Additional income through covered call option strategy

on Jun 14, 2012 in Derivative, Equity, Home | 2,390 comments

During times of economic uncertainty, having blue chip titles in your portfolio that pay  steady dividends is one way to ride out the storm. Dividends provide indeed regular  income to investors. But did you know you could earn an extra income on shares you already own? This strategy involves selling covered calls on shares that you own. By using a covered call option strategy, the investor gets a premium writing calls and at the same time enjoys all benefits of share ownership, such as dividends and voting rights, unless he is  exercised on the written call and is then obligated to sell his shares. It is also important to cover a caveat of this strategy. When you sell a covered call on a share, you are limiting your upside potential. If the share price goes skyward then the option will probably be exercised and you will be obligated to sell the share at the agreed on strike price. However, if the asset price is below the strike price at expiration, then the calls that you sold are not exercised and the premium that you collected provides additional income for you, increasing your rate of return on your portfolio. If you are writing out of the money calls, the share may continually increase in value, yet the options may never get exercised, allowing you to simply roll over the strategy. This generates continuous income for you. Obviously, you want to sell covered calls at a strike price above your cost basis, so you still profit if the market price is above the strike price and the shares are called. Ideally you would like to set the strike price above where you believe the price will rise by the expiration date, so that you can pocket both the premium and keep the shares within your portfolio. When your view is neutral on a share and you want to generate additional income from your investments, this option strategy is worth your...

How much do you think Facebook is worth?

on May 5, 2012 in Equity, Home | 2,154 comments

There’s an emotional draw that can sometimes make investors more comfortable buying companies that they are familiar with, but investors sucked into buying Facebook during what’s sure to be hectic first day of trading may want to take a look at the downward trajectory that’s followed the debuts of LinkedIn or Groupon. Ironically, the company has no revenue generating features in place except for displaying advertising which makes its shares a questionable investment. I believe the social networking giant will make a splashy debut but could slump when the actual revenues and earnings are made public. Dropping popularity could be around the corner, and advertiser will always move to channels where the action is. In fact, the business model for a Facebook IPO seems to replicate many technology shares during the Internet Bubble of the late 90s. Time will tell if Facebook can find a way to monetize its audience without driving them off to other services. In the end, it may be that Facebook’s IPO serves no purpose other than to temporarily artificially inflate its value so that it can be acquired for a larger amount than is currently offered by major players like Google or Microsoft. The question is, will Facebook experience the same fate as AOL and its Time Warner...

Apple and PowerShares QQQ: the double edged sword

on May 4, 2012 in Equity, Home | 1,569 comments

Do you like Apple? Do you think they will continue their stellar climb? Are you prepared to include Apple in your portfolio? If you own the PowerShares QQQ, that’s exactly what you’re doing. Apple now accounts for 18.50% of the NASDAQ-100 index. In fact, Apple’s weight in the index is higher than the combined weights of Google, Oracle, Cisco and Intel! The PowerShares QQQ is an ETF that tracks the NASDAQ-100 index. In other words, it’s designed to invest in the same companies, at the same proportion, tracked in the NASDAQ-100 index. Since investors can’t actually invest in an index, the idea is to match the performance of the underlying index giving investors a chance to, as closely as possible, emulate the performance of the index with a tracking share. This weighting difference can have dramatic effect on the performance of the index and the tracking share. As of about midday today Apple is currently experiencing a correction. While the broader S&P 500 index is down 0.44%, the Qs is down 2.15%. While shares of Google, Intel and Cisco are all trading down today, Apple is currently off 2.23% on the day and dragging the Qs along with it. The lesson for investors? The Qs is not as diversified as it may sound. As goes Apple, so goes the Qs! So watch out the double edged...

“Sell in may and go away” strategy

on May 1, 2012 in Equity, Home | 4,718 comments

“Sell in May and go away” is a strategy that some investors are likely contemplating right now. The adage is based on the historically weaker performance of stocks during the May through October time period. Certainly, last year made selling at the end of the April seems like a prudent decision. From the end of April 2011 to the end of October 2011, the Euro Stoxx 50 lost almost 19% and the Dow lost 6.7%. The strategy works because of seasonal factors. End of the year bonuses and the so called Santa Claus rally help boost November, December and January. February is mild and March sometimes suffers from end of quarter machinations. Anticipation about the soon to be reported first quarter reports typically lifts April. May through October tend to be sketchy: first quarter results are over, the summer doldrums have set in and fall generally brings a period of portfolio housekeeping. Given how strong the first quarter’s rally was, a summer pause in the markets would not be surprising, but a pause is far milder than a correction. However, if global (or domestic) economic conditions surprise to the upside, summer flowers may not be the only thing...