Short put strategy to generate income

on May 17, 2012 in Derivative, Home | 1,303 comments

This strategy is best played if your outlook on a blue chip company is bullish and if you are ready to eventually include this blue chip in your portfolio. By deciding to enter a short put option strategy, you are hoping that the underlying share will rise in price, or not fall below a certain point. The primary motivations for this strategy is that you are prepared to buy the share at a defined price below current market value, and for selling the option you will receive a premium. Once you go short on the put, you are exposed to the risk of having to buy shares at the strike price. That might not be a terrible outcome, as long as you consider the strike price a fair price for the share. If the stock price moves upwards, the put options decrease in price. You can either buy back the put option to close your position, or, you could wait, hoping that the options expire worthless. For example, I placed this week for a client a short put on Siemens. The share price was trading at EUR 67 and he decided to place a strike price at EUR 44, on the defensive side. We sold the put for EUR 3,6. At expiry in 2014, if Siemens trades below EUR 44, the client gets assigned the shares for EUR 44, and the cost basis for his shares is the strike price of the put minus the premium received, reducing the transaction cost to EUR 40,4. A short put locks in the purchase price of a stock at the strike price. Plus you will keep any premium received as a result of the trade. Your opinion about a company’s true value might influence your decision to write the short put. However, some investors believe this option strategy is worth your consideration as you will be able to own the share for a fair price and generate a premium income from the...

Absolute Return Funds: too good to be true?

on May 5, 2012 in Derivative, Home | 1,694 comments

Investors absolutely want to benefit regardless of the direction of the market. That’s precisely why absolute return funds are gaining popularity in the mutual fund world. But just because something is easy to market to the public doesn’t mean it’s a good idea. Absolute return funds remain a popular choice among investors seeking security in volatile markets. However, financial advisers are expressing concern over investors’ enthusiasm for these funds, and their understanding of the likely returns. The objective of these funds – to produce positive returns in any market conditions – is simply too good to be true. Even if this objective is met by some funds, investors still might not understand exactly what they are getting into. Unlike other sectors, the funds are defined by what they try to deliver, rather than what they invest in. Their attraction is that they aim to provide a positive return even in falling markets, using a variety of techniques including short selling. Fees charged by absolute return funds have been widely criticized. Many fund managers charge performance fees on top of annual management fees. Often this performance fee kicks in quarterly, which means that the manager can take his share if the fund performs well for the first quarter even if it subsequently underperforms for the rest of the year. I believe this distribution process should take place over a period of at least two years. Anyway, if capital preservation is your priority, then you should probably be looking at other investments rather than exposing yourself to the volatility of this...