Monthly Archives: February 2009

So What are these Covered Calls?

Posted on by
Reply

More and more brokers are allowing their users to be able to use the trading and risk management strategy of selling \”covered calls\” otherwise known as buy write style trading. So what is a covered call? Are they too complex? What are the risks?

Calls are a type of option contract (this article is written for American style options) trading the right to buy the underlying security at a given strike price. It\’s important to know that options contracts tend to trade in sizes of 100 share increments and that options expire on the 3rd Saturday every month (but some securities don\’t \”have\” them every month if they are low volume.)

Option prices are based primarily on the following:

  • Underlying volatility (does the stock move a lot of % every day)
  • Price of the underlying
  • Distance to strike price
  • Time Decay (how long until the expire)

Risks

Covered calls themselves carry an inherent less amount of risk than directly investing in a given security. It is hard to lose money by just selling a covered call (unless the security drops and you don\’t buy back your call and sell the stock quickly.) That being said, it is very likely to reduce the earnings that you might have through a security.

Examples

  • Buy 100 shares of BAC at $4.64, sell a call at a strike price of $5 for $0.30 a share, so your price per share is now $4.34. In the end, BAC goes to $5.64/share and whoever bought your option exercises it. You make $5-$4.34=$0.66/share, but if you would not have sold the call, you would have eventually made $1 a share.

Trading

In 2008 and 2009 we\’ve seen systematic volatility in the stock markets increase drastically — and in an overall negative direction. This provides a huge opportunity for a trade to be established on these calls.

\"Possible

The idea is just a simple idea of buy low and sell high, but with the call option we are selling at the height, and buying it back at the lows.

I\’ve taken the 3 month chart of BAC (it has been extremely volatile over this period) and put some dots at the 20/20 hindsight spots of the trading. You\’ll notice that if you had 100 shares of BAC you would have lost a significant amount of value ($10/share),  but thanks to trading covered calls you could have made back up to $6 (very liberal estimate) of that… Not to mention that you\’ve kept 100 share of BAC (something that you think is a pretty solid long term 5 year investment.) And that $6 is in 3 months, so in a year, you could potentially erase all losses if you trade optimally.

But It\’s Not Easy

So you may be thinking that I just showed you how you would never have to work again in life, but you would be sadly mistaken. First of all, you have to be careful with your brokerage fees: I mentioned that tons of brokers are allowing covered calls; brokers like sharebuilder who charge high commissions. Next we\’re talking about a lot of analysis, 20/20 is one thing to say, but when you add that with the emotion of selling close to strike price for more immediate money, you are very likely to not maximize money. To be able to track the stocks you would need to look at them very often and  have some pretty strong technical skills. Finally, there is the possibility in a high news volume market that huge price changes will overshoot your calls, and if you sell a call below your purchase costs, you would be completely out of luck and out of money.

Why I own GE Stock

Posted on by
Reply

With the dividend cut that came today, most people would probably wonder why I would consciously decide to keep my position of 100 shares in GE. Frankly, it was a very tough decision that actually caused me to look through the books again to make sure that I didn\’t want to sell.

\"GE,

When I Bought

Buying into GE in early January was a decision that I made as an investor, not a Trader.  I believe that America needs the innovation and production that GE offers offers hope for America. GE also at the time had a nice ~10% dividend yield that I believed was likely to continue based on the prevalence of GE investors so dependent on that dividend.

But More, they\’re fixing their financial problems:

You probably saw all of this in November when the commercial paper market went to smithereens and GE announced that they had definite restructuring plans for GE Capital to become less dependent on the short term debt and to also reduce the liabilities of GE Capital.  GE Press Release on Restructuring Finance

Why Invest

I\’ve started realizing over the last year how much I actually like GE (see NBC programs) In fact, most of my room mate\’s and my favorite shows are produced with Heavy GE Involvement: House, The Office, 30 rock. And I working at JP Turner, CNBC is the source of financial news (on at GT College of Management too.)

\"30

So to echo, I\’m very much a fan of production in manufacturing in America (GE Energy, GE Power, GE Healthcare), realize the name brand idea of the previously mentioned segments, and then enjoy the NBC expansions of GE for entertainment and possible cross promotions (ps. 30 rock has a brilliant plan, the \”reality\” of producing and planning all the shows that people should watch.)

GE is also historically a very stable company and has the AAA credit rating to boot; one which Moody\’s reaffirmed late last year, but is also publicly looking at.

Now the big issue is that this is NOT a Trade and possibly lacks some wisdom in market timing. In fact, my position definitely suggests that. So I\’m not recommending that you buy GE in the short term.

Slightly distraught over the dividend:

Alas, what should happen now that the company is looking to pay only 1/3 of their dividend. Institutional investors may jump ship, because unlike the CEOs thoughts that $0.10 dividend/quarter is \”appropriate\” in today\’s market, it really isn\’t as the the costs of capital up as banks can lend less and people are more risk adverse.  On the other hand, this legitimately suggests that Immelt will take the steps to prevent needing funds in favor of the business succeeding.

My plan:

My plan is to keep my 100 shares of GE stock over the long run. Every month I will try to squeeze out some call income out of the money one or two steps for monthly returns near 1%, cutting my cost of investment. In addition, I\’ll collect the (now 6%) dividend as well, and probably reinvest it in these less expensive shares. In the end, I look at owning shares of GE in 5 years and it will be worth more and still be the idea behind American MFG.

Some people claim that GE may be insolvent. These people have not looked at the book value per share ($9.96) or the effective movement in restructuring of GE capital that will help prevent the crisis they looked at with a major part of the company in November 2008.

Finally, I know somebody who was hired last year and currently works for GE Capital, and unlike the friends at hedge funds and investment institutions, he still has a job. Some of my engineering friends are also now considering jobs at GE.

Finance

Posted on by
Reply

Trading and Investing in multiple markets is something that everybody wishes they had more experience with, and luckily I have a lot of experience both gaining and losing value in the stock market through various vehicles.  I am a senior analyst with the Georgia Tech Student Foundation (the U.S.A.\’s largest student run fund), worked with JP Turner, analyze for a small fund,  and have been actively trading stocks since 2005.  I specialize in Exchange Traded Funds, REITs, and call option strategies.

The more productive and innovative side of business is startups.  I\’ve had the pleasure of being an entrepreneur with my first contract at age 13 and working with various other business startups since then, including my time at Elgia Inc. that went from a 3 person company to a 20 person company during my employment.

This blog will contain a lot of information, mostly information that you can decide to use to your advantage (I take no negative  responsibility for anything you do resulting from these posts) or just to have a better overall knowledge of how things works.

I will occasionally post on events that I attend, popular people in the field that I see,  and some ideas brought up at public investment group meetings.

Old Reports:

DUK Duke Energy 6/2008 download pdf

SD Sandridge Energy IPO 1/2008 pdf

About

Posted on by
Reply
\"\"

Stephen Reid is a 24 year old living it up in Atlanta, GA.

Now

During 2009, Stephen worked for a handful of companies as a technology consultant and programmer while trading stocks and options during this tumultuous economic time. This is also when Stephen got more involved in the Atlanta startup scene as he tried grow his SAAS application for schools with the Tag program.

Stephen is currently working as a software engineer at Pardot, developing their saas marketing automation program in PHP5 symphony.

College Years (Sports, Investments)

The decision to attend The Georgia Institute of Technology was not an easy one, as his brother had attended slight rival Auburn University and as such was a fan (Georgia Tech Beat Auburn the last time they played in 2005) but decided to do so considering the academic quality and the potential for the Georgia Tech Water Ski team. After finding that he was most interested in the Georgia Tech Student Foundation Investments Committee, he decided to become a College of Management student and concentrate in Finance.

In the Investments Committee, students analyze and report on both new and current holdings of the foundation, along with educational presentations on new topics. At the time, Exchange Traded Funds were new and a fun and exciting way to pursue indexes, internationals, commodities, and eventually some options exposure and this was the knowledge presentation series Stephen would keep researching.

In 2006, Stephen quickly became the captain of the Georgia Tech Water Ski Club and began sharing some of the presidential duties including adding input to competition, budget use, and major fund raising items. The Water Ski club grew and made over $80k in purchases and established one of its first sponsors. This growth helped the competition team as well, as in 2008 and 2009 the team sent several skiers to the NCWSA All Stars Competition.

Beginnings with The Internet

As a young entrepreneur, Stephen wrote, arranged, and began his first contract web site and hosting for Wexford Club in 1998.

In 2001, Stephen began working for Elgia Inc. as a PHP developer, working mostly in internal applications including CRM and Event management software. Working at a small company, he had the chance to manage email, web, database, and phone servers. With a knack for technology problem solving, he often found himself supporting and training the upper levels of fortune 500 companies.

Stephen cooperated his studies and job  by taking directed studies at Roswell High School through the TAG department where he worked with close friends David, Brian, and Jeff in writing various PHP applications. The first of these applications being a logic intensive script that saved teachers hundreds of hours each semester in planning a rotating seminar schedule to be used with the tag registration system implemented slightly earlier.  This group of programmers would go on to write the content management system and design that Roswell High used from early 2005 until 2010.


Welcome to the ultimate in positive extreme.

Posted on by
Reply

Rated Sar. Urban Dictionary defines Sar as \”the ultimate in positive extreme\” (adj) and so that is the goal of this website, to expose the readers to my life and experiences. Here you will certainly find some useful and often funny information that may help you through life. And my life is involved: politically, athletically, and financially, and dozens of different other experiences that you might never expect, or maybe you would, because aftetrall you found me here.

I\’ve recently switched from hosting this blog on my own computer/server because I found that to be slightly unreliable on my new conenctions. I hope that you like the reliablility of hosted servers (or I may not pay for them again.)