InvestEd 2013: Saturday Sessions Focus
March 2013 Webinar: Enriching the FINVIZ Experience with Tables, Portfolios, and Spreadsheets

Selling Options Wisely: Two Important Factors
Finding the Best Airline Prices: Start with Hipmunk

 

InvestEd 2013
Wichita, KS   June 7-9, 2013
Hyatt Regency Wichita
Register Now! Receive paper handouts and save $20 by registering no later than March 31.

 

Saturday morning starts the two days of investing-related sessions at InvestEd 2013. This month our focus is on three of the Saturday sessions.

 

John Diercks is presenting Dividends: The Forgotten Profit Maker.

 

Dividend-paying equities can provide rates of return far superior to money market funds and certificates of deposit. How can an investor determine when a dividend payout is safe? This session will introduce the importance of depreciation and free cash flow in determining the safety of dividends for companies in the communications and energy sectors. Learn the pros and cons of investing in common and preferred stocks, as well as other poorly understood investment vehicles offering high rates of return.

 

The table below shows dividend payout ratios … and a lot more … based on net income and free cash flow for Verizon for 2009 - 2011. Join John in Wichita to learn how to interpret this data.

 

 

Don Cassidy is presenting a new session titled Why You Must Use Technical Analysis.

 

Fundamental analysis tells only half of a stock's story, and that information is delayed! Technical analysis tells the other half, and its input is up to the minute.

 

When we buy, hold, sell, or avoid a stock, we are making predictions about the future. Neither of the two major tool sets is infallible. But why not use both, rather than just one? Technical analysis tells you what people actually taking action think about a stock. If that verdict contradicts your fundamental view, you are hoping to be smarter that the rest of the market. Look at a two-year daily price chart of Apple. Everyone loved it at $700, but in October at $650 it had broken down on two major technical indicators. If you don't see them, you should attend this session! Don will discuss overall market indicators plus key technical signals for individual stocks and ETFs. In addition, he will supply a bibliography for further study.

 

 

Our final focus is on Bart Womack's World Demographics and Investing.

 

Did you know that people in the developed world have stopped having babies? Okay, you are correct, people in the developed world are still having babies - but at such a low rate that their overall population numbers are contracting substantially. Europe, which accounts for 21 percent of the world’s population today, will account for only seven percent by 2050. Ninety-seven percent of the world’s population growth will come from developing countries. The U.S. is seeing its demographics shift in the same way. These changes will dramatically affect the economics of the world and the value of your portfolio. Come and explore this world transition with Bart.

 

Learn from John, Don, and Bart and all the InvestEd instructors at InvestEd 2013 in Wichita. View the InvestEd PowerPoint kiosk, and register to join us on June 7.

 

Early Bird Registration Rate Ends March 31, 2013
Early bird registration is $389. Registration received after March 31 is $409. Full-time students with a valid school identification card pay $359.

 

You must register by March 31, 2013, to receive paper copies of session handouts. All attendees receive a CD of the handouts.
Register now and save!

 

 

InvestEd Inc. Free Webinar
Enriching the FINVIZ Experience with Tables, Portfolios, and Spreadsheets
Sunday, March 24, 2013
8:00 PM-9:00 PM ET / 5:00 PM-6:00 PM PT
Instructor: Saul Seinberg
Webinar Registration

 

This webinar will address the use of tables, portfolios, and spreadsheet downloads in FinViz. Understanding the nature of these functions, especially their capabilities and limitations, will enhance your FinViz experience. For purposes of this webinar, attendees are encouraged to submit advance questions related to the current webinar, as well as the previous FinViz webinars. In fact, any aspect of FinViz is fair game for your questions. Submit your questions to InvestEd.Inc@gmail.com and Saul will cover as many as possible in the allotted time.

 

Register now to attend the InvestEd Inc. free online investor education webinar. Space is limited.

 

Saul is an InvestEd Inc. advisory director and a conference instructor. A former vice president for education of InvestEd, he teaches at local through national investor education events. He is a former director and vice president of the Rocky Mountain Chapter of BetterInvesting. With degrees in electrical engineering and law, Saul spent most of his career as a corporate attorney. In addition, he served as an adjunct professor at Albany Law School in New York.

 

 

Selling Options Wisely: Two Important Factors
Saul Seinberg

 

Selling options is a favored income producing strategy. Unfortunately, two important factors, all too often ignored by many option traders, should be considered by every option seller. The two factors I deem most important are quality (safety) and lost profits. These factors should be considered before an option is sold. Prior to discussing these factors, however, let's first take a look at the nature of a covered call or put option trade from the seller's point of view. For purposes of this article, we will be discussing conventional covered calls and cash secured puts.

 

In the case of selling a covered call option, the buyer purchases the right to acquire, in most cases, 100 shares of a stock or ETF from the seller for each option and does so at a designated strike price by a date certain, the expiration date. The call buyer is motivated by the possibility that the share price of the company's stock, termed the underlying stock or underlying asset, will exceed the strike price of the call option by the expiration date.

 

The covered call option seller, who owns sufficient shares of the underlying stock to meet the obligation to the buyer, keeps the premium, the income from the option sale, but must deliver the shares represented by the option if the strike price is timely exceeded and if the call option is exercised. Thus, the call seller, in exchange for the premium, gives up the gains in excess of the strike price when the buyer exercises or keeps the underlying stock and sells more calls to get additional premiums if no exercise of the option takes place.

 

When a put option is sold, the buyer purchases the right to sell or put 100 shares (in most cases) of a stock or ETF for every option sold to the seller at a designated strike price by the expiration date. The put buyer is motivated by the possibility that the share price of the underlying asset will decline below the strike price of the put option through the expiration date.

 

The put option seller keeps the premium, the income from the option sale, but legally is obliged to accept delivery of the shares represented by the put option if the share price is below the strike price and the put option is exercised. As a consequence of selling a put, the seller keeps the premium and does not have to buy the underlying shares at expiration if the share price is above the strike price. The seller is free to sell another put, but loses any profit that might have been made if the stock had been purchased outright at the time the put was sold.

 

Some option sellers only consider the size of the premium available and are completely wrapped up in the expected return, that is, the level of the annualized percentage return (APR) for the option sale. The safety and profit potential of the underlying stock or ETF may get a cursory look, but too many option traders are blinded by APRs that meet or exceed their minimum requirement, leading them to ignore the critical safety and lost profits factors. In other words, the fact that an option sale under consideration is warranted by a spreadsheet calculation doesn't mean the option sale is a viable or a desirable option trade from a quality or lost profit perspective.

 

Every income motivated option seller must first, in my view, independently consider the underlying stock or ETF in a possibly APR attractive option sale. In a properly reasoned option selling strategy, initial consideration of APR is appropriate for determining what underlying stocks and option trades will produce sufficient premium value or income per the seller's criteria. However, in such an option strategy, once the APR is vetted and before any options are sold, the underlying asset should be evaluated to determine how safe it is from a quality perspective and whether or not money will be left on the table if an option is sold. For purposes of this article, quality should be considered to mean any readily discoverable, but overlooked, corporate financial item that led to a fall in share price and a resulting losing option trade, one where the fall in share price meaningfully exceeded the option premium.

 

The quality aspect of selecting a stock or ETF on which to sell an option cannot be understated. Because the amount of money available as an option premium is small relative to potential drops in share price, a small drop in price might convert an intended income situation into a loss of principal, sometimes into a fairly meaningful loss. Further, several, if not many, successful option sales will be needed to recoup any losses.

 

If share price of an underlying asset drops below the strike price, a call option will expire worthless, and the call seller will keep the option premium. However, the seller remains the owner of a now depressed holding. If the drop is minor, a new call can be sold and another premium captured. However, if the share price drops sufficiently, the chances of selling another option with a reasonable premium at the same strike price are significantly reduced. In that event, the option position can be held for share price recovery, sold at a loss, or further manipulated in attempts to repair the trade in order to reduce the loss or hopefully to hang on until the share price recovers and a profit is achieved.

 

About two years ago, Cliff Natural Resources (CLF) was cruising along at the $100 per share level and offering juicy call option premiums. The company also was having problems getting product to market, and inventories were increasing at an above average rate. The failure to spot this impending shift in slowing turnover by call writers blinded by CLF’s high premiums took a heavy toll on those option sellers who watched the stock sink below $60 in mid-2011 while they were still holding a covered call position. Those who stubbornly held on hoping for a recovery now see their shares valued by the market at slightly below $29 and are staring down the barrel of a likely dilutive secondary stock offering.

 

Another example is the recent case of Century Link (CTL), a high dividend (around 7%) paying company that was very popular with the double dividend strategy crowd (collect a fat dividend and an option premium).Even for a utility stock, CTL has paid a higher than usual dividend for several years. This was reflected in its high payout ratio, one which exceeded the traditionally accepted levels of 60-70%. CTL also struggled with high debt levels. Both these factors would have stood out to any investor willing to carefully consider CTL’s financial position. Up until the 4Q earnings announcement, the stock was chugging along at a share price in the low $40's. The 4Q announcement of a 25% dividend cut sank CTL’s share price by almost 25 percent. Option sellers who had positions through the earnings announcement were trapped by the dividend cut prompted by a drop in share price, which readily could have been avoided.

 

These negative impacts and likely losses could have been avoided or reasonably limited if the quality of the underlying asset had been scrutinized before an option had been sold. A conventional stock study would have revealed the danger of selling an option on shares of a company in danger of or actually underperforming its prior achievements. A similar review of an ETF also could pinpoint hidden dangers, such as the underlying asset's industry or sector in decline. Yes, a stock or ETF that looks good in a study still may fall appreciably in price, but avoiding any clearly unsuitable underlying asset, no matter how attractive its premium might be, is a far better action.

 

We cannot completely eliminate a quality issue with respect to a specific underlying asset. Stuff happens, and surprises aren't rare. On the other hand, we can weed out most or all of the marginal and unsuitable choices of an underlying stock or ETF before selling an option. That opportunity should not be ignored. Working to eliminate companies or ETFs likely to experience greater than acceptable share price drops from option selling consideration is an important key to maintaining a positive, consistent flow of option income free of avoidable surprises over time.

 

The stock study used for purposes of assessing the quality of an underlying stock or ETF also can be employed to determine the likelihood and potential amount of share price increase. In fact, that's one of its primary purposes. Therefore, when the stock study is completed and a determination made that sufficient quality exists to sell an option, the study also should be used to project the expected amount of share price increase over the life of the option to be sold. While many option sellers may believe a short-term share price increase is too difficult to project, actually doing so should be less difficult than the longer term projections and unknowns commonly associated with stock studies.

 

The projected short-term share price increase can and should be used to determine if the contemplated option sale is likely to leave too much profit on the table. Since an option seller gives up profits above the strike price, plus the premium in the case of selling a call and the profits above the share price, plus the premium at the time of selling the put, that seller would be prudent to determine how much above the strike price the underlying shares of stock might increase for a call or how much above the current price the underlying shares will increase for a put.

 

If the stock study and its projections indicate that the share price will rise by a predetermined percentage above the strike price for a call or the share price when a put is sold, then money is being left on the table. In that case, neither the call nor the put should be sold. Instead, the possible option seller should simply retain the shares and decline to sell a call and buy some shares outright, instead of selling a put as a way to acquire shares.

 

Many option sellers will argue that making the short-term projections required by the lost profits factor is too difficult. In almost every instance of discussions about this point, when asked, the sellers admit they don't even keep records to show specifically how often and to what extent they are losing profits to the option buyer.

 

Back in late November 2012, I came across a company named Titan Machinery (TITN). It owns and operates a network of full service agricultural and construction stores in the U.S. The share price had dropped from near $36 in May 2012 to less than $20 a share. Assuming a mild recovery at best, I sold a put with a $20 strike price at a 60-cent premium, despite an upcoming earnings release. Share price edged up, and share price gathered momentum after the favorable earnings release. The put expired worthless, and I kept the premium. However, TITN's share price continued to climb and has now reached $32. I would have been much better off to buy the stock outright instead of selling that put. Yes, I had a successful option trade, but I left money on the table by not looking more closely at the results of my initial inquiry into TITN's prospects and by assuming earnings would be flat to slightly better.

 

The rule of thumb is: options should be sold on underlying stocks or ETFs that are of decent or better quality and not likely to fall dramatically or to increase in price, as determined by a study undertaken for these purposes. And yes, occasionally quality and price change projections will be wrong, but the benefits of improving income flow and avoiding losses, while not leaving money on the table, can't be realized unless the quality and lost profits factors are addressed consistently and rigorously as a mandatory part of an option selling strategy.

 

Editor's note: Join Saul and Mary Ann Davis at InvestEd 2013 in Wichita KS, June 7-9, for several sessions about options.

 

Saul is an InvestEd Inc. advisory director and a conference instructor. A former vice president for education of InvestEd, he teaches at local through national investor education events. He is a former director and vice president of the Rocky Mountain Chapter of BetterInvesting. With degrees in electrical engineering and law, Saul spent most of his career as a corporate attorney. In addition, he served as an adjunct professor at Albany Law School in New York.

 

 

Finding the Best Airline Prices: Start with Hipmunk
Sandy Gallemore

 

Many sites are available for checking airfare and hotel prices. All you need to do to locate a variety of sites is type airfare price comparisons into a search engine. I like Hipmunk, a travel site with a clean and simple design. I find this a great place to begin looking for a flight and getting some idea about the price of the flight.

 

Bruce Upbin of Forbes has identified Hipmunk as the best travel site on the web, noting that it is smarter than the traditional airfare comparison sites about the presentation of our search results. Says Hipmunk co-founder Steve Huffman: "Our main philosophy is that we want you to spend as little time on our site as possible with the least amount of pain." A review of Hipmunk by Fred Perrotta in his Blog of Tortuga Backpacks does a good job of analyzing the site and enlightening the reader about his experiences with the website.

 

Before identifying what is available on the site, let me indicate some items you will not see. No ads grace the borders of the page. No duplicate flights from the same airline are displayed. No dense, text-heavy stack of flights will appear with detailed information.

 

After you insert your departure and arrival airports and dates, the default screen will display a color-coded bar-ranking of flights in descending order of "agony," a Hipmunk search criteria combining price, duration of the flight, the number of stops, and departure and arrival times.

 

 

Small Wi-Fi symbols to the left of your destination airport code (ATL, for example) let you know if the flight has wireless capabilities on board. The airline name is identified to the right of your destination city. Since not all available flights are seen on the Hipmunk default screen, a small number on the far right indicates the number of "worse" flights also available at that price. Clicking on that number expands the flight listings to include those flights. An example of a "worse" flight would be one that has a longer duration or a longer layover.

 

At the bottom of your flight graph, you will see a live chat option. Click the up arrow and type in your question or comment.

 

If I want to search on price, that option is available. If I am concerned most about the duration of the flight, or the departure time, or the arrival time, all of those options are available with a simple click. If I choose, I can subscribe to the flight alert option.

 

 

A downside of the site is the limited number of airlines covered: American, Delta, US Airways, and United. However, the price information will give you a starting point when looking at other comparison sites or various airline sites.

 

Hipmunk includes integration with Google Calendar (note the Enable Google Calendar box at the top right of the above image). If you click in that box to link to your Google account, Hipmunk will ask your permission to view your email address and manage your calendars. If you grant access, Hipmunk shows your flight results on your calendar. Personally, I do not use this option. I choose to put my flight on my calendar once I book it.

 

Traveling to more than one location? Use the multi-city option in the opening search screen. Want to know which day is best for departure? Click on the price graph option in that screen and see a small 30-day calendar letting you know which flight dates might be cheaper.

 

Click on the small plus or minus sign to check days before or after your chosen dates to see if they are cheaper (green) or more expensive (blue) or an average price (tan).

Select the Price Graph option, and click your mouse to a pop-up graph of flight price information by date.

 

 

Hipmunk also allows you to do some comparison shopping for hotels. An example for Wichita is below (note that the InvestEd conference room rate is $99).

 

 

Check out Hipmunk not only to plan your next vacation, but to help you with your search for the best flight for your travel to InvestEd 2013 in Wichita.

 

Sandy is an InvestEd Inc. director and serves as secretary. She is lead editor and prepares the general program brochure for the InvestEd conference. A founding director and the current president of the Coastal Georgia/South Carolina Chapter of BetterInvesting, Sandy is an O'Hara Award recipient and is a charter member and the current president of a local investment club. She helps form investment clubs, presents introductory investing programs, and teaches stock study classes at local and regional events. Sandy is professor emerita, Georgia Southern University.

 

 

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