InvestEd 2014: Southern California Dreaming
September 2013 Webinar: The Whys of a Stock Study
TINSTAAFL: Using Covered Calls Part 1
Foiling Online Tracking
Irvine CA, June 6-8, 2014
Visit the InvestEd 2014 Tourism page and plan to arrive early or stay late to spend a few vacation days in southern California.
The InvestEd 2014 curriculum schedules will be available in November. In the meantime, investor education is available via the InvestEd webinars. Many of the InvestEd conference instructors provide free InvestEd webinars. Log in to the InvestEd online education page to view a listing of webinar recordings and handouts. Listen to some of the webinars to get a feel for the quality of our instructors and sessions.
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Make your hotel reservations and register for InvestEd 2013 now!
InvestEd Inc. Free Webinar
The Whys of a Stock Study
Sunday, September 22, 2013
8:00 PM-9:00 PM ET / 5:00 PM-6:00 PM PT
Instructor: Brian Altschul
WHY do I need 10 years of data? WHY is profit margin so important? WHY should I eliminate any of the price-to-earnings (PE) ratios? WHY is my buy range so high? Attend this webinar to find the answers to these and many other questions about the whys of a stock study.
Register Now to attend the InvestEd Inc. free online investor education webinar. Space is limited.
Brian is an InvestEd Inc. director and vice president for education. A conference instructor, he was chair of the inaugural InvestEd conference in 2007. Brian is a former member of an online investment club and is a founding member and former president of a local investment club. He has been running a monthly stock study group in northern New Jersey since 2004. Professionally, with a BS in mathematics and an MBA in computer systems, Brian manages a large computer systems department.
TINSTAAFL: Using Covered Calls Part 1
When I first became interested in investing, the result of a summer job working as a backup order clerk at the American Stock Exchange, a helpful floor trader introduced me to the word TINSTAAFL, an acronym for the phrase "There is no such thing as a free lunch." In other words, no matter how terrific an opportunity to profit looks, especially in the stock market, be aware that a catch is likely and that the greater the apparent likelihood of success, the more significant and hidden that catch will be. This three part article is concerned with how and to what extent TINSTAAFL impacts various aspects of selling covered calls.
As many investors are aware, the rock bottom interest rates offered by savings accounts, money market funds, bonds, and other income investments over the past few years has been spectacularly unattractive. The result of such lean pickings for income centric investors has brought about a significant rush to alternative income producing investments, most notably covered call options. The recent rise in interest rates, while somewhat temporarily spooking the market, has done little to reduce the attraction of options as a surrogate for conventional income producing strategies.
The rush to the options market also attracted many value and growth investors. In all, the dramatic rise in option trading increased participation by individual investors, most of whom were new to these derivatives. Many brokers have taken to beating the options drum, often and loudly, in an attempt to convince their customers to participate in covered call option trading so they can replace income lost to basement interest rates or to switch the uncertainty of capital gains for the certainty of collecting premiums. Brokers have taken to promoting covered call selling as a viable or better alternative to owning stock. The fact that option trading increases a broker’s commission revenues, since they receive two commissions instead of one for a covered call, rarely is mentioned in the broker's marketing material.
To be sure, an attractive possibility is that covered call option profits will replace lost interest income and, in some cases, even exceed it. That is a possible outcome often emphasized by brokers. However, several key tradeoffs involved in covered call options often are stated only briefly and then ignored. This situation is explained best after a brief review of the mechanics of covered call options.
A covered call can be created in two distinct ways. You can sell a call against a stock you already own in your portfolio. This is called "overwriting." Alternatively, you can simultaneously buy stock and sell call options on that stock in a transaction known as a "buy-write." In a buy-write combinational transaction, the trade is not completed unless both the stock purchase and option sale meet your specified price and premium requirements.
In either case, you sell a call option on a stock you own at an agreed strike price for a cash premium that obligates you to deliver your shares if the strike price is reached or bettered within the period of time covered by the call you sold. If the strike price is not reached in that period, you keep the cash premium and your stock, and you are free to sell another call, sell the stock, or just continue to hold it. That's an attractive strategy when savings accounts and money market accounts are paying miniscule interest on deposits.
However, in any covered call trade, you give up all of the gain or upside potential in the underlying stock above the strike price. In return, the covered call seller earns a cash premium that represents income as well as a hedge against downside market activity. The surrender of all potential gain above the strike price should be the first concern of any covered call seller after consideration of the quality of the underlying stock.
Each of the many types of option strategies implemented in the market is dependent on what the trader's expectation of individual stock price or index movement will be in the period covered by the call option. Thus, option traders must decide how they think a stock will react over the option period of interest and then pick the option strategy appropriate for the expected price action of the stock. Many new option traders are unaware of this important step, or they think it's beyond their understanding and decide to ignore it. Such a lack of action is a poor decision that leads to misuse of an option strategy and undesirable results
Covered calls have a specific strategic intent. They should be used only for stocks that have an outlook of neutral to a slightly bullish price response over the period covered by the call option. This is not the same kind of determination applied to measure a stock's chances of doubling in five years. In the much shorter run covered by options, the potential for share price increase is a completely different problem to solve, and perhaps a more difficult one, than projecting longer term price growth.
When you underestimate shorter term growth, you'll find that many of the options you sell are being assigned. Clearly, when too many of your covered calls result in assignment, this means you are leaving money on the table. In other words, you are surrendering profits in excess of your call's strike price too often. If that is your situation, you may be better off changing your covered call selection process or not selling covered calls at all. One place to start in correcting an assignment ratio that is too high is always determine before selling a covered call what you think prospects are for the stock or index of interest over the period covered by the option.
Part 2 of this article, which will appear in the October newsletter, will focus on record keeping and testing your strategy.
Attend the next InvestEd conference, June 6-8, 2014, in Irvine CA, to learn more about options from Saul and from Don Cassidy and Mary Ann Davis. Specific session information will be available soon on the InvestEd website.
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. 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.
Foiling Online Tracking
Perhaps you would like a free tool that would help you control the data you share when on the web and would put a stop to the tracking of your browsing activities. A nifty free browser extension that blocks online trackers is Disconnect, which works for Chrome, Firefox, and Safari browsers. A short video on the Disconnect website highlights how the extension works.
After a Disconnect download, a small icon sits in your toolbar. It will let you know how many requests you are receiving from trackers on websites you are visiting. By default, Disconnect blocks tracking by Facebook, Google, LinkedIn, Twitter, and Yahoo, but you may choose to unblock tracking by such services when, for example, you want to play games in Facebook.
This useful tool also forces you to use https, the secure http, when accessing Facebook, Gmail, LinkedIn, Twitter, Yahoo, and YouTube on public Wi-Fi networks. Your username and password are vulnerable to theft when you do not use the secure https.
Another free browser extension that blocks most trackers is DoNotTrackMe, an extension that works with Internet Explorer, Chrome, Firefox, and Safari. After the extension is installed on your computer, a small button displays a real-time count of the number of trackers keeping an eye on your web activity.
DoNotTrackMe blocks tracking capabilities of data-collection companies and advertisers, as well as social networks, web bugs, and other tracking technologies used in collecting personal information about your searches, things you purchase, videos you watch, articles you read, and so forth.
You can see details about who is tracking you by clicking on the small icon at the right end of your toolbar.
From this page, you can click on the settings button and find more details about the tracking.
Non-tracking browser extensions put a stop to third party and search engine snooping when you are browsing the web. They prevent tracking of websites you visit and searches you conduct. Although tracking may not be harmful to you, it does happen without your consent or your knowledge. If tracking is a concern to you, a good way to control personal information you share online is to use one of the non-tracking services.
My choice is DoNotTrackMe, which indicates not only the number of companies tracking me when I land on a specific website, but also the names of these companies. Should you want to view a website blocked by DoNotTrackMe, you can turn off the blocking by double clicking the green bar under Settings shown in the image above. If you want to allow a website to track you, you can use the same double click of the green bar beside that company to change your setting. Double clicks are all you need to reactivate DoNotTrackMe or to block a company's tracking.
Sandy is an InvestEd Inc. director and serves as secretary. She is lead editor and prepares the general program brochure for the InvestEd conference. Sandy, an O'Hara Award recipient, is a charter member and the current president of a local investment club. She has helped form investment clubs, presented introductory investing programs, and taught stock study classes at local and regional events. Sandy is professor emerita, Georgia Southern University.
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