Ways to increase your income

A Forex Carry Trade that makes Money!

2008-08-10T18:19:00.000-07:00

I have personally been working on a way to consistently make money by doing forex "carry trading" for 5 years, and God has lead me to it. Now, some of you will be want to stop reading, but I ask you to read on. I absolutely give credit to God for all in my life, so I give him credit for this above all. The challenge had always been how do you protect your underlying investment when the market makes major moves, so you can still earn the interest will protecting your investment. If I have peaked your curiosity come back and I will continue to expound on this methodology (that is currently making money by the way). Thanks.

2/28/2008

2008-02-28T18:43:00.000-08:00

The markets gave back some of their gains for the week today. Below is the current status of our covered call trades for the month of March. To see the specifics of the trade, please review previous postings. These postings are for educational purposes only. All trading involves risk. Please do not invest money you cannot afford to loose.

Account based on $25,000
Total stock purchase - $24,496
Call premium - $2575
Return 10.1%
Current value of stock - $24,255
Net month to date account value - $27,334

Talk to you tomorrow.

2/27/2008

2008-02-27T18:18:00.000-08:00

The markets were pretty undecided today. The good news was that OFHEO, the regulatory agency for Fannie Mae and Fredie Mac, raised their portfolio limits today. This will add needed liquidity to the credit markets. Below is the current status of our covered call trades for the month of March. To see the specifics of the trade, please review previous postings. These postings are for educational purposes only. All trading involves risk. Please do not invest money you cannot afford to loose.

Account based on $25,000
Total stock purchase - $24,496
Call premium - $2575
Return 10.1%
Current value of stock - $24,754
Net month to date account value - $27,833

Talk to you tomorrow.

2/26/2008

2008-02-26T15:00:00.000-08:00

The markets got another nice boost today as IBM increased their earnings outlook for 2008. Below is the current status of our covered call trades for the month of March. To see the specifics of the trade, please review previous postings. These postings are for educational purposes only. All trading involves risk. Please do not invest money you cannot afford to loose.

Account based on $25,000
Total stock purchase - $24,496
Call premium - $2575
Return 10.1%
Current value of stock - $25,197
Net month to date account value - $28,276

Talk to you tomorrow.

2/25/2008

2008-02-25T19:08:00.000-08:00

The markets got a nice boost today as S & P validated some of the bond issurers AAA rating. Below is the current status of our covered call trades for the month of March. To see the specifics of the trade, please review previous postings. These postings are for educational purposes only. All trading involves risk. Please do not invest money you cannot afford to loose.

Account based on $25,000
Total stock purchase - $24,496
Call premium - $2575
Return 10.1%
Current value of stock - $24,952
Net month to date account value - $28,031

Talk to you tomorrow.

2/22/2008

2008-02-24T19:13:00.000-08:00

Overall the markets were undecided on their intent today. Below is the current status of our covered call trades for the month of March. To see the specifics of the trade, please review previous postings. These postings are for educational purposes only. All trading involves risk. Please do not invest money you cannot afford to loose.

Account based on $25,000
Total stock purchase - $24,496
Call premium - $2575
Return 10.1%
Current value of stock - $23,475
Net month to date account value - $25,975

Talk to you tomorrow.

2/21/2008

2008-02-21T17:44:00.002-08:00

More negative data moved the US stock market down today. Below is a recap of where we are with our March portfolio. This is for educational purposes only. All trading has risk. Please do not risk money you cannot afford to loose.

Account based on $25,000
Total stock purchase - $24,496
Call premium - $2575
Return 10.1%
Current value of stock - $23,141
Net month to date account value - $26,220

Talk to you tomorrow.

Our March Portfolio

2008-02-20T19:02:00.000-08:00

Well we have talked strategy and stocks for a while now. It is now time to show you what our March portfolio looks like. We will post this with results every trading day along with thoughts on different stocks and financial market situations. These trades are shown for educational purposes only. All investments have risk. Please do not invest money you cannot afford to loose.

The format is the stock symbol/description/quantity bought or sold/purchase or sale price.

Negative numbers mean the number of calls sold.

ARNA/ARENA PHARMACEUTICALS INC/700/$6.97
.UGGCU/ARNA MAR 7.5 Call /-7 /$0.85
CRME/CARDIOME PHARMA CORP/800/$6.02
.UXYCU/CRME MAR 7.5 Call/-8/$0.70
PGNX/PROGENICS PHARMA INC/400/$16.39
.GUBCW/PGNX MAR 17.5 Call/-4/$0.95
PMI/PMI GROUP INC/500/$7.51
.PMICU/PMI MAR 7.5 Call -5/$1.20
YGE/YINGLI GREEN EN HOLDING CO/200/$22.45
.YGECX/YGE MAR 22.5 Call/-2/$2.20

This account is based on a $25,000
$24,496 of stock purchased
$2,575 call premiums
Return 10.1%
Current profit loss on stock ($710)
Net month to date $1835

Talk to you tomorrow.

The 3rd scenario

2008-02-19T19:02:00.000-08:00

If you using a covered call strategy to generate monthly income, you need to evaluate each stock in your portfolio every month just like in the 2nd scenario. The difference is generally what return are you good with keeping in your portfolio. As we stated yesterday, call premiums change based on several different factors.

As we talked about yesterday if you can average 6% per month and reinvest, the power of compound interest grows your account balance very quickly. If you are taking all or part of the generated income every month you have to think about what % do you want to take out as income every month. If your account balance is $100,000 and you would like to generate $5000 or 5%, you have to think about your asset protection differently. In the first 2 scenarios, you leave you call premiums in the account for the long term which allows you to dollar cost average you stocks over the medium/long term. In those cases when a stock is no longer delivering the call premium you would like it is generally easier to liquidate since your account balance is continually growing. If you have a none performer you can liquadate the position and get into another stock that has a good call premium.

In this scenario since you are more than likely taking most or all of your premiums, you do not always have that luxury. When you are in any type of account to produce long term income, you have to protect your underlying investment. In this case, you have to protect your $100,000. That money is your instrument to generate income.

Lets think about that example. If in the above example you want to take 5% every month, we would suggest targeting at least 7-8%. That will give you the cushion you need to sell stock that you may have a negative balance on and the call premium has fallen significantly. Job number 1 is to keep that $100,000 whole so you can keep generating that monthly income.

Talk to you tomorrow.

The 2nd scenario

2008-02-18T19:32:00.000-08:00

When you are looking to do covered call strategies for longer term wealth growth, this is generally done in an IRA, the key thing to remember is you have to evaluate every stock at the end of every option month. Stock price volatility and/or the belief the stock will rise rapidly in the short term is what gets us a higher premium and therefore a better return.

If in the case of an account where you leave all the call premiums in the account, such as an IRA, your outlook may need to be a little different. Lets think about the powerful investing tool of compound interest. If you make 6% per month and reinvest that profit every month, you will double your money every 12 months. If you start with $4000 and double every year with our 6% per month, in 5 years you have $128,000 and you have over a million dollars in 8 years. This is a very powerful tool when planning for retirement.

Since stock volatility changes over time, we need to reevaluate our portfolio each month to see what rate of return you are receiving from each stock and its call premium. In an account where all premiums are held and reinvested in the account and the account grows tax free, you can afford to take less risk and accept less return and still grow your nest egg quite nicely.

Talk to you tomorrow.

3 Trading Scenarios

2008-02-17T16:16:00.000-08:00

Now that we have looked at some stocks that might be good candidates for covered call strategies, lets think about how we trade covered calls day to day. The three basic reasons that people use strategies such as covered calls. The first is to increase the rate of return on current stock investments and give some downside protection with the generated call premiums. The second is to generate longer term wealth accural, such as an IRA. The third is to generate monthly income. Over the next three days we will discuss options on how to best trade for each of these scenarios.

In the first scenario you can write options on stocks that you have owned for a length time. Generally they are blue chips. Writing covered calls on these is not going to generate a tremendous return, but if your goal is to hold blue chip stocks for long term gains you can add 8-10% per year. The key is remembering what the goal of this and each of the three strategies is. In this case, the goal is long term appreciation of the stock. You will have to determine option premium versus stock price increase versus short term trend for the stock price.

Lets take Wal-Mart as an example. As of close on friday the stock was at 49.44. The short term outlook for the stock is bullish (above 50 day moving avg, relative strength indicator is rising). The 50 march option is at 1.40. The 52.50 is going off at 0.55. If you think of the options premium at an addition to the strike price of the option, in this case 50 +1.40 =51.40. So if you don't think the stock is going above that with the next 30 days, it would be best to sell the 50 option. You would get the stock increase up to the strike price, 50 in this case. Using the 52.50 option, your defining price would be at 53.05.

The other benefit to consider is the average price of the stock. In the 50 option scenario, it is 49.44 - 1.40 = 48.04. The average price that you have in the stock is 48.04. If you are in the market to hold blue chip stocks for lock term appreciation this can be very important. In overall bear markets, if you hold the stocks until the market turns around, you can lower your average price and increase your profit long term.

Covered calls can be a nice addition to this type of portfolio. It will take a little analysis to understand when to write that closet option versus a farther out option. It will take a little more work, but it will be worth it. Tomorrow we will talk about scenario number 2.

Talk to you tomorrow.

SulphCo. Inc

2008-02-13T19:01:00.000-08:00

Today's stock that we are going to talk about is a little different. There is not a lot of fundamental history to talk about with Sulphco, but they have patented a sonar "cracking" or breaking down of heavy crude oil. The world is not running out of oil. It is running out of nice light easy to refine oil. As more and more crude oil that is newly discovered is a heavier oil, it requires more refining. There are much fewer in the world that can refine heavy crude. Sulphco just signed there first contract to use their process. Investing carries risk. Please do not invest money you cannot afford to loose.

SulphCo. Inc. is a developmental stage company, engaged in the development and commercialization of technology for the upgrading of crude oil. The company's Sonocracking process is based upon the use of ultrasonics that include the application of energy and frequency sound waves, which alters the molecular structure of crude oil, decreases the relative density and the viscosity of crude oil, and increases the amount of lighter oils that can be recovered during the refinery processes.
This technology also reduces the weight percentage of sulfur and parts per million of nitrogen in the chemical composition of crude oil. The company serves crude oil producers and refiners. SulphCo has a collaboration agreement with ChevronTexaco Energy Technology Company and a joint venture with Trans Gulf Petroleum Co. to implement SulphCo's Sonocracking desulfurization technology.
SUF Investor Highlights
Announced that it has signed an agreement with Pt. Isis Megah ("Isis"), an Indonesian oil and gas services company, which grants Isis an exclusive distributorship in the sales territories of India, Malaysia, Singapore and Indonesia.
Announced its first customer order, procured through Isis, for Sonocracking units with at least thirty thousand barrels per day of processing capacity.
Reported results from the first and second rounds of testing in Europe. Two sets of testing programs were completed with minimal operating issues and the appropriate analyses have now been completed.
Reported that the interest level in the Sonocracking process remains high as potential customers see the value that can be driven by the technology.

Trades:

Covered Call
But stock @ 4.51
Sell March 5 call @ 0.55
12.2% return in 36 days

Hedge Wrap
Buy stock @ 4.51
Sell March 5 call @ 0.55
Buy March 2.50 put @ 0.05
11% return in 36 days

Talk to you next week.

Xinhua Finance Media Limited

2008-02-13T18:40:00.000-08:00

This stock is another Chinese company. The fundamentals do not look that great, but the chart and the analyst recommendations look positive. As we have stated before, when using foreign based stocks for a covered call, we strongly recommend the hedge wrap strategy due to an increased volitilty level. All investing carries risk. Please do not invest money you cannot afford to loose.

Xinhua Finance Media Limited (XFM) is a diversified media company in China. XFM has developed an integrated platform that includes the creation and production of content that is distributed across nationwide television and print media outlets, and radio in Beijing and Shanghai. XFMGÇÖs business operates across five groups: media production, broadcasting, print, advertising and research. Beijing Taide Advertising Co., Ltd. (Beijing Taide), an affiliated entity, XFM acquired 50% of Beijing Jingguan Xincheng Advertising Co., Ltd., or Economic Observer Advertising. In June 2007, it acquired Singshine (Holdings) Hongkong Limited and Beijing Mobile Interactive Co., Ltd. On July 2, 2007, the Company acquired the entire stake in a Virgin Islands-based company, which holds 100% stake in Convey Advertising Company Limited, a Hong Kong-based company. In November 2007, the Company acquired JCBN Company Limited, an advertising company with operations in Shanghai, Beijing and Hong Kong.

Xinhua Finance Media Ltd: Stock Rating Summary

3
Xinhua Finance Media Ltd, a micro-cap company in the consumer services sector, is expected to underperform the market over the next six months with above average risk.

FundamentalGrade: D
• The most recent quarterly earnings report was slightly lower than analysts’ consensus forecast. Neutral/Negative
• Earnings growth information is unavailable or inconsistent.
• Earnings estimate revision information is unavailable or inconsistent.

OwnershipGrade: C
• Insider trading information is unavailable or inconsistent.
• Shares are neither being accumulated heavily nor sold heavily by financial institutions. Neutral for a small company like XFML

ValuationGrade: C
• The price-to-earnings multiple is lower than average for all stocks in the StockScouter universe. Positive
• Price-to-sales information is unavailable or inconsistent.
• The ratio of XFML's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.

TechnicalGrade: NA
• Relative strength information is unavailable or inconsistent.
• Moving average information is unavailable or inconsistent.

Average brokerage recommendation is Strong Buy.

Trades:
Covered calls
Buy stock @ 4.88
Sell March 5 call @ 0.65
13.3% return in 37 days

Hedge Wrap
Buy stock @ 4.88
Sell March 5 call @ 0.65
Buy March 2.50 put @ 0.10
11.3% return in 37 days

Talk to you tomorrow.

Vanda Pharmaceuticals Inc.

2008-02-12T19:14:00.000-08:00

Well we are looking at yet another small pharma company, These companies are fairly immune to economic slowdowns, therefore a large number of investors are wanting to buy call options. This results in driving up the price on the options we want to sell. The thing to keep in mind is that these stock prices are very Susceptible to FDA rulings on their drugs as they go through trials. All types of investing carry risk. Please do not invest money you cannot afford to loose.

Vanda Pharmaceuticals Inc. (Vanda) is a biopharmaceutical company focused on the development and commercialization of clinical-stage drug candidates, with exclusive worldwide commercial rights to three product candidates in clinical development for various central nervous system disorders. VandaGÇÖs lead product candidate, iloperidone, is a compound for the treatment of schizophrenia and bipolar disorder. Its second product candidate, VEC-162, is a compound for the treatment of sleep and mood disorders. In November 2006, Vanda announced positive top-line results from its Phase III trial of VEC-162 in transient insomnia. VEC-162 demonstrated significant improvement in several parameters used to measure the efficacy of insomnia therapies, including reduced duration of wake after sleep onset, improved sleep efficiency and shortened time to persistent sleep. VandaGÇÖs third product candidate, VSF-173, is a compound for the treatment of excessive sleepiness and is ready for a Phase II trial.

Vanda Pharmaceuticals Inc: Stock Rating Summary
5
Vanda Pharmaceuticals Inc, a small-cap company in the health care sector, is expected to match the market over the next six months with above average risk.
10 is the best possible rating.

FundamentalGrade: B
•The most recent quarterly earnings report was significantly higher than analysts’ consensus forecast. Positive
•Earnings growth information is unavailable or inconsistent.
•Earnings estimate revision information is unavailable or inconsistent.

OwnershipGrade: C
•Insider trading information is unavailable or inconsistent.
•Shares are under heavy accumulation by financial institutions. Positive for a small company like VNDA

ValuationGrade: D
•The price-to-earnings multiple is a negative number. No effect
•Price-to-sales information is unavailable or inconsistent.
•The ratio of VNDA's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.

TechnicalGrade: F
•The StockScouter measure of relative price change and consistency is very low. Very negative
•Previous day’s closing price for VNDA was significantly below its 50-day moving average, a level from which prices frequently rebound over the long term. Positive

Average brokerage recommendation is Moderate Buy.

Trades:
Covered call
Buy stock @ 4.91
Sell March 5 covered call @ 0.70
14.3% return in 38 days

Hedge Wrap
Buy stock @ 4.91
Sell March 5 covered call @ 0.70
Buy March 2.50 put @ 0.10
12.3% return in 38 days

Talk to you tomorrow.

Cardiome Pharma Corp

2008-02-11T17:24:00.005-08:00

Well here is the next stock we want to look at. Cardiome pharma corp is another small pharma company that has a good up side for a covered call strategy. First a quick update on the bond insurers that we discussed last week. It is looking more optomistic that a deal will get done for MBIA and Ambac so they can retain their AAA rating. It is not yet a done deal, but the chances are looking better than last week. All investing has risk. Please do not invest money that you cannot loose.

Cardiome Pharma Corp. (Cardiome) is a drug research and development company focused on developing drugs to treat or prevent cardiovascular diseases. The Company has four wholly owned subsidiaries: Rhythm-Search Developments Ltd.; Cardiome, Inc.; Cardiome Research and Development (Barbados), Inc., and Artesian Therapeutics, Inc. Vernakalant intravenous (iv) is in ongoing Phase III clinical and safety testing and Vernakalant (oral) is in Phase II clinical testing. The Artesian small molecule drug candidates are in pre-clinical testing.

CARDIOME PHARMA CORP: Stock Rating Summary
7
CARDIOME PHARMA CORP, a small-cap growth company in the health care sector, is expected to outperform the market over the next six months with very low risk.
10 is the best possible rating.
FundamentalGrade: NA
• The most recent quarterly earnings information is unavailable or inconsistent.
• Earnings growth information is unavailable or inconsistent.
• Earnings estimate revision information is unavailable or inconsistent.
OwnershipGrade: C
•Insider trading information is unavailable or inconsistent.
•Shares are being heavily sold by financial institutions. Neutral for a small company like CRME

ValuationGrade: B
•The price-to-earnings multiple is a negative number. No effect
•The price-to-sales multiple is significantly higher than the average for all stocks in the StockScouter universe. Negative for a small company like CRME
•The ratio of CRME's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.

TechnicalGrade: C
•The StockScouter measure of relative price change and consistency is low. Negative
•Previous day’s closing price for CRME was significantly below its 50-day moving average, a level from which prices frequently rebound over the long term. Positive

Average brokerage recommendation is Moderate Buy.

Strategies:
Covered Call
Buy stock @ 6.02
Sell March 7.50 call @ 1.10
18.3% return in 39 days

Hedge Wrap
Buy stock @ 6.02
Sell March 7.50 call @ 1.10
Buy March 2.50 put @ 0.15
15.8% return in 39 days*

* - the March 5 put is selling at 0.95. That does not give much room between the call and the put. We will look at a covered call only or the 2.50 put if we want downside protection.

Talk to you tomorrow.

Medis Technologies Ltd

2008-02-09T18:27:00.000-08:00

Well it is time to start another week in the markets. Medis Technologies Limited is the next stock that we are looking at for a covered call play. We must again advise caution this week because of potential market volitility. Investing always brings risk. Never invest money you cannot afford to loose.

Medis Technologies Ltd. (MTL) is a holding company, which through its wholly owned subsidiaries, Medis El Ltd., More Energy Ltd. and Cell Kinetics Ltd., designs, develops and markets liquid fuel cell products principally for the mobile handset and portable consumer electronics markets. The CompanyGÇÖs 24/7 Power Pack is a small disposable power source capable of providing direct power or multiple recharges to many portable electronic devices, such as mobile handsets, smart phones, Moving Picture Experts Group Layer-3 audio (MP3) players, gaming and other handheld electronic devices. During the year ended December 31, 2006, MTL produced over 7,000 24/7 Power Packs for testing, marketing and promotional purposes, of which it distributed in excess of 1,000 to personnel of mobile network operators, original equipment manufacturers (OEMs), software providers, retail customers, advertising executives, content providers and others worldwide.

Medis Technologies Ltd: Stock Rating Summary
5
Medis Technologies Ltd, a small-cap company in the technology sector, is expected to outperform the market over the next six months with above average risk.
10 is the best possible rating.

FundamentalGrade: D
• The most recent quarterly earnings report was approximately equal to or higher than analysts’ consensus forecast, but not to a degree that is predictive of future returns. Neutral
• Earnings growth in the past year has decelerated moderately compared to earnings growth in the past three years. Negative
• Earnings estimate revision information is unavailable or inconsistent.

OwnershipGrade: C
• Insider trading information is unavailable or inconsistent.
• Shares are under heavy accumulation by financial institutions. Positive for a small company like MDTL

ValuationGrade: D
• The price-to-earnings multiple is a negative number. No effect
• Price-to-sales information is unavailable or inconsistent.
• The ratio of MDTL's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.

TechnicalGrade: A
• The StockScouter measure of relative price change and consistency is high. Positive
• Previous day’s closing price for MDTL was significantly below its 50-day moving average, a level from which prices frequently rebound over the long term. Positive

Average brokerage recommendation is Hold.

Covered Call:
Purchase stock at $9.87
Sell March 10 call at 1.50
15.2% return in 40 days

Hedge Wrap:
Purchase stock at $9.87
Sell March 10 call at 1.50
Purchase March 7.50 call at 0.50
10.1% return in 40 days

Talk to you tomorrow.

E House China Holdings Ltd

2008-02-07T19:16:00.000-08:00

This is a stock that we are looking to add to our covered call portfolio. The thing to remember about China stocks is that there is a greater volitility involved. They can be good covered call candidates, however we choose to always use the hedge wrap on China/foreign stocks to guard against increased volitility. The financial fundamentals do not look as strong for this stock as the previous stocks we have talked about, but it has a strong recommendation from several analyst and looks to be a good candidate as a hedge wrap. There is always a risk associated with investing. Please do not invest money that you cannot afford to loose.

E-House (China) Holdings Limited (E-House), through its subsidiaries, is engaged in providing real estate agency and brokerage services in the primary and secondary markets and real estate consulting and information services in the PeopleGÇÖs Republic of China. The Company sold an aggregate of approximately five million square meters of primary properties. It operates through a network of over 1,800 real estate sales professionals in 20 cities throughout China. E-HouseGÇÖs service offerings are enhanced by its real estate information database and analysis system, which the Company refers to as China Real Estate Information Circle system (CRIC system), which is an information system that provides up-to-date and in-depth information covering residential and commercial real estate properties in all regions in China. It provides three principal types of services: primary real estate agency services, secondary real estate brokerage services, and real estate consulting and information services.

E House China Holdings Ltd: Stock Rating Detail
3
The grades below summarize the effects of key business and trading trends on this stock. FundamentalGrade: B
• The most recent quarterly earnings report was significantly higher than analysts’ consensus forecast. Positive
• Earnings growth information is unavailable or inconsistent.
• Earnings estimate revision information is unavailable or inconsistent.

OwnershipGrade: NA
• Insider trading information is unavailable or inconsistent.
• Institutional holdings information is unavailable or inconsistent.

ValuationGrade: F
• The price-to-earnings multiple is higher than the average for all stocks in the StockScouter universe. Negative
• Price-to-sales information is unavailable or inconsistent.
• The ratio of EJ's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.
E House China Holdings Ltd: Analyst Ratings
Average brokerage recommendation is Strong Buy.

Trades:
Purchase stock at $16.60
Sell March call at 2.25
13.5% return in 43 days

Hedge Wrap
Same as above plus buy March put at 12.50
7.5% return in 43 days

Good investing!

Arena Pharmaceuticals

2008-02-06T16:14:00.000-08:00

Arena pharmaceuticals is a stock that we are looking to add to our portfolio. Below is a brief description of the financial fundamentals for Arena, as well as some current analyst recommendations , and a brief description of the company. Before we get into that detail, we want to state that all trading carries with it a risk. Please do not risk any funds that you cannot afford to loose.

Arena Pharmaceuticals, Inc. (Arna) is a clinical-stage biopharmaceutical company focusing on the discovery, development and commercialization oral drugs in four therapeutic areas: cardiovascular, central nervous system, inflammatory and metabolic diseases. The CompanyGÇÖs advanced drug candidate, lorcaserin hydrochloride (lorcaserin), is being investigated in a Phase III clinical trial program for the treatment of obesity. It has a pipeline of compounds that target known and orphan G protein-coupled receptors (GPCRs), and includes compounds being evaluated independently and with its partners, Ortho-McNeil Pharmaceutical, Inc. and Merck & Co., Inc.ArenaGÇÖs other lead internal development programs include APD125 and APD791. During the year ended December 31, 2006, the Company initiated dosing in a Phase II clinical trial of APD125, which is an orally available drug candidate that it discovered and has the potential to reduce insomnia symptoms and improve sleep maintenance.

Arena Pharmaceuticals Inc: Stock Rating Detail
6 (10 being the best)
The grades below summarize the effects of key business and trading trends on this stock.

FundamentalGrade: B
• The most recent quarterly earnings report was significantly higher than analysts’ consensus forecast. Positive
• Earnings growth in the past year has decelerated rapidly compared to earnings growth in the past three years. Negative
• One or more analysts has modestly increased quarterly earnings estimates for ARNA. Positive

OwnershipGrade: C
• Insider trading information is unavailable or inconsistent.
• Shares are being heavily sold by financial institutions. Neutral for a small company like ARNA

ValuationGrade: B
• The price-to-earnings multiple is a negative number. No effect
• The price-to-sales multiple is significantly higher than the average for all stocks in the StockScouter universe. Negative for a small company like ARNA
• The ratio of ARNA's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.

TechnicalGrade: F
• The StockScouter measure of relative price change and consistency is very low. Very negative
• Previous day's closing price for ARNA was slightly below its 50-day moving average. Negative

Arena Pharmaceuticals Inc: Analyst Ratings
Average brokerage recommendation is Moderate Buy.

Our trades on this stock are as follows:
Purchase stock at $7.69
Sell 7.50 March call for 1.40
18.2 % in 44 days.

Purchase stock at $7.69
Sell above call
Buy 5 March put for 0.35
13.6% in 44 days.

Talk to you tomorrow.

Progenics Pharmaceuticals (PGNX)

2008-02-05T19:04:00.000-08:00

Well finally we get to talk about individual stocks. Progenics pharmaceuticals is a stock that currently we have in our covered call portfolio. Below is a brief description of the financial fundamentals for Progenics, as well as some current analyst recommendations , and a brief description of the company. Before we get into that detail, we want to state that all trading carries with it a risk. Please do not risk any funds that you cannot afford to loose.

Progenics Pharmaceuticals, Inc. (Progenics) is a biopharmaceutical company focusing on the development and commercialization of therapeutic products to treat the unmet medical needs of patients with debilitating conditions and life-threatening diseases. Its principal programs are directed toward gastroenterology, virology and oncology. In the area of gastroenterology, ProgenicsGÇÖ work is focused on methylnaltrexone, which is its most advanced product candidate. In the area of virology, the Company is developing viral-entry inhibitors. Progenics is developing immunotherapies for prostate cancer, including monoclonal antibodies directed against prostate specific membrane antigen (PSMA), a protein found on the surface of prostate cancer cells. Its PSMA programs are conducted through PSMA Development Company LLC (PSMA LLC). On April 20, 2006, the Company acquired Cytogen CorporationGÇÖs 50% membership interest in PSMA LLC. As a result, PSMA LLC became a wholly owned subsidiary of Progenics.

Progenics Pharmaceuticals Inc: Stock Rating Detail
6 (10 being the best)
The grades below summarize the effects of key business and trading trends on this stock.
FundamentalGrade: D
•The most recent quarterly earnings report was significantly lower than analysts' consensus forecast. Negative
•Earnings growth in the past year has accelerated moderately compared to earnings growth in the past three years. Positive
•One or more analysts has modestly decreased quarterly earnings estimates for PGNX. Negative
OwnershipGrade: C
•An executive, director or major shareholder sold a small number of shares recently. Neutral
•Shares are under heavy accumulation by financial institutions. Positive for a small company like PGNX
ValuationGrade: B
•The price-to-earnings multiple is a negative number. No effect
•The price-to-sales multiple is significantly higher than the average for all stocks in the StockScouter universe. Negative for a small company like PGNX
•The ratio of PGNX's price-to-earnings multiple to its five-year growth rate is unavailable or inconsistent.
TechnicalGrade: D
•The StockScouter measure of relative price change and consistency is low. Negative
•Previous day's closing price for PGNX was slightly below its 50-day moving average. Negative

Progenics Pharmaceuticals Inc: Analyst Ratings
Average brokerage recommendation is Moderate Buy.

Our current play is a stock purchase at 16.55. While selling a 17.50 option for 3.50. That gives you a return of 21.1%. If you want to do a hedge wrapper then add a purchase of a 12.50 put to net out to a 10.9% return. These are for the March options that will expire 45 days from today.

Tomorrow we will look at another good potential covered call stock.

Get Ready, Get Set, don't Go!

2008-02-04T16:59:00.000-08:00

We told you yesterday that we would start providing individual stock data. We will start that tomorrow, but first a discussion about the current state of the markets.

We very strongly believe in our free market economy, the American economy, and the American people. This makes us always long-term bullish on the American markets. This does not mean that we can bury our heads in the sand when short-term macro economic factors occur. We will always believe that if you are invested for the long-term, then you should "ride out" the short-term down trends and remain focused on the long-term goal. Now having said that, we would suggest not buying stocks for the covered call strategy for the next 2 weeks unless you are going to buy the stock to hold for the long-term, you already own the stock and want to write calls to increase your yield, or you want to use the hedge wrapper strategy to protect your downside risk.

Why 2 weeks you ask? In the next 2 weeks we will learn "if" the other shoe to the subprime mortgage issue will drop. There are 2 companies that insure a large portion of the bonds issued in this country. They are Ambac and MBIA. These companies insure bonds that a large number of financial institutions "have on their books". Ambac and MBIA are rated by the rating services (predominately Moody's) as AAA. By insuring bonds, they lend their triple A rating to those bonds. That triple A rating carries with it a certain value. The higher the rating the higher the value of the bond, which companies that own these bonds consider as an asset and are valued on their balance sheet based on that rating. With the recent fallout from the subprime issue it is widely believed that Ambac and MBIA do not have the necessary capital to retain their triple A rating.

There are groups of banks and private investors that are currently trying to put together deals that would get these companies enough capital to retain their triple A rating. If Ambac and MBIA loose their rating, the above mentioned bonds will also loose their rating and some of their value. If that happens companies that have these bonds will have to take a "write down" on the bonds lost value. While it is important to remember that this does not represent an actual cash loss, it does represent a revaluation of an asset to a lower value. If this happens it will more than likely cause the stock market to drop in the short-term.

Moody's has stated they will re-evaluate the ratings in 2 weeks. It is our opinion that the necessary deals will get done so these companies can retain their ratings, but this will drive a large amount of volitility in the next couple of weeks.

Now tomorrow we will start discussing individual stocks.

The Hedge Wrapper Strategy

2008-02-03T16:16:00.000-08:00

Now that we have looked at the covered call strategy, maybe you are thinking it still has too much risk for your taste. Well then the hedge wrapper or collar strategy should make you feel more comfortable. Most any stocks that would be a good candidate for an outright covered call strategy, would also be a good candidate for the hedge wrapper strategy. You will protect your downside risk, but also lower your rate of return.

Hedge Wrapper Introduction
One of the most common strategies is selling or writing OTM calls against a long position in underlying stock. This is also referred to as "covered calls" (CC). When utilizing this option strategy, the investor is neutral to slightly bullish about the direction the stock will move in the near term. CC writing is considered more conservative than strictly buying and holding stock because the risk is offset by the CC premium earned for selling the option or "call".
There is a buyer and seller using this option transaction: the owner of the underlying stock is considered the option seller or CC writer. As the CC writer, the investor is willing to limit the upside potential movement in the stock price by selling a call option with a strike price higher than (OTM) the stock price and immediately receiving the CC premium. The seller of the call is then obligated to sell the underlying stock (called out or exercised) should the stock price move higher than the call option strike price. But what if the stock price drops dramatically during the option period and the CC premium doesn't offset the loss in stock price? The CC writer could have large downside loss potential. That is where the Hedge Wrapper strategy, commonly known as a "Collar", comes into play. By purchasing protection on the downside with put options that are OTM (lower) in price than the stock price the investor gives up some of his/her CC premium, but lowers the investment risk by hedging and avoiding a major loss should the stock price drop significantly. Let's summarize the Hedge Wrapper strategy: 1) you will purchase the stock, 2) sell OTM call options which is a strike price higher than the stock price and 3) buy OTM put options at a strike price which is lower than the stock price. Thus, you have collared the stock price with call options above and put options below the stock price. Another characteristic of a Hedge Wrapper is the call and put options are sold and bought on the same underlying stock with the same expiration date.
It is important to note that no matter what happens to the stock price during the option period, the stock owner retains the CC premium (minus the cost of the put options). If the stock price stays the same through the option period, the stock owner retains the CC premium and the underlying stock and the call and put options expire worthless. If the stock price should move above the call option strike price, the stock owner still keeps the CC premium and may have the stock "called out or exercised" and the put options expire worthless. That's o.k. because the stock owner realizes profit from the CC premium and the increase in the stock price minus the cost of the put options. If the stock price should drop during the option period below the strike price of the put option, the investor retains the stock and CC premium and the investor has the right to "put" (sell) the stock at the put strike price. The only difference with a Hedge Wrapper play versus a straight CC write is you are limiting your downside risk by purchasing OTM put options. This will cost you a little of your CC premium, but it will save you large losses should the stock drop significantly. You can also still lose on the downside, however, if smaller drops in stock price occur: If the stock price drops below the price you bought the stock at, but is slightly above the strike price of the put, and the amount that you collected from selling the CC (minus the cost of the put options) doesn't cover the amount that the stock has dropped, then this could be a small loss. The Hedge Wrapper strategy is really designed to protect against catastrophic drops in stock price...it doesn't protect against small drops.
Call and Put Option Positions
There are a number of different terms that describe the option strike price in relation to the stock price. We will outline three terms, but keep in mind that the exact opposite is true for call options and put options. That is, a call option strike price that is higher than the stock price is considered an "out-of-the-money" position. If a put option has a strike price higher than the stock price, it is termed "in-the-money" and visa versa.
In-The-Money: This term refers to a call option strike price that is lower than the current stock price. For example, if a CC writer sold a call that is the May $10 strike price against a stock that is currently priced at $12.50, this would be considered an in-the-money call position. Again, the opposite is true for put options. If we buy the May $10 put option, it would be considered an out-of-the-money put position. This is the put position used when creating a Hedge Wrapper.At-The-Money: This describes a call option strike price and a stock price that are the same. For example, if the CC writer sold a call that is the May $10 strike price against a stock that is currently priced at $10, this would be considered an at-the-money call position. The same is true for put options, the same stock price and put option price equals an at-the-money put position.Out-Of-The-Money: This term refers to a call option strike price that is higher than the current stock price. For example, if a CC writer sold a call that is the May $15 strike price against a stock that is currently priced at $12.50, this would be considered an out-of-the-money call position. This is the call position used when creating a Hedge Wrapper. Again, the opposite is true for put options. If we sold the May $15 put option, it would be considered an in-the-money put position.
Let's refer to our call and put option descriptions. To create a Hedge Wrapper you would purchase the stock at $12.50, sell or write call options against the stock at the out-of-the-money (higher) strike price of $15 and buy the put options at the out-of-the-money (lower) strike price of $10.
Steps To Create a Hedge Wrapper
To write a Hedge Wrapper, you must first own the optionable stock. The investor can take either approach: Buy stock in 100 share blocks and simultaneously sell an equivalent number of call options against the underlying stock (what is known as a "buy/write") and then buy the equivalent number put option contracts. One call or put option contract is equivalent to 100 shares of stock. So, if you own 500 shares of a particular stock, you will sell or write 5 OTM (higher) call option contracts and buy 5 OTM (lower) put option contracts.
Here are some simple steps to create a Hedge Wrapper position:
Instruct your stock broker or enter your order through an on-line brokerage account and purchase the stock. You can then enter an option order to sell a specific number of call option contracts against your purchased shares and buy a specific number of put options equal to the number of call contracts sold. For example, you could purchase 500 shares and then turn around and sell 5 OTM call option contracts against those shares and buy 5 OTM put option contracts.
You must specify the month and strike price for the option contracts. Options are available in specific months and at specific strike prices. Here is an example of options available - $5.00, $7.50, $10.00, $12.50, $15.00, $17.50, $20.00, $22.50, $25.00, $30.00 and $5 increments thereafter.
Option Expiration Day - The Third Friday of each month is Expiration Day. When you sell the call options and buy the put options you have sold options that expire on the third Friday of a particular month. Both call and put option positions should have the same expiration date.
Hedge Wrapper Example
Let's go through a Hedge Wrapper example:
Stock Company Name/Ticker Symbol: ETrade (EGRP)Stock Price: $14.875Sold Out-Of-The-Money Call Option: 1 contract - June $15 @ $1.375Bought Out-Of-The-Money Put Option: 1 contract - June $12.5 @ $0.69Call Options Expiration Date: June (The market close of the third Friday of the month)
If we were to create a CC position (without downside put protection) we would purchase at least 100 shares x $14.875 = $1,487.50 and sell one OTM (higher) call option contract for an additional CC premium of $1.375 x 1 Call Option Contract (100 shares) = $137.50. In this scenario, the stock price would have to drop to $13.50 ($14.875 - $1.375) before our CC write would be at a break-even position.
If the stock price goes above the call option strike price, we retain the CC premium of $137.50 and also profit the difference between the CC strike price - stock purchase price or $12.50 ($15 - $14.875 x 100 shares). This would equal $137.50 + $12.50 = $150.00 or 10.1% return on a $1,487.50 investment in less than 30 days. If the stock price stays the same, we keep the $137.50 CC premium, retain the 100 shares of stock and can then write another CC on the same underlying stock after the June expiration date.
Now, let's include the purchased put option scenario to form a Hedge Wrapper. Let's make the assumption that we aren't quite sure the direction of the market or this stock price in particular. We would feel more comfortable if we had some downside protection should the stock fall below $12.50 (the put option strike price) and we are in a loss position. If we purchase the put option at $.069 x 1 Put Option Contract (100 shares) = $69.00, we have reduced our profit to $68.50 ($137.50 CC Premium - $69.00 Put Option Purchase) or 4.62%. Remember, our profit without the downside put protection is 10.1%. Therefore, the downside loss protection is costing us over half of our profit using the Hedge Wrapper strategy versus a straight CC strategy. Each investor must decide their risk versus reward criteria and fully understand the exact costs associated with their choice of option strategy.

Option Strategy: Hedge Wrapper (Own/Buy Stock, Sell Out-Of-The-Money Call Option , Buy Out-Of-The-Money Put Option)
Investor Sentiment: Neutral to Bullish
Profit Potential: Lower risk than strictly selling covered call options or buying stock outright, but limited profit potential. Realize revenue if stock price moves up, slightly down or stays the same. The positive side is the option seller realizes immediate profit from option premium from selling out-of-the-money (OTM) call options against underlying stock.
Drawbacks: Losing upside potential if stock moves up significantly. Also, buying OTM (lower) strike price put options costs the investor part of their CC premium in return for downside protection should the stock price drop significantly.

Now that you have a good understanding of all the tools for increasing your income by using a covered call strategy. Tomorrow we will start looking at individual stocks.

What is a covered call?

2008-01-31T20:09:00.000-08:00

Now that we have a good understand in what options are lets start learning about some of the more lucrative strategies involving options.

Covered Call Introduction
One of the most common strategies is selling or writing call options against a long position in underlying stock. This is also referred to as "covered call writing" (CC). When utilizing this option strategy, the investor is neutral to slightly bullish about the direction the stock will move in the near term. CC writing is considered more conservative than strictly buying and holding stock because the risk is offset by the CC premium earned for selling the option or "call".
There is an option buyer and seller in every option transaction. Using the CC strategy, the owner of the underlying stock is considered the option seller or CC writer. As the CC writer, the investor is willing to limit the upside potential movement in the stock price by selling the option strike price and immediately receiving the option premium which is paid by the option buyer. The seller of the call is then obligated to sell the underlying stock should the stock price move above the option strike price. As you will see there are some very profitable premiums that can be made using this option strategy. But remember, the more profitable premiums also means more volatility in the stock price, thus possibly making it a somewhat risky position.
It is important to note that no matter what happens to the stock price during the option period, the CC writer retains the call option premium. If the stock price drops or stays the same through the option period, the stock owner retains the CC premium and the underlying stock. If the stock price should move above the call option strike price, the CC writer still keeps the CC premium and may have the stock called away by the option buyer. That's o.k., because the CC writer realizes profit from the CC premium and the increase in the stock price minus the stock purchase price. The CC strategy can be a consistent way to realize profits for the stock owner, but it does limit the upside potential should the stock price move upward significantly during the option period.
There is one reason the call option buyer is willing to pay this up-front premium for the right to buy the stock at the option strike price; leveraging investment capital. So, what is the downside for the option buyer? Because an option contract has time value, as soon as a call option is purchased time is eroding that value. In order for the call option buyer to realize profit, the stock price, which affects the option price, must increase prior to the option expiration date or the option expires worthless. Time is working for the call option seller or CC writer, but working against the buyer of that call option.
Call Option Positions
There are a number of different terms that describe the option strike price in relation to the stock price. Lets look at three terms:

In-the-money - This term refers to a call option strike price that is lower than the current stock price. For example, if a CC writer sold a call that is the May $10 strike price against a stock that is currently priced at $12.50, this would be considered an in-the-money call position.

At-The-Money: This describes an option strike price and a stock price that are the same. For example, if the CC writer sold a call that is the May $10 strike price against a stock that is currently priced at $10, this would be considered an at-the-money call position.

Out-Of-The-Money: This option position is riskier than in-the-money or at-the-money call positions, but has the greatest profit potential. Because the option strike price is slightly higher than the stock price, a slight movement in the stock price will allow the CC writer to realize a gain with the CC premium and the difference between the call option strike price minus the stock purchase price. The CC premium will not be as large as an in-the-money or at-the-money position, but the combination of the stock price increase and CC premium on a slightly out-of-the-money option generally has the best profit potential.
Some investors purchase a stock and then later make a decision which option to sell or write against that stock. There is more analysis that is necessary in making your selection for which stock to purchase and write a CC against. You can fall in love with a particular stock and continue to write slightly out-of-the-money CCs against that stock, but the combination of stock price increase and CC premium may not be the most profitable investment return. You may also select a stock strictly based on the CC premium returns. This may be risky because the underlying stock may not have the fundamentals to support its current price. Remember, the only way an option investor can lose using the CC strategy is if the stock price drops more than the CC premium realized during the option period. If you invest in a stock with weak fundamentals strictly to realize the high CC premium, the stock may drop significantly (and possibly never recover) during the option period and the CC premium will not offset the stock price loss.
How Do I Identify a Good CC Candidate?
A question that is often asked is, "how do identify a CC candidate"? While you can look at the highest in-the-money and out-of-the-money CC premiums each day, this does not necessarily mean that buying the stock with the highest CC premium percent return is the purchase you should make. There are many fundamentals that must be considered to make sure that your risk versus reward criteria is met.
There are various theories and strategies available for deciding which underlying stock and its associated CC are right for your investment criteria. We would like to outline just a few things that we consider important when making your CC decisions. Here is a list that may assist you when reviewing a particular stock before making an investment in that stock and writing the CC:
First, take a look at the Bollinger Bands/Relative Strength Index (BB/RSI). Is the stock trending up or down? Is the stock at the lower range of the RSI and down toward the bottom BB band?
Once you find a CC candidate that has a stock price toward the bottom BB band and has a relatively low RSI with an upward trend, take a look at the fundamentals of the stock.
Take a look at the profile of the company. What industry and business sector is the company involved in? Is this the type of sector you think has growth potential in the near term? How were earnings for the previous quarter? Take a look at the company summary and see if the numbers meet your criteria.
Two areas that can be reviewed is the profitability and management effectiveness of the company. This number should be positive. If not, you should do more research and find out when they expect to be profitable.
52 week high/low - Is the stock price at the 52 week high or low? Is the stock trending down and could set a new low (this shouldn't be the case if you reviewed the BB/RSI and selected a stock that is currently trending up). What is causing the stock to be at a high or low; good quarterly earnings, rumors, etc.
Price/Earning Ratio (PE) - Does the stock have a PE ratio that is in line with companies in the same industry sector? If not, do a little homework to find out why it has a high or low valuation versus the rest of the industry.
Message Boards - This can be great information or it can steer you in a negative direction. Be careful what you read into message threads, you don't always know the motives of the people posting to a particular thread. There is as much good information as there is misinformation. Rely on the fundamentals and make your own decisions based on your risk versus reward criteria. Nobody knows better than you what you are willing to risk for a pre-determined gain.
Volatility - How Does it Affect Option Premiums?
High option premiums are usually generated by volatility in the stock price. If there is some sort of positive or negative news or other excitement about the company the stock price will be affected, sending the premium up or down. Why are there call options with such high premiums? "More volatile underlying stocks have higher option prices. This relationship is logical, because if a stock has the ability to move a relatively large distance upward, buyers of the calls are willing to pay higher prices for the calls--and sellers demand them as well.

"McMillan in "Options As A Strategic Investment"

By having your research pool include stocks that produce high CC premiums you have another angle to find stocks that can possibly help you make monthly and yearly returns that are relatively conservative (compared to strictly buying call options) yet potentially more profitable than simply buying and holding stock. You must still do your own detailed research of the fundamentals of the underlying stock to see if it's a stock you'd be comfortable holding if the stock price drops.
How Do I Write a Covered Call?
To write a CC, you must first own the optionable stock. The CC writer can buy stock in 100 share blocks and simultaneously sell an equivalent number of call options against the underlying stock (what is known as a "buy/write"). One option contract is equivalent to 100 shares of stock. So, if you own 500 shares of a particular stock, you will sell 5 call option contracts.
The writer sells call options against stock that is already owned. This strategy is often referred to as "legging in".
You must get approval from your stock broker in order to write covered calls. Your broker may require you to fill out some paperwork to receive this approval. He or she will also send you "The Characteristics and Risks of Standardized Options" brochure. It is mandatory that prior to trading options this brochure is delivered to you by your broker.
Here are some simple steps to write a covered call:
Identify and fully research an optionable stock that has a CC premium that meets your risk versus reward criteria.
Instruct your stock broker or enter your order through an on-line brokerage account and purchase the stock. You can then enter a call option order to sell a specific number of option contracts against your purchased shares. For example, you could purchase 500 shares and then turn around and sell 5 call option contracts against those shares.
You must specify the month and strike price for the call option contract. Options are available in specific months and at specific strike prices. Here is an example of available strike prices - $5.00, $7.50, $10.00, $12.50, $15.00, $17.50, $20.00, $22.50, $25.00, $30.00 and $5 increments thereafter for stocks over $25.
Option Expiration Day - Expiration day is the third Friday of each month. When you write the CC (sell call options) you have sold a call that expires on the third Friday of a particular month. On this date, your call options will either be called out or exercised (the stock price is above the call option strike price) or the option will expire worthless (the stock price is below the call option strike price).
If your option is called out (exercised) your stock will be sold at the CC strike price. You will keep the CC premium as well as the difference between your stock purchase price and the call option strike price.
If the call option expires with the stock price below the option price, you still own your stock and you keep the CC premium. You can then turn around and write another CC on the same underlying stock.
Commissions - Check with your broker about commissions charged when purchasing stock as well as writing covered calls. You will be charged commissions for purchasing stock, selling the CC and selling your stock if the call option you have sold is called out (exercised). The CoveredCalls.com Calculator takes these charges into consideration when calculating your actual percentage return on your covered call transaction.
Margin - Most brokerage firm accounts, except IRA accounts, allow margin. That means that you can purchase stocks wherein you put up 50% and the brokerage puts up 50%. For the cost of interest charged on your margin account you have twice the amount of purchasing power. If you purchase stock on margin, then sell a CC your percent return is doubled, minus the margin loan interest charge.

Basic overview:
Option Strategy: Covered Call Writing (Own/Buy Stock, Sell Out-Of-The-Money Call Options)

Investor Sentiment: Neutral to Slightly BullishProfit

Potential: Realize revenue if stock price stays the same or moves up to the out-of-the-money (higher) call option strike price and is called out or exercised. The positive side is the option seller realizes immediate profit by retaining call option premium.

Risks: If stock price moves down significantly, the option premium may not offset the loss in stock price.

Drawbacks: Investor loses upside profit potential when stock moves past the call option strike price.

Tomorrow we will talk about where we find the information to determine what is a good covered call as well as another version of this strategy that will limit the downside risk that can occur when a stock price falls.

What is a put option?

2008-01-30T19:38:00.000-08:00

We are going to post the definiton and explanation on put option so we can complete the base learning of just exactly what are options and what do they do. Before we do that though we are going to start to talk about a couple of stocks to look at for writing covered calls. The symbols for these companies are CRME and PGNX. They are both small pharma company stocks. The $7.50 option for CRME could return a nice profit for Feb. since those options will expire in only 16 days. The 17.50 for PGNX could do the same. Both are looking strong to roll over in March once the Feb. options expire. Both stocks are in good places technically for bollinger bands and RSI (relative strength index). Analyst have a moderate buy rating on both and there is a larger than average institutional buying for both, because a large number of experts are saying that the pharma industy in a good flight to quality play going into an economic slowdown. Don't worry if you do not know what all this means, because you will.

A put option (sometimes simply called a "put") is a financial contract between two parties, the buyer and the writer (seller) of the option. The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.
Note that the writer of the option is agreeing to buy the underlying asset if the buyer exercises the option. In exchange for having this option, the buyer pays the writer (seller) a fee (the premium). (Note: Although option writers are frequently referred to as sellers, because they initially sell the option that they create, thus taking a long position in the option, they are not the only sellers. An option holder can also sell his short position in the option. However, the difference between the two sellers is that the option writer takes on the legal obligation to buy the underlying asset at the strike price, whereas the option holder is merely selling his short position, and is not contractually obligated by the sold option.)
Exact specifications may differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration. An American put option allows exercise at any time during the life of the option.
The most widely-known put option is for stock in a particular company. However, options are traded on many other assets: financial - such as interest rates (see interest rate floor) - and physical, such as gold or crude oil.
The put buyer either believes it's likely the price of the underlying asset will fall by the exercise date, or hopes to protect a long position in the asset. The advantage of buying a put over shorting the asset is that the risk is limited to the premium. The put writer does not believe the price of the underlying security is likely to fall. The writer sells the put to collect the premium. Puts can also be used to limit portfolio risk, and may be part of an option spread. Example of a put option on a stock
Buy a Put: Buyer thinks price of a stock will decrease.
Pay a premium which buyer will never get back.
The buyer has the right to sell the stock
at strike price.
Write a put: Writer receives a premium.
If buyer exercises the option,
writer will buy the stock at strike price.
If buyer does not exercise the option,
writer's profit is premium.
'Trader A' (Put Buyer) purchases a put contract to sell 100 shares of XYZ Corp. to 'Trader B' (Put Writer) for $50/share. The current price is $55/share, and 'Trader A' pays a premium of $5/share. If the price of XYZ stock falls to 40/share right before expiration, then 'Trader A' can exercise the put by buying 100 shares for $4,000 from the stock market, then selling them to 'Trader B' for $5,000.
Trader A's total earnings (S) can be calculated at $500.
Sale of the 100 stock at strike price of $50 to 'Trader B' = $5,000 (P)
Purchase of 100 stock at $40 = $4,000 (Q)
Put Option premium paid to Trader B for buying the contract of 100 shares @ $5/share, excluding commissions = $500 (R)
S=P-(Q+R)=$5,000-($4,000+$500)=$500
If, however, the share price never drops below the strike price (in this case, $50), then 'Trader A' would not exercise the option. (Why sell a stock to 'Trader B' at $50, if it would cost 'Trader A' more than that to buy it?). Trader A's option would be worthless and he would have lost the whole investment, the fee (premium) for the option contract, $500 (5/share, 100 shares per contract). Trader A's total loss are limited to the cost of the put premium plus the sales commission to buy it.

Basically a put option is just the opposite of a call option. We will talk about the actual covered call strategy tomorrow.

What is a call option?

2008-01-29T19:42:00.000-08:00

Our first step to learning how to write covered call is learning exactly what a call option is the following post explains exactly what a call is.

A call option is a financial contract between two parties, the buyer and the seller of this type of option. Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.
The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples).
Call options are most profitable for the buyer when the underlying instrument is moving up, making the price of the underlying instrument closer to the strike price. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money".
The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or financial asset (the underlying instrument). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee - the option price or premium.
Exact specifications may differ depending on option style. A European style option allows the holder to exercise the option (i.e., to buy) only on the option expiration date. An American call option allows exercise at any time during the life of the option.
Call options can be purchased on many financial instruments other than stock in a corporation. Options can be purchased on futures on interest rates, for example (see interest rate cap), as well as on commodities such as gold or crude oil. A tradeable call option should not be confused with either Incentive stock options or with a warrant. An incentive stock option, the option to buy stock in a particular company, is a right granted by a corporation to a particular person (typically executives) to purchase treasury stock. When an incentive stock option is exercised, new shares are issued. Incentive stock options are not traded on the open market. In contrast, when a call option is exercised, the underlying asset is transferred from one owner to another. Example of a call option on a stock
Buy a call: The buyer expects that the price may go up.
The buyer pays a premium that he will never get back.
He has the right to exercise the option at the strike price.
Write a call: The writer receives the premium.
If the buyer decides to exercise the option, then
the writer has to sell the stock at the strike price.
If the buyer does not exercise the option, then
the writer profits the premium.
'Trader A' (Call Buyer) purchases a Call contract to buy 100 shares of XYZ Corp from 'Trader B' (Call Writer) at $50/share. The current price is 55 per share, and 'Trader A' pays a premium of $5/share. If, the share price of XYZ stock rises to $60/share right before expiration, then 'Trader A' can exercise the call by buying 100 shares for $5,000 from the Trader B and sell them at $6,000 in the stock market.
Trader A's total earnings (S) can be calculated at $500.
Sale of 100 stock at $60 = $6,000 (P)
Amount paid to 'Trader B' for the 100 stock bought at strike price of $50 = $5,000 (Q)
Call Option premium paid to Trader B for buying the contract of 100 shares @ $5/share, excluding commissions = $500 (R)
S=P-(Q+R)=$6,000-($5,000+$500)=$500
If, however, the price of XYZ drops to $40/share below the strike price, then 'Trader A' would not exercise the option. (Why buy a stock from 'Trader B' at 50, the strike price when it can be bought at $40 in the stock market?). Trader A's option would be worthless and the whole investment, the fee (premium) for the option contract, $500 (5/share, 100 shares per contract). Trader A's total loss is limited to the cost of the call premium plus the sales commission to buy it.
The key thing to remember is that option sellers make money at a much greater frequency than option buyers. Especially when done using a covered call strategy.

Our next post will talk about what a put option is.

Things We Wish We Would Have Known

2008-01-27T18:04:00.000-08:00

This blog is the story of a couple of friends who independently spent their young adult lives desperately looking for ways to make money in addition to the their regular jobs. Long they wondered why if public school and then college was supposed to prepare you for the world, why did it not teach you how to make money outside of teaching you a specific vocation.

Now before you think this is some multi-level marketing pitch or an add to sell you the latest and greatest investment course, let us say that these are legitimate investment strategies and we will not be selling any information. All information will be for posted for all to see and use. These are investment strategies that we are currently using to increase our income with a closely managed risk/reward component.

You are probably asking if you are making money why are you giving this away for free? Well, this is information that we wished someone would have taught us in high school, college, or anytime. If you want to follow along with our posts and you are comfortable implementing these strategies, we think that is great. If you are not comfortable with that implementation, or you do not have the time, we are in the process of setting up a hedge fund that will use these exact strategies. Stay tuned for more information on that.

We will be posting our strategies on 2 basic investment methods. They are Forex carry trade and covered call option writing. These 2 strategies are capable of delivering better than average rates of return with smaller risks. They are simply the best we have found and we want to share them with you. Stay tuned as we tell you what our methodology is and where you can go to find free information. We are here to be your mentors for these things because we do wish someone would have done the same for us.