stock goes up and it loses when the stock drops. However, the maximum profit is achieved when the stock is at $15. Above 15, the profit on the stock is exactly offset by the loss on the call option that was sold. On the downside, the maximum loss occurs with the stock at or below $10. Below $10, the profit from the put offsets the loss from the stock.

NTAP trading @ $12.84
Buy	100 NTAP @ $12.84	$1,284
Buy	1 NTAP JUL 10 Put @ $0.80	$60
Sell	1 NTAP JUL 15 Call @ $0.80	($80)
Cost of Trade		$1,264

The collar strategy is best used for investors looking for a conservative strategy that can offer a reasonable rate of return with managed risk and potential tax advantages. The key to implementing the collar strategy is selecting the appropriate put and call combination that allows for profit while still protecting the downside risk. Many investors will roll the puts and calls in the collar strategy each month and lock in a 3-5% monthly return. By rolling, you would buy back the short calls and sell new calls for a later month and perhaps different strike price, and do the same with the puts. Hence adjusting the collar based on the movement in the stock price. There may be tax benefits associated with long term capital gains on the stock in the collar strategy versus short term capital gains in a pure option strategy. Consult your tax advisor for more details.

In addition to retail investors, many senior executives at publicly traded companies use collars as a way to protect their personal wealth that might be heavily concentrated in their company's stock. By collaring their stock, an executive can insure the value of his/her stock without paying huge premiums for put insurance.

Important

Before using Universal Broker's spread and combination one-step trading screens, options spread traders MUST understand the additional risks associated with this type of trading.

Conversions

2008-10-07T08:21:00.000+07:00

Conversions are primarily a Floor Trader strategy. To capitalize on minor price discrepancies between calls and puts, floor traders and other professionals will sometimes put on a trade known as a conversion.

Like all arbitrage strategies, the conversion involves buying something in one market and simultaneously selling it in another to capitalize on whatever small discrepancy exists.

Traders do conversions when options are relatively overpriced. To put on the position, the trader would buy stock on the open market and sell the equivalent position in the option market. When the options are relatively under-priced, traders will do reverse conversions, otherwise known as reversals.

Theoretically, conversions and reversals have very little risk because the profit is locked in immediately.

The idea behind a conversion is to create what is known as a synthetic short position and offset it with a long position in the same underlying stock. The synthetic short position is created by selling a call and buying a put with the same strike price and expiration.

synthetic short position = short call + long put

Combining the synthetic short position with a long stock position creates a conversion:

Short call + long put + long stock

To see how this might work, imagine that a stock is trading at $104. At the same time, the options are priced as follows:

Option	Bid	Ask
August 100 call	7.60	7.75
August 100 put	3.35	3.50

In the absence of any price discrepancies, the following will be true:

Call price - put price = stock price - strike price

In other words, if the stock is trading for $104, the 100 calls - the 100 puts should equal $4. At the prices above, this calls and puts are relatively overpriced because the synthetic short position (short call and long put) can be done at 4.10.

Thus, by buying the stock for $104, selling the call for 7.60 (the bid) and buying the put for 3.50 (the offer), the trader will lock in an .1 point profit.

Individual investors and most other off-the-floor traders don't have an opportunity to do conversions and reversals because price discrepancies typically only exist for a matter of moments. Professional option traders, on the other hand, are constantly on the lookout for these opportunities. As a result, the market quickly returns to equilibrium.

Reversal

2008-10-07T08:19:00.000+07:00

Reversals are primarily a Floor Trader strategy. Sometimes, to capitalize on minor price discrepancies between calls and puts, floor traders and other professionals will put on a trade known as a reverse conversion or reversal. As the name implies, this is exactly the opposite of a conversion.

Like the conversion and other arbitrage strategies, the reversal involves buying something in one market and simultaneously selling it in another to capitalize on whatever small discrepancy exists.

Traders do reversals when options are relatively underpriced. To put on the position, the trader would sell stock on the open market and buy the options equivalent in the option market. When options are relatively overpriced, traders do conversions.

Theoretically, conversions and reversals have very little risk because the profit is locked in immediately. For this reason, traders will do conversions and reversals as many times as the market will allow.

The idea behind a reversal is to create what is known as a synthetic long position and offset it with a short position in the same underlying stock. The synthetic long position is created by buying a call and selling a put with the same strike price and expiration.

synthetic long position = long call + short put

Combining a synthetic long position with a short stock position creates a reversal:

long call + short put + short stock

To see how this might work, imagine that a stock is trading at $104. At the same time, the options are priced as follows:

Option	Bid	Ask
August 100 call	7.35	7.50
August 100 put	3.60	3.75

In the absence of any price discrepancies, the following will be true:

call price - put price = stock price - strike price

In other words, if the stock is trading for $104, the 100 calls - the 100 puts should equal $4. At the prices above, this calls and puts are relatively underpriced with the stock at $104 because the synthetic long position (long call and short put) can be purchased for 3.90.

Thus, by selling the stock at $104, buying the call for 7.50 (the offer) and selling the put for 3.60 (the bid), the trader will lock in a .1 point profit.

Naked Put

2008-10-07T08:17:00.001+07:00

Let's take the case of selling naked puts. When a put option is assigned, the seller (i.e., option writer) is obligated to buy shares at a fixed price, regardless of where the underlying market is. For example, the stock might be trading at $20, but if the strike price of the option is $45, the option seller must buy the stock from the put holder for $45 per share.

Given this scenario, it's easy to see why an individual investor would probably view selling naked puts as having limited reward and substantial risk. After all, the maximum profit that can be achieved is limited to the premium received from the sale of the options. A fund manager, on the other hand, might view the situation differently.

By selling slightly out of the money puts, one is able to buy the stock at a discount relative to where it currently trades if the stock moves down in price. At the same time, the position would have earned additional income from the premium associated with the options. If the stock advances, naked put writers haven't missed out entirely because they keep the premium collected from the options that expire worthless.

Example

To truly appreciate this strategy, let's look at the following hypothetical example. Imagine that you want to buy International Business Machines (IBM) but think it is due for a slight correction from its current price, $82.83. By selling the $80 puts at $5.10, you collect $510 ($5.10 x 100 shares) per contract. If the stock drops to $75 and the puts are assigned to you, you will pay $80 for the stock. However, your net cost is really $74.90 per share ($80 strike - $5.10 premium) � a relative bargain compared to buying the stock outright at $82.85!

New facility from Blogger

2008-10-02T12:17:00.001+07:00

Would you like to know who enjoys reading your blog? Or stay updated with your favorite blogs right from your Blogger dashboard? You can do those things and more with Blogger’s new Following feature.

By following your blog, your readers tell you and the world that they’re a fan of what you post. Your Dashboard now shows you how many followers each of your blogs has. With a click on the Followers icon, you can browse your followers, see what blogs they write, and read the other blogs they’re following.

Now that you know who your Followers are, you can show them off by adding the Followers gadget to your blog’s sidebar. From the “Layout | Page Elements” tab, click “Add a Gadget” and select “Followers” from the gadgets list. The Followers gadget shows the profile pictures of your followers and gives your readers a “Follow This Blog” link to join up, too.

Your followers can stay updated with your blog with the Reading List that we’ve added to the Blogger Dashboard. The Blogs I’m Following tab automatically shows the latest posts from all the blogs you follow. You can follow any blog from your reading list, even blogs that haven’t added the Followers widget or aren’t hosted on Blogger. Just click the “Add” button and type in the blog’s URL.

If you’re a Google Reader user, you’ll now see a special folder in Reader called “Blogs I’m Following,” full of the subscriptions for all of the blogs you follow. You can follow blogs you’ve subscribed to in Reader, too: From the Reading List on your Blogger Dashboard, click “Add,” then “Import from Google Reader.”

And.... there's more to come! We are also in the process of integrating with Google Friend Connect so you can give your readers more engaging social features.

For more details about what we've launched, check out the help articles here:

Call Back Spread

2008-09-05T14:45:00.001+07:00

Call back spreads are great strategies when you are expecting big moves in already volatile stocks. The trade itself involves selling a call (or calls) at a lower strike and buying a greater number of calls at a higher strike price. Ideally, this trade is initiated for a minimal debit or possibly a small credit. This way, if the stock heads south, you won't suffer much either way. On the other hand, if the stock takes off, the profit potential will be unlimited because you have more long than short calls. To maximize the potential for this position, many traders use in-the-money options because they have a higher likelihood of finishing in-the-money.

Example

Using International Paper (IP), a company that historically has been quite volatile, we can create a ratio back spread using in-the-money options.

In this case, you might buy two of the JUL 45 calls at $1.05 and sell one 40 call at $4.00.

IP trading @ $43.46
Buy	2 IP JUL 45 Call @ $1.05	$210
Sell	1 IP JUL 40 Call @ $4.00	($400)
Credit from Trade		($190)

In this case, you would receive $190 ((4.00 - 2.10) x 100 shares) for putting on the trade. If the stock dropped below $40, you would keep the $190. However, the real money would be made if the stock made a huge move to the upside. The upside breakeven for this trade would be $48.10. At this price, the 40 calls would be worth $8.10 (8.10 x 1) each while the 45 calls would be worth $6.20 (3.10x2). Factoring in the initial $190 credit, the ROI at this price would be 0. Above $48.10, the profit potential is unlimited.

Calculating the Breakeven

The easiest way to calculate the upside breakeven is by using the following formula:

Upside Breakeven = Long strike price + [(Long strike - short strike) x # of short contracts] - net credit/100*

*(or + net debit)

Using the data for this example, the breakeven calculation looks like this:

45 + [(45 - 40) x 1] - 190/100

The maximum loss for this trade would occur with the stock at 45 because the long calls would be worthless and the short call would be worth $5. Factoring in the initial credit of $190, the maximum loss on this trade would be $310 (1 contact x $5 x 100 shares - $190 credit).

Important

Before using Universal Broker's spread and combination one-step trading screens, options spread traders MUST understand the additional risks associated with this type of trading

Bull Put Spread

2008-09-05T14:44:00.000+07:00

When your feeling on a stock is generally positive, bull spreads are nice low risk, low reward strategies. One way to create a bull spread that you might not immediately consider is by using put options at or near the current market price of the stock.

Example

If you have a bullish short-term feeling about Coca Cola Co. (KO) when it is trading at $54.14, you might put on a bull put spread by selling the 55 put for $2.55 and buying the 50 put for $0.85. In this case, the maximum profit would be the $1,700 you received when you initiated the position.

The maximum loss would be the difference between strike prices less the $1,700 credit you received for putting on the trade. In this example, the maximum loss would be $3,300 (((55 - 50) x 1,000) - $1,700). For margin purposes, however, the maximum loss is considered to be the difference between strike prices-in this case $5,000-because that is the amount that must be available should the position reach a maximum loss.

KO trading @ $54.14
Sell	10 KO AUG 55 Put @ $2.55	($2,550)
Buy	10 KO AUG 50 Put @ $0.85	$850
Credit from Trade		($1700)

If you like the idea behind the bull put spread, be sure to check out bull call spreads and bear put spreads. These can be comparable strategies depending on your objectives.

Important

Before using Universal Broker's spread and combination one-step trading screens, options spread traders MUST understand the additional risks associated with this type of trading.

Bull Call Spread

2008-09-05T14:42:00.002+07:00

When your feeling on a stock is generally positive, bull spreads represent a nice low risk, low reward strategy. The easiest way to create a bull spread is using call options at or near the current market price of the stock. If the underlying stock is trading at $26, you could buy a 25 call and sell a 30 call.

Example

With DELL Trading at $26.85, you might buy one JUL 25 call and sell one JUL 30 call. By selling the 30 call, you lower your exposure, but you also lower your upside potential. You would have paid $2.95 for the 25 call and sold the 30 call for $0.50. In this case, your total cost-and the most you could lose-would be $245 ($2.95 x 100 - $0.50 x 100).

DELL trading @ $26.85
Buy	1 DELL JUL 25 Call @ $2.95	$295
Sell	1 DELL JUL 30 Call @ $0.50	($50)
Cost of Trade		$245

Your maximum profit is $255, the difference between the strike prices less the $245 you paid to put on the position. Even if the stock goes to 50, you still only stand to make $255 because while your 25 call is worth $25, the 30 call you sold is worth $20. To close the position, you would have to pay $20 for the 30 call when you sell the 25 call for $25. This limited upside is the price you pay for lowering your exposure (from $295 to $245) through the spread.

If you like the idea behind the bull call spread, be sure to check out bull put spreads and bear put spreads. These can be comparable strategies depending on your objectives.

Important

Before using Universal Broker's spread and combination one-step trading screens, options spread traders MUST understand the additional risks associated with this type of trading.

Protective Puts

2008-09-05T14:41:00.000+07:00

With the market volatility we've seen over the past few years, more investors are recognizing the value of using puts as part of their everyday trading strategy.

For investors who put money in the volatile Internet or biotech sectors, the rewards can be enormous. But so can the risks--if the stock price rises instead of falls, this strategy may limit the upside potential by the cost of the put. By adding put options to their overall investment strategy, investors can better position themselves for any direction the market may head.

Using protective puts is simple and can be relatively inexpensive given the insurance value. For each 100 shares of stock you buy, buy one protective put at a strike price or two below the current market price. For example, if you buy a stock at $50, you'd buy either the 47.5 put or the 45 put. That way, if the stock plummets, you'll be able to sell the stock for close to what you paid for it.

On the other hand, if the stock jumps as you hope, you'll participate fully in the upswing less the small amount you paid for the protective puts. In this way, the puts act as an insurance policy.

Example

Let's look at AMGEN INC. (AMGN) trading at $50.66. It would take $5,066 to buy 100 shares. If you buy the shares, your downside risk, theoretically, is $5,066, with a potentially unlimited upside reward. Buying one protective put (to cover all 100 shares) limits the amount you can lose, should the stock fall.

To see how this works, consider the following:

AMGN trading @ $50.66
Buy	100 AMGEN INC @ $50.66	$5,066
Buy	AMGN OCT 45 Put @ $2.55	$255
Cost of Trade		$5,321

No matter how far the stock drops, as long as there is a protective put, the combined position will be worth $4,245.

Rolling Your Options

As the stock moves higher, you might want to roll the put up by selling the contracts you own and buying another one at a higher strike price. This way, you can lock in profit from the move higher. Too many investors have learned the hard way that what goes up rapidly can drop with equal momentum. So, if the stock jumps from $50 to $122, the 45 puts won't provide much downside protection. That's why it would be advisable to lock in profits by rolling the puts up to the 115 or 120 strike.

Knol

2008-08-03T21:37:00.000+07:00

A few months ago, we announced a new web authoring tool called Knol.

Well, today we've announced its public launch, and we wanted to tell you a little bit more about it and how you might use it to complement your blog. Blogs are great for quickly and easily getting your latest writing out to your readers, while knols are better for when you want to write an authoritative article on a single topic. The tone is more formal, and, while it's easy to update the content and keep it fresh, knols aren't designed for continuously posting new content or threading. Know how to fix a leaky toilet, but don't want to write a blog about fixing up your house? In that case, Knol is for you.

Except for the different format, you'll get all the things you've come to expect from Blogger in Knol. Like Blogger, Knol has simple web authoring tools that make it easy to collaborate, co-author, and publish. It has community features as well: Your readers will be able to add comments and rate your article, and, if you want, they'll be able to suggest edits that you can then either accept or reject. And, just like in Blogger, you can also choose to include ads from AdSense in your knols to perhaps make a little money.

One other important difference between Knol and Blogger is that Knol encourages you to reveal your true identity. Knols are meant to be authoritative articles, and, therefore, they have a strong focus on authors and their credentials. We feel that this focus will help ensure that authors get credit for their work, make the content more credible.

All in all, we think Knol will be a great new way for you to share what you know, inform people about an issue that is important to you, raise your profile as an expert in your field, and maybe even make some money from ads

New Information from Blogger about SPAM

2008-08-03T21:35:00.000+07:00

You knew that already, and now we do too. We have now restored all accounts that were mistakenly marked as spam yesterday. (See: Spam Fridays)

We want to offer our sincerest apologies to affected bloggers and their readers. We’ve tracked down the problem to a bug in our data processing code that locked blogs even when our algorithms concluded they were not spam. We are adding additional monitoring and process checks to ensure that bugs of this magnitude are caught before they can affect your data.

At Blogger, we strongly believe that you own and should control your posts and other data. We understand that you trust us to store and serve your blog, and incidents like this one are a betrayal of that trust. In the spirit of ensuring that you always have access to your data, we have been working on importing and exporting tools to make it easier to back up your posts. If you'd like a sneak peek at the Import / Export tool, you can try it out on Blogger in Draft.

Our restoration today was of all blogs that were mistakenly marked as spam due to Friday's bug. Because spam fighting inherently runs the risk of false positives, your blog may have been mis-classified as spam for other reasons. If you are still unable to post to your blog today you can request a review by clicking Request Unlock Review on your Dashboard.

New Information about Paypal in Indonesian

2008-08-03T21:23:00.002+07:00

Hi everyone, I’m Vivian Hsiang, and I work on PayPal’s international products. I’m excited to tell you that PayPal is continuing to expand our presence around the globe. As you may remember, we recently announced PayPal’s expansion into 190 markets worldwide. We also added the ability to view PayPal.com in four languages including English, Spanish, French and simplified Chinese – allowing PayPal customers to shop online safely and easily in the language they prefer. New today, PayPal now offers account balance withdrawals to Visa-branded credit, debit, or prepaid cards in 26 international markets. This feature greatly improves the utility of PayPal accounts in these markets and is accomplished through an easy 3-step process.

This new feature is particularly valuable to PayPal account holders in markets where customers could use PayPal to send money, but had limited ways to receive or withdraw funds. A good example is Brazil. In the past, customers in Brazil could only withdraw funds via a paper check. Now, Brazilian account holders can withdraw money in a secure environment and have their funds available for online and offline purchases using their preferred Visa card.

It is also exciting for our Italian customers where local PostePay cards are widely used. The new withdrawal method gives them the freedom to easily move funds from their PayPal accounts to the payment cards they prefer to use online or offline.

This new functionality is available in: Argentina, Brazil, Bulgaria, Chile, Cyprus, Estonia, Gibraltar, Iceland, Indonesia, India, Israel, Italy, Latvia, Lichtenstein, Lithuania, Luxembourg, Malaysia, Malta, Philippines, Romania, San Marino, Slovakia, Slovenia, Turkey, UAE, and Uruguay.

At this time, only cards with the Visa or Visa Electron brands can be used.

Today’s news offers great opportunities for PayPal to become even more relevant to merchants in many of our international markets. We are constantly evaluating new functionality around the globe, so stay tuned and visit our PayPal Offerings Worldwide page for updates.

RESPONSE FROM INDONESIA

Hi Vivian, I am from Indonesia. I really happy with the news. At least we are from south east Asia specially from Indonesia can more productive in Internet Business with Paypal. By the way, can you please inform me, which Indonesian Bank that can be approved to their debit card?
Thanks.
Best regards,
Andi

Covered Calls-Bullish

2008-07-31T19:39:00.000+07:00

Covered calls are a way to earn additional income on your stock portfolio. For conservative investors, selling calls against a long stock position can be an excellent way to generate income.

Example

Let's imagine that you would like to purchase 100 shares of Disney (DIS) stock with the stock at $24.40. Pleased with the overall growth rate, you would like to hold the stock rather than sell it. Rather than just sitting back and collecting the Disney dividends, you can use options to generate additional income at minimal risk to you. You can do all of this in one transaction using our Covered Call screen.

With the stock at $24.40 you could sell one 27.5 call in the near month at $0.90. As each call is valid for 100 shares you are only able to sell one call.

DIS trading @ $24.40
Buy	100 DIS @ $24.40	$2,440
Sell	1 OCT 27.5 call @ $0.90	($90)
Cost of Trade		$2,350

Knowing the stock price hasn't fluctuated much, you might have confidence that it isn't going to move higher than $27.50 in the short term. After all, that would be a more than 10% move. At expiration, if the stock is still below $27.50, you keep the $90 you received by selling the calls and the 100 shares of stock. At that point, you might decide to write another call for a future month.

Should the stock rise unexpectedly above $27.50, you will have two choices. You can either buy the calls back and keep the stock. Or, you can let the stock be called away and sell your 100 shares (1 contract x 100 shares) at the strike price of $27.50. The good news, in this case, is that you participated in the rise from $24.40 to $27.50 on the 100 shares you sold at 27.5. In doing so, you locked in an additional $310 in profit. The bad news is that you may have capital gains tax issues to deal with-especially if you've owned the stock for a long time and your cost basis is low.

Using Near Month Options

When writing covered calls, most investors tend to sell near month options for two reasons. First, the earlier the expiration, the less opportunity the stock has to trade through the strike price. Second, and equally important, is the role time decay plays in the value of the options. Like all out-of-the-money options, the call in the example above has no intrinsic value. As such, the only value is the time premium or time value which, in the final month before expiration, decays more and more rapidly. For these reasons, investors often sell options that have one month remaining until expiration.

Long Call - Bullish

2008-07-31T19:37:00.000+07:00

Let's imagine you have a strong feeling a particular stock is about to move higher. You can either purchase the stock, or purchase 'the right to purchase the stock', otherwise known as a call option. Buying a call is similar to the concept of leasing. Like a lease, a call gives you the benefits of owning a stock, yet requires less capital than actually purchasing the stock. Just as a lease has a fixed term, a call has a limited term and an expiration date.

Example: Let's look at an example option. Microsoft (MSFT) is trading at $55.00, it would take $55,000 to buy 1000 shares of the stock. Instead of purchasing the stock you could purchase a MSFT "call option" with a strike price of 55 and an expiration 1 month in the future. For instance, in May you could Buy 10 MSFT JUN 55 Calls for $2.50. This transaction will enable you to participate in the upside movement of the stock while minimizing the downside risk of purchasing stock.

Since each contract controls 100 shares, you bought the right to purchase 1000 shares of Microsoft Stock for $55 per share. The price, $2.50, is quoted on a per share basis. As such, the cost of this contract is $2500 ($2.50 x 100 shares x 10 contracts).

MSFT trading @ $55.00
Buy	10 MSFT JUN 55 Call	$2,500
Cost of trade		$2,500

If the stock stays at or below $55 before the options expire, $2500 is the most you could lose. On the other hand, if the stock rises to $65 at expiration, the options will be trading around $10 (current price: $65 - strike price: $55). Thus, your $2500 investment will be worth $10,000 ($10 x 100 shares x 10 contracts).

If the stock price increases, the option gives you two choices: sell or exercise the call. Many investors choose to sell because it avoids the substantial cash outlay involved in exercising your call option. In the example above, to exercise you would pay $55,000 ($55 x 1000 shares) to buy the stock when you exercise the options. At a market price of $65, your shares would actually be worth $65,000. Not including commissions, you would have made a $7,500 profit on your $2500 investment ($10,000 - $2500).

Compare this to selling the options: you realize the same profit without spending the money to buy the shares. With the stock at $65, the Jun 55 calls would be worth $10 per contract. Thus, each option contract would have a value of $1,000 ($10 x 100 shares * 10 contracts). Not a bad return for a $2500 investment!

The scenario described above is a great example of the leverage that options provide. Just look at the returns on a percentage basis.

	Purchase $	Sale $	Profit	% Gain
Stock Price	$55	$65	$10	18.2%
1000 Shares	$55,000	$65,000	$10,000	18.2%
10 Jun 55 Calls	$2,500	$10,000	$7,500	300%

As the chart above demonstrates, if you bought 1000 shares of stock at $55, you would be putting $55,000 at risk. If you sold the stock when it rises to $65, you make $10,000 on your $55,000 investment, a 18.2% return. In contrast, investing $2500 in call options only puts $2500 at risk. In this case, the return is 300%.

Now, let's see what happens when the stock drops.

	Purchase $	Sale $	Profit	% Gain
Stock Price	$55	$45	($10)	(18.2%)
1000 Shares	$55,000	$45,000	($10,000)	(18.2%)
10 Jun 55 Calls	$2,500	$0	($2,500)	(100%)

While this scenario looks scary on a percentage basis, when you look at the raw numbers, it's clearly relative. If the stock drops, your calls may expire worthless, but your loss is limited to your initial investment, in this case $2,500. In contrast, the stockholder sustains a far larger dollar loss of $10,000. When you compare the limited downside and the unlimited upside potential of call options, it easy to see why they are such an attractive investment for bullish investors.

Volatility & Equity Options

2008-07-31T19:35:00.003+07:00

Successful equity option trading requires opinions on three variables concerning the underlying stock: expected price direction, timing of the expected move, and the stock's future volatility. Although most investors appreciate the importance of a formed opinion on price movement and timing when selecting an option, it is consideration of the stock's future volatility that is usually ignored or not understood.

What is volatility? Mathematically, volatility is the annualized standard deviation of daily returns. A simple definition, however, is the fluctuation of stock prices without regard to direction. Big average daily stock price changes (up or down, in percentage terms) means high volatility, and small average daily price changes means low volatility.

To be able to make a forecast of a stock's future volatility we need to have an understanding of the role that volatility plays when pricing an option. The easiest way to accomplish this is comparing the pricing of an option contract to the pricing of an insurance contract.

Options can serve as insurance policies? In a manner of speaking, yes. Just as the insurance policy owner desires to transfer the risk of owning real property to someone else at a fee, an investor can purchase an option contract to protect their cash or stock positions against market fluctuations by paying a premium to someone else to assume the risk. Because of the leverage options convey, many investors assume they are meant only for speculation. By definition, however, options are instruments of risk transfer. They evolved because of a need for protection, or insurance, against wild price fluctuations in agricultural markets. To understand further how options work as insurance products, consider the following two examples.

Through the purchase of equity puts on a share-for-share basis with owned stock, an investor has the right to sell the underlying stock at a fixed price for a specific length of time. This right to sell may protect the owner of the underlying stock against a decline in price until that option's expiration. By purchasing equity calls, an investor has the right to buy the underlying stock at a fixed price for a specific length of time. This right to buy may insure a cash position against a price increase in the underlying stock until the option's expiration. Although the put protects against a "real loss" and the call against an "opportunity loss," both types of options may protect an investor from unfavorable events, acting as insurance polices in every respect.

To continue the comparison, both the insurance company and the options marketplace must consider risk when establishing a contract's premium. Insurance companies hire actuaries to evaluate the potential risk of writing policies. When would an actuary's job be the most difficult? Consider an actuary sitting in a client's home with a hurricane expected to arrive in hours trying to evaluate the risk factor for the homeowner's policy. In this case, the actuary could justify inflating the policy's premium because of the potential for damage that the hurricane's winds pose. If the hurricane suddenly diverted its course away from the house, the risk would diminish considerably and the actuary might price the policy at a more modest level.

As with an insurance policy, potential risk is considered in the pricing of an option contract; however, the risk comes from the possible price fluctuations of the underlying stock, i.e. its volatility. A market maker pricing that option in the marketplace makes a forecast of the stock's future volatility.

When might pricing an equity option be difficult? Imagine a market maker pricing an option on the underlying stock of a company expected to announce earnings the next week. A discrepancy between the analysts' expectations and the announced earnings could cause the stock price to fluctuate dramatically. The market maker might inflate the option's premium in order to offset this potential volatility risk. If after the earnings are announced there is reduced uncertainty about future stock price changes, the market maker could justify lowering the option's premium.

Taken to another level, volatility can be considered three ways. First, there is historical volatility, which is simply the measure of actual stock price fluctuations in the past. Second, there is forecasted volatility, or an estimate of the future volatility in an underlying stock. Third, there is implied volatility, or the volatility assumption that results in the actual price of an option in the marketplace. It reflects a consensus of the marketplace as a whole on the forecasted volatility of an underlying stock.

Using this new vocabulary let's apply it to an example. Companies which are in the headlines are frequently the favorites of speculators buying options. When doing so many will have opinions on just price direction and timeframe, and pay little attention to implied volatility. Consider this scenario.

With the historical volatility of XYZ stock at 27%, a XYZ 30-day at-the-money call option was initially trading at an implied volatility of 25%. However, because of a recent 2 for 1 stock split announcement by XYZ, the implied volatility of the option contract had risen to 40%. As a result of this increase, the option contract, which previously traded for $1 �, or $150, was now trading for $2 �, or $250. News of the split prompted a speculator to purchase this option with the expectation of reselling the contract at a 100% return on investment in a week's time. However, the speculator did not consider implied volatility and paid $250 for an option contract which had historically been trading for $150. In this case, after the initial reaction to the news subsided, the implied volatility returned to historical volatility levels, resulting in a decrease in the option's premium. Although fluctuation in an option's premium is often the result of movement in the stock price, the fluctuation of this option's premium was the result of movement in its implied volatility. Because of implied volatility fluctuation, the speculator must now wait for a larger movement in the stock's price to reach the investing goal of 100% return.

Understanding how volatility affects option premiums enables traders to complete a three-part forecast: expected price direction of the underlying, timing of the expected move, and the stock's future volatility. Although there is no guarantee that a forecast will be correct, including a prediction on the stock's future volatility in the decision-making process gives traders an improved chance of achieving their intended results.

Volatility

2008-07-31T19:35:00.001+07:00

If you are unfamiliar with the concept of volatility, you might want to review the previous section on pricing options.

Implied Volatility

Before we examine the ways professional traders use volatility in conjunction with theoretical pricing models, it's important to note that these calculations are all done by computer programs. What typically happens is that traders plug their volatility assumptions into the computer and have instant access to theoretical option values at a wide range of stock prices.

Although not all traders rely on models, those that do use a volatility assumption, usually based on a historical value, as a barometer for where they believe options should be trading. At the same time, traders monitor the actual market prices to determine what is known as implied volatility. By plugging real-time option prices into a theoretical model (instead of a volatility assumption), the same equation can be used to calculate the volatility of each option. For example, while the 90 day volatility of a stock may be 25%, the current option prices may imply higher or lower volatilities even for the same expiration month.

Stock XYZ Corp:

Price $54 per share
Historical Volatility: 25%

Option	Implied Volatility
Sep 40 call	18%
Sep 45 call	23%
Sep 50 call	38%
Sep 55 call	42%
Sep 60 call	27%
Sep 65 call	29%

Some professional traders have sophisticated programs that continually monitor the implied volatilities of every exchange traded option looking for options that are significantly underpriced or overpriced relative to their historical volatility. These options are then either bought or sold and hedged against other options or stock. In the example above, if a program determined that the volatility of the September 55 call (42%) was statistically significant relative to other options, the trader might decide to sell the 55 calls and buy the 40 or 45 calls as a hedge.

Trader Psychology

2008-07-31T19:34:00.000+07:00

Discipline

Anyone seriously interested in trading would do well to buy a copy of Jack Schwager's books Market Wizards and The New Market Wizards. Through interviews and conversations with America's top traders, Jack extracts the wisdom that separates successful traders from those who, through their trading, simply add to the wealth of successful traders.

One of the key factors mentioned by almost every good trader is discipline. Discipline, as you might imagine, takes a variety of forms. For beginning traders, one of the toughest challenges is to keep trades small. Believe it or not, more than a few top traders don't allow any one position to account for more than 1% of their total portfolio. Linda Bradford Raschke, one of the traders featured in The New Market Wizards, attributes much of her success to managing risk in this way. As a result, her average trade, at the time the interview, had a profit of only $450. At the same time, her average loss was only $200. Keeping her position small didn't impede her profit though. By remaining disciplined, she earned over $500,000 trading that year.

Limiting Your Losses

Another aspect of trading that involves discipline is limiting your losses. Here, there isn't a magic formula that works for everyone. Instead, you have to determine your own threshold for pain. Whatever you decide, stick to it. One of the biggest mistakes people make is to take a position with the intention that it be a short-term trade. Then, when the position goes against them, they make a seamless and unprofitable transition from trader to long-term investor. More than a few people have gone broke waiting for the trend to reverse so they could get out at break-even. If you are going to trade, you have to be willing to accept losses--and keep them limited!

Another mistake novice traders make is getting out of profitable positions too quickly. if the position is going well, it isn't healthy to worry about giving it all back. If that's a concern, you might want to liquidate part of the position or use options to lock in your profit. Then, let the rest of it ride. Mark Ritchie, one of the founders of CRT, an extraordinarily profitable Chicago-based trading company, once kept a trade on for 4 years because it kept working for him. Not every trader has that kind of patience. And not every trader makes as much money as Mark Ritchie.

It isn't uncommon for people to view trading as a fast-paced, exciting endeavor. Fast-paced? Absolutely. Exciting? Now that's a matter of opinion.

The Importance of Remaining Even-Tempered

More than a few traders interviewed in The New Market Wizards emphasize the importance of remaining unemotional and even-tempered. To these people, trading is a game of strategy that has nothing to do with emotion. Emotion, for these traders, would only cloud their judgment.

In the book, Charles Faulkner, a Neuro-Linguistic Programming trainer talks about one trader who was extremely emotional. Although Faulker was able to show him how to be less emotional and more detached, it became quickly apparent didn't enjoy being emotionally unattached. He found it boring. Unfortunately, emotion involvement in trading comes at a high price. Before too long, that trader went broke. The morale of the story is simple: If you insist on being emotionally attached to your trading, be prepared to be physically detached from your money.

Acceptance and Responsibility

One of the most interesting interviews in the book was with Robert Krausz, a member of the British Hypnotist Examiners Council who specializes in working with traders. According to Krausz, one of the biggest mistakes traders can make is to agonize over mistakes. To beat yourself up for something you wish you hadn't done is truly counterproductive in the long run. Accept what happens, learn from it and move on.

For the same reason, it's absolutely crucial to take responsibility for your trades and your mistakes. If you listen to someone else's advice, remember that you, and you alone, are responsible if you act on the advice.

Another Way to View Losses

Perhaps the most striking example of emotional distance in trading mentioned in Schwager's book was attributed to Peter Steidlmayer who reacts to positions that go against thinking to himself, "Hmmm, look at that." If only we could all be that calm!

Of all the emotions we could possibly experience, fear and greed are possibly the two most damaging.

Fear

Of all the emotions that can negatively impact your trading, fear may be the worst. According to many of the traders interviewed in The New Market Wizards, trading with scared money is an absolute recipe for disaster. If you live with the constant fear that the position will go against you, you are committing a cardinal sin of trading. Before long, fear will paralyze your every move. Trading opportunities will be lost and losses will mount. To help deal with your fear, keep in mind what fear is:

Confidence

The flip side of fear is confidence. This is a quality that all great traders have in abundance. Great traders don't worry about their positions or dwell on short-term losses because they know they will win over the long term. They don't just think they'll win. And they don't just believe they'll win. They KNOW they'll win. As Linda Bradford Raschke put it, "It never bothered me to lose, because I always knew that I would make it right back." That's what it takes.

To Talk or Not to Talk

For many traders, sharing opinions and taking a particular stance only magnifies the stress. As a result, they begin to fear being wrong as much as they fear losing money. Although it may be one of the hardest lessons to learn, the ability to change your opinion without changing your opinion of yourself is an especially valuable skill to acquire. If that's too hard to do, the alternative may prove much easier: Don't talk about your trades.

Greed

Greed is a particularly ugly word in trading because it is the root cause of more than a few problems. It's greed that often leads traders to take on positions that are too large or too risky. It's greed that causes people to watch once profitable positions get wiped out because they never locked in profits and instead watched the market take it all back.

Part of the remedy for greed is to have, and stick to, a trading plan. If you faithfully set and adjust stop points, you can automate your trading to take the emotion out of the game. For example, let's say you are long the 50 calls in a stock that rises more rapidly than you ever expected. With the stock at $77, the dilemma is fairly obvious. If you sell the calls, you lock in the profit but you eliminate any additional upside potential. Rather than sell the calls, you might buy an equal number of 75 puts. The $25 profit per call that you just locked in will more than offset the cost of the puts. At the same time, you've left yourself open to additional upside profit.

Gradual Entry and Exit

Another strategy successful traders use is to gradually get in and out of positions. In other words, rather than putting on a large trade all at once, buy a few contracts and see how the position behaves. When it's time to get out, you can use the same strategy. Psychologically, the problem people have implementing this strategy is that it takes away the "right" and "wrong" of the decision making process. It's impossible to be completely right or completely wrong using this strategy because, by definition, some of the trades will be put on at a better price than others.

Awareness & Instincts

For floor traders especially, instincts often play a crucial role in trading. To truly appreciate this, just close your eyes and imagine making trades in a fast market with dozens if not hundreds of people screaming around you. In this environment, it becomes absolutely essential to maintain a high level of awareness about everything going on around you. Then, to have the confidence to pull the trigger when necessary, you have to trust your instincts. It's absolutely amazing to see how some floor traders, even in a busy market, know exactly who is making what trades. For these traders, expanded awareness is often a necessary prerequisite to fully developing and trusting their instincts.

The same is true for off-the-floor traders as well. Watching how markets behave and developing a feel for the price fluctuations is truly time well spent. Unfortunately, in this era of technology, people have become so removed from their natural instincts that many are no longer in touch with their intuition. This is unfortunate because intuition functions as a wonderful inner guidance system for those who know how to use it.

One trader interviewed by Jack Schwager in The New Market Wizards relies so heavily on his intuition that he didn't want his name in the book for fear his clients would be uncomfortable with his strategy and move their money elsewhere. Speaking anonymously, he described in detail how he establishes a rhythm and "gets in sync" with the markets. In this way, he has learned to distinguish between what he "wants to happen" and what he "knows will happen." In his opinion, the intuition knows what will happen. With this knowing, the ideal trade is effortless. If it doesn't feel right, he doesn't do it.

When he doesn't feel in sync with the markets, this trader will virtual trade until he feels back in rhythm. But even here, he keeps his ego and emotion out of it. His definition of out of sync is completely quantifiable. Being wrong three times in a row is out of sync. Three mistakes and it's back to the virtual trading. Now there's a strategy almost everyone can benefit from.

Time & Risk

2008-07-31T19:33:00.004+07:00

Quick changes can speed you forward or take the wind out of your sails.

Volatility is the speed with which an investment gains or loses value and the frequency of those changes. The more volatile an investment is, the more you can potentially make or lose in the short term.

For example, equities tend to change price more quickly than most fixed-income investments (bonds and bank deposits). But it's not always that simple. The price of stock in large, well-established companies tends to change more slowly than stock in smaller, or newer, companies. And the more predictable a company's business, the slower the price fluctuation is apt to be.

There are other factors to consider, too. Low�rated, high-yield bonds, often known as junk bonds, and some bond funds fluctuate in price at least as often as stocks, and offer some of the same opportunities for gain � and loss. Junk bonds may provide higher income than other bonds in the short term but are more likely to default on their obligations to pay principal and interest, just as some speculative stocks may lose all their value.

Time and Risk

Volatility poses the biggest investment risk in the short term. Sometimes if you wait, and hold onto your equity investments until a market downturn ends and recovery begins, its effect may be reduced. Similarly, if you hold onto your bond investments until maturity, changing market values have no impact on their par value or their interest payments.

Volatility may pose several serious problems, though. If you have been planning to sell an investment to pay for the down payment on a home, college tuition, or any other goal, you may not have enough to cover your costs if its price has fallen dramatically. Or, you may be so concerned over the falling value of your investments that you sell. Not only does that lock in your loss, but you'll no longer own the investment. If its price rebounds, you can't share in its potential recovery. But, of course, your investment may not recover even if the market rebounds.

Historically, major drops in the stock market � including market crashes and bear markets, when the value of stocks drops 20% or more � have been ultimately followed by a period of recovery. If you look at the big picture, you'll discover that what seems to be a huge drop in price often evens out when it is part of a long-term pattern.

Another way to deal with volatility is to capitalize on it. If an equity increases dramatically in value, you can sell it and make another investment. Then, if the price of the equity you sold drops, you can buy it again and wait to see if the cycle will repeat itself. The one investment strategy that's pretty much doomed to failure is trying to time the market, or predict what the stock and bond markets are going to do next so you can be in the right place at the right time. The reason? It can't be done. Or at least nobody has been able to do it successfully over a period of time.

Watching the Movement

If you recognize a certain trend in stock prices, you may be able to turn it to your advantage. For example, some investments, known as cyclicals, move in identifiable patterns, up in certain economic climates and down in others.

If you invest when a cyclical stock is down and sell when it's up, you benefit from the movement. One problem, of course, is knowing when to get in and out.

Other investments are more volatile and less predictable. For example, technology stocks (and the mutual funds that invest in them) jumped dramatically in value during 1995. But in the years before that many of them performed rather poorly.

Reading the Wind

The range between an investment's high and low price over a period of time � often a year � is one measure of its volatility. The smaller the percentage of change the less volatile the investment.

For example, a stock that increases in value from $15 a share to $20 a share over the course of a year has a 33.3% volatility rate, while a stock that increases from $45 to $50 over the same period has a volatility rate of 11.1%. The assumption is that a stock that increases by a large percentage could easily fall by the same percentage, providing a potential loss.

One strategy some investors use to avoid volatility is to sell stock when its price increases or drops a predetermined percent, often in the range of 10% to 20%. One way to handle this approach is to put in a limit order, an instruction to your broker or advisor to sell any investment automatically when it drops to the level that you set.

No Pain, No Gain
Illogical as it may seem, predictability is sometimes a bigger stumbling block to achieving your long�term investment goals than volatility. For example, the rate of return on a bank issued certificate of deposit (CD) is predictable. The problem is that while what you earn on the CD may be higher than the return on a stock, bond, or mutual fund during a market downturn, it doesn't have the potential to increase in value. When the CD matures, you can roll the principal and interest into a new CD at whatever the current rate is. But you can't sell the CD for more than you paid for it, and you can't earn more than the current rate that's being offered. What's more, while what you can earn on a CD increases when interest rates are high, your real rate of return, after taxes, is rarely greater than the rate of inflation.

Volatility's Reward

Don't get the mistaken impression that volatility is to be avoided at all costs. It can work in your favor at least as dramatically as it can work against you. In fact, a strong stock market often produces rapidly increasing prices in a relatively short time. That, in turn, can increase the value of your investment portfolio.

Leveling Out Your Risk
You can neutralize the impact of volatility with a buying strategy known as dollar cost averaging. Using this approach, you invest the same amount regularly in a specific investment, such as a mutual fund, paying whatever the going price is. When the price goes up, your dollars buy fewer shares. When it goes down, they buy more. The effect, over time, can be to lower the cost of the average share of stock or mutual fund you buy, so that you end up with more shares for less money. But remember that while dollar cost averaging has advantages if you invest consistently over time, it doesn't guarantee a profit or protect you from losses in a falling market.

Selling Short

2008-07-31T19:33:00.001+07:00

Some stock investors take added risks in the hope of greater returns.

Not all stock trades are straightforward buys or sells. There are several strategies you can use to increase your gains, though they also increase your risk of incurring losses. Among these strategies are selling short and buying warrants. Both are based on a calculated wager that a particular stock will change in value, either dropping quickly in price � for a short sale � or increasing, for a warrant.

How Short Selling Works

While most investors buy stocks they think will increase in value, others invest when they think a stock's price is going to drop, perhaps substantially. What they do is described as selling short.

To sell short, you borrow shares you don't own from your broker, order them sold and pocket the money. Then you wait for the price of the stock to drop. If it does, you buy the shares at the lower price, turn them over to your broker (plus interest and commission) and keep the difference.

For example, you might sell short 100 shares of stock priced at $10 a share. When the price drops, you buy 100 shares at $7.50 a share, return them to your broker, and keep the $2.50-a-share difference � minus commission. Buying the shares back is called covering the short position. In this case, because you sold them for more than you paid to replace them, you made a profit. And you didn't have to lay out any money to do it.

You borrow 100 shares at $10 per share from your broker
You sell the shares at the $10 price getting $1,000
	You profit if stock price drops	You lose if stock price rises
Stock price	$7.50	$12.50
Shares you owe your broker	100 Shares	100 Shares
Your cost to pay back the shares	$750	$1,250
Profit or loss	$250 profit	$250 loss

What are the Risks?

The risks in selling short occur when the price of the stock goes up � not down � or when the drop in price takes a long time. The timing is important because you're paying your broker interest on the stocks you borrowed. The longer the process goes on, the more you pay, and the more the interest expense erodes your potential profit.

An increase in the stock's value is an even greater risk. If it goes up instead of down, you will be forced � sooner or later � to pay more to cover your short position than you made from selling the stock. That means you lose money.

Squeeze Play

Sometimes short sellers are caught in a squeeze. That happens when a stock that has been heavily shorted begins to rise. The scramble among short sellers to cover their positions results in heavy buying, which drives the price even higher.

Short Interest Highlights

Trading activity in stocks that have been sold short on the New York Stock Exchange and the American Stock Exchange and not yet repurchased is described as short interest. The volume of short interest gives you a sense of how many investors expect prices to fall, and the stocks they expect to be affected.

Selling short often increases when the market is booming. Short sellers believe that a correction, or drop in market prices, has to come, especially if the overall economy does not seem to be growing as quickly as stock values are rising. But short selling is also considered a bullish sign, or a predictor of increased trading, since short positions have to be covered.

The average daily volume, which is the average number of shares sold short each trading day during the month, and the percentage change during the month are reported in the financial press for each company that has had at least 550,000 shares sold short or a change of short interest of at least 250,000 shares in the month.

In addition, graphs track the recent history of short interest and summary tables provide the names of the companies with the largest short positions and the greatest change. You may also find a graph showing the short interest ratio. That's the number of days it would take to cover the short interest in selected stocks if trading continued at a consistent pace.

Buying Warrants

Like a short sale, a warrant is a way to wager on the future price of a stock - though a warrant is less risky. Warrants guarantee, for a small fee, the opportunity to buy stock at a fixed price during a specific period of time. Investors buy them if they think a stock's price is going up.

For example, you might pay $1 a share for the right to buy a stock at $10 within five years. If the price goes up to $14 and you exercise, or use, your warrant, you save $3 on every share you buy. You can then sell the shares at the higher price to make a profit [ $14 - ($10 + $1) = $3 ], or $300 on 100 shares.

Companies sell warrants if they plan to raise money by issuing new stock or selling stocks they hold in reserve. After a warrant is issued, it can be listed in the stock columns and traded like other investments. A wt after a stock table entry means the quotation is for a warrant, not for the stock itself.

If the price of the stock is below the set price when the warrant expires, the warrant is worthless. But since warrants are less expensive than purchasing the stock outright and have a relatively long lifespan, they are traded actively.

Pricing Options

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The Key Factors in Determining an Options Price

To anyone just becoming familiar with options, understanding how options are priced can be one of the greatest challenges. Until the early 1970s, only cumbersome mathematical models existed to help traders determine the theoretical value of an option. Since these models involved complex equations and market prices changed constantly, they didn't prove especially practical.

In 1973, two University of Chicago mathematics professors, Fischer Black and Myron Scholes devised a model that even today remains a standard for many option traders. The Black-Scholes Model, as it is known, was such an important advancement that the professors earned a Nobel Prize for their work.

Theoretical Value

The Black-Scholes Model, or any model for that matter, is not always representative of what happens in real life. Models are limited by the numerical inputs used to calculate the theoretical value of an option. They will never be able to take into consideration qualitative factors like market sentiment. For this reason, the theoretical prices and actual market prices may bear little resemblance.

Having said that, let's look at the quantitative factors that impact an option's theoretical value:

Strike Price and Intrinsic Value

The strike price plays a significant role in the market price of an option because it determines whether an option has any intrinsic value. For example, if the underlying stock is trading at $84 an 80 call will have $4 of intrinsic value because it gives the call owner the right to buy the stock for $80. At the same time, the 80 put will have no intrinsic value because it doesn't make sense to sell a stock for $80 when it can be sold for $84 on the open market. In this situation, whatever value the put has will be purely extrinsic (time) value.

As you can see on the table below, the closer an option is to the current stock price, the more extrinsic value it has. Conversely, the further in- or out-of-the-money the option is, the lower its extrinsic value.

AT&T Corporation (NYSE: T)
Stock Price: 19.00

Option	Price	Intrinsic Value	Extrinsic (Time) Value
Calls
Dec 12.50	6.60	6.50	0.10
Dec 15.00	4.20	4.00	0.20
Dec 17.50	1.90	1.50	0.40
Dec 20.00	0.55	-	0.55
Dec 22.50	0.15	-	0.15
Dec 25.00	0.10	-	0.10

Jan 12.50	6.70	6.50	0.20
Jan 15.00	4.40	4.00	0.40
Jan 17.50	2.05	1.50	0.55
Jan 20.00	0.75	-	0.75
Jan 22.50	0.25	-	0.25
Jan 25.00	0.10	-	0.10
Puts
Dec 12.50	0.05	-	0.05
Dec 15.00	0.10	-	0.10
Dec 17.50	0.35	-	0.35
Dec 20.00	1.50	1.00	0.50
Dec 22.50	3.70	3.50	0.20
Dec 25.00	6.10	6.00	0.10

Jan 12.50	0.10	-	0.10
Jan 15.00	0.15	-	0.15
Jan 17.50	0.65	-	0.65
Jan 20.00	1.90	1.00	0.90
Jan 22.50	3.90	3.50	0.40
Jan 25.00	6.30	6.00	0.30

Deep-in-the-money options tend to move on in tandem with the underlying stock. Thus, when the stock moves $1, the option value also changes by $1. With deep out-of-the-money options, the situation is a bit different. Since it would take a significant move in the underlying stock to increase the likelihood that a deep out-of-the-money option finishes in the money, people aren't usually willing to pay much for them. As a result, they tend to have low extrinsic value. At the same time, these options have no intrinsic value.

Time Remaining Until Expiration

Unlike the strike price of an option which remains fixed, the time remaining until expiration changes over the life of the option. As an option approaches expiration, the time value tends to decrease more rapidly. The rate at which an option loses value is often referred to as theta.

Time value is also known as extrinsic value because it represents the premium people are willing to pay above and beyond an option's intrinsic value. For example, in the table below, a December 20 call for AT&T is considered out-of-the-money because the strike price (20) is higher than the current market price ($19.00). As such, the price of the December 20 call ($0.55) consists exclusively of time value.

AT&T Corporation (NYSE: T)
Stock Price: 19.00

Option	Price	Intrinsic Value	Extrinsic (Time) Value
Calls
Dec 12.50	6.60	6.50	0.10
Dec 15.00	4.20	4.00	0.20
Dec 17.50	1.90	1.50	0.40
Dec 20.00	0.55	-	0.55
Dec 22.50	0.15	-	0.15
Dec 25.00	0.10	-	0.10

Jan 12.50	6.70	6.50	0.20
Jan 15.00	4.40	4.00	0.40
Jan 17.50	2.05	1.50	0.55
Jan 20.00	0.75	-	0.75
Jan 22.50	0.25	-	0.25
Jan 25.00	0.10	-	0.10
Puts
Dec 12.50	0.05	-	0.05
Dec 15.00	0.10	-	0.10
Dec 17.50	0.35	-	0.35
Dec 20.00	1.50	1.00	0.50
Dec 22.50	3.70	3.50	0.20
Dec 25.00	6.10	6.00	0.10

Jan 12.50	0.10	-	0.10
Jan 15.00	0.15	-	0.15
Jan 17.50	0.65	-	0.65
Jan 20.00	1.90	1.00	0.90
Jan 22.50	3.90	3.50	0.40
Jan 25.00	6.30	6.00	0.30

Not surprisingly, the January 20 call is worth more than the December 20 call because it has an additional month of time value before expiration. In other words, because the stock has an extra month to move beyond the 20 strike price, people are willing to pay more for the January 20 call than for the December 20 call.

At-the-Money vs. Out-of-the-Money

Another important point to notice on the table above is the relationship between the strike price and the time value of the options. With the stock at 19.00, the 20 strike is considered the most at-the-money. For puts and calls alike, this strike has the highest time value. As we move further away from the current stock price, in either direction, the time value decreases. For example, the deep in-the-money December 12.50 calls have only 0.10 cents in time value while the at-the-money December 20 calls have 0.55 cents.

This makes sense when you consider that the time value is nothing more than the price that people are willing to pay for the chance that an option will finish in-the-money. An option that is far out-of-the-money with almost no chance of finishing in-the-money won't command a particularly high price. Similarly, an option that is already deep-in-the-money can be readily exercised and converted to stock. For these reasons, the contracts that tend to trade most frequently are the options that are at or near-the-money. In a sense, these strike prices command a higher extrinsic value because there is more uncertainty as to whether or not the options will finish in-the-money.

Price of the Underlying Stock

The price of the underlying stock impacts option prices in a number of ways. First, and most basic, the relationship between the stock price and a given strike price determines whether an option has intrinsic value, extrinsic value, or both.

When the strike price is below the current market price, calls will have intrinsic value and puts will not. In the table above, the January 12.50 calls have 6.50 points of intrinsic value while the January 12.50 puts have no intrinsic value at all. Like the January 12.50 calls, the December 12.50 calls have 6.50 of intrinsic value (19.00 - 12.50), but less extrinsic value (0.10 vs.0.20) because there is less time remaining on the contract. In some cases, deep-in-the-money options have intrinsic value but no extrinsic value. In this situation, the options are said to be trading at parity. For example, if the December 12.50 calls were priced at 6.50 rather than 6.60, they would be at parity.

Hedging and Theoretical Value

When using a theoretical model like Black-Scholes, the exact price of the underlying is important because it impacts the price traders are willing to pay for any given option. For example, it isn't enough to know that the stock is trading at $45.50 because a trader may need to buy or sell stock to offset option contracts. For example, if the market for the stock is really 45.25 - 45.50, a trader will only receive 45.25 selling the stock. Thus, the option values should be based on a stock price of 45.25 rather than 45.50. This seemingly small spread can make the difference between a profitable and an unprofitable trade.

Volatility of the Underlying Stock

The volatility of the underlying stock may be the most important factor in pricing options because unlike the other numerical inputs which have an exact value, volatility can only be known with certainty from a historical standpoint. At any given moment, the strike price, the current market price, and a few relatively minor factors we haven't examined yet (i.e., prevailing interest rates, stock dividends) are all exact numbers that people know and agree upon. With volatility, that isn't the case.

What is volatility?

In simplest terms, volatility is the tendency of a stock to fluctuate and the likelihood that it will be within a particular price range at a specific moment in time. The higher the volatility, the more prone a stock is to large price swings. Conversely, low volatility stocks tend to show a history of stable prices.

Low Volatility

Some stocks, like utilities, tend to be relatively stable over time because their earnings are relatively predictable. People who invest in these stocks often do so for the slow, steady growth and consistent dividends. At the same time, they want secure investments they don't have to monitor everyday. With these low volatility stocks, the daily price changes are generally fractional. While the long-term trend may be up, the short term trend may even appear to be sideways. A good example of this is Ameren (NYSE: AEE), a large Midwestern utility. Looking at Ameren from the point-of-view of an options trader, we see a 52-week range between $46.50 and $37.43. Given this level of stability, even an untrained chart reader could predict the price range over the subsequent months with a high degree of accuracy. Considering the low likelihood that the stock would deviate from this pattern of low volatility, the market for options on this stock was quite small in terms of volume and price. This is confirmed by the options chain:

Ameren (NYSE: AEE)
Stock price: 44.67

Calls	Price	Vol.	Puts	Price
Dec 40	4.90	0	Dec 40	0.25
Dec 45	0.80	0	Dec 45	1.50
Dec 50	0.20	0	Dec 50	6.10
Mar 40	5.00	0	Mar 40	0.65
Mar 45	1.15	0	Mar 45	2.60
Jun 40	5.00	0	Jun 40	1.15
Jun 45	1.55	10	Jun 45	3.30
Jun 50	0.30	0	Jun 50	7.30

High Volatility

Other stocks, like Internet and biotechs tend to have larger daily price swings. The bigger the price swings, the more volatile the stock. When assessing stock volatility, traders look at a particular period of time (e.g., 90 days). However, it may be necessary to look at volatility over a shorter period, particularly when recent developments change the long-term outlook for a company.

From an options trading standpoint, it makes sense that people would be willing to pay more for options on a stock that has a higher likelihood of making a profitable move during the life of the option. As we can see, that's exactly what happens.

Let's take EBAY, Inc. (Nasdaq: EBAY) as an example. Here's a stock that had some fairly significant price swings in a relatively short period of time. The 52-week range on this stock was from $30.88 to $61.60. Given this level of volatility, it stands to reason that options on this stock would be significantly more expensive than they would for a stable utility like Ameren. Again, this is confirmed by the option chain:

EBAY, Inc. (Nasdaq: EBAY)
Stock price: 56.35

Calls	Price	Vol.	Puts	Price	Vol.
Dec 40	16.60	149	Dec 40	0.15	120
Dec 45	11.70	173	Dec 45	0.25	233
Dec 50	7.20	413	Dec 50	0.80	177
Dec 55	3.60	517	Dec 55	2.20	34
Dec 60	1.45	103	Dec 60	5.00	0
Dec 65	0.50	477	Dec 65	9.10	0
Dec 70	0.15	9	Dec 70	13.80	13
Jan 40	16.80	9	Jan 40	0.35	0
Jan 45	12.20	47	Jan 45	0.65	223
Jan 50	8.00	10	Jan 50	1.50	100
Jan 55	4.60	47	Jan 55	3.10	67
Jan 60	2.30	149	Jan 60	5.90	16
Jan 65	1.05	14	Jan 65	9.70	10
Jan 70	0.50	30	Jan 70	14.00	7

As you might imagine, there are several advantages to trading options on volatile stocks. As we've already discussed, there is a greater likelihood that the options will finish in-the-money. Although the options tend to be more expensive, they also tend to be more liquid. This is an important consideration because whether you are getting in or out of the market, you want to get the best price. The more frequently the contracts trade, the more likely that market competition will maintain a tight bid-ask spread.

If for some reason, the actual volatility of the options decreases, the options will lose value faster than their less volatile counterparts. However, that's a known risk most traders are willing to take. In fact, many traders make their fortunes selling options when volatility is high and covering their positions when the market becomes less volatile.

Position Management

2008-07-31T19:30:00.000+07:00

efore establishing any position it's important to establish a few guidelines for yourself:

Are you trading with money you can afford to lose?

The importance of this cannot be overstressed. If you have already earmarked the money for another use, it is not advisable to invest it in a risky position--even for a short term trade. Every day the market extracts money from people who can't afford to lose it. Don't be one of them.

Is the position you intend to put on sufficiently small that it won't have a major impact on your portfolio?

This is a guideline novice traders routinely violate. Experienced traders caution people against putting on positions that will have devastating results if the market moves the wrong way. Some traders go so far as to say that positions should be so small that putting them on seems almost meaningless. Typically, the percentage of your portfolio associated with this would be 1/2% to 1%. Keep in mind though that this applies to traders more than long-term investors. This is not to say that investors wouldn't benefit from the same advice. They probably would. It's just that a disciplined approach is particularly beneficial to option traders who could easily lose their entire investment.

What is your specific objective for this position? What is your exit strategy?

These issues are inter-related so we will examine them together.

First, whenever you put on a position, it's important to set a price target along with a strategy for what happens when you get there. For example, if you are convinced a particular Internet stock is hugely overvalued (imagine that!) and due for a correction, you might decide to buy a long put either at-the-money or slightly out-of-the-money. If the market behaves as you predict and the price drops, you have to decide how far to let your profits run and at what point to take profits.

If the stock drops 50% and your put is now deep in-the-money, this might be a good time to take profits. On the other hand, if you think the stock is still overvalued, you could buy a slightly out of the money call and let the put ride. For example, if the stock dropped from $100 to $49 and you own the 95 put, you could lock in your profit by buying a 50 call. This way, if the stock goes back up, what you lose in the put will be made up by the call. If the stock continues to drop as you hope, the put will increase in value and the call will expire worthless. Whatever you decide, it's good to have your strategy thought out in advance. This helps to take the emotion out of it.

What is your downside risk?

With option spreads and other advanced strategies, your maximum loss may be more than your initial investment. Before entering into any trade, it's important to know your maximum profit, maximum loss, and break-even. Trading surprises are seldom pleasant.

Modifying and Managing a Position

Depending on market conditions, option investors may need to modify their positions either to lock in profits or protect themselves from adverse moves.

Protecting Your Profits

Taking the easiest example, let's imagine you bought a long call and watched with interest as the stock rallied. How can you protect what is now a paper profit? Considering the additional stock commissions involved in exercising the option, we'll disregard this as a strategy and focus on other alternatives.

The dilemma whenever a position makes money is when to take profits and when to let profits ride. By selling the call, you lock in profits, but you may miss additional upside. On the other hand, if you sit tight, the stock could pull back below the strike price. In this case, you would lose your additional investment as well as your paper profit. Fortunately, there are other alternatives.

Now, let's imagine you bought an AT&T August 35 call for 1.75 when the stock was trading at 33.38. Shortly afterwards, the stock rallied to 42 where your call was worth 8.5. Rather than sell the call, lock in the profit and walk away (which is a perfectly acceptable strategy), you might sell the 35 call and buy the September 45 call for 1.5. The profit you make on the Aug 35 call will more than cover your investment in the September 45 call. As long as the stock climbs, you can continue to lock in profits by rolling your options to higher strike prices and subsequent months.

The other possibility would be to transform the position into a bull spread by holding the August 35 call and selling the August 45 call. With AT&T at $42, the August 45 call will probably be trading around 1.35. By selling the 45 call, you effectively own a 10 point bull spread for .4 of a point (1.75 - 1.35). If the stock continues to rise, 10 points (less your .4 point investment) will be your maximum profit. Should the stock suddenly drop back below $35, the most you can lose would be .4 point or $40.

The important point to note is that the riskiest course of action is to do nothing because your initial investment remains at risk along with any paper profits you have generated.

Limiting Your Losses

Let's imagine you bought an AT&T August 35 call for 1.75 when the stock was trading at 33.38. Shortly afterwards, the stock dropped to $30 where your call was only worth $1. If you sell the call, you may limit your losses, but you'll also eliminate the opportunity to profit from a rebound in the stock. On the other hand, if you sit tight, the stock might never regain strength in which case you'll lose your initial investment. Here again, there are other alternatives.

Rather than sell the call, lock in the loss and walk away (which is a perfectly acceptable strategy), you might consider selling two August 35 calls at 1 and buying one Aug 30 call for 2.65. This way, you will create a bull spread using the 30 strike because you will be long one 30 call and short one 35 call. Thus, for an additional .65 investment, you now have increased the likelihood that the position will be profitable. Before, the stock would have had to go over 36.75 for you to make a profit. Now, the break even is 32.35.

The other possibility would be to transform the position into a calendar spread by holding the August 35 call and selling the July 35 call at .75. This course of action would make sense if you expected the price to remain depressed through July but expected a rally shortly afterwards. Ideally, the short July 35 call would expire worthless and the stock would rally as expected. If the stock rallies before July expiration, the price differential between the July and August 35 calls may be limited as will your profit potential. In contrast, if the stock fails to gain strength, your maximum loss using this strategy is significantly less than it was before you put on the calendar.

Here again, the riskiest course of action is to do nothing because the full value of your initial investment remains at risk.

LEAPS Strategies

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The purchase of LEAPS puts to hedge a stock position may provide investors protection against declines in stock prices. This strategy is often compared to purchasing insurance on one's home or car, and may give investors the confidence to remain in the market. The amount of protection provided by the put and the cost of the protection, sometimes evaluated as a percentage of the stock's cost, should be considered.

For example, ZYX is trading at 45 and a ZYX LEAPS put with a three-year expiration and a strike price of 42.5 is selling for 3.5 or $350 per contract. These puts provide protection against any price decline below the break-even point, which for this strategy is 39 (strike price less the premium). The investor's risk or maximum loss is limited to the total amount paid for the put options or $350 per contract. The following are possible outcomes of this strategy at expiration.

Stock above the break-even point

If ZYX is trading at 48 at expiration, the unexercised put would generally expire worthless, representing a loss of the option premium or $350 per contract.

Stock below the strike price

The put would be profitable if the stock closed below 39 at expiration. If ZYX is trading at 37.5 at expiration, the 42.5 put, upon exercise, would have a value of 5 or $500, representing a profit of 1.5 points or $150 per contract. This profit will partially offset the decline in the value of the stock.

Stock between the strike price and the break-even point

If ZYX is trading at 41.5 at expiration, the 42.5 put would be valued at approximately 1. This means that, upon exercise, a portion of the option premium would be retained and the loss would then be 2.5 points or $250 per contract. If the contract is not exercised or sold, the investor will lose all of the initial investment, or $350 per contract.

Sell LEAPS Covered Calls

The covered call, which is selling (writing) a call against stock, is a widely used conservative options strategy. This strategy is utilized to increase the return on the underlying stock and to provide a limited amount of downside protection.

The maximum profit from an out-of-the-money covered call is realized when the stock price, at expiration, is at or above the strike price. The profit is equal to the appreciation in the stock price (the difference between the stock's original purchase price and the strike price of the call) plus the premium received from selling the call.

Investors should be aware of the risks involved in a covered call strategy. Call writers cannot realize additional appreciation in the stock above the strike price since they are obligated, upon assignment, to sell the stock at the call's strike price. The downside protection for the stock provided by the sale of a call is equal to the premium received in selling the option. The covered call writer's position will begin to suffer a loss if the stock price declines by an amount greater than the call premium received.

The following example illustrates a covered call strategy utilizing an out-of-the-money LEAPS call. ZYX is currently trading at 39.5, and a ZYX LEAPS call option with a two-year expiration and a strike price of 45 is trading at 3.25.

An investor owns 500 shares of ZYX at $39.5 per share and sells five of ZYX LEAPS calls with a strike price of 45 at 3.25 each or a total of $1,625. The investor's objective is to obtain profits without selling the stock. The break-even point for this covered call strategy is 36.25 (the stock price of 39.5 less the premium received of 3.25). This represents downside protection of 3.25 points. A loss will be incurred if ZYX declines to below 36.25. Possible outcomes of this strategy at expiration are as follows.

Stock above the strike price

If ZYX advances to 50 at expiration, the covered call writer, upon assignment, will obtain a net profit of $875 per contract (the exercise price of 45 less the price of the stock when the option was sold plus the option premium received of 3.25 X 100).

Stock below the break-even point

If ZYX is trading at 34 at expiration, the unexercised LEAPS calls would generally expire worthless and the unassigned covered call writer would have a theoretical loss of $1,125 (a present theoretical loss of $2,750 on the stock position less the $1,625 premium received). This investor will incur additional losses in his/her stock position if ZYX continues to decline in value.

Stock between the strike price and the break-even point

If ZYX advances to 40 at expiration, the LEAPS calls will be out-of-the-money. Therefore, the call writer will generally not be assigned and exercised, and will retain the 500 shares of ZYX and the option premium of 3.25 per share.

LEAPS Contract Specifications

Unit of Trade: Generally 100 shares of stock per unadjusted contract.

Premium (Price) Quotations: Stated in points and fractions; one point equals $100. The minimum price change for series trading below 3 is .05 ($5) and for all other series is .10 ($10) per contract.

Exercise: Equity LEAPS are American-style options. The option may be exercised prior to the expiration date.

Exercise Settlement: A holder that tenders an exercise notice on any business day will receive delivery of the underlying stock on the fifth business day following the date of exercise. The exercise settlement price equals the strike price multiplied by 100 (multiplier) for unadjusted series.

Expiration Cycle: Equity LEAPS expire in January of each year.

Expiration Date: Expiration occurs on the Saturday following the third Friday of the expiration month.

Position Limits: LEAPS positions are aggregated with other options with the same underlying asset. Limits vary according to the number of outstanding shares and trading volume. Hedge exemptions may be available. Contact exchanges for details.

Trading System: Market Maker/Designated Primary Market Maker/Lead Market Maker/Specialist/Registered Option Trader (depending on the exchange).

Leaps

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LEAPS ( Long Term Equity Anticipation Securities) merupakan Opsi jangka panjang , jangka waktu 1 tahun atau lebih dan selalu expired di bulan Januari.

Jika ingin memiliki suatu saham, nasabah mempunyai pilihan dengan memiliki LEAPS saja. Jadi tidak perlu membeli sahamnya tetapi cukup LEAPS nya saja ( LEAPS Call ). Atau jika ngin memproteksi suatu saham dari kerugian yang besar , nasabah bisa memiliki LEAPS Put untuk memproteksi dalam jangka panjang ( 1 tahun atau lebih).

While using LEAPS does not ensure success, having a longer amount of time for your position to work is an attractive feature for many investors. In addition, there are several other factors that make LEAPS useful in many situations.

Stock Alternative

LEAPS offer investors an alternative to stock ownership. LEAPS calls enable investors to benefit from stock price rises while placing less capital at risk than is required to purchase stock. Should a stock price rise to a level above the exercise price of the LEAPS, the buyer may exercise the option and purchase shares at a price below the current market price. The same investor may sell the LEAPS calls in the open market for a profit.

Diversification

Investors also use LEAPS calls to diversify their portfolios. Historically, the stock market has provided investors significant and positive returns over the long term. Few investors purchase shares in each company they follow. A buyer of a LEAPS call has the right to purchase shares of stock at a specified date and price up to three years in the future. Thus, an investor who makes decisions for the long term can benefit from buying LEAPS calls.

Hedge

LEAPS puts provide investors with a means to hedge current stock holdings. Investors should consider purchasing LEAPS puts if they are concerned with potential price drops on stock that they own. A purchase of a LEAPS put gives the buyer the right to sell the underlying stock at the strike price up to the option's expiration.

What's the Downside?

If you are a buyer of LEAPS calls or LEAPS puts, the risk is limited to the price you paid for the position. If you are an uncovered seller of LEAPS calls, there is unlimited risk, or a seller of LEAPS puts, significant risk. Risk varies depending upon the strategy followed, and it is important for an investor to understand fully the risk of each strategy.

Stock Versus LEAPS

There are many differences between an investment in common stock and an investment in options. Unlike common stock, an option has a limited life. Common stock can be held indefinitely, while every option has an expiration date. If an option is not closed out or exercised prior to its expiration date, it ceases to exist as a financial instrument. As a result, even if an option investor correctly picks the direction the underlying stock will move, unless the investor also correctly selects the time frame that movement will take place, the investor will not profit as desired.

Options investors run the risk of losing their entire investment in a relatively short period of time and with relatively small movements of the underlying stock. Unlike a purchase of common stock for cash, the purchase of an option involves "leverage," whereby the value of the option contract generally will fluctuate by a greater percentage than the value of the underlying interest.

How LEAPS Work

LEAPS are simply long-term options that expire at dates up to 2 years and 8 months in the future, as opposed to shorter-dated options that expire within one year.

LEAPS grant the buyer the right to buy, in the case of a call, or sell, in the case of a put, shares of a stock at a predetermined price on or before a given date. Equity LEAPS are American-style options, and therefore may be exercised and settled in stock prior to the expiration date. The expiration date for Equity LEAPS is the Saturday following the third Friday of the expiration month.

LEAPS are quoted and traded just like any other exchange listed option. In fact, many of the features of LEAPS are the same for shorter-term options:

Number of shares covered by the contract (100)
Exercise and assignment procedures
Trading procedures
Margin and commission costs

Availability of LEAPS

Several factors impact the availability of LEAPS. When options are listed for trading on a particular stock, most times LEAPS are not immediately available. After a period of time, and if interest warrants it, the exchanges listing the shorter-term options may decide to list LEAPS options, after consulting with the market-makers or specialists assigned to trade the stock options. The reason for this is that LEAPS options are difficult to price because of their long life. The exchanges ensure that sufficient interest is present in the market, and that market-makers or specialists are prepared to price and trade longer-dated options once they are listed. The result is that LEAPS are not available on every stock which has options traded on it. LEAPS are initially listed with three strike prices, at the current price and 20 to 25% above and below the price of the underlying stock. Strikes may be added as the underlying stock moves. LEAPS only have one expiration month: January in two different years.

As LEAPS draw within one year of their expiration and it becomes necessary to list new LEAPS series, the existing LEAPS options continue to be listed and traded until their expiration. However, because of the shorter length of time until expiration, they then trade as ordinary shorter-term options and they lose their distinctive LEAPS symbols. New LEAPS options with expiration dates in the future are then added.

LEAPS Pricing

Options pricing models contain five factors that are used to determine a theoretical value for an option: stock price, strike price, time to expiration, interest rates (less dividends) and volatility of the underlying stock.

With shorter-term options, it is fairly straightforward to use an interest rate which approximates the "risk-free" interest rate; most people use the U.S. Treasury-bill rate (90-day). However, to price a LEAPS option, it is necessary to predict the volatility (expectation of price fluctuation) of the underlying stock and interest rates over 2 1/2 years; this is difficult even for most professionals.

In short, pricing longer-term options is more difficult than pricing shorter-term options. Of the five factors mentioned above, interest rates play a more significant role in the pricing of longer-dated options, due to the length of time involved. For these reasons, professionals are not ready to instantly quote prices of options with maturity dates far into the future, since the predictability of the inputs is so much more unreliable than for shorter-term options.

Despite these difficulties, investors will find that exchange policies generally require market-makers and specialists to offer quotations (both bid and offer) for up to 10 contracts. This allows investors to find a market for LEAPS whenever the decision is made to use them.

LEAPS Symbols

In order to differentiate LEAPS from shorter-dated options, LEAPS have a different set of symbols for retrieval on quotation systems. While other options have fixed symbols, LEAPS symbols change to reflect the expiration year.

Motorola (MOT)

Option	Symbol	LEAPS Option	Symbol
OCT ('02) 15 call	MOT JC	JAN ('04) 15 LEAPS call	LMA AC
JAN ('03) 15 call	MOT AC	JAN ('05) 15 LEAPS call	ZMA AC
APR ('03) 15 call	MOT DC

This feature makes it easy to distinguish a longer-term option from a shorter-term option in data listings.

Time Erosion vs. Delta

One of the most challenging aspects of shorter-term options is the erosion of the "time premium" portion of the option's price. Time premium refers to the amount of the option's price that exceeds its intrinsic value. As an option nears its expiration date and the time period shortens, the marketplace is less and less willing to pay any premium over intrinsic value until, at expiration, an option is trading purely for intrinsic value.

As a seller of shorter-term options, time premium erosion works in your favor. Conversely, the option buyer has to overcome the erosion of time premium to make a profit from a long option position. The graph below is a representation of theoretical time erosion for longer-dated options:

Any stock or options symbol displayed are for illustrative purposes only and are not intended to portray a recommendation to buy or sell a particular security.

As you can see from the graph, time erosion of options premium is not linear (i.e. it does not occur in a straight line). The mathematical reasons for this are complex, but the result is that the erosion of time premium in the earlier months of an option's life is much less dramatic than the erosion that occurs in the last few months. Because of the long time frame of LEAPS options, this effect is even more pronounced. The time erosion that occurs in the first several months of a LEAPS option is minimal.

However, when LEAPS options become shorter-term options (time to expiration is less than one year), they behave like all other shorter-term options, as the graph shows. Time erosion becomes more pronounced and has a greater impact, especially in the last 90 days of the option's life.

What does this mean to options investors? Buyers of LEAPS options have less time premium erosion to fight than buyers of shorter-dated options. The tradeoff, however, is that LEAPS options offer less "leverage." The deltas of LEAPS options will not increase dramatically as with shorter-dated options since there is so much time remaining until expiration. Any increase in option value due to an increase in the price of the underlying stock will be tempered by this lower "gamma" effect.

The slow time erosion will frustrate LEAPS sellers. However, the premiums available to writers, because of the increased time in LEAPS options, can provide a good rate of return in covered writing and other strategies.

Buy LEAPS Calls

An investor anticipates that the price of ZYX stock will rise during the next two years. This investor would like to profit from the increase without having to purchase shares of ZYX.

ZYX is currently trading at 50.5 and a ZYX LEAPS call option, with a two-year expiration and a strike price of 50, is trading for a premium of 8.5 or $850 per contract. The investor buys five contracts for a total cost of $4,250, which represents the total risk of the call position. The calls give the investor the right to buy 500 shares of ZYX between now and expiration at $50 per share regardless of how high the price of the stock rises. To be profitable, though, at expiration, the stock must be trading for more than 58.5, the total of the option premium (8.5) and the strike price of 50. The buyer's maximum loss from this strategy is equal to the total cost of the options or $4,250. The break-even point for this strategy is 58.5.

The following are possible outcomes of this strategy at expiration.

Stock above the break-even point

If ZYX advances to 65 at expiration, the LEAPS will have a value of approximately 15 (the stock price of 65 less the strike price of 50). The investor may choose to exercise the calls and take delivery of the stock at a price of 50, or may sell the LEAPS calls for a profit.

Stock below the strike price

If ZYX, at expiration, is trading for less than the strike price, or below 50 in this example, the unexercised calls will expire worthless. In this case, the investor will incur the maximum loss of $4,250.

Stock between the strike price and the break-even point

If ZYX, at expiration, has risen to 56, the calls will be valued at approximately 6 (the stock price of 56 less the strike price of 50) and will represent a partial loss given the break-even point of 58.5. The calls purchased by the investor for 8.5 will, upon exercise, then be worth approximately 6, creating a loss of 2.5 points or $250 per contract. If the investor does not exercise or sell these options, the investor will lose all of the initial investment, or $850 per contract.

Prior to expiration, the LEAPS may trade at a price that is somewhat higher than the difference between the 50 strike price and the actual stock price This difference is due to the remaining time value of the contract and the possibility that the stock price may increase by expiration. Time value is one of the components of an option premium and generally decreases as expiration approaches.

Options Greeks

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When traders talk about "the Greeks," they are referring to the different ways risk can be measured as it relates to a particular option or position. A different Greek letter (e.g., delta, gamma, vega) corresponds with each unique measurement. Together, these analytical tools enable traders to manage risk. Of these, the delta is one of the most common. Often, you'll see strategies or positions referred to as delta neutral. According to the theoretical pricing models, a delta neutral strategy has essentially no risk from market movement. In other words, the market could go up or down and the position will continue to perform as expected provided that certain predictable adjustments are made along the way.

The risk measures presented here are:

The delta, derived from a theoretical pricing model like Black-Scholes, is a number between 0 and +/-100 that has a variety of different uses and interpretations including:

A hedge ratio
Change in price of an option given a $1 change in the underlying stock
The probability that an option will finish in-the-money

The table below shows call and put deltas over a range of strike prices. Note that the at-the-money 105 strike has 48 and -52 deltas for calls and puts respectively. Deep in-the-money deltas approach +/-100 while far out-of-the-money deltas approach 0.

Stock Price: $104
37 days to expiration

Option	Delta	Option	Delta
70 Call	100	70 Put	-1
75 Call	97	75 Put	-3
80 Call	91	80 Put	-9
85 Call	85	85 Put	-15
90 Call	78	90 Put	-21
95 Call	68	95 Put	-32
100 Call	59	100 Put	-40
105 Call	48	105 Put	-52
110 Call	37	110 Put	-63
115 Call	27	115 Put	-73
120 Call	18	120 Put	-82
125 Call	10	125 Put	-90
130 Call	6	130 Put	-93
135 Call	2	135 Put	-99

Hedge Ratio

Traders who use the delta as a hedge ratio do so to know how many shares of stock to buy or sell in order to establish a theoretically riskless hedge. By doing so, they are able to establish a position that should make money regardless of market direction.

Before establishing a hedge, it's important to remember the following:

The delta of a stock position is always in a 1:1 ratio with the number of shares (in other words, 100 shares of stock have a 100 delta)
Calls have a positive delta
Puts have a negative delta

Position	Delta
Long 100 shares of stock	+ 100
Short 100 shares of stock	- 100
Long 1 call (45 delta)	+ 45
Short 1 call (55 delta)	- 55
Long 1 put (70 delta)	- 70
Short 1 put (60 delta)	+ 60

Like other arbitrage strategies, delta neutral strategies are often used to capitalize on price discrepancies in the market. If the delta of a call option is 45 and the trader wants to stay delta neutral, it will be necessary to sell 45 shares of the underlying stock for every call contract purchased. Similarly, if the calls are sold, stock will have to be purchased to create a neutral hedge. As the stock price moves, the option delta also changes. For this reason, it may be necessary to adjust the position by buying or selling stock to remain delta neutral.

Initial Position	Delta
Stock Price: $35
Long 1 40 call	38
Sell 38 shares @ $35	-38
Position Deltas	0

With a stock trading at $35, let's imagine that your theoretical pricing model shows 40 calls offered $0.75 below their theoretical value. Since each contract represents 100 shares, this adds up to a theoretically riskless profit of $75 per contract. To lock in this profit, you would buy the 40 calls (with a 38 delta) and sell 38 shares of stock for every 40 call you purchased. In this way, you establish a delta neutral position.

Stock Price: $39

Position	Delta
Long 1 40 call	49
Short 38 shares @ $35	-38
Position Deltas	+11
Adjustment
Sell 11 shares @ $39	-11
Adjusted Delta	0

Later, if the stock jumps to $39 and the 40 call delta increases to 49, it will be necessary to sell an additional 11 shares of stock to remain delta neutral.

Stock Price: $30

Position	Delta
Long 1 40 call	+ 25
Short 38 shares @ $35	- 38
Short 11 shares @ $39 (from adjustment)	- 11
Delta	- 24
Adjustment
Buy 24 shares @ $30	+ 24
Adjusted Delta	0

If the stock plummets from $39 to $30 and the delta of the 40 call drops to 25, it will be necessary to buy 24 shares (49 - 25) to remain delta neutral.

Throughout the life of the position, ongoing adjustments may be necessary to maintain the risk neutral position. At expiration, any out-of-the-money options expire worthless, any in-the-money options are sold (or exercised), and any long or short stock position is liquidated. At that point, the net result of all the trades should approximate the $75 profit per contract predicted by the model. This is the essence of how delta neutral trading works.

Now, let's examine how traders use delta to measure the change in price of an option as the underlying moves.

The Delta as a Measure of Changing Option Prices

One of the other common uses of the delta is as a measure of the change in an option's value given a $1 change in the underlying. For example, imagine that a stock trading at $75 has at the money options with the following prices and deltas.

Stock Price: $75

Option	Price	Delta
75 Call	$ 5	+ 52
75 Put	$ 4.75	- 48

If volatility and all other factors remain the same and the stock price rises to $76, the price of the options will change by the amount of the deltas. More specifically, the call price will increase by $0.52 and the put price will decrease (because of the negative delta) by $0.48. Thus, the new option prices will be $5.52 and $4.27 respectively.

It is important to note that the delta of the 75 call and 75 put changes as the stock price moves. If you think in the case of an large price move, $10 for example, this makes sense. If the 75 put delta didn't change, a $10 price increase would imply that the put value would drop by $4.80 ($10 per share x -.48) bringing the value to -$0.05. That, however, is impossible because options never have negative prices. With the stock at $85, the 75 put will be worth significantly less than $4.75, but it will still have a positive value.

Deep In- and Out-of-the-Money Options

While the deltas of at-the-money options tend to hover near 50, the deltas of deep in- and out-of-money options tend to approach +/-100 and 0 respectively.

Using the example above, a 50 call might be considered deep in-the-money with the stock at $75. As such, it's value would consist primarily of its $25 of intrinsic value. For this reason, deep in-the-money options tend to move in tandem with the underlying stock. For example, a 100 delta option implies a $1 move in the price of the option for every $1 move in the underlying stock. Therefore, if the stock price dropped from $75 to $73, the 50 call would drop from $25 to $23.

Deep out-of-the-money options, the 50 put for example, have deltas that approach 0. In other words, since the option has no intrinsic value and as little as 1/16 of time value, it would take more than a $1 move in the stock to have an impact on the value of the put. In this case, it might take a $5 drop in the stock price to get the 50 put as high as 1/8.

With these examples in mind, it will be easy to understand the third interpretation that views the delta as a probability.

The Delta as Probability

Although purists might argue that the delta was not intended as a probability, there are many who view the delta as the likelihood that an option will finish in-the-money.

Consider the following option chain where deltas have been substituted for prices:

Stock Price: $104
37 days to expiration

Option	Delta	Option	Delta
70 Call	100	70 Put	-1
75 Call	97	75 Put	-3
80 Call	91	80 Put	-9
85 Call	85	85 Put	-15
90 Call	78	90 Put	-21
95 Call	68	95 Put	-32
100 Call	59	100 Put	-40
105 Call	48	105 Put	-52
110 Call	37	110 Put	-63
115 Call	27	115 Put	-73
120 Call	18	120 Put	-82
125 Call	10	125 Put	-90
130 Call	6	130 Put	-93
135 Call	2	135 Put	-99

First, let's look at the at-the-money options. In this case, the closest strike to $104 is the 105 strike. Here, we see that the 105 calls have a + 48 delta while the 100 puts have a -52 delta. When viewing delta as a probability, it doesn't matter whether the value is positive or negative. Only the number is important. Thus, the 52 delta of the put can be interpreted as a 52% probability the option will finish in-the-money. Considering the option is already $1 in-the-money with the stock at $104, it makes sense that the option would have a slightly better than even chance of finishing in-the-money. Similarly, the 105 call has a slightly less than even chance of finishing in-the-money. More precisely, the probability is 48%.

At every strike, the sum of the call and put deltas--all taken as a positive number--add up to approximately 100.

Deep In- and Out-of-the-Money Deltas

Looking at the 135 strike, we see the call and put deltas at 2 and 99 respectively. With the stock at $104, this can be interpreted to mean there is a 99% probability the 135 put will finish in the money. At the same time, there remains an outside probability (roughly 2%) the stock will rally above 135 so the 135 calls finish in the money. Not great odds no matter how you look at it.

How Deltas Behave Closer to Expiration

The closer the options get to expiration, the more the deltas tend to approach 0 and +/-100. Using the example above, if we fast forward from 37 until expiration to just 9 days, the deltas for each strike are markedly different. For the sake of comparison, we'll assume the stock price didn't move during the 28 days.

Stock Price: $104

Option	Delta	Delta	Option	Delta	Delta
	Days to Expiration			Days to Expiration
	37	9		37	9
70 Call	100	100	70 Put	-1	0
75 Call	97	100	75 Put	-3	0
80 Call	91	100	80 Put	-9	0
85 Call	85	99	85 Put	-15	-1
90 Call	78	95	90 Put	-21	-5
95 Call	68	87	95 Put	-32	-13
100 Call	59	71	100 Put	-40	-29
105 Call	48	48	105 Put	-52	-52
110 Call	37	26	110 Put	-63	-74
115 Call	27	10	115 Put	-73	-89
120 Call	18	3	120 Put	-82	-97
125 Call	10	1	125 Put	-90	-99
130 Call	6	0	130 Put	-93	-100
135 Call	2	0	135 Put	-99	-100

As you can see, the further the option is out-of-the-money, the more its delta approaches 0 or +/- 100. Looking at the at-the-money 105 strike, we see that the deltas remain exactly the same. However, just one strike away, the 100 calls gain 12 deltas, while the 100 puts lose 11 deltas. Similarly, the out-of-the-money 110 calls lose 11 deltas. In other words, with only 9 days remaining until expiration, the probability that the 110 calls would finish in-the-money is only 26%. Just 28 days earlier, the same option had a 37% probability of finishing in-the-money.

A few strikes away, the difference is even more pronounced. The 125 calls which once had a 10% probability of finishing in-the-money now have only a 1% probability of doing so. Conversely, the 125 put now has a 99% probability of finishing in the money whereas before the probability was only 90%.

Pin Risk

It sometimes happens that the stock price at expiration is exactly the same as one of the strike prices. In the example above, if the stock closed at $105 on expiration, the 105 calls and puts would technically have a 50 delta up until the moment of expiration because the stock's next move, theoretically, has an equal probability of being up or down.

If it becomes apparent the stock will settle on a particular strike price, traders generally get out of the position if they are short options at the strike because they have no way to know how many contracts on which they will be assigned. This uncertainty is known as pin risk because they may find themselves unexpectedly short or long if they receive an assignment notice and the stock moves sharply against them.

Although gamma, as a risk measurement, is more useful to professionals who manage large positions, an understanding of the concept can certainly enhance every investor's knowledge and appreciation of option behavior.

The gamma measures the change in delta of an option as the underlying price changes. Perhaps the best way to understand this is to look again at the delta across a range of strike prices.

Stock Price: $104
37 days to expiration

Option	Delta	Option	Delta
65 Call	100	65 Put	0
70 Call	100	70 Put	-1
75 Call	97	75 Put	-3
80 Call	91	80 Put	-9
85 Call	85	85 Put	-15
90 Call	78	90 Put	-21
95 Call	68	95 Put	-32
100 Call	59	100 Put	-40
105 Call	48	105 Put	-52
110 Call	37	110 Put	-63
115 Call	27	115 Put	-73
120 Call	18	120 Put	-82
125 Call	10	125 Put	-90
130 Call	6	130 Put	-93
135 Call	2	135 Put	-99
140 Call	0	140 Put	-100

As you can see in the table above, the deltas range from 0 to +/-100. As the price of the underlying stock changes, the option deltas also change. The amount these deltas change is referred to as the gamma. More specifically, gamma is the change in delta for every point change in the underlying.

What is important to notice in the table below in the way gamma increases near the at-the-money strike and decreases as you get further from the current stock price in either direction. For demonstration purposes only, we'll assume that the gamma is, on average, 1/5 the difference between the deltas of the 2 strikes.

Stock Price: $104
37 days to expiration

Option	Delta	Gamma	Option	Delta	Gamma
65 Call	100	0	65 Put	0	0.2
70 Call	100	0.6	70 Put	-1	0.4
75 Call	97	1.2	75 Put	-3	1.2
80 Call	91	1.2	80 Put	-9	1.2
85 Call	85	1.4	85 Put	-15	1.2
90 Call	78	2.0	90 Put	-21	2.2
95 Call	68	1.8	95 Put	-32	2.4
100 Call	59	2.2	100 Put	-40	2.4
105 Call	48	2.2	105 Put	-52	2.2
110 Call	37	2.0	110 Put	-63	2.0
115 Call	27	1.8	115 Put	-73	1.8
120 Call	18	1.6	120 Put	-82	1.6
125 Call	10	0.8	125 Put	-90	1.4
130 Call	6	0.8	130 Put	-93	1.2
135 Call	2	0.4	135 Put	-99	0.2
140 Call	0	0	140 Put	-100	0

Looking at the at-the-money 105 strike, the calls have delta of 48 while the puts have a -52 delta. A gamma of 2.2 for these options suggests that the delta is going to change by +2.2 for every point increase in the underlying. For simplicity, we'll round the gamma to 2.0. If the stock moves from $104 to $105, the 105 call and put will have 50 (48 + 2) and -50 (-52 + 2) delta respectively.

Although it might seem confusing that gamma is positive for both calls and puts, it begins to make sense when you look at the big picture. As the stock price increases, the call deltas increase and approach 100. Meanwhile, the deltas of the puts also become more positive as the stock price increases. Only this time, because puts have a negative delta, the more positive the delta, the closer it will be to zero.

How Gamma Behaves Closer to Expiration

Using the example above, if we fast forward from 37 to 9 days before expiration, the deltas and gammas for each strike are markedly different. For the sake of comparison, we'll assume that the stock price didn't move during the 28 days

Stock Price: $104

Option	Delta	Gamma	Delta	Gamma	Option	Delta	Gamma	Delta	Gamma
	Days to Expiration					Days to Expiration
	37	37	9	9		37	37	9	9
65 Call	100	0	100	0	65 Put	0	0.2	0	0
70 Call	100	0.6	100	0	70 Put	-1	0.4	0	0
75 Call	97	1.2	100	0	75 Put	-3	1.2	0	0
80 Call	91	1.2	100	0.2	80 Put	-9	1.2	0	0.2
85 Call	85	1.4	99	0.8	85 Put	-15	1.2	-1	0.8
90 Call	78	2.0	95	1.6	90 Put	-21	2.2	-5	1.6
95 Call	68	1.8	87	3.2	95 Put	-32	2.4	-13	3.2
100 Call	59	2.2	71	4.6	100 Put	-40	2.4	-29	4.6
105 Call	48	2.2	48	4.4	105 Put	-52	2.2	-52	4.4
110 Call	37	2.0	26	3.2	110 Put	-63	2.0	-74	3.0
115 Call	27	1.8	10	1.4	115 Put	-73	1.8	-89	1.6
120 Call	18	1.6	3	0.4	120 Put	-82	1.6	-97	0.4
125 Call	10	0.8	1	0.2	125 Put	-90	1.4	-99	0.2
130 Call	6	0.8	0	0	130 Put	-93	1.2	-100	0
135 Call	2	0.4	0	0	135 Put	-99	0.2	-100	0
140 Call	0	0	0	0	140 Put	-100	0	-100	0

The closer the options get to expiration, the more the deltas tend to approach 0 and +/-100. With 37 days until expiration, the call deltas ranged from 100 at the 65 strike to 0 at the 140 strike. With 9 days to go, the range is more concentrated.

It's also worth noting that the real action is happening near the at-the-money strikes. As you can see, the gamma increases dramatically as the difference between the strike deltas becomes more pronounced.

At the same time at-the-money options rapidly gain gamma, the out-of-the-money options lose it. Just two strikes away from the at-the-money 105 strike we see the 115 calls and puts losing gamma as expiration nears.

Gamma and the Professional Trader

Seeing how rapidly the delta changes as expiration approaches makes it easier to appreciate just how important it is for professional traders to carefully monitor their positions. Using gamma to anticipate the change in delta is what makes it such a valuable measure of risk. Looking at the overall gamma, traders can see at a glance how much longer or shorter they will be given a move in the underlying stock.

In the discussion on theta or time decay, we make the point that an option position either benefits from the passage of time or from market movement, but not both. In this sense, gamma is considered the flip side of theta because if time hurts a position (i.e., negative theta), price movement (i.e., positive gamma) will help it and vice versa. For example, the short straddle is a position that is hurt by market movement but helped by the passage of time. The straddle writer wants the market to remain steady because the more the underlying moves, the more likely it is that the position will lose money. In contrast, a person holding a long straddle is in a race against time hoping to see the market move before the options expire.

Theta is the Greek letter used to represent the impact of time on an option's value. All options lose value as they get closer to expiration. However, the rate at which an individual option loses value is primarily a function of how much time remains until expiration. Options tend to lose the most value in the final 30 days. At that point, the price decay accelerates.

Only the extrinsic portion of an option's value is subject to time decay. An in-the-money option will retain at least its intrinsic value until expiration. In other words, if an underlying stock is trading at $42, the 40 call will always have at least $2 of intrinsic value whether there are three or 300 days remaining until expiration. Any value above $2 will be extrinsic value and therefore subject to time decay.

Theta, or time decay, is usually expressed as a negative number to represent the loss of value as time passes. Since the time remaining on an option can never increase, time decay is a one-way street. Thus, if the theta is given as -.37, they option will lose $0.37 per day in value.

However, it is important to note that theta changes over time. Assuming the price of the stock doesn't change, an out-of-the-money $3.50 option with a theta of -.20 will be worth $3.30 tomorrow. At that point, the theta may only be -.18. If so, the option will only be worth $3.12 the following day if prices remain constant. Gradually, the value of the option will approach zero as long as it remains out-of-the-money.

In the adjacent table, the theta of the AT&T Aug 35 call is -.10. If the stock price remains unchanged, the Aug 35 calls will only be worth $1.65 on the following day.

The Relationship Between Theta and Strike Price

When we looked at the extrinsic value of an option in the section on pricing options, we saw that at-the-money options have the highest extrinsic value. For this reason, these options also have the highest thetas.

Deep in- and out-of-the-money options have lower thetas because they have less extrinsic value than at-the-money options. The less value they have, they less they can lose through decay. Hence, the lower thetas.

When Time Works For You

The only way to have a positive theta position is to be short options. This makes sense when you consider that short option positions (e.g., the short straddle) tend to do best in stable markets. Wide swings up or down will hurt these positions. Only the passage of time will help. Neutral strategies like the long butterfly also benefit from the passage of time. The less time to expiration, the less chance the underlying stock has to move up or down into unprofitable territory.

Every option position represents a trade off between time and market movement. You can't benefit from both. If the passage of time helps a position, price movement will hurt it and vice versa. In Greek terms, price movement, the flip side of theta, is known as gamma. Any position that has a positive theta (i.e., a position that benefits from the passage of time) will by definition have a negative gamma. Similarly, a negative theta position (i.e., one that is hurt by the passage of time), will have a positive gamma.

Rho is the Greek letter used to represent the impact of the prevailing interest rate on an option's value. More specifically, the rho measures the change in an option's value given a change in interest rates.

An increase in interest rates raises the carrying costs associated with holding an option position. As such, it decreases the value of the options. Conversely, a decrease in interest rates increases the value of options. However, the impact of interest rates on price is so small, relatively speaking, that it makes very little difference overall. Familiarity with delta, vega, gamma, and theta is much more important because each has a significant measurable impact on option prices.

Diversifying your Portofolio

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Even if you find risk exciting, you'll probably sleep better if you've got your investment nest eggs in different baskets.

Diversification helps protect against risk by spreading your investments around instead of investing in only one area For example, you can balance cash investments like CDs and money market funds with stocks, bonds, and stock or bond mutual funds. You can buy stocks of small growth companies while also investing in blue chips, which are the stocks of large, well-established companies. Often when the return is down in one area, it's balanced by a positive performance in another.

You may also want to evaluate your assets and realign the investment mix from time to time. For example, if some stocks increase in value, they will make up a larger percentage of your portfolio. To keep the balance, you may want to decrease your stock holdings and increase your bond or cash holdings.

The Benefits of Diversification

Well-diversified portfolios � containing various mixes of stocks, bonds, mutual funds, cash equivalents like Treasury bills or money funds, and sometimes other types of investments � can help iron out a lot of the ups and downs in investing. And studies have shown that, over lengthy periods, investors didn't have to sacrifice much in the way of returns to get that reduced volatility. Finding the right portfolio mix depends on your assets, your age, and your risk tolerance.

Stocks, Bonds, or Cash? What's the Right Mix?

Recommendations from different investment advisers may vary, as shown by these suggestions from some major investment firms for four individual investors.

The Breadwinner		Firm A	Firm B	Firm C	Firm D
Early 30s, nonearner spouse, two kids. Moderate risk takers, with investment assets of $726,200 (41.6% cash, 6.8% fixed income, 51.6% growth).	Cash	5.8%	11.5%	12.6%	6�25%
	Fixed Income	32.5%	39.7%	25.0%	19�37%
	Growth	61.7%	48.8%	62.4%	61�84%
The DINKS		Firm A	Firm B	Firm C	Firm D
Double income, no kids, late 20s. Moderate risk takers with investment assets of $182,000 (11.5% cash, 66.5% fixed income, 22% growth).	Cash	7.5%	12.4%	27.0%	18�34%
	Fixed Income	33.0%	47.2%	25.4%	33�53%
	Growth	59.5%	40.4%	47.6%	25�41%
The Single Parent		Firm A	Firm B	Firm C	Firm D
Late 30s, one child. Moderate to aggressive risk taker, investment assets of $95,300 (10.8% cash, 20.7% fixed income, 68.5% growth).	Cash	3.8%	14.9%	29.0%	39�51%
	Fixed Income	29.9%	36.4%	37.4%	24�40%
	Growth	66.3%	48.7%	33.6%	18�31%
The Young Achiever		Firm A	Firm B	Firm C	Firm D
Single, mid-20s. Aggressive risk taker, investment assets of $14,000 (60.7% cash, 39.3% growth).	Cash	2.7%	17.2%	45.4%	100%
	Fixed Income	10.9%	26.4%	23.0%	0%
	Growth	86.4%	56.4%	31.6%	0%

Asset Allocation

Asset allocation means dividing your portfolio among investment categories, sometimes called asset classes, according to a particular formula. One allocation model, for example, would put 60% of your investment capital in stocks, 30% in bonds, and the remaining 10% in cash.

No single portfolio is ideal for everyone. While a stock-heavy portfolio may tend to grow faster over time, the value also fluctuates more. It may also produce losses in some years.

And you don't have to stick to the same model throughout your investing career.

Many experts suggest that young people put 80% or more of their investments in stock and stock mutual funds. People nearing retirement, on the other hand, might want more of their assets in income-producing investments, such as US Treasuries or high-rated corporate bonds.

What a Difference an Allocation Makes

Asset allocation can make a real difference in portfolio performance over an extended period. Here's what a hypothetical $100,000 portfolio allocated three different ways and computed using the compound long-term return for three investment types would have gained in a hypothetical year. The returns used in the calculation are 10.4% for large company stocks based on the return of the S&P 500 stock index between 1926 and 2003, 5.9% for long-term corporate bonds, based on the return of the Salomon Brothers Long-Term High Grade Corporate Index for the same period, and 3.7% for cash, based on the return on a US Treasury bill.

Actual annual returns on specific portfolios could be quite different from the average. For example, in 1996 though 1999, portfolios invested 60% in stocks had higher than average returns, while in 2000 through 2002, portfolios invested 60% in stocks had negative returns.

Portfolio A		Portfolio B		Portfolio C
60% stocks		30% stocks		10% stocks
30% bonds	OR	60%bonds	OR	30% bonds
10% cash		10% cash		60% cash
$8,380 return		$7,030 return		$5,030 return

Buying on Margin

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Buying on margin lets investors borrow some of the money they need to buy stocks.

If you want to increase the potential return on a stock investment, you can leverage your purchase by buying on margin. That means borrowing up to half of the purchase price from your broker.

If you can sell the stock at a higher price than it cost, you can repay the loan, plus interest and commission, and keep the profit. But if the stock drops in value, you still have to repay the loan. And if you must sell the shares for less than you paid, your losses could be larger than if you had owned the stock outright.

Leveraging Your Stock Investment
Leverage is speculation. It means investing with money borrowed at a fixed rate of interest in the hope of earning a greater rate of return. Like the lever, the simple machine for which it is named, leverage lets the users exert a lot of financial power with a small amount of cash. Companies use leverage � called trading on equity � when they issue both stocks and bonds. Their earnings per share may increase because they expand operations with the money raised by bonds. But they must use some of those earnings to repay the interest on the bonds.

Margin Accounts

To buy on margin, you set up a margin account with a broker and transfer the required minimum in cash or securities to the account. Then you can borrow up to 50% of a stock's price and buy with the combined funds.

For example, if you buy 1,000 shares at $10 a share, your total cost would be $10,000. But buying on margin, you put up $5,000 and borrow the remaining $5,000. If you sell when the stock price rises to $15, you get $15,000. You repay the $5,000 and keep the $10,000 balance (minus interest and commissions). That's almost a 100% profit. Had you paid the full $10,000 with your own money, you would have made a 50% profit, or $5,000.

Margin Calls

Despite its potential rewards, buying on margin can be very risky. For example, the value of the stock you buy could drop so much that selling it wouldn't raise enough to repay the loan.

To protect brokerage firms from losses, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) require you to maintain a margin account balance of at least 25% of the market price of any stock you buy long, to hold in your account. Individual firms can require a higher margin level, say 30%, but not a lower one.

Closing the Barn Door
The government and its regulatory agencies are good at figuring out ways to prevent financial disasters � after they happen. The rules and regulations that govern stock trading, for example, were devised in the wake of two major stock market crashes.

If the market value of your equity falls below its required minimum, the firm issues a margin call. You must either meet the call by adding money to your account to bring it up to the required minimum, or sell the stock, pay back your broker in full and take the loss.

For example, if shares you bought for $10,000 declined to $7,000, your equity would be $2,000, or only 28.6% of the total value. If your broker has a 30% margin requirement, you would have to add $100 to bring your equity to $2,100, or 30% of $7,000.

During a market crash or dramatic drop in the price of certain stocks, investors who are heavily leveraged because they've bought on margin might not be able to meet their margin calls. The results could be panic selling to raise cash and further declines in the market. That's one reason the SEC instituted Regulation T, which limits the leveraged portion of any margin purchase to 50%.

Margin Minimums
To open a margin account, you must deposit a minimum of $2,000 in cash or eligible securities. All margin trades have to be conducted through that account, combining your own money and money borrowed from your broker.