Welcome to the Humble Investor

Sorry Everyone

My apologies for neglecting the site. My Mother has been in the hospital 4 times over the past several weeks.

The good news is she is doing well and back home! So now I can get back to posting. If anyone has suggestions for topics of interest please comment or post in the forums. I am thinking about an article on "Short Intrest".

Cheers!
-The Humble Investor

Put Options

I am very interested in options since they allow an investor to leverage their available cash. For some reason, buying “Calls”, or Call Options, is very easy for me to understand. I suspect this is true for others as well. “Puts”, or Put Options, on the other hand are a bit harder for me to wrap my arms around. So, I started doing some research and self-education. Yahoo! Finance has an excellent source of information in this regard. Buying puts is a bearish strategy and selling puts is a bullish strategy.

Three things to keep in mind:

·         All options (Calls and Puts) expire on the 3^rd Friday of the expiration month. For instance, Feb 2007 options expire on Friday the 16^th of February 2007.

·         Options are traded as contracts and each contract represents 100 shares of the underlying stock or option.

·         A put option is “in-the-money”, and likely to be exercised, if its strike price is above the current price of the stock or index. Conversely, an option is “out-of-the-money”, and likely to expire worthless, if the strike price is below the stock price.

Buying Puts

Let’s talk first about buying puts. If a person believes that a stock or index will go down in price, they could buy put options. When a put is bought, it is called an opening position. The buyer now has the right, but absolutely no obligation, to sell the stock or index at the strike price of the option up until close of trading on the expiration date. The risk for the buyer is limited to the price of the option. Profit will occur if the stock falls below the strike price and is the difference between the strike price and the current price taking into account commission costs. To close out a position, one would sell a put with the same strike price and expiration date.

Selling Puts

If one is bullish and believes that the stock price will rise, then you could sell puts. Sellers have obligations. A put seller has the obligation to buy 100 shares (per option) of the underlying stock at the put strike price. In other words, the option seller must be ready to have the stock sold to them at the strike price. The put seller's risk is the drop in the stock price, which is limited to the stock falling to zero. Profit equals the credit received from the sale of the put. Put sellers often prefer options with little time left until expiration because they want a put to expire worthless. In that way, the seller keeps the entire premium. To close out a position, one would buy a put with the same strike price and expiration date.

I hope this helps. It helped me for sure.

-The Humble Investor

More on ETFs

I have been seeing more and more commentary on what is "bad" about ETFs in the past week or so. In fact, I have heard Jim Cramer, from  TheStreet.com, speak out against them and  Jack Bogle, the founder of Vanguard, had an opinion piece published in today's Wall Street Journal that was very anti ETF.

Mr. Bogle postulates that people are using ETFs as trading vehicles and that they are only "dreams come true" for fund managers, brokers, financial advisors, and entrepreneurs. He further states that there is no real way for an investor to gauge the potential return offered by a particular ETF vs. the broader market. In fairness, he also says that if ETFs are bought for investment and not traded, they can be “solid competitors” to the index mutual funds.

I am confused. Mutual funds have been around for a very long time now. They have evolved from what I call managed funds, where a fund manager picks funds based on some ideology and picks which stocks to purchase with the fund assets, to include index based and sector based funds. I see ETFs as the next logical progression. With ETFs you have several advantages and very few downsides. I won’t repeat myself as I mentioned a few of the advantages a previous post.

I like the idea of lower management fees, having the ability to trade in real time, and ease of diversification that ETFs offer. With that said, I only own two. EWY, the iShares ETF that invests in South Korea and “spiders” in my retirement account. The former offers me an easy opportunity to invest in a foreign market and more specifically Samsung which does not trade in the US. The latter gives me a lower cost alternative to an index mutual fund. What’s not to like?

-The Humble Investor

Terms that Analysts Use to Recommend Stocks

We all are familiar with ratings such as Strong Buy, Buy, Accumulate, Neutral, Hold,  and Sell. These are all very intuitive. However, a lot of analysts use other terms in an attempt to differentiate themselves from their peers. I will jot down a few of the alternative ratings.

Perform:

Ratings given by analysts showing how they expect a stock to perform compared to major indices such as the S&P 500. Examples are, In-Line, Outperform and Underperform.

Weight:

This is used the same way that Perform is. Overweight stocks are expected to perform better than the overall market. Examples are, Overweight, Equal-Weight, and Underweight.

-The Humble Investor

Exchange Traded Funds (ETF)