The Secret of Stock Option

Obama Tax Deal Sets the Bull Running

2010-12-14T16:03:00.001-08:00

U.S. President Barack Obama’s tax deal has yet to pass Congress, but the compromise – hatched as an appeasement to Republican opposition – already has had an effect on the currency and stock markets.

What’s more is the deal looks as though it could offer a significant impetus for the U.S. economy as we move into 2011.
What has happened in the political arena over the past month has been magnificent theater. I don’t believe in coincidences, so we have to try to understand what is being staged.

Consider the following:

Just weeks ago we had the stunning compromise by Irish officials with their new European overlords. Then the Standard & Poor’s 500 Index reversed at the well supported 1,175-level and its 50-day average. Then came a positive reaction to a weak jobs report. Then U.S. Federal Reserve Chairman Ben Bernanke went on “60 Minutes” to explain the Fed’s monetary program. And finally President Obama went on television to announce his tax compromise.

What’s the play? Here’s a guess.

President Obama knows he has to get the economy straightened out before 2012 to ensure re-election. So he has to find a way to stimulate further without actually writing a check.
This tax deal, particularly the investment credit, is the only way he’s going to be able to add $300 billion to the financial system because he would never, ever get a pure stimulus package through the House of Representatives.

Remember from high school civics class that the federal budget process starts in the House. And the Republicans who will run the place in January are going to use their power to muddy the waters between now and 2012 so that they can accuse President Obama of messing up the economy. They can do this by cutting spending and claiming that slimming down the deficit is in the country’s best interest – which it is, but that’s another matter.

So strip away everything else, and the tax plan is really the first major salvo in the 2012 presidential race. And it’s likely to be successful, at least in the short run. The deal lets individuals keep more of their earnings, and lets companies save a fortune through the investment tax credit. That will give 2011 gross domestic product (GDP) a fighting chance at hitting 3% or better. And growth is the best stimulus of all.

That is an out-of-consensus number, which ought to force stock analysts to lift corporate earnings estimates. Add in higher Price/Earnings (P/E) ratios – due to the low inflation environment – and more consumer spending from unemployment check transfer payments, and you’ve got a winning recipe for equities.

In short, my expectation is that last Tuesday’s weak market following the tax compromise announcement did not represent a “sell on the news” top. It was more likely part of the normal consolidation, or rest period, that is to be expected following a torrid five-day span like the one seen last week.
Give the bears credit for showing that they still have fight in them – their third assault at the 1,230-level was well executed. But bulls are still in charge.
And then there’s the dollar.
Commodity gains last week were limited to nickel, copper and hogs, while modest losses fell to gold, silver, coffee, wheat, natural gas and orange juice futures. The rise of the dollar accounted for much of the struggle, as it was up 0.5% versus a basket of currencies. The greenback’s surge came amid renewed concerns about the prickly euro, and rose again in after-hours trading.

Why would the dollar rise? Because if the White House’s tax-based stimulus works as expected, then the U.S. dollar may be reinvented in investors’ imagination as a growth currency and not just a safe haven.
It’s strange but true – especially since traders are comparing it to the euro, whose fiscal sustainability is very much in question.

My advice: Keep your eyes on the horizon. The Weekly Leading Index, the improvement in jobless claims, and rising corporate earnings tell us that the economy is strengthening, with real GDP on the verge of an expansion. ISI Group economists this week noted that recoveries can be “short and dangerous if slow, like an airplane taking off.” That is what we have to look forward to.

Nominal GDP is already above its 2007 peak and real GDP (minus inflation) is on track to make a new high in the first quarter. So we’ve just about got our wheels off the ground, and President Obama’s tax compromise likely will seal the deal. So stay positive.
Medium-sized companies may be the best way to play this rally. Just look at the iShares S&P MidCap 400 Growth exchange-traded fund (NYSE: IJK), which is one of my favorite positions for subscribers to own. The whole bull/bear debate is over for this index. It’s off on a new adventure. [Writer Jon D. Markman]

Obama Tax Deal Sets the Bull Running

2010-12-14T16:03:00.000-08:00

Consider the following:

What’s the play? Here’s a guess.

Buy, Sell or Hold Pairs Trade: Why it’s Time to Sell Fiat SpA (Pink ADR: FIATY) and Buy Ford Motor Co. (NYSE: F)

2010-12-08T08:27:00.000-08:00

With all that’s happening in Europe right now – not to mention economic expectations and consumer-spending trends both overseas and here in the United States – I find that we have an interesting “pairs trade” available to us.
And the trade that I’m talking about is to have investors sell Fiat SpA (Pink ADR: FIATY) and buy Ford Motor Co. (NYSE: F).
The inspiration for this trade stems from an experience I had as a teenager.
Indeed, it’s been more than 25 years since the story I’m about to relate took place, but the memories are so vivid that they’re never far from my thoughts.
Neither are the lessons I learned – which is fortuitous, since those lessons are especially applicable in today’s unforgiving financial markets.
You see, I was 18 and was in the market for my very first car. Against my father’s wishes – and against what should have been my better judgment – I purchased a used-and-abused Fiat Spider.

In the four years I owned the Fiat, I believe it was in actual running shape for a total of perhaps 11 months. True, the car had been driven hard before I owned it. And I loved that car, despite its failings – after all, I was 18 and the Fiat was a convertible.
But I ultimately came to realize that my father had been right … and that a big reason the Spider was in such bad shape was that it had been a poorly manufactured car to begin with.
Dad had tried to warn me away from that Fiat sports car: The warning signs were all there, he said at the time. I just didn’t see or hear them. Today, when I look at Fiat – the company – I’m experiencing the same warning signals.
But this time they’re warning me away from Fiat’s stock.
Here is how we can listen to what the market is saying about Italy – and its largest employer, Fiat – and use those insights in a pairs-trading strategy that will save some money on one trade, and make some money on the second.
Let’s begin with a close look at Fiat SpA (Pink ADR: FIATY).

A Thumbs Down on Fiat

When I look at Fiat, I see four key causes for caution. Fiat faces:

An unprofitable home market, where it is trapped by a hostile work force.
A major challenge in efforts to leverage its chief U.S. asset (Chrysler Group LLC.), which was acquired essentially for free, but which is dreadfully expensive to operate.
A crucial need to succeed in the international arena, which means it has to succeed as “Fiat” in the United States – a market it left in disgrace nearly three decades ago.
A need to survive and grow until it can take Chrysler public, which won’t happen for at least a year.

Let’s look at these in more detail.
What makes it particularly tough for Fiat is that there’s no “home-field advantage” for the Italian carmaker. Indeed, Italy is the poster child for a Western nation that needs to refinance its sovereign debt.
Italy has the world’s third-largest pile of government debt – but only the seventh-largest economy. It is this debt/gross domestic product (GDP) matchup that is going to drive Italy toward the financial cliff known as “default.” In my mind, it’s not a question of “if,” but rather “when” this is going to happen.
Just to refinance the portion of its debt that’s coming due this year, experts say that Italy will have to issue an estimated $300 billion in new debt. For some context, this is the same amount of money borrowed by the state of California – I mean, by all of the counties, cities, hospitals, airports, railways and anything else I’ve missed.
And Italy needs to do this rollover at lower rates, not higher rates (which isn’t likely to happen, given that it’s becoming a much larger risk.
This sum is huge, but it’s only a portion of the debt burden being carried by an economy that had a $2.04 trillion (GDP) economy in 2009. With a debt/GDP ratio of 116%, Italy’s public debt exceeds its GDP. In all of Europe, only Greece has a higher percentage of debt to GDP.
Italy is sitting on a powder keg of sovereign debt in need of rolling over in 2011 – at the precise time that the country’s central bank is facing a world market that’s already saturated with sovereign debt.
Italy has issued so much national public debt, that it is both “too big to fail” and “too big to bail out.” Even more importantly, it may be too big to roll over the debt that it needs to refinance in the New Year.
In the U.S. market, Chrysler has spent decades playing the role of the Rodney Dangerfield of car manufacturers – getting little or no respect.
And that’s probably with good reason, given the carmaker’s bargain-bazaar pedigree (the modern Chrysler was built by combining the largely second American Motor Corp. with Jeep assets plus the Chrysler and Dodge assets). The company has staggered from one crisis to another; in the last five years alone, three outside firms have tried to turn it around.
As one of what once had been the U.S. “Big Three” automakers, Chrysler was put into receivership as the U.S. government had to step in and bail out the U.S. auto industry during the 2008 financial crisis. Today, Chrysler is operated as part of the Fiat group of companies.
Fiat ended up getting Chrysler for free, with the proviso that the Italian carmaker had to assume stewardship of the U.S. carmaker. Fiat viewed this as a chance to return to the U.S. market for the first time in 27 years. Today, new dealerships are being built for the standalone return of Fiat to the American car market.
Fiat needs its U.S. return to go well. You see, while the company is profitable internationally, it doesn’t make money in its home market. And, as Fiat Chief Executive Officer Sergio Marchionne candidly stated recently: “We are losing money in Italy [and] we can’t go on losing money like this.”
In fact, according to IndustryWeek, Marchionne said Fiat would be best-served by closing all its factories in Italy, and outsourcing all its manufacturing to countries outside of Italy.
As Italy’s largest employer, Fiat is hobbled by a work force with many shortcomings – not the least of which is the fact that the Italian national work force is prone to regular, spontaneous strikes.
That home-market work force isn’t efficient, either. Consider that:

In Italy, Fiat employs about 22,000 workers to build about 650,000 cars annually – for an ouput ratio of 30 cars per employee.
In Brazil, Fiat has a work force of about 9,400, and produces 750,000 cars per year – for an output ratio of 80 cars per worker.
And in Poland, Fiat has a work force of 6,100, and turns out about 600,000 cars per year, for a productivity ratio of 98 cars per employee per year.

Clearly, Chrysler will have to be a key element of Fiat’s growth strategies.
Current plans call for Chrysler to conduct an initial public offering (IPO) of stock in 2011 or 2010, giving the U.S. government a chance to recoup some of the bailout dollars it provided to the U.S carmaker – in a similar fashion to the General Motors Co. (NYSE: GM) IPO that took place in November. Hopefully, the financial markets will be strong at that point, because with other nationalized assets – such as GMAC – also going public, there will be a competition for those IPO-investment dollars.
The key takeaway: Fiat needs a new business plan. The company is stuck with a loss-generating home market, and needs to leverage its Chrysler assets if it’s to have any hope of remaking itself into an international powerhouse.
You know it’s bad when you need to leave your home market, and pin your future on a market that you exited in complete disgrace 27 years before.
It’s not a good strategy, the odds of success aren’t high, and the only conclusion that I can reach is that for anyone who holds Fiat shares – either as U.S. American Depository Receipts (ADRs) or as direct shares listed on a European exchange – now’s a good time to “Sell.”
Since we’re looking at this as a “pairs trade,” let’s now examine the other half of our proposed trade: Ford Motor Co. (NYSE: F).

A Thumbs Up on Ford

When I look at Fiat, I see long lists of challenges and problems – many of them seemingly insurmountable. But when I look at Ford, I see possibilities and potential. Five points in particular underscore Ford’s potential as an investment. For instance, Ford:

Has recorded $6.7 billion in profits so far this year, more than double last year’s year-to-date results at this time.
Did not accept government bailout money in 2009 – making the Dearborn-based company that Henry built the only one of the so-called “Big Three” American carmakers to refuse federal handouts.
Is on track to gain U.S. market share – which would make 2010 the second straight year that Ford did so.
Reported a year-over-year sales gain of 20% in November.
Is already expected to do better in 2011 than it did in 2008 or 2009.

Ford Motor Co. – “FoMoCo” to longtime automobile aficionados (i.e. “gearheads”) such as myself and Money Morning Executive Editor Bill Patalon – has appeared to do the impossible again and again during the past couple of years.
After losing $30 billion between 2006 and 2008, Ford has shown real profits in 2009 and this year, with additional earnings growth expected for 2011.
Ford was the only major U.S. automaker that refused Uncle Sam’s bailout entreaties when the U.S. Federal Reserve was handing out cash to major corporations during the liquidity crisis. Instead, the company used the crisis to address cost issues in its corporate structure. It sold off or spun off non-core international divisions. It reinvested in new product lines.
Ford has a nice head start on GM or Chrysler in the realm of new-vehicle research and development, since the two “government motors” companies were forced to slash R&D initiatives during their “reset” periods. Reports, of late, say that Ford has also been very active in addressing its unfunded retirement liabilities.
Ford has become profitable again and – even more importantly – is proactively taking the steps needed to boost its corporate bond rating. These actions will bear fruit, as the cost of borrowing will start to drop.
As noted, Ford has already reported $6.7 billion in profit in the first three quarters of the year. It is using this to pay down its corporate debt load, which ballooned during the economic upheaval of 2008. In fact, Ford has already pared $10.8 billion in debt so far this year – bringing its total debt down to $22.8 billion.
At Friday’s closing price of $16.80, Ford shares are trading near the top of their 12-month trading range. But the shares are only trading at 10 times earnings, which is well below the growth rates the company is experiencing in its profits.
And the U.S. car market is looking bullish. Light vehicle sales rose 17% in December to a seasonally adjusted rate of 12.3 million units – signaling a strong recovery. For all of 2010, industry sales are projected to be range from 11.5 million to 12 million units – a major rebound from the historic nadir of 10.4 million units sold last year, says Zacks Investment Research.
All the major automakers – except problem-plagued Toyota Motor Corp. (NYSE ADR: TM) – experienced double-digit sales gains. But Ford paced the field, recording a 24.3% gain. That was more than double GM’s results and was nearly 50% better than Chrysler’s.
There was a big upswing in demand for pickup trucks and sport utility vehicles (SUVs) – both historical Ford strengths – during the month. In fact, Ford’s soaring growth was driven by sales of a new Ford Edge SUV (55.2%), F-Series trucks (26.4%) and Lincoln MKZ crossover (48.1%), Zacks analysts said.

And Down Came the Spider…

By the way, I’ll finish the sad story about my first car. In the time I owned it, I replaced the engine, transmission, and even the ignition system – chiefly because they were poorly made and wore out. I also spent a small fortune on bondo and paint in an attempt to stay ahead of the bumper-to-bumper rust that afflicted that little car like an automotive cancer – again, the result of its poor construction.
And that goes back to my comment about the lessons I learned three decades ago still being relevant today. In the end, I could not afford my poor Spider anymore, so I gave it away. That’s akin to the challenge Fiat has with Chrysler, which was presented to Fiat at virtually no cost, but is still to expensive to fix.
Just as Daimler AG (PINK: DDAIF), which owned Chrysler for nine long years, or Cerberus Capital Management LP, the private-equity firm that bought the carmaker in 2007, and that’s now trying to sell the Chrysler financing arm that it still owns. Cerberus walked away from its multi-billion-dollar investment in Chrysler, much as I did with my hefty investment in the Spider.
Some investments are just too expensive to keep. Fiat’s shares are in that category.

Actions to Take: The essence of the “pairs trade” that I’m talking about here is to have investors sell Fiat SpA (Pink ADR: FIATY) and buy Ford Motor Co. (NYSE: F) (**).
If you have exposure to Fiat – either through its Milan-traded shares, or through the U.S. ADRs that trade on the U.S. pink sheets – end it. If you can arrange for shares to borrow, you might even consider going “short” on Fiat.
The Italian automaker is predicating its future on its ability to turn around a basket-case property in the U.S. market – namely Chrysler. Fiat shares are trading near their 52-week high. Let’s look to get out of those shares, or even go short before the reality of Italy’s finances become so clear that Fiat becomes the poster child for a way to short Italy. Given that the Turin-based carmaker is also the largest employer in Italy, as Fiat goes, so goes Italy.
If I were still a hedge-fund manager, I would look to pair the Fiat short trade with an offsetting equivalent long trade using a stock like Ford. In Ford, you have a company that did not go bankrupt, is rapidly paying down its corporate debt, and is doing everything necessary to boost its credit rating.
Short Fiat/long Ford is a nice paired trade, in my opinion. It is also a nice way to get a short on an overpriced Euro-based manufacturer, while at the same time getting the potential added return that a turnaround play such as Ford can provide.
In simple terms, this is all about shorting Europe, and going long on a U.S.-based multinational – making sure that both are in a similar sector. With the continuing contagion that EU countries are experiencing, European countries aren’t going to be able to keep rolling over their debt. When the haircut comes, you don’t want to be anywhere nearby.
That’s why you do want to short Europe, and this trade achieves that goal.
(**) Special Note of Disclosure: Jack Barnes holds no interest in Fiat or Ford.

By Jack Barnes, Contributing Writer, Money Morning

How to Play Market Uncertainty With an Options Straddle

2010-12-06T18:34:00.000-08:00

It’s often said that the only thing certain in the stock market is uncertainty – and that’s certainly been the case this fall.
Since 1950, September has consistently been the worst month for stock performance and October is most notable for the market crashes it has seen – 1929 and 1987, to name two. This year, however, the Dow Jones Industrial Average broke out of a summer slump and gained 11.08% over those two months, with similar percentage gains by the other major indexes. Then, in November, the Dow and other broad indexes lost more than 1%, only to rebound by more than 2% each on Dec. 1 in a 250-point Dow rally inspired by a better-than-expected November jobs report.

What will happen next?
Will Wednesday’s surge turn into a legitimate Santa Claus rally, followed by a strong January Effect advance? Or, will poorer economic numbers and a wave of tax-related selling send the market reeling as fall winners cash in their gains and summer losers shed their poor performers?

No one can provide the answer with 100% assurance – but that doesn’t mean you can’t profit from the market, regardless of which scenario proves correct. The solution involves using options on your favorite stocks or indexes in a strategy known as a “straddle.”

Though it sounds exotic, structuring a straddle is really quite simple. All you do is simultaneously buy both an at-the-money call option and an at-the-money put option on the same stock or index — at the money meaning the striking prices of the options are the ones closest to the actual trading price of the underlying security.
For example, with Altria Group Inc. (NYSE: MO) trading at $24.11 a share, as it was on Dec. 2, the at-the-money call would be the one with a $24.00 striking price. The at-the-money put would also be the one with a $24.00 striking price.
Assuming you expected Altria’s stock to make a move over the coming six or seven weeks, but were unsure of the direction, you would create an Altria straddle by buying both the January $24.00 MO call and the January $24.00 MO put. Based on prices available on Dec. 2, the $24.00 call would cost you 56 cents (the option premium), or $56 for the full 100-share option contract, and the put would cost 74 cents, or $74 for the full contract.
The entire straddle would thus cost $1.30 a share, or $130 total, and would have these features:

If Altria stock closed at exactly $24.00 per share on the option expiration date (January 22, 2011), you would lose the entire $130 you paid for the position. (This is rare, as is a total loss on a straddle position.)
If Altria stock closed between $22.70 (the striking price minus the total premiums paid) and $25.30 (the strike price plus the total premiums paid), you would suffer a partial loss.
At any Altria stock price above $25.30 or below $22.70, your straddle would produce a profit – and the further Altria went outside that range, the larger the profit would be.

In summary, then, the theory behind a straddle is that, if the underlying stock makes a large move in either direction, the gain on the winning option will more than offset the loss on the losing option, giving you a profit on the overall trade.
The table below illustrates the potential outcomes of this straddle at various Altria stock prices, assuming the position is held until the expiration date.

Straddles can be used with any stock or index on which options trade, but the profit/loss scenario can vary substantially from stock to stock, depending on several factors, most important being the time remaining until the expiration of the options used and the price range and volatility of the underlying security.
For example, with Altria, a straddle using March $24.00 puts and calls rather than the January ones cited above would have cost $218 instead of just $130 – meaning Altria would have to climb above $26.18 or fall below $21.82 by expiration for the trade to be profitable. That’s still possible, although quite a bit less likely given Altria’s 52-week trading range of $19.12 to $26.22.
Similarly, a January straddle on U.S. Steel Corp. (NYSE: X) – a much more volatile stock than Altria – would have cost a whopping $640 had it been initiated on Dec. 2. With U.S. Steel trading at $50.30, the premium on the at-the-money January $50.00 call was $3.35 ($335 for the full contract), while the quote for the January $50 put was $3.05 ($305).
Given those numbers, U.S. Steel’s stock would have to climb above $56.40 or fall below $43.60 by Jan. 22, 2011 for the trade to become profitable. While that may seem unlikely, it’s actually quite possible given U.S. Steel’s 52-week range of $36.93 to $70.95 and the fact that it frequently makes daily moves of $1.50 to $2.00 per share.
Nonetheless, the straddle strategy is usually best suited for highly uncertain or extremely erratic market environments, and you should always carefully consider the past trading range and recent volatility of the underlying security to ensure the straddle profit targets are reasonable.
A cheaper variation of the straddle offering slightly smaller profits – a strategy known as a “strangle” – can also be used in volatile markets, and it will be detailed in a future Money Morning article. The potential offered in selling both straddles and strangles will also be covered in the future, though those plays are generally suitable only in more stable markets than the one we’ve experienced recently.

By Larry D. Spears, Contributing Writer, Money Morning

Implied Volatility Movers

2010-12-01T22:28:00.000-08:00

The CBOE Volatility Index (.VIX), which tracks the implied volatility of S&P 500 Index (.SPX) options, is under pressure. SPX is up an impressive 25.5 points to 1,206 and has moved beyond a previous resistance level around 1,200. Meanwhile, VIX hit a low of 20.40 and was recently off 2.85 to 20.69. VIX is sometimes called the market's "fear gauge" because it tends to move higher during times of panic and anxiety on Wall Street. Today's weakness in the index reflects a decline in risk perceptions, which was triggered by a rebound in Europe's equity markets along with positive economic data in the US and China.

After Hours Report for December 1, 2010

2010-12-01T22:13:00.000-08:00

S&P 500 Index (.SPX) 1,206.07 +25.52
CBOE Volatility Index (.VIX) 21.36 -2.18
DJIA 11,255.78 +249.76
NASDAQ 2,549.43 +51.20
Global equity markets rallied and stocks on Wall Street finished broadly higher Wednesday. In Europe, Spain's IBEX helped pace the advance, gaining 4.3 percent on diminishing concerns about the European Debt Crisis. Meanwhile, Hong Kong's Hang Seng added 1 percent following a stronger-than-expected reading on manufacturing activity in China. The domestic news helped as well. Before the opening bell, ADP reported that the US economy added 93,000 private sector jobs last month, which was more than the 58,000 increase that economists had predicted. The Federal Reserve's Beige Book was released Wednesday afternoon and in the report the Fed noted modest improvement in economic conditions. At the end of the day, the Beige Book didn't seem to matter much, however, because the Dow Jones Industrial Average had already ripped more than 200 points higher prior to the news. At the closing bell, the Dow was up 250 points and the NASDAQ had added 51.

Bullish Flow
BofA (BAC) saw a surge in call activity Wednesday. Shares finished up 35 cents to $11.29 and 593,000 contracts traded. The volume is 2.5X the recent average daily and compares to put volume of 237,000 contracts. January 12.5 calls were the most actives. More than 200,000 traded on the session. The activity included a massive spread in which an investor apparently bought 44,900 January 12.5 calls at 21 cents and sold 44,900 January 14 calls at a nickel. The spread, for a net debit of 16 cents, is a bullish play. At expiration, it offers a pay-off (excluding commissions), if shares are trading at $12.67 or higher, which is 12.2 percent above current levels.
Bullish options action was also seen in Tiffany (TIF), Omnivision Tech (OVTI), and Hartford (HIG).
Bearish Flow
Options volume picked up in specialty glassmaker Corning (GLW) Wednesday. Shares finished the day up 38 cents to $18.04 and 43,000 puts and 21,000 calls traded in the name. The top trade was a seller of 20,000 December 17 puts at a dime. This trade probably exits a position opened in late-October when 40,000 contracts were bought at 50 cents. Next, this same investor initiated a bearish May 17 put – 19 call risk-reversal, 15000X. They paid $1.21 per contract for 15,000 May 17 puts and collected $1.23 per contract for 15,000 May 19 calls. So, at the end of the day, it appears that they were closing a bearish position in December and opening a new bearish risk-reversal in May. It might be a move designed to hedge a position in GLW shares.
Bearish flow also picked up in Dana Corp. (DAN), BMC Software (BMC) and Owens Illinois (OI).
Index Trading
The Russell 2000 Small Cap Index (.RUT) saw more volume than usual. The index added 16.13 to 743.11 after the bulls dropped a bomb on the bears Wednesday, triggering big gains in large, mid and small cap names alike. In options action, 83,000 calls and 57,000 puts traded on the Russell, or more than double the recent average volume. The top trade was part of a spread in morning trading after 11,118 December 800 calls traded at the 50-cent asking price and 11,118 December 790 calls traded on the 80-cent bid. It looks like this (Dec 790 – 800 call) spread was sold for a net credit of 30 cents. If so, this strategist probably expects the Russell to hold below 790 (which is 6.3 percent above current levels) through the December expiration in two and half weeks. In other words, they don't expect Wednesday's dramatic run to continue through the December expiration and are collecting premium by writing out-of-the-money call spreads.
Source: optionsXpress Equity Team

Hot Stocks: Google Inc. (Nasdaq: GOOG) Spreads Beyond Search With Groupon Bid

2010-12-01T17:55:00.000-08:00

Google Inc. (Nasdaq: GOOG) is gunning for even greater Web dominance in 2011 by announcing an aggressive move in the online advertising industry, as well as a game-changing entrance into the rapidly growing e-book market.
Google is close to sealing a deal to buy online coupon company Groupon for $5.3 billion, according to people familiar with the matter. This would be Google’s biggest purchase to date. The two-year-old Groupon’s popularity has skyrocketed since its November 2008 start, making it a target for Internet companies wanting a stronger hold on local advertising.
"This would basically get Google the feet on the street for what they would never build themselves," Jason Helfstein, an Oppenheimer & Company (NYSE: OPY) analyst, told The New York Times.

Retailers pair with Groupon hoping the promotion will draw new customers. Instead of typical advertising where a company pays for an ad to encourage its business, Groupon retailers don’t pay unless customers use the e-coupons, which have been wildly successful in some cases. A promotion by The Gap Inc. (NYSE: GPS) last summer generated one-day revenue of $11 million.
Google is eager for the deal to gain specific insight into consumer spending habits as well as a sales force with close ties to local merchants. With access to local business information, Google could enhance offerings like its mapping service and customer reviews. It would also gain access to contact information for 12 million Groupon users, including credit card information and frequently purchased coupons.
The deal also could help Google strengthen its social networking line, which it has failed to develop against powerful rival Facebook.com. The popularity of Mark Zuckerberg’s creation allows news to spread rapidly across friend and business networks, perfect for companies trying to gain attention without spending top dollar on advertising.
But more importantly, Google is afraid of what its competition would do with Groupon if the company remained on the market. Companies like Facebook and Yahoo! Inc. (Nasdaq: YHOO) are competing for the biggest share of the local advertising market as the industry continues its rapid growth. Local businesses spent about $20 billion on online advertising this year, according to media advisory firm BIA/Kelsey, and that should rise to more than $35 billion by 2014.
Danny Sullivan, editor of industry blog Search Engine Land, said when it comes to Groupon, Google’s asking itself, "What’s the price of not buying it?"
But Google’s investors are concerned about the steep price the company is willing to pay for Groupon, which in April was valued at $1.4 billion – about a quarter what Google is said to be offering.
"A multibillion-dollar valuation for a company that is in a business with virtually no barriers to entry and is younger than my toddler is absurd," Forrester Research Inc. (Nasdaq: FORR) analyst Sucharita Mulpuru wrote in a note to clients on Tuesday.
Mulpuru said it would be hard for Google to offer the Groupon service to more retailers through an automated search for advertising because it would have less control over the quality of deals.
Sources close to the matter told The Wall Street Journal that Groupon’s board of directors would hold a conference call Wednesday to decide how to proceed. Groupon founder Andrew Mason refused to comment on the deal, but sources speaking on the condition of anonymity to The Times said the deal could be closed as early as this week.
Alternatives to taking the Google deal include Groupon pursuing an initial public offering.
Analysts estimate Groupon has annual revenue of more than $500 million. It has 35 million subscribers worldwide in 300 markets. Its fast growth allowed it to expand from 200 employees to 3,100 in 11 months.
Groupon continued its growth this week amid acquisition speculation, announcing Tuesday it was buying three "daily deal" Web sites – uBuyiBuy, Beeconomic and Atlaspost – operating in Taiwan, Singapore and Hong Kong, to expand into East and Southeast Asia.

An E-Book Market Game Changer

Google also announced this week that its long-awaited online bookstore would be open by the end of this year. The e-book market is expected to grow to $966 million a year from $301 million in 2009, according to Forrester Research.
In an effort to snag market share from Internet powerhouse Amazon.com Inc. (Nasdaq: AMZN), which holds an estimated 65% of the e-book market, Google Editions will operate on a "read anywhere" model for use on most devices with a Web browser. In an approach different than that of competitors, users can buy books from Google or multiple online retailers, collect them in a library set up through a Google account and read them on a variety of devices.
Users of Amazon.com’s Kindle purchase books only through Amazon, and can read them only on devices running Kindle software. They can also access free books from other sources.
Analysts think Google’s strategy of not linking its online bookstore with a specific e-reader device could give it a market advantage as the number of gadgets used for online books grows in coming years.
Google has already signed deals with many major book publishers, and more than 200 independent booksellers in the United States could sign up, according to the American Booksellers Association. Independent stores that can’t afford to open their own e-bookstore can install Google technology on their Web sites and receive a percentage of revenue from books sold.
Since Google’s search engine attracts 190 million U.S. Internet users per month, according to comScore Inc. (Nasdaq: SCOR), analysts think it could make significant waves in the e-book market.
"Google is going to turn every Internet space that talks about a book into a place where you can buy that book," Dominique Raccah, owner of independent publisher Sourcebooks Inc., told The Journal. "The Google model is going to drive a lot of sales. We think they could get 20% of the e-book market very fast."
Credit Suisse Group AG (NYSE ADR: CS) analysts said Google’s e-book venture combined with Apple Inc.’s (Nasdaq: AAPL) use of the iPad and online iTunes store could reduce Amazon.com’s market share to 35% over the next five years, down from 90% in early 2010.

Regulatory Roadblocks

The European Commission is launching a formal inquiry into allegations that Google is manipulating search results.
The investigation will try to determine if Google is intentionally lowering the rank of unpaid search results that could lead users to competitors’ sites. It’s also looking into claims that Google places exclusivity obligations on its ad partners, preventing them from posting certain competitors’ advertisements on their sites.
Google said after the European Union’s announcement that it has never intentionally hurt competing services and that there are "compelling reasons" why complaining sites were "ranked poorly by our algorithms."

Google is already facing heat from online travel firms that are trying to block Google’s acquisition of ITA Software, which organizes flight information for online search. The firms say Google’s ITA ownership would give it too much power over the industry.
Google might be facing more U.S. regulatory roadblocks after the European Commission’s announcement this week.
"You may well see something soon from the U.S. agencies, but I can’t promise anything," said Melanie Sabo, the assistant director for anticompetitive practices at the Federal Trade Commission’s Bureau of Competition.
As Google continues its expansion and enters more industries, it’s likely to face even more scrutiny.
"The more Google acquires, the more antitrust issues they are opening themselves up to," an anonymous source told Reuters. "That has to be considered."

By Kerri Shannon, Associate Editor, Money Morning

Goldman's Trading Tips Reward Its Biggest Clients

2010-09-01T12:24:00.000-07:00

24 Agustus 2009 22:53
By SUSANNE CRAIG, WSJ.com
AUGUST 24, 2009
Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show.
The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry's research didn't find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.
Every week, Goldman analysts offer stock tips at a gathering the firm calls a "trading huddle." But few of the thousands of clients who receive Goldman's written research reports ever hear about the recommendations.

At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman's widely circulated research reports. Some Goldman traders who make bets with the firm's own money attend the meetings.

Critics complain that Goldman's distribution of the trading ideas only to its own traders and key clients hurts other customers who aren't given the opportunity to trade on the information.
Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.

Former Goldman client George Klopfer of Park City, Utah, who was unaware of the trading tips until recently, says the practice is unfair. "When I joined Goldman as a client, I got all these fancy brochures saying they put the client first," he says. "I just don't want to have to worry about them or big clients trading on stuff like this. I was at the end of the food chain." He says he pulled out most of the $20 million in his account earlier this year after losing money on several Goldman funds. Goldman says individual clients like Mr. Klopfer typically have a long-term investing approach and are not focused on individual stocks.
Since the trading huddles began about two years ago, Goldman has supplied "trading ideas" on hundreds of stocks to the traders and top clients, according to internal documents reviewed by The Wall Street Journal.

Goldman spokesman Edward Canaday says the tips are "market color" and "always consistent with the fundamental analysis" in published research reports. "Analysts are expected to discuss events that may have a near-term or short-term impact on a stock's price," he says, even if that is a different direction from an analyst's overall forecast. Goldman's published research reports include a disclosure that "salespeople, traders and other professionals" may take positions that are contrary to the opinions expressed in reports. But the firm doesn't disclose the trading huddles.

Mr. Canaday says analysts are told that any comment at a meeting that could result in a change in a rating, earnings estimate or stock-price target "must be published and disseminated broadly to all clients." He adds, however, that it is rare that tips arising from the meetings reach that threshold. He says ratings changes after the meetings also are rare.

The tips usually go to top clients who have expressed interest in having the information and have short-term investment horizons, he says. Goldman doesn't want to overload other clients with information that isn't relevant to them, he says. "We are not in the business of serving thousands of retail customers," he says.
At least one competitor discloses such trading tips much more broadly. Morgan Stanley's research department sends blast emails with short-term views on various stocks to thousands of clients, and posts the information on its Web site. It doesn't call customers to convey the tips, because Morgan Stanley officials decided that could expose the firm to questions about selective disclosure, according to people familiar with the matter.

"The spirit of the law is twofold," says Eric Dinallo, who in 2003, when serving as a deputy to former New York Attorney General Eliot Spitzer, helped negotiate a $1.4 billion stock-research settlement with 10 major Wall Street firms, including Goldman. "Analysts should give consistent advice to all their customers, be they small investors or big trading clients." Any views that differ from an analyst's published rating but are "worth sharing with certain customers," he says, should be made "available to everyone."

The 2003 case involved allegations that Wall Street firms were issuing overly optimistic stock research in order to win more lucrative investment-banking business. The settlement, in which Goldman and the other firms didn't admit or deny wrongdoing, erected walls between research and investment banking. Securities laws currently require research analysts to personally certify that their reports accurately reflect their views of a stock.
Some analysts have gotten into big trouble by contradicting themselves. In 2003, former Merrill Lynch & Co. technology analyst Henry Blodget agreed to a lifetime ban from the securities industry after touting stocks that he disparaged in private emails.

These days, analysts must juggle growing demands from trading units at their firms. Such operations have emerged as big moneymakers, fueling the record $3.44 billion in net income at Goldman in the second quarter. A large portion of Goldman's profit came from trades done for mutual funds, pension funds, endowments, hedge funds and other big institutional investors. Proprietary trading, in which Goldman makes bets with its own capital, accounts for about 10% of its profits.
Analysts have a financial incentive to give clients useful information. Goldman sets aside roughly 50% of money allotted each year to analyst compensation to distribute based on feedback from trading customers. The balance of analysts' pay is determined by the performance of their stock picks. That pay system is common among major Wall Street firms.

At many firms, traders, salespeople and analysts hold early-morning calls to review ratings changes, recommendations and market events. Throughout the day, analysts talk to key clients to help them interpret research reports and provide more detail on specific events such as earnings.

The research business is considered a loss leader at most firms, despite persistent attempts by Goldman and other securities giants to squeeze more revenue from it. Goldman was looking for a leg up on rivals when it started the trading huddles in 2007. That year, Goldman ranked ninth in Institutional Investor magazine's annual list of the best equity analysts, as determined by a survey of big institutional investors. Goldman was rated eighth in last year's competition.

The huddles began in earnest around the time Goldman's research department got a new boss, Mr. Strongin. He came to the firm in 1994 from the Federal Reserve Bank of Chicago, where he had been director of monetary-policy research. At Goldman, he had run the commodities-research operation, then was co-chief operating officer of the whole research unit, before being asked to run it in April 2007.
Mr. Strongin, 51 years old, set out to improve Goldman's research operations. The firm asked important clients for suggestions. One idea that took hold was giving certain customers and traders more access to stock tips.
The idea was controversial with some Goldman research staffers. "I am not sure we should be giving recommendations that go against our research," said one Goldman employee at a meeting where the trading huddles were discussed, according to one attendee.

Laura Conigliaro, Goldman's co-head of research in the Americas region, replied at the meeting that the firm needed to respond to inevitable differences in the time horizons of investors. Issuing a short-term buy recommendation wasn't necessarily at odds with a lukewarm "neutral" rating for the long run, she added.
One recipient of the trading tips, Steve Eisman, a managing director of hedge fund Frontpoint Partners LLC, says that he likes the back-and-forth he now has with Goldman's analysts, and that he pays attention to some of the tips. "A few years ago, Goldman wouldn't make a negative call on anything," he says. "Now they say it like it is."

The huddles can last from 20 minutes to one hour, according to participants. Analysts are encouraged to bring a trading idea. They talk with Goldman traders about the financial markets and events that could trigger movement of specific stocks. Goldman specifies how long each recommendation is in effect, often one week.
At a huddle on July 31, for example, the firm's technology analysts and traders discussed more than a dozen stocks, ranging from Garmin Ltd. to Microsoft Corp. None of the analysts said anything that appeared to differ from their stock ratings.

Compliance officers sit in on almost all the meetings, Goldman says. Research analysts say they have been guided on what language to use in the huddles. Words like "buy" and "sell" are to be avoided, while "run up," "give back" and "oversold" are encouraged. Internal documents reviewed by the Journal initially tracked the trading-huddle tips as "buy" or "sell," but now refer to them as "up" or "down."
Research-department employees prepare telephone scripts, then call top clients, typically several hours after the meeting has ended. Goldman says its in-house traders are prohibited from trading on the tips until after they've been relayed to clients.

Documents reviewed by the Journal indicate that anywhere from six to 60 clients are contacted, depending on the investment. For example, clients specializing in financial stocks are given recommendations about that sector. Each call typically includes comments about the overall market and the kinds of investors Goldman believes are propelling it, and ends with a stock tip.
The meeting where Mr. Irizarry suggested that Janus shares were worth buying, held on April 2, 2008, was attended by Goldman's financial-research analysts and traders who handle customer orders. It also included another class of traders called "franchise risk managers," who sit with and advise the traders handling customer orders -- and make bets with Goldman's money.

Typically, traders who wager firm capital are walled off from those handling customer orders so that they don't take advantage of information about client trading, which securities regulations forbid. Goldman says its franchise risk managers don't trade on client information and must first share trading-huddle tips with clients before acting on the tips themselves.

At the April 2 meeting, Goldman says, Mr. Irizarry was expressing a sentiment about Janus similar to one contained in a report Goldman published the previous day. A chart in that report, Goldman says, cited a report from mutual-fund-research firm Morningstar Inc. that was positive on Janus. While internal documents show Mr. Irizarry's rating on Janus stock at the time was "neutral," they note the "price action expected" was "up." Mr. Irizarry declined to comment.
The day after the meeting, Goldman told selected clients that "in particular, we highlight Janus," according to an internal document.

At the same April 2 trading huddle, Goldman analyst Thomas Cholnoky said he favored MetLife Inc. over other insurers, according to notes from the meeting. Internal documents indicate he believed the stock would rise over the short run.
Hours after the meeting, Mr. Cholnoky released a research report that reiterated his "neutral" rating on MetLife, saying he hadn't changed his estimates. Goldman says his view about the company's favorable short-term prospects is clearly conveyed in a research note issued prior to the huddle, which said the insurer "stands to be the biggest beneficiary from the steepening yield curve."
A week later, Mr. Cholnoky boosted his rating on MetLife to a buy, and Goldman added the stock to its "America's Buy List" of top stock recommendations. Mr. Cholnoky said he expected MetLife's quarterly results, due in a few weeks, to "surprise on the upside." (The quarterly results, when they came out, did slightly.) Mr. Cholnoky, who no longer works at Goldman, didn't respond to messages seeking comment.

Goldman says that in both these cases the analysts' views were consistent with the published research, which included a 12-month price target that was above each stock's price at the time.
Morgan Stanley also generates short-term views on various stocks, which it calls "Research Tactical Ideas" and distributes widely via email and the firm's Web site. In May, for example, it told clients that insurer Aflac Inc.'s earnings guidance would be "softer than many investors expect." Its rating on Aflac at the time was "neutral."

In its longer-term reports published by analysts, Morgan Stanley discloses that it issues such trading tips, and that the tips on any given stock "may be contrary to the recommendations or views expressed in this or other research on the same stock."
Last year, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible.
A Finra spokesman said the agency still is reviewing comment letters filed in response to the proposal. Goldman hasn't commented on the proposed rules.

Hot Stocks for 2010

2010-01-07T11:43:00.000-08:00

I know I'm a little late with this post since we're almost in to March already but I thought it would be useful to have a little round up of what we can expect in 2010. You haven't all gone and blown your budgets already have you? No I didn't think so. This is actually a trick post anyway because if you've read any of my other messages I'd never actually recommend a stock tip to go and buy. I will however pass on a few ways on how to buy stocks for beginners and how to buy stocks for dummies. That way you can do a little work yourself and retain no liability if it doesn't work out. Sometimes it won't work out! I've been down that way and unfortunately suffered from the technology bubble bursting. I'm sure I wasn't the only one to suffer from that right? Anyway Kraft finally bought Cadbury in the UK much to my disappointment. To be honest it's not about the stock is more about my love for chocolate. If you've read any of the press coming from Warren Buffett you'll see that he was dead against the move from the start. Don't listen to Warren Buffett at your peril! One piece of advice I would give if you're looking for quick stock picks for 2010 then why not have a look at what Berkshire Hathaway has been buying. It's kind of cheating I know but it's not at the same time. You can see what Warren Buffett decides is a good purchase and then do a little research of your own to decide if it's still a good investment. The problem with following a trend like this is that you often get on just as the price has been ramped right out. Just the shear mention of Berkshire Hathaway's name against a stock is enough to drive the price up through the roof. Everyone see's who's interested in and decide to invest in it themselves. This is a sure fire way of paying over the odds for a share or stock in a company. This is the same the world over. It doesn't matter if you're in the Japanese stock exchange or UK, a bargain is still a bargain.

So now that my ranting is over here's the stocks that Warren Buffett's been buying in 2010. Could this be an insight into 2010 hot stocks? Perhaps. If you're looking hot penny stocks, well that doesn't really go with the ethos of Berkshire Hathaway. The two biggest investments Buffett made this year has been in the document and information management company called Iron Mountain. You might have seen them in your office coming to collect the back up tapes from your servers and such like. Buffett doubled his investment in the company to 7 million shares. Can we expect that this type of company will be on the rise in the near future? Probably, Iron Mountain is the market leader in this kind of work and will only get stronger and stronger. Fantastic name too. Buffett always increased his shares in Republic Services Inc. to 8.3 million. This company deals with garbage and waste management. Again this is a service that is going to grow and grow and will likely be unaffected by recession or any other type of outside interference. Investing for dummies this could be, stick to what you know and the market leaders in their field.

Buffet also increased his shares in Wal-Mart by more than a million bringing the total to 37.8 million shares. Wal-Mart are always a sure fire bet due to their stranglehold in the US supermarket area. They also own number one supermarket chain ASDA in the UK. The most interesting investment he made, perhaps another hot stock for 2010 is his purchase of more stocks in a bank. Which one was it this time? Well it wasn't Sun Trust Banks Inc. He actually reduced his shares from 2.22 million to 1.54 million. So which bank has he shown faith in? Wells Fargo & Co. Another 2010 hot stock? Do your analysis and find out for yourself! It was interesting that he chose to invest in another bank though considering the terrible time of it the financial sector has faced recently. It is somewhat reassuring that someone of Buffett's caliber has decided to back a bank and invest heavily. Could this be a sign that things in the financial sector are about to pick up?

OK so I know it's not quite a hot stock for 2010 list but to be honest things don't change from year to year. If you do your analysis properly, work out the intrinsic value of a company and decide if its worth investing in. There's no point in trying to predict the future and don't get carried away because you can buy stocks online so easily these days. You want to try to keep a clear head and look at things from a very analytical point of view. Keep emotions out of it and assess investment opportunities on their relative positives and negatives. Stock market for dummies is probably a misleading title but I guess we all have to remain focused on the job in hand. Warren Buffett's purchases are a little taster of what we can expect in 2010. Just make you do your research properly first before you jump in and copy him blindly! You might just have missed the chance of a bargain in the stock market by that point.

How You Finance Goldman Sachs’ Profits

2009-08-04T12:18:00.000-07:00

By Nomi Prins | Tue July 28, 2009

This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation's biggest banks can't be trusted might not matter very much to the rest of us. But since the record bank profits we're now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed's role in Goldman's rapid return to the top of Wall Street.

To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn't have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.

Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks'. That's the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.

Goldman didn't like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what's called the Market Risk Rules that bank holding companies adhere to when computing their risk.

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG's spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG's free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there's the $29.7 billion it's used so far out of the $35 billion it has available, backed by the FDIC's Temporary Liquidity Guarantee Program, and finally, there's the $11 billion available under the Fed's Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman's request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That's the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It's also the division that would stand to gain the most if Waxman's cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It's not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.

But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can't trade without it. As of June 26, 2009, Goldman's total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn't disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed's secret facilities.

Not only that, by virtue of how it's set up, most of Goldman's unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman's subsidiaries, some of which are regulated, some of which aren't. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase's results got from Wall Street. Betting is betting.

Let's pause for some reflection: The bank "stars" made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he's concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn't add up to a really healthy scenario. It's more like bad déjà vu.

As a recent New York Times article (and many other publications in different words) said, "For the most part, the worst of the financial crisis seems to be over." Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that's a dangerous conclusion. It doesn't mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn't mean that consumers are any better off than they were before the crisis emerged. It's just that they didn't get the same generous subsidies.

Additional research by Clark Merrefield.

Stock Option Plants For Executive

2009-07-21T11:50:00.000-07:00

A stock option is an offer to sell stock at a specified price at some time in the future or over a limited period of time with a specific termination date. Stock options have long been used for executive compensation to accomplish some of the same purposes as compensation with restricted stock. Over the years, Congress has designed special tax incentives to make certain types of stock option plans attractive. The type of tax-favored plan currently in effect is known as an incentive stock option (ISO) plan, which will be discussed separately. In this section, stock options in general-sometimes referred to as nonstatutory or nonqualifed stock options-will be discussed first.

Options to buy stock in the employer company are typically granted to executives as additional compensation at a favorable price, with the hope that the value of the stock will rise and make the option price a considerable bargain for the executive. If the stock price declines, the executive simply declines to exercise the option to buy the stock. This gives the executive a benefit whose potential value is tied to the fate of the company, but with no downside risk. This valuable incentive to the executive appears to cost the company very little, although this is somewhat misleading, as discussed below.

Stock options other than ISOs can be designed in any manner the employer and employee desire. Typically, a stock option runs for a period such as ten years, and is granted at a price equal to the fair market value of the stock on the date that it is granted.

Bill Kate is given an option in Year 1 to purchase up to 1,000 shares of stock at $50 per share, which is the current market price, with the option to be exercised over the next ten years. The plan may provide a waiting period before the option may be exercised, or it may provide that the option can be exercised only in successive installments-i.e., only 20 percent of the option can be exercised during the first two years, 40 percent over the first four years, and so on. The option has no value to Bill at the date of the grant because the option price was the same as the market price. Therefore, as of Year 1, there was no taxable income to Bill. Under the general tax rules in this situation, Bill will not be taxed until shares are actually purchased.

Suppose Bill purchases 400 shares in Year 4 for a total of $20,000. If the fair market value of the shares in Year 4 has risen to $40,000, the executive has $20,000 of ordinary income in Year 4. The company will get a tax deduction of $20,000 in Year 4, the same as the amount of Bill's compensation income, again assuming that Bill's compensation meets the reasonable compensation test for deductible compensation. However, the company gets no further deduction if Bill resells the stock and realizes a capital gain.

Options with an immediate value to the executive are sometimes used in executive compensation.

Suppose that the option had been granted at $40 per share, a bargain over the prevailing market price of $50 at the time of the grant. If the option has a determinable value and the option could be traded on an established market, the value of the option is taxable as ordinary income to Bill at the time of the grant, with a corresponding deduction to the employer. If tax is payable at the grant of theoption, there is no further taxable compensation income when the option is exercised later. This can be an advantageous approach if the stock is expected to appreciate substantially in value, because the taxable compensation income at the time of the grant is relatively small, while the remainder of the gain on the overall deal will be taxed as capital gain only when the stock is sold.

Suppose that Bill is granted an option for 500 shares of company stock at $40 per share in Year 1, the current market price being $50 per share. Bill has $5,000 of ordinary compensation income in Year 1, the year of the grant. In Year 4, Bill exercises the option and buys 400 shares for $16,000. There is no ordinary income tax to Bill at the time of the exercise in Year 4.

The stock option appears to be an almost ideal method of compensating executives, providing a valuable incentive-based compensation arrangement at practically no cost to the company. However, the company's cost is comparable to the cost of cash compensation. While it costs the company almost nothing to grant options and print stock certificates to provide shares when the options are exercised, the executive will exercise the option only when the stock has a substantial market value. If this is the case, the company could itself have sold the stock used in the option arrangement on the open market and received the full proceeds. However, the grant of an option does not result in a charge to the company's income statement, so this form of compensation can be attractive from an accounting point of view.

The tax rules applicable to nonstatutory stock options do not provide any particular tax advantage to the employer company in using stock option plans. Therefore, in designing a stock option plan the company must look for benefits to itself just as in the case of any other kind of executive compensation. Typically, stock option plans would be used where the executive has a strong desire to obtain an interest in the business, or where the executive has a direct impact on the company's profits and, therefore, its stock value.

Financial Markets and Economic Crash, The Next Leg Down Will be Worse

2009-06-10T11:37:00.000-07:00

Collapsing home prices and credit markets continue to put downward pressure on consumer spending, forcing the Federal Reserve to take even more radical action to revive the economy. Last week, Fed chief Ben Bernanke raised the prospect of further monetizing the debt by purchasing more than the $1.75 trillion of Treasuries and mortgage-backed securities (MBS) already committed. The announcement sent shock-waves through the currency markets where skittish traders have joined doomsayers in predicting tough times ahead for the dollar.

Foreign central banks have been gobbling up US debt at an impressive pace, adding another $60 billion in the last three weeks alone. That's more than enough to cover the current account deficit and put the greenback on solid ground for the time-being. But with fiscal deficits ballooning to $3 trillion in the next year alone, dwindling foreign investment won't be enough to keep the dollar afloat. Bernanke will be forced to either raise interest rates or let the dollar fall hard.

Export-led nations are looking for an edge to revive flagging sales by keeping their currencies undervalued. But the strong dollar is making it harder for Bernanke to engineer a recovery. He'd like nothing more than to see the dollar tumble and reset at a lower rate. That would reduce the debt-load for homeowners and businesses and send consumers racing back to the shopping malls and auto showrooms. Perception management is a big part of stimulating the economy.

That's why the financial media has been air-brushing articles that focus on deflation and shifting the attention to inflation. It's an effort to kick-start consumer spending by convincing people that their money will be worth less in the future. But deflation is still enemy number one. Rising unemployment, crashing home prices, vanishing equity and tighter credit; these are all signs of entrenched deflation.
Bernanke faces three main challenges to put the economy back on track. He must remove the hundreds of billions in toxic assets from the banks balance sheets, reignite consumer spending to offset the sharp decline in aggregate demand, and fix the wholesale credit-mechanism that provides 40 percent of the credit to the broader economy. Treasury Secretary Timothy Geithner has taken over the distribution of the remaining TARP funds, and created a new program, the Public-Private Investment Partnership (PPIP), for purchasing toxic mortgage-backed assets.

The PPIP will provide up to 94 percent "non-recourse" government loans for up to $1 trillion of assets which are worth less than half of their original value at today's prices. The Treasury's plan is an attempt to keep asset prices artificially high so that the losses will not be realized until they've been shifted onto the taxpayer. Here's how John Hussman of Hussman Funds summed up Geithner's PPIP:
"From early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount - the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid.

This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
Make no mistake - we are selling off our future and the future of our children to prevent the bondholders of U.S. financial corporations from taking losses. We are using public funds to protect the bondholders of some of the most mismanaged companies in the history of capitalism, instead of allowing them to take losses that should have been their own.

All our policy makers have done to date has been to squander public funds to protect the full interests of corporate bondholders. Even Bear Stearns bondholders can expect to get 100% of their money back, thanks to the generosity of Bernanke, Geithner and other bureaucrats eager to hand out the money of ordinary Americans." (John Hussman, "The Fed and Treasury - Putting off Hard Choices with Easy Money, and Probable Chaos, hussmanfunds.com)
The second part of the Fed's plan is to fix the wholesale credit-mechanism, which means restoring the securitization markets where pools of loans are transformed into securities and sold to investors. Until Bernanke is able to lure investors back into purchasing high-risk debt-instruments comprised of student loans, mortgage securities, auto loans and credit card debt, the credit markets will continue sputter and growth will be flat.

Structured-debt creates the asset base which is leveraged though traditional loans or complex derivatives. Credit expansion maximizes profit, inflates asset prices and establishes the structural framework for shifting wealth to financial institutions via speculative asset bubbles. This is the basic financial model that US banks and financial institutions hope to export to the rest of the industrial world to ensure a greater portion of global wealth for themselves and a stronger grip on the political process.

Bernanke's Term Asset-backed Securities Loan Facility (TALF) provides up to $1 trillion in non recourse loans to financial institutions willing to buy AAA-rated debt-instruments backed by consumer and small business loans. So far, the response has been tepid at best. For all practical purposes, the market is still frozen. Bernanke knows that there will be no recovery unless the credit markets are functioning properly.

He also knows that the TALF won't succeed unless he provides guarantees for the underlying collateral, which is loans that were made to applicants who have no means for paying them back. Bernanke's guarantees will cost the taxpayer billions of dollars without any assurance that his plan will even work. It's a complete fiasco.
From the Federal Reserve Bank of San Francisco Economic Letter, "US Household Deleveraging and Future consumption Growth" by Reuven Glick and Kevin J. Lansing:
"More than 20 years ago, economist Hyman Minsky (1986) proposed a "financial instability hypothesis." He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.

Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing. The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.
Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores.

Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless. (The Federal Reserve Bank of San Francisco Economic Letter, "US Household Deleveraging and Future consumption Growth" by Reuven Glick and Kevin J. Lansing)

FOREX

2009-05-08T11:16:00.000-07:00

FOREX is a more objective market, because if some of its participants would like to change prices, for some manipulative purpose, they would have to operate with tens of billions dollars. That is why any influence by a single participants in the market is practically out of the question. The superior liquidity allows the traders to open and/or close positions within a few seconds. The time of keeping a position is arbitrary and has no limits: from several seconds to many years. It depends only on your trading strategies. Although the daily fluctuations of currencies are rather insignificant, you may use the credit lines, that are accessible even to currency speculators with small capitals ($ 1,000 - 5,000), where the profit may be impressive. (You can learn more about it in the section: The main principles of trading.)

The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply. This decreases overhead expenses for transferring money and gives an opportunity to open positions with a small account in US dollars, buying and selling a lot of other currencies. That is, on can conduct transactions very quickly, getting a big profit, when the exchange rates go up or down. Many speculative transactions in the international financial markets are made on the principles of marginal trading.

Margin trading is trading with a borrowed capital. Marginal trading in an exchange market uses lots. 1 lot equals approximately $100,000, but to open it it is necessary to have only from 0.5% to 4% of the sum. For example, you have analyzed the situation in the market and come to the conclusion that the pound will go up against the dollar. You open 1 lot for buying the pound (GBP) with the margin 1% (1:1000 leverage) at the price of 1.49889 and wait for the exchange rate to go up. Some time later your expectations become true. You close the position at 1.5050 and earn 61 pips (about $ 405). For the calculation of 1 pip click here.

Everyday fluctuations of currencies constitute about 100 to 150 pips, giving FX traders an opportunity to make money on these changes. In FOREX, it's not obligatory to buy some currency first in order to sell it later. It's possible to open positions for buying and selling any currency without actually having it. Usually Internet-brokers establish the minimum deposit such as $ 2000, for working in the FOREX market, and grant a leverage of 1:100. That is, opening the position at $100,000, a trader invests $1,000 and receives $99.000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD).

In order to assess the situation in the market a trader has to be able to use fundamental and/or technical analysis, as well as to make decisions in the constantly changing current of information about political and economic character. Most small and medium players in financial markets use technical analysis. Technical analysis presupposes that all the information about the market and its further fluctuations is contained in the price chain. Any factor, that has some influence on the price, be it economic, political or psychological, has already been considered by the market and included in the price. The initial data for a technical analysis are prices: the highest and the lowest prices, the price of opening and closing within a certain period of time, and the volume of transactions.

A technical analysis is founded on three suppositions: Movement of the market considers everything; Movement of prices is purposeful; History repeats itself. That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices. A number of technical indicators have been installed into the PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies. For a more detailed description of the indicators, analyzing price charts and volumes of trading, click here.
Fundamental analysis is an analysis of current situations in the country of the currency, such as its economy, political events, and rumors. The country's economy depends on the rate of inflation and unemployment, on the interest rate of its Central Bank, and on tax policy. Political stability also influences the exchange rate. Policy of the Central Bank has a special role, as concentrated interventions or refusal from them greatly influence the exchange rate. At the same time one should not consider fundamental analysis just as an analysis of the economic situation in the country itself. A far bigger role in the FOREX market belongs to the expectations of the market participants and their assessment of these expectations. Various prognoses and bulletins, issued by the participants, have a strong influence on the expectations. Very often an effect of the so-called self-filfilling prophecy occurs when market players raise or lower the exchange rates according to the prognosis. But a deep and thorough fundamental analysis is available only for big banks with a staff of professional analysts and constant access to a wide field of information.

The Main Principles of Trading In contrast to exchange transactions with real supply or real currency the participants of FOREX use trading with a margin deposit; i.e. marginal or leverage trading. In marginal trading, each transaction has two obligatory stages (they can be divided by period of time, which can be as long as you like): buying (selling) of currency at one price, and then selling (buying) it at another (or at the same) price. The first transaction is called opening the position, the second one, closing the position. Opening a position, a trader furnishes a deposit sum from 0.5 to 4 per cent of the credit line, granted for the transaction. So, in order to buy or sell 100,000 US dollars for Japanese yens, you will not need the whole sum, but only from 500 to 2000 US dollars depending on your policy of controlling risks. When the position is closed, the deposit sum returns, and calculation of profits or losses is done. All the profit or losses caused by the change of currency rates is credited on your account.

Underlying Instrument

2009-04-15T04:58:00.000-07:00

The something that an option gives a person the right to buy or sell is the underlying
instrument. In case of index options, the underlying shall be an index like the Sensitive index DOW or S&P 500 or individual stocks. A class of options is all the puts and calls on a particular underlying instrument.

Liquidating an option

An option can be liquidated in three ways.

A closing buy or sell, abandonment or exercising. Buying and selling of options are the most common methods of liquidation.
An option gives the right to buy or sell a underlying instrument at a set price.
Call option owners can exercise their right to buy the underlying instrument.
The put option holders can exercise their right to sell the underlying instrument.
Only options holders can exercise the option. In general, exercising an option is considered the equivalent of buying or selling the underlying instrument for a consideration.

Options that are in-the-money are almost certain to be exercised at expiration.
The only exceptions are those options that are less in-the-money than the transactions costs to exercise them at expiration.
Most option exercise occur within a few days of expiration because the time premium has dropped to a negligible or non-existent level.
An option can be abandoned if the premium left is less than the transaction costs of liquidating the same.

Option Pricing

Options prices are set by the negotiations between buyers and sellers.
Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument.
An option price or premium has two components : intrinsic value and time or extrinsic value.

The intrinsic value of an option is a function of its price and the strike price. The intrinsic value equals the in-the-money amount of the option.
The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value.

Exercising Options

2009-04-04T04:55:00.000-07:00

People who buy options have a Right, and that is the right to Exercise.
For a Call exercise, Call holders may buy stock at the strike price (from the Call seller).
For a Put exercise, Put holders may sell stock at the strike price (to the Put seller).
Neither Call holders nor Put holders are obligated to buy or sell; they simply have the rights to do so, and may choose to Exercise or not to Exercise based upon their own logic.

Assignment of Options
When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i.e., class, strike price and option type). Once found, that writer may be Assigned. This means that when buyers exercise, sellers may be chosen to make good on their obligations.

For a Call assignment, Call writers are required to sell stock at the strike price to the Call holder.
For a Put assignment, Put writers are required to buy stock at the strike price from the Put holder.

Some Basic Terms Explained

Strike price
The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price. Each option on a underlying instrument shall have multiple strike prices.

In the money:
Call option - underlying instrument price is higher than the strike price.
Put option - underlying instrument price is lower than the strike price.

Out of the money:
Call option - underlying instrument price is lower than the strike price.
Put option - underlying instrument price is higher than the strike price.

At the money:
The underlying price is equivalent to the strike price.
Expiration day Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American style options can be exercised any time, before the expiration date at the owner's discretion. Thus, the expiration and exercise days can be different. European style options can only be exercised on the expiration day.

How to buy a stock

2009-03-31T12:40:00.000-07:00

Using stock market software is part of the game now whether you are comfortable with it or not. It just makes thing so much easier and quicker. I can manage all my stocks in one place using Google Finance. I can see everything quickly at a glance without having to log into multiple web sites and compare the data across split screens. Yes it was a bit of a pain to set up in the first place as I have accounts with different brokers. I still tend to use Fidelity’s site every now and then to keep track of how my mutual funds are doing. I haven’t found a way of integrating that with Google Finance just yet. If anyone knows let me know as I’ll be all set from the one screen. I want the perfect stocks for dummies interface!

Automated stock trading software is something I get emailed about every now and then. It tends to be those annoying spam emails that end up in my junk mail box and I really have no business reading. Still, I find myself pondering over them wondering if they could actually make this whole game any easier. Its human nature to try and find shortcuts and lets face it some of the work in buying stocks is really boring. I mean seriously, who enjoys reading over companies annual reports. Especially if it’s the fifth one you’ve read that day.

Unfortunately automated software isn’t quite as sophisticated that it’s going to replace all the boring manual work for you. Well, none that I’ve seen anyway. You can use them if you’re interested in day trading or currency trading to manage all those transactions for you. I can’t imagine trading in those markets without using some sort of software. The idea with the automated offerings is you put in a host of parameters at the start and it goes off on it’s own buying and selling as you have instructed. The keyword in that last sentence is ‘you have instructed’ as there’s no thinking involved in this software. It’s just matching patterns based on your initial criteria. Unfortunately we don’t have any Skynet style system that will make you rich. If I did I wouldn’t tell you anyway. Anyway I’m not saying they’re all bad I’m sure they have their uses. Day traders and currency traders will know what I’m talking about. For value investing, I’ll be keeping my money for now.
In other stocks news this well GM stock is back and available to trade! It’s been up and down like a fat kid on a trampoline since opening on Monday. My advice? Stay away for now and let it settle down. I’d imagine the price will dip and climb until the end of the week. So check back at the start of next week and see how the GM stock price is doing then. The stock market has been pretty unstable as it is lately without this giant of a company making a reappearance. General Motors Co. pulled off an IPO worth $15.8 billion, which was quite hard to believe but in many ways announced the return of the company. I’m sure many of you will remember GM being bailed out by taxpayers to the tune of $50 billion not too long ago. The U.S government sold 478 million shares at $33 each share on the opening day. Things are about to get interesting. Many market experts are estimating that the stock will level out at $36 a share but how can they really be sure. I’d stay away for now, but that’s just me ever the cautious one. General Motors has a bit to go to convince me of parting with my cash. If you're new to how to buy stocks for beginners I'd recommend you do the same.

Options Premiums

2009-03-31T04:49:00.000-07:00

An option Premium is the price of the option.

It is the price you pay to purchase the option. For example, an XYZ June 25 Call (it is mean, an option to buy Company XYZ stock) may have an option premium of $ 0.5. This means that this price of option XYZ for June is $ 50 . Why? Because listed of options must be in 100 shares of stock (market lot), and all equity option prices are quoted on a per share basis, so they need to be multiplied times 100 (market lot).
More in-depth pricing concepts will be covered in detail in other section.

Strike Price

The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract.
For example, with the XYZ June 25 Call, the strike price of 30 means the stock can be bought for $ 30 per share. Were this the XYZ June 30 Put, it would allow the holder the right to sell the stock at $.30 per share.
The strike price also helps to identify whether an option is in-the-money, at-the-money, or out-of-the-money when compared to the price of the underlying security. You will learn about these terms later.

Expiration Date

The Expiration Date is the day on which the option is no longer valid and ceases to exist. The expiration date for all listed stock options in the U.S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday).
For example, the XYZ June 30 Call option will expire on the Fourth Thursday of June.

Types Of Expiration

2009-03-25T04:29:00.000-07:00

There are two different types of options with respect to expiration.

There is a European style option and an American style option. The European style option cannot be exercised until the expiration date. Once an investor has purchased the option, it must be held until expiration. An American style option can be exercised at any time after it is purchased.

Today, most stock options which are traded are American style options. And many index options are American style. However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option.

Employee stock options

2009-03-11T05:14:00.000-07:00

There are many ways that you can make your employees feel better when working for you and the best one among them is to use employee stock options. Although, this is not a common practice for the larger companies, many small ones are using that option to give their employees a sense of ownership.

Basically the employee stock options will allow the people, who work with you to buy shares from your company at a specific price. The price of the shares that you will offer to your employees is called strike price, which should be pegged to the value of the stock before it is offered to the employees. They will have the option to buy shares of the company for that price and later on sell it whenever they decide. For example, you let an employee to purchase 10 shares for a price of $1 each. Later on when the price for the stock reaches $3, he or she will sell the shares and will make $20 before taxes.

The employees are not required to buy Employee stock options, so when the price of the shares drops, they will not loose any money. However, if you decline employee stock options, you will probably reduce the morale of your employees. So make sure that if you are required to offer this option, you will accept.

There are different types of employee stock options and here are the main ones among them:

CenturyTel_(CTL) Incentive_Stock_Options,

Thermo_Fisher_Scientific_(TMO) Incentive_Stock_Options, and

Laboratory_Corporation_of_America_Holdings_(LH) Incentive_Stock_Options

will allow the employees to only pay taxes on such options when they are selling them. Furthermore, they will be able to qualify for the 20% long term capital gains tax if they sell the stock 2 years after they had bought them.

The employee stock options are a common solution for all the small companies that are offering their employees smaller salaries. In the beginning of the 1990s many of the dot com companies were offering employee stock options, but not all of those, who had taken advantage of that option, were actually able to make some income when selling the stock. By using the employee stock options, you will get the best from your employees. use them at all costs, you do not risk anything when you are doing that. In fact, stock options bring in a sense of belonging for the company among the employees. It also reduces employee turnover as you reward all your key employees with stock options.

Call Options and Put Options

2009-02-23T16:28:00.000-08:00

Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear.
To begin, there are only two kinds of options:

Call Options and Put Options.

A Call option is an option to buy a stock at a specific price on or before a certain date. In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned.
If you never returned, you would give up your security deposit, but you would have no other liability.

Call options usually increase in value as the value of the underlying instrument
increases. When you buy a Call option, the price you pay for it, called the option premium, secures your right to buy that certain stock at a specified price, called the strike price. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium.

A Put option ia an options to sell a stock at a specific price on or before a certain date. In this way, Put options are like insurance policies. If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases.If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk.

With a Put option, you can "insure" a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, "damages" your asset, you
can exercise your option and sell it at its "insured" price level.
If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium.
This is the primary function of listed options, to allow investors ways to manage risk.

Options vs. Stocks

2009-02-02T16:40:00.000-08:00

Options vs. Stocks
Similarities:

Listed Options are securities, just like stocks.
Options trade like stocks, with buyers making bids and sellers making offers.
Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security.

Differences:

Options are derivatives, unlike stocks (i.e, options derive their value from something else, the underlying security).
Options have expiration dates, while stocks do not.
There is not a fixed number of options, as there are with stock shares available.
Stock owners have a share of the company, with voting and dividend rights. Options convey no such rights.

The term of the Capital Market

2009-01-22T03:15:00.000-08:00

Agio / disagio: Values obtained from the difference between a public offering at par value.
Annual Report: Annual Report of the activities of the company, which includes balance sheet, income statement, cash flow statement and statement of changes in equity.
Custodian Bank: Parties serving perform physical observations document storage and exchange.
Bond: Bonds, investments in debt.
Bull market: The market in which prices of a large number of stocks have increased or are expected to increase.
Bear Market: The opposite of Bull Market.
Blue Chip: An example of the most classy of shares in the capital market. These shares are generally owned by established companies with a good financial reputation and stable.
Bonus Share: New stocks issued by the issuer to the holders of old shares from the capitalization of paid-in capital.
Stock Exchange: Sources system party or the means to bring together the buy and sell offers another paties effects in order to trade securities among themselves.
Call: Contract option entitles the holder member the option to buy a certain asset at a specified price and time.
Capital Gain: Profit from the sale and purchase of shares in the form of surplus value from the sale and purchase of shares.
Capital Loss: The opposite of Capital Gain.
Close Position: Exit from the position of a stock or securities. Ex: If a broker asks you to close a long position in a stock, then he asks you to immediately sell the shares earlier.
Day Trader: Players who hold shares in a very short period of time (in minutes / hours) and made several trades in one day. This activity can be categorized as an act of speculation.
Derivative: A securities, such as options and futures contracts whose value depends on the performance of the underlying asset (underlying asset)
DPR (Dividend Payout Ratio): A comparison between the DPS with EPS.
DPS (Dividend per Shares): Represents the total of all dividends are distributed compared to the number of shares outstanding.
Dividend Yield: The annual dividend per share divided by price per share. Dividend Yield plus percentage capital gain equal to the total return of a Due Diligence.
EPS (Earning per Shares): This is the ratio between net profit after tax by the number of shares issued.
Equity: Ordinary Shares referred to, or securities representing the share / part ownership of the company is quite high.
Going Public: The process of selling its shares to the public, known also by the term IPO.
Greenshoe: An option which gives permission to the underwriter of the IPO shares to sell additional shares to the public / community if the demand for shares.
Hedge: Making an investment to reduce / avoid the risk of asset price movements.
Hedging: Protecting a position in any securities, currencies or other assets.
Index: Measurement statistics of the changes in a stock portfolio that describe / represent the overall market. The Standard & Poor's 500 is one of the best known index, measuring changes in the overall value of 500 shares of big companies in the U.S.
Initial Public Offering (IPO): Usually called going public, is selling its shares by a company to the public.
Investment: Putting funds in financial assets that are expected to increase in value in the future.
Liability: legal liability to pay a debt that was recorded on the balance sheet of a company.
Option: This type of option that could be withdrawn at any time until the maturity.
PER (Price Earning Ratio): This is the ratio between the market price of a stock by EPS.
Portfolio: A group of assets such as stocks, bonds, and mutual funds held by an investor.
Preferred Stock: Stock that has the characteristic combination of bonds and common stock.
Profit Taking: Action took profits, usually occurs when traders sell their shares when the price increases.
Prospectus: The official document that explains in detail about the company as do the stock exchange plans stock offering (IPO), issuing new shares, issuance of rights issue, bonds / debt, etc..
Put: An option contract which entitles the holder member to sell a certain number of shares listed on the option price and time. The opposite of Call.
Return: Gains and losses realized on investments in a given period.
Return on Assets (ROA): Calculated by dividing net income by total assets of the company and shown in percentages. ROA is useful to know the level of profits relative to total assets of the company. In other words, the ROA will give an idea how big the revenue generated from the asset.
Rights Offering: Issuance right to shareholders to purchase additional shares to be issued by the company for a price.
Fried Shares: Shares traded companies generally are not based on fundamentals, but are often traded by the Airport shares for a profit. The characteristics include: a small capitalization, so the stock is easily played by the Big Guys, Gains and losses realized usually high enough, given the high risks as well.
Stagflation: The condition of stagnation in the economy coupled with rising prices.
Stock: The product derived from the asset.
Stock / Equity: Ownership in the company, represented by the number of shares.
Short Sale: A transaction in the market in which a person (investor) selling shares to profit from the loan (as anticipated) decrease in stock price.

Thankyou

2009-01-20T07:48:00.000-08:00

Option

2009-01-06T16:19:00.000-08:00

In finance, Forwards, Futures, and Options are a derivative financial instrument, because of the price or value of them taken from the provisions of a contract between two parties regarding the purchase or sale of an asset at a reference price during a certain period. During that time, buyers of the benefits right choice, but not the obligation, to engage in some specific transactions in assets, while the seller bears the obligation to fulfill the transaction if requested by the buyer. Underlying asset option price is generally derived from a stock, bond, currency or futures contract, plus a premium is usually called the Underlying Asset.

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.

An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity).

An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.