An Option Trader who doesn’t blog about options

Risk-Pyramid

I recently had the opportunity to visit with my godson who flew in from Calgary. He is a follower of my blog and shares my posts on his LinkedIn account. He believes that I should write about option trading. I argued that very few viewers on word press would be interested in reading about options. Why write about a complex topic like options if no one will read it.

I been trading options for over 25 years ago. During those years, I have found only one other person who shares the same passion. Even the financial advisors from my former office didn’t fully understand options. In fact, the reason we started our investment club back in 2001 was to get more practical experience with options. It took me three years’ worth of quarterly meetings to get my investment club members up to speed with my option strategies.

Keep in mind, the financial industry measures risk by potential loss and options are at the highest level in the risk pyramid. Unlike a stock, an option has an expiry date which means you can potential lose 100% of your investment. However, the reward  could easily be 100% to as high as 500% return on investment.

For years, I have made the argument that percent risk should be balanced off with the amount of dollars that you have invested. For example: Buying 500 Microsoft shares for $25,000 could generate a potential dollar lost greater than buying 5 call options for only $1,500. A 15% correction in the price Microsoft stock would cause a loss of $3,700 and the option would expire worthless (-$1,500).

The option loss is immediate! One could argue that you don’t have to sell the stock for a loss, you could continue to hold hoping for a recovery in price. I believe that a buy and hope investment strategy isn’t very successful over the long-term.

Another reason why I don’t write about options is the risk management department within the financial industry will not approve the average investor for option trading. An investor would be lucky to get basic level one option trading. It only allows an investor to buy a call or put and the writing of a covered call position. Even with my extensive option experience, my accounts have restrictions on the types of option trades that I am allowed. I have even tried moving my option accounts to other discount brokers but they all fall short.

Here are some option strategies that are difficult to get approved:

  1. Uncovered Call or Put
  2. Bull Call Spread
  3. Bear Put Spread
  4. Protective Collar
  5. Long Straddle
  6. Long Strangle
  7. Butterfly Spread
  8. Iron Condor
  9. Iron Butterfly

Knowing what they are is only half the battle, knowing how & when to use them is the other half.

One trader recently sold 17,000 puts on Facebook betting that earnings would beat and  the options would expired worthless. He only made $1,700,000 in just over a month.

 

 

June rate hike? Too late for Americans’ to refinance their mortgage?

mortgage

Mortgage rates have been historically low for several years, but a surprising number of American borrowers are still not taking advantage to refinance their mortgage. The Fed raised rates in early December and the common expectation was that mortgage rates would raise in 2016.

The release of the April’s Fed’s minutes indicates that a June rate hike is on the table. Market expectations for a June rate hike moderated to a 28 percent chance Thursday afternoon. The probability for a July hike was 52 percent, a touch above Wednesday’s 51 percent chance.

Are Americans not aware that mortgage rates are on the rise? This could be their last chance to lock in some low mortgage rates.

Being Canadian, I am by no means of an expert on the American mortgage market. It is much more complicated than the Canadian market. What I do know is paying down mortgage debt can save thousands of dollars in interest.

Reducing your interest rate and decreasing the amortization period are the two easiest ways to achieve debt free-living. The decision is not that simple for Americans because mortgage interest is tax-deductible in the U.S. so the savings really depends on your marginal tax rate. Individuals in the lower brackets will benefit the most. Credit scores and the amount of equity that you have in your home are other factors which will affect your ability to refinance your mortgage.

I used an on-line amortization schedule calculator to run some different mortgage refinancing options. Keep in mind, the amount of the interest savings depends on the size of the mortgage.

If you can handle an increase of $200 to $300 a month in mortgage payments  than refinancing a 30 year fix to a 20 year fix could save you a bundle in mortgage interest. For example: refinancing $300,000 from  4.5% (30 yr. fix) to $3.25% (20 yr. fix) would save the borrower $138,839 in interest.

One of the blogs that I follow How to stuff your pig posted “How I Made a $665,680.41 Mistake!”

Here is a portion of her post:

It Was Bitter Pill to Swallow

I still find it hard to believe that I had agreed so readily to pay $405,820.74 in interest on a home that cost only $259,859.67. It’s even harder to believe that I signed a loan where the interest alone was higher than the agreed purchase price by 56%! To top it all off, I put zero down and was stuck paying that dreaded PMI (Private Mortgage Insurance).

Was I on something? I did go through a brief addiction with Oreo cookies. Maybe I could blame this on a sugar high.

Seriously. What was I thinking to sign my life away to the tune of $665,680.41 for a house I had agreed to buy for a cost of $259,859.67?

To read the entire post click here: “How I Made a $665,680.41 Mistake!”

I do recommend doing some on-line research on mortgage rates in your area. Take those numbers and compare them at http://www.amortization-calc.com/ to see if mortgage refinancing makes sense. Remember that the cost of refinancing is tax-deductible but it would be spread out over the length of the new mortgage. You have nothing to lose but time.

Disclaimer:  Mortgage refinancing is very complicate, do your own research and shop around for the best deal.

 

 

 

 

 

Hedge fund managers making an obscene about of money

Ken Griffin at Citadel and James Simons at Renaissance Technologies

Two actors portraying hedge fund managers in the movie “The Big Short” were nominated for a golden globe. Best performance by an actor in a motion picture – Comedy or Musical. Spoiler alert: nothing funny or musical about this movie.

Call me old fashion but I failed to see the humor in millions of Americans losing their homes and millions more losing their jobs because of Wall Street fraud. I found it despicable that some hedge fund managers made billions on this tragedy.

Fast forward to present day and nearly 3 trillion dollars are invested in the hedge fund industry. Computerized trading strategies has helped reap the biggest profits for some the industry’s largest players. Fully six of the top eight money makers for 2015 use quantitative analysis approaches to generate profits.

Quantitative trading consists of strategies which rely on mathematical computations and number crunching to identify trading opportunities. Price, trading volume, price to earnings ratio and discounted cash flow are just some of the more common data inputs used in quantitative analysis. The transactions are usually large in size and may involve the purchase or sale of hundreds of thousands of shares and other securities.

Tops among the hedge fund managers were Ken Griffin at Citadel and James Simons at Renaissance Technologies, both of whom reeled in $1.7 billion according to the year’s Institutional Investor‘s Alpha Rich List of the top hedge fund managers.

Nearly half of hedge funds lost money, according to Institutional Investor, and some familiar names on the Rich Lists of years past were missing, including John Paulson of Paulson and Co., Leon Cooperman of Omega Advisors, and Daniel Loeb at Third Point.

These industry leaders, however, did make the list, and qualified for the top 10:

Hedge funds hot hands

Manager Firm Income
1. Ken Griffin Citadel $1.7 billion
1. James Simons Renaissance $1.7 billion
3. Ray Dalio Bridgewater $1.4 billion
3. David Tepper Appaloosa $1.4 billion
5. Israel Englander Millennium Mgmt $1.15 billion
6. David Shaw D.E. Shaw $750 million
7. John Overdeck Two Sigma $500 million
7. David Siegel Two Sigma $500 million
9. O. Andreas Halvorsen Viking Global $370 million
10. Joseph Edelman Perceptive Advisors $300 million

Source: Institutional Investor’s Alpha

Now add the fact that the world’s wealthiest investors are benefiting from a broken U.S. tax code. Hedge fund managers’ profits are treated as long-term capital gains, which means they’re taxed at no more than 15 per cent. Any wonder why the 1% are getting richer and the American middle class is disappearing.

Americans are so angry that this man could be the next President.

trump

 

Are the best days for Apple over?

apple1

Investors managed to make it through a volatile April modestly ahead of the game, though individual returns were held back by one principal culprit: Apple. The tech giant was “the biggest wealth destroyer” for market participants during the month.

Apple’s decline hits especially hard because it is the most-owned stock by mutual funds. Some 363 mutual funds owned the stock as of the end of 2015 with Microsoft the second most-popular and Alphabet third, according to Credit Suisse.

Many index funds include Apple in their holdings. For example, Apple is off 12 percent year to date as of Friday’s close and has subtracted about 92 points from the Dow Jones Industrial Average in the second quarter alone, a period during which the blue chip index is just above positive.

So where is the real hope in Apple’s earnings call? This quarter’s earnings provide no silver lining and one instead must look past this quarter’s earnings (and probably next quarter’s results) to continue to be positive about Apple’s prospects.

Why it isn’t time to give up on Apple stock:

  • New lower-priced phones. While Apple iPhone sales declined for the first time, results do not reflect the new lower-priced iPhone that will likely capture market share from competitors.
  • A healthy product mix. Apple services, including cloud services, music offerings, and Apple Pay, are a recognition that services and ongoing revenue are an important part of a healthy product mix.
  • Apple is still massively profitable, pays a dividend, has huge cash reserves and built-in consumers for future upgrades. It has a low price to earnings multiple compared the rest of the market.

Why the best days for growth are over:

  • Wall Street believes that Apple really needs to kick off its innovation engine. The discussions around the iPhone 7 indicates that it is an evolutionary product rather than revolutionary. Market sentiment is negative on Tim Cook as an innovator compared to Steve Jobs.
  • Analysts were particularly concerned about declining sales in China where sales have fallen 26% over the year. They also believe that iPhone pricing is uncompetitive to penetrate the huge cell phone market in India.
  • Within developed markets, the upgrade cycle has been extended. Consumers don’t feel the need to buy a new phone every year. Plus U.S. carriers are required to separate the cost of the iPhone from their data plans. Many U.S. consumers are deciding to save about $40 per month rather than upgrade once their two-year contract with their carrier has expired
  • Analysts estimate that Apple has sold 12 million watches last year, generating about 6 billion in revenue. Despite the big numbers, users aren’t particularly impressed with the slower processing and response times. The frequent battery charging requirements didn’t make it the most favorite wearable.

My two cents worth on Apple:

Apple reminds me the early days of Microsoft. The windows operating system was growing Microsoft’s revenue and profits for many years. However, the market for windows became saturated and the growth in upgrading cycles slowed down. It turned Microsoft from a growth company into value stock generating a huge about cash. The chart below illustrates a ten-year period where Microsoft’s stock price was struck in a trading range between $25 to $30. Microsoft’s growth cycle didn’t resume until the company got into offering cloud computing.

apple2

Now, my wife is very happy with her iPhone 6 and we seem to manage to share our iPad. Don’t laugh but I am still a dinosaur using a flip phone for the few times that my wife and I are not together.  In my defense, I am retired, not on Facebook and only use my phone for emergencies. The iPhone 7 will have to be revolutionary for me to upgrade.

What do you think, are the best days for Apple over?