Call Option Basics - Long Positions - Buying Contracts Calls on Stocks

 Call Option Trading 

An investor who feels the market will rise on a stock, index, sector or other, may wish to purchase call contract options. 

If SRX Stock is expected to rise (from the investor's point of view), he could purchase a call option will rise in value during it's life if the stock does in fact rise. The value will depend on how high the market rises, and the time left on the contract. All Options have monthly expirations, so time is absolutely part of the strategy, and the risk.

Current market value of SRX is $63. The investor anticipated a jump in price over the next 14 days, but he does not want to spend additional funds to own the shares outright. A cheaper alternative (capital wise) would be to buy call contracts. 

A position scenario could be as the following:

SRX Current Market Value or CMV is $63

Buys 1 SRX SEP 65 Call for a $400 premium per contract.

If SRX begins to increase, the value of the contract will go up. The contract itself allows the buyer to lock in a price of 65 per share until September.  If SRX moves to say $72, the investor can still buy the stock for $65. The contract itself can also be traded. So, if the market doe move to $72, the contract could be worth $1000. The investor could sell the contract and make a profit of $600 from his original investment of $400.  

The risk is the stock remains flat or goes down and the contract expires worthless. The maximum loss would be the $400 invested. The maximum gain is unlimited or unknown for the upside since the owner can lock in a buy price of $63 and the stock could shoot up to anything. The break even is 69. Call (or strike price) of 65 + 4 ($400 premium)

 

Article - A Fundamental Analysis Balance Sheet - Analyzing Balance Sheets

The following is a helpful article on understanding balance sheet basics for FINRA Broker exams, including the Series 7 Exam.

A company's balance sheet is a record of its assets and liabilities. Basically, if we look at how much the assets are worth and deduct the total value of the liabilities, we will arrive at the net worth of the company. Net worth or the book value of the company is also known as shareholders' equity.

Under assets, first, we see Current Assets. Current Assets are cash and other assets which can be converted into cash within a very short time. Usually, they are listed in the balance sheet in order of liquidity with cash being the first item as it is the most liquid. Secondly, we have Non-current Assets. These are assets which cannot be converted into cash within a very short time.

One thing that value investors look out for is how much cash and cash equivalents a company has. Having a lot of cash is usually a sign of strength. The company will have the ability to seize business opportunities and will be able to go over rough patches in the business cycle relatively intact.

Next on the list is inventory or the goods which are in the company's warehouse which it sells to customers. In business, we say that we cannot do business with an empty wagon. Our wagon has to be stocked and that's our inventory. However, we do not want our wagon to be overstocked as well. Goods also run the risk of becoming obsolete in many cases.

Accounts Receivables is next. When the company sells goods to its customers, very often, the customers are given credit terms. In businesses which have a strong retail bias, this might be a very small amount if it exists at all since they collect cash for all their sales. We want to keep an eye on this because if most of a company's Current Assets are in Accounts Receivables, we have to question the financial health of its customers and how long does it usually take before payments are made.

Prepaid Expenses or payment in advance is next. I like this because it shows that customers are willing to pay in advance before they receive the goods. It shows that the company's products are in demand and, probably, cannot be replicated or very difficult to replicate by its competitors. The company has a competitive advantage.

Next, we move on to Non-current Assets. Companies might own properties, vehicles and production equipment. Vehicles and production equipment will depreciate in time and the value we see in this line is the total value at the time the balance sheet was prepared minus depreciation.

Then, we have goodwill. This is something which has been discussed in the case of Healthway Medical. This number appears when a company buys over another company at a price above the latter's book value. The value above the book value ends up as goodwill in the former's balance sheet.

This is followed by other intangible assets which cover copyrights, patents, trademarks and so on. Only intangible assets bought from another company can be reflected in a company's balance sheet.

Both goodwill and other intangible assets must be amortized over time if they have a finite life. If they are not depreciating in value over time, then, they need not be amortized.

Long Term Investments are next. This shows any investments a company might have made which have durations of longer than a year. We will have to dwell on this a bit more to see what kind of investments have been made here as and when it occurs. It will differ from case to case but generally, we want to see that these are investments which generate higher returns for the company.

An important ratio we use in fundamental analysis is Return on Assets (ROA). This is a measure of the level of efficiency in which a company utilises its total assets. If we take net earnings and divide this by total assets, we get a figure in percentage terms. The higher the better.

We move on to Liabilities and just like Assets, there are Current and Non-current forms. First off under Current Liabilities, we have Accounts Payable which is money owed to suppliers for goods and services provided.

Then, we have Short Term Debt or Debt which is due. If a company has a lot of Short Term Debt, this could be dangerous in times when credit is suddenly difficult to come by.

To calculate the financial health of a company, analysts employ the Current Ratio which divides the total Current Assets by the total Current Liabilities. So, you can imagine that if you have more of the former and less of the latter, it's a good thing. A more stringent ratio is the Quick Ratio and it measures a company's ability to meet its short term obligations using its Current Assets minus Inventory. Any ratio value of more than 1 is good.

Under Non-current Liabilities, we have Long Term Debts and so on. I guess the important thing to say here is that very strong and long established companies which generate healthy cash flow usually have very little debt.

I think it is common sense that we want to see as little debt as possible in a company's balance sheet but debt is sometimes a necessary evil. So, we have to evaluate debt on a case by case basis.

I hope this quick introduction to what is a Balance Sheet and how to use certain ratios to determine the health of a company is useful.

I'm just another person trying for a secure financial future in an uncertain world. Creating a stream of reliable passive income is a primary objective for me.

By Alvin Koh

http://singaporeanstocksinvestor.blogspot.com/

http://singaporeanstocksinvestor.blogspot.com/2010/02/fundamental-analysis-balance-sheet.html

Understanding Butterfly Options Spreads - Options Strategies

Butterfly Spread - Churning Out Consistent Monthly Income
By David Harms

A extraordinary trade for option investors who believe that the stock or index/ETF they are working with will be range bound for the next 2 or 3 weeks to a month or so of time is referred to as the butterfly spread.

This theta positive option trading system generates revenue for the trader when the main underlying or index/ETF on which it is being traded stays trading within a somewhat contained range on the graph - or - when the trading vehicle winds up on expiration day at or close to the sold strikes of the trade.

An illustration of this option strategy is as follows: Buy 2 contracts of QQQQ 44 call. Sell 4 contracts of QQQQ 46 call. Buy 2 contracts of QQQQ 48 call. This is a 'classic' butterfly spread position - a 3 legged option strategy trade.

Butterfly spreads produce fantastic trades for income traders due to the fact the short strike (the strikes that are being sold) supply favorable premiums to the trader up front due to the fact they are being sold 'at the money' - or very 'near the money'.

While it is a fact that regular butterfly spreads are executed for a debit (rather than a credit like what the iron butterfly strategy trade gives off) - nevertheless - even so - it is the short strikes that we are selling that will decay over the time left to expiration and hand over to the trader gains.

The butterfly trading strategy is considered a 'delta neutral' option trading strategy. Investors who use this technique anticipate that the underlying will continue to be in the general location on its chart from where it was located when the spread trade was initiated to begin with. Unless the investor is attempting to place - or planning to place a directional based trade, the strikes of butterfly spreads are normally sold at the money - meanwhile the longs of the butterfly are sold away from from the short strikes usually at an equal distance and range apart on either side.

The Butterfly Strategy, when traded accurately, can be an extremely enjoyable and financially rewarding way to trade the marketplace to generate regular and consistent profits.

David Harms teaches various Butterfly Spread Trading Strategies and Techniques at the following blog: Butterfly Spread

EARN LARGE PROFITS FROM FOREX TRADING - HIGH PROFIT FOREX TRADING

Bond Yield Curve Article - Bond Investors and Interest Rate Yield Curve

What Is a Bond Yield Curve and How Do Investors Use Them?

By Preston G Pysh  

The more advanced you become in stock and bond investing, the more familiar you'll become with a thing called a bond yield curve. This graph is probably one of the only tools you might find that can aide in predicting market trends. Since interest rates are ultimately controlled by the Federal Reserve (FED), tracking the way that the FED adjusts these rates can really help your investing approach.

The yield curve is broken down into two axis'. The x-axis is the term of the federal bill, note, and bond. While the y-axis is the corresponding yield for each of those securities. In order to show how all the investments are inter-related, a line is drawn between them on the graph. If you'd like to see what a yield curve looks like, simply google the term and you'll see a multitude of examples.

You see, the FED is completely reactionary. If the market goes down and jobless rates increase, they increase the supply of money so interest rates decrease. Inversely, if the market is booming and employment is very high, the FED gradually raises interest rates in order to prevent a future market bubble. This cycle, which some argue is the result of the FED itself (and I kind of agree), is something that will continue to occur in the future as long as we have a central bank for the country.

So how can you take advantage of this behavior as a stock and bond investor? Well for starters, let's talk about bonds. We know that the market value of a bond is directly related to interest rates. If we look at a current bond yield curve in 2012, you'll see a positively sloped graph that depicts the yield on long term bonds much higher than short term notes and bills. This is important because it's the FEDs way of saying, "Hey we don't think these low interest rates are going to last for a long period of time. In fact, over a 30 year period we think the average yield will be X (insert the yield from the intersection of the 30 year bond and line on the chart)" Knowing that the market value of a bond decreases when interest rates increase, we can rest assure that buying bonds in 2012 is probably a very poor financial decision.

With respect to stocks, we know when the yield curve is positively slopped, short term interest rates are low and it probably means it's a great time to be purchasing common shares.

Although this article only provides a very quick and ruff way to examine yield curves, active investors should really try to learn more about this wonderful tool.

If you would like to watch a 15 minute YouTube video on how bond yield curves work, be sure to click on this link. This takes you to a wonderful site that shows you how to access bond yield curves and applies the information to previous market conditions.

Article Source: http://EzineArticles.com/expert/Preston_G_Pysh/1381442

https://www.americaninvestmenttraining.com/

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Understanding Bonds

By Lyn Bell

In simple financial terms a bond is a debt instrument. A borrower who is the issuer of the bond seeks to raise money from investors. The borrower may be a government, municipality or corporate, and the investors are the lenders. In return for the loan of funds the borrowers promise to repay the debt on a specific date in the future and to pay interest either along the way or at maturity.

Although this sounds simple enough, there are certain things that a bond investor needs to know before putting money into the bond market. There are some important terms to be aware of when purchasing a bond and these include par value, maturity date, and coupon rate.

The par value (or face value) of a bond refers to the amount of money you will receive when the bond reaches its maturity. What confuses many people is that the par value is not the price of the bond but it is the value at maturity.

A bond's price fluctuates during its life in response to interest rates. A bond which trades at a price above the face value, it is said to be selling at a premium or at a discount when it sells below its face value. The maturity date is the date that the bond will reach its full value and you will receive your initial investment. As interest rates rise, the value of a bond decreases and if interest rates drop the value of the bond then becomes more sought after and the value rises. People are willing to pay the premium to get the higher interest rate.

The interest may be paid at maturity or at intervals during the term of the investment. Terms may be, six monthly, quarterly or other specified terms. The interest is known as the coupon rate and is normally a fixed rate throughout the life of the bond. The term coupon originates from the past when physical bonds were issued that had coupons attached to them. On the coupon date the bond holder would give the coupon to a bank in exchange for the interest payment.

The bond yield is basically the amount or percentage of return that an investor can anticipate receiving from a bond issue within a specified time period. Calculating the yield involves making use of current data regarding the current price of the bond as opposed to the price at the time of purchase. It also includes the current annual coupon associated with the bond and usually assumes that the buyer will hold the instrument for at least a term of one year.

The advantage of a bond is that they can be traded before maturity if cash is required, making them a liquid investment. Depending on the interest rates they will trade at par or at a premium and therefore it is possible to make a profit or loss on the sale. Holding to maturity does not affect the value of your investment as all things being equal you will get the money back that you deposited.

Bonds can be purchased using a broker or brokerage firm or your financial adviser. Most banks also have a money market department where bonds are transacted.

Lyn Bell has been in the finance industry for more than 30 years and is a Certified Financial Planner. She has helped many clients achieve their financial goals.

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