Karim Rahemtulla (Investment U):
Of all the great investments you could have made in 2009, gold is right up there among the best of them.

The price of gold has surged this year, taking gold shares upwards with it. Readers of my Xcelerated Profits Report have rung the register with 45% profits on Goldcorp (NYSE: GG) and a triple-digit winner on Golden Star Resources (NYSE: GSS). We’re also up big on Yamana Gold (NYSE: AUY) at the moment.

All is good, right?

On the surface, perhaps. But not if you believe what the options market is saying…

Yamana Options Signal a Share Price Drop

Using Yamana as an example, the options market is betting that over the next 12 months or so, Yamana may fall from current levels of around $13 back into the single digits again.

Just take a look at the January 2011 $7.50 put options (the right to sell Yamana shares at $7.50), currently trading at $0.70 cents per contract. This means the put buyer thinks Yamana’s price will fall to $6.80 – almost 50% below current levels – in order to be in the money. The $6.80 price is derived from subtracting the price of the option from the strike price ($7.50 minus $0.70 = $6.80). This tale is similar across other gold shares, too.

These put options are expensive relative to Yamana’s share price – the result of gold prices moving sharply in previous weeks and causing the volatility in gold stocks to increase.

As a quick refresher, the price of an option is based on four major factors:

The price of the underlying shares
The options strike price
The time to expiration
The volatility of the underlying shares
Two Ways to Play Gold Prices… But Only One Viable Option

So if you’re a gold investor looking to participate in the market, what can you do to protect your profits, or buy shares at a lower price? Here are two potential ways…

Click here for the rest of Mr. Rahemtulla’s Analysis at Investment U.

But sometimes, we make exceptions – especially when their over-zealous attitude causes a stock to blast higher and hand us triple-digit gains.

I remember one such occurrence in particular with a high-tech company that we own in our Xclerated Profits Report portfolio. Thanks to some giddy CNBC analysts pumping up the price, the stock surged from $6 to $20 and we took half our position off the table for a gain of more than 100%.

The small-cap stock has suffered along with the broader market, but there’s no doubt that its business is viable. It’s leading the way in the field of touch screen and force-feedback technology – otherwise known as “haptics.” In short, this simplifies and enhances human interaction with technology in a variety of ways.

Cellphones… Games… Cars… Healthcare… This Technology is Everywhere

You’ve probably used the company’s tactile feedback technology and don’t even know it.

• For example, its technology is what causes cellphones to vibrate when they ring, or you get a message. And the company has licensed the technology to major firms like Nokia (NYSE:NOK), Samsung, Motorola (NYSE:MOT), and LG.
• It’s also present in video games, which gives gamers a more interactive, realistic experience, as the action on the screen is “forced” back into the controller.
• Elsewhere, it’s used in the auto industry in dashboard instruments, the casino industry in gaming machines, and the medical industry, in helping to train surgeons and doctors by replicating the behavior of the human body.

The company holds hundreds of patents and it recently signed a deal with a major chip company, a move that an influential analyst called a “game changer.”

In short, we spotted the vast potential well before Wall Street and we’re looking for another triple-digit win on the stock. And if that happens, we’ll adopt the same practice that we always do – one that you should use in your own investing…

The Name of the Game is Profits

We have a hard and fast rule at the Xcelerated Profits Report: We don’t discriminate when it comes to profits. That means if we have a winner of 100%-plus, we take our money off the table. This is true for stocks or options.

We did this last week when we sold half our shares in the gold company Golden Star Resources (NYSE: GSS) for a cool 103% gain in just a couple of months. But what makes this trade even sweeter is that we bought the shares using the proceeds from call options that we sold on another gold stock we’ve owned for a while – Yamana Gold (NYSE: AUY).

Come options expiration in January, if Yamana is trading above $6.75 per share or thereabouts (it’s currently close to $11), we’ll have essentially bought the shares of GSS for nothing.

And speaking of gold, I’ve made another play in the upcoming October Xcelerated Profits Report issue, due out at the end of this week. But it’s a play with a twist – we’re taking a “show me” stance on gold prices, arguing that gold is either going to soar or plunge from current levels. What’s more, we’ll make it do so for about $3. If you’re looking for exposure to gold, or to hedge against a price drop, you don’t want to miss it.

The bottom line is that we don’t just make picks. We take our ideas and then figure out how to turn them into “xcelerated” profits by using straightforward investment strategies that many other investors don’t know about. We teach, then we trade.

Good investing,

Karim Rahemtulla

Source: How to Turn Ordinary Profits into ‘Xcelerated’ Profits

As I’ve explained in recent columns, LEAPS are long-term options that expire in one to two years or more. So it’s an effective strategy if your outlook is a couple of years ahead at most.

And the best part is that LEAPS allow you to participate in the moves of the underlying stock (either up or down), for a fraction of what it would cost you to buy the shares outright.

So let’s compare a regular stock investing strategy with LEAP options, using the following guidelines. This is purely as an example…

The Stock Strategy

Here are the initial parameters of the stock strategy example:

• Cash to invest: $1,000,000
• Stocks to hold: 20 – Buy 1,000 shares of each, priced at $50 a share
• Timeframe: Two years
• Stop-loss: 20%
• Upside target: 30% across the board over two years (from $50 to $65)

Given that we’re looking for a 30% gain from each position, our maximum profit is $300,000. And our 20% stop-loss means the maximum loss would theoretically be $200,000.

The LEAP Strategy

Basically, we’re going to replicate the parameters above using LEAP options instead of regular shares.

• Strike price: $50 for each stock
• Cost of LEAP: $6. That’s $6,000 for each at-the-money LEAP.
• Timeframe: Two years
• Stop-loss: None
• Upside target: 30% on the underlying stocks (from $50 to $65)

Based on that guide, we’ll invest a total of $120,000 in the LEAPS positions in order to replicate the share position.

So right off the bat, that’s $880,000 less than we’d shell out for the shares outright. We’ll dump it in an account that yields 2% interest per year, which will generate about $30,000.

Stocks vs. LEAPS: Who Wins?

• The Stock Portfolio: Based on the $65 target being achieved for the stocks after two years, the portfolio will be worth 30% more ($1,300,000). Remember, though, we had $1 million at risk and capped our loss at $200,000, given the 20% stop-loss.
• The LEAP Portfolio: With each stock sitting at the $65 target price, each LEAP option is worth $15 – a 150% gain from the $6 we paid for each contract.

The combined portfolio would thus be worth $300,000 at expiration – a “net gain” of $180,000 ($300,000 minus the $120,000 we originally invested). But in fact, the actual return is even higher, since we received $30,000 by using the cash we didn’t spend on the stock portfolio to generate income for us. So our actual net outlay has dropped to $90,000 in order to make $210,000 net.

And as for the most we can lose… well, it’s capped at $90,000 – a far cry from the $200,000 at risk in the stock portfolio.

So the question you have to ask yourself, based on the above example, is whether you want to spend $1,000,000 and risk $200,000, or spend $90,000, with your risk also capped at that amount. Your answer will determine whether you are a LEAPS investor or not.

Karim Rahemtulla

Source: LEAPS vs. Stocks: An Investment Vehicle Throwdown

And it’s this time component that is a critical factor when it comes to valuing the price of a LEAP option and the amount of risk involved.

An option’s price is determined by a computer program – either the Options Pricing Model or the Black-Scholes Model. Black, Scholes and Merton developed the latter model in the 1970s, winning a Nobel Prize for it.

Essentially, both models take the same main factors into account…

• The amount of time until expiration.
• The price of the underlying shares.
• The volatility of the share price.
• The risk-free rate of return.

Let’s take a look at these factors, so you know how to pick the right options with the best chance of yielding handsome profits…

Put Time on Your Side With LEAP Options

Time Until Expiration: When most people think about options, they think about getting the biggest bang for their buck and profiting in the shortest amount of time.

But be careful, because it isn’t that simple. With short-term options, time is against you. If the outcome you desire isn’t achieved within a short period of time, your option expires worthless.

However, LEAP options give you plenty of time for you to be correct and profit from the trade. Time is a critical component of a LEAPS trade.

• For example, I’ve seen a LEAP option on a gold stock recommendation move from the $3 price we paid, to $0.50, then right back up to $16… all during a 12-month period.
• Contrast that with a short-term option, which would have flamed out a long time before the share price recovered.

With LEAPS, you have time to withstand a bad earnings report, a market correction, a terrorist attack, or a plethora of other shocks that would otherwise mean a world of hurt for your position.

Stock-Watching: How the Share Price Affects the Option Price

Price of the Underlying Shares: It stands to reason that the price of the underlying shares is another key factor in determining how much you pay for the LEAPS options.

Basically, the closer the strike price (the price at which you have the right to buy or sell the stock) is to the current share price, the more expensive the option will be.

• For example, if IBM (NYSE: IBM) trades for $100, a $95 call option would be considered in-the-money since the strike price is less than the current option price. In this case, the option premium will have intrinsic value. For example, if the option cost $9, $5 of that would be intrinsic value and $4 would be the amount paid for time and risk.
• If your option is out-of-the-money, you pay for time and risk. So if IBM was at $100 and you bought a $105 call option for $5, the entire $5 would be for time and risk. But while the option premium is less than an in-the-money option, the probability of winning is also lower.

How Much Will Your Option Move? This Volatility Number Will Tell You

Volatility: When we talk about volatility here, we’re referring to how the share price performs in relation to the broader market. This is known as a stock’s beta.

Simply put, a stock with a beta of 1 will move in line with the market. A number under 1 means it’s less volatile, while a number higher than 1 means it’s more prone to volatility. So if the S&P 500 moves down 1% and your stock moves down 2%, your stock has a very high beta – double that of the market.

The higher the beta, the more expensive the options are, since options have the ability to move with greater speed in either direction.

• For example, the beta on shares of tech giant Apple (Nasdaq: AAPL) will be much higher than the beta on a stodgy pharma company like Procter & Gamble (NYSE: PG).

Risk Free Rate of Return: Measuring the cost of money at the cheapest possible price and the best possible return with no risk, this final factor is usually associated with government Treasury securities, especially 10-year Treasury bonds.

Together, these four features – time to expiration, underlying share price, volatility and risk-free rate of return – represent the critical components in determining the price of LEAP options (or any options, for that matter).

Next time, we’ll explore the economics of the LEAP strategy along with how you can invest in the market with 15% of your cash while the rest of the world is foolishly using 100% of theirs.

Good investing,

Karim Rahemtulla

Source: Put Time on Your Side With This Trading Strategy

Here’s how…

In this case, I’m assuming that you’re short on Yamana and are trying to manage the position in order to not take a big loss in case it moves against you.

The way to do this would be to buy out-of-the money call options to protect you against any sharp moves up. This is like insurance. You’ll lose a little bit of money, but your downside will be capped once the option goes in-the-money.

The problem here is that if Yamana trades sideways, you’ll lose on the call option and would have to buy more as each one expires. The way around this would be to buy a LEAP call option, but it will be more expensive and eat away at your potential profits.

But what if you want to “go deep?”

Buying Short-Term Options Is A Sucker’s Bet

Here’s another question:

“Please explain the benefits of buying deep-in-the-money options.”

The buyer stands a lesser chance of benefiting than the seller, since the underlying shares must rise in order for the buyer to make money.

On the other hand, the seller can either have Yamana stay at the same price, move up, or move down to make money. Just as long as it’s not by more than his cost.

So what prompts buyers to buy options? Simple… they’re gambling and wish to spend a little bit of money, as opposed to buying the shares. They’re betting on a strong move up, but will unfortunately lose out 70% to 80% of the time. That’s why we don’t buy short-term options. Because doing so is basically saying that we can predict where Yamana will be by expiration in a few weeks or months.

What To Do When Your Options Expire

Finally, here’s another question – a two-parter:

Part 1: Whenever I read about covered calls strategies, there never seem to be much information of what to do after expiration. For example, if the shares get called away or increase in share price, do we buy the same shares again? And do we still sell deep-in-the-money calls then?

It depends on your goals. For us, when we’re using the deep in the money strategy, the objective IS to get called away every time since we are looking to own the shares at lower levels. However, if you’re looking to own the shares and continuously sell calls, then you would buy back the calls the day before expiration, taking advantage of all the premium you have captured from the expiration of time value and volatility. Then you would sell another option with either a higher strike and further out. This is called “rolling” your trade.

Part 2: If the shares don’t get called away, due to a drop in the share price, do we sell covered calls again, except at a lower strike price in order to get a good premium? Or do we sell out-the-money calls now (but the premium is lower).

With the strategy we use, we always try to sell options at the same strike price. So if the shares are lower than the strike price and we hold on to them, we’d then sell options at the same strike price and lower our cost even more. Our goal is to own the shares for zero or negative cost.

If you want to go out-of-the-money, you’re now engaging in a pure long strategy, which is not the goal of deep-in-the-money investing. The worst case is that the shares fall well below the strike and your cost. In this case you can either book the loss, or if you’re investing in a very good company, you just hold the shares until they recover. This happens about 20% to 25% of the time.

This is also the reason why you should only invest in companies that you truly do want to own… because sometimes you’ll end up owning them.

Good investing,

Karim Rahemtulla

Source: Why You Shouldn’t Buy Short-Term Options

In my column, I used the example of Yamana Gold (NYSE: AUY), showing you how to reduce your cost when buying stocks – and thereby increasing your upside potential if the shares move higher.

Today, we’re going to kick things up a notch and explain how you can cleverly take the same covered call strategy and add a twist, by using deep-in-the-money covered calls. When you do so, you can achieve more consistent returns over time, while also protecting your capital.

Simply put, I’m going to focus on mitigating risk…

Getting Deep-In-The-Money… Even When Your Stocks Fall

With a conventional covered call strategy, you buy regular shares of a stock and then sell a call option against them, whose strike price is higher than the current share price. Your aim is that the shares will move higher and will get called away at expiration for a profit.

While this does happen, it doesn’t occur as often as you might think. Plus, it usually only happens during an upward moving market.

However, with the deep-in-the-money (DITM) covered call strategy I’m focusing on today, we’re not expecting the shares to move higher. In fact, we don’t even need the stock to trade higher in order for us to make money. It can actually go lower (sometimes much lower) and we’ll still make money.

Pretty compelling, right?

In short, what we’re seeking is safety. And to get it, we need to employ a strategy that protects us much more often than not.

Deep-In-The-Money Calls: A 75% Win Rate Over 13 Years

So how about a win/loss ratio of 75%? That’s the performance the deep-in-the-money strategy recorded over the past 13 years that I’ve used it. That means we’ve only lost money or broken even 2.5 times out of 10. At all other times, we’ve made money, usually notching up market-beating returns.

Just yesterday, in fact, in my Strategic Income service, we closed out two winning positions – 13% on Wells Fargo (NYSE: WFC) and 33% on Goldcorp (NYSE: GG) – positions we initiated before the market’s collapse.

Here’s how it works, using the Yamana Gold example again. Recall that in last week’s example, we bought Yamana under $9 and sold the $10 (out-of-the-money) calls against our position.

Using Deep-In-The-Money Covered Calls On Yamana

This time, we’re going to buy the same Yamana shares. But instead of selling the $10 calls, we go deep-in-the-money instead.

• Buy 1,000 shares of Yamana at $9.50 – a total outlay of $9,500.

• Sell 10 contracts of the January 2010 $9 calls (AUY-AL). Trading at $1.75 per contract, you receive proceeds of $1,750 (remember that each contract contains 100 shares, so it’s $1.75 multiplied by 100 = $175. Then $175 multiplied by 10 = $1,750).

• Your cost for Yamana shares is now $7.75 ($9.50 minus $1.75) – a full 18% below the current price. This is the crucial number. If Yamana closes above $7.75, you’ll be profitable.

• If Yamana closes above $9 at expiration, you’ll make 16%. You arrive at this number in this way…$9 (strike price) minus $7.75 (cost) = $1.25 (profit).
  $1.25 divided by $7.75 = 16%.

  If the stock moves higher, your returns are capped at 16%, regardless of where it goes.

• Even if Yamana shares stay at today’s level, you’ll still make 16%. So you have an additional chance of profiting from the trade, versus just one with a straight long strategy, which requires the shares to move higher.

Additionally, you reduce your cost of ownership in Yamana to $7.75.

Basically, you’re saying that you’re willing to own Yamana at $7.75 – 18% below current prices. But if you don’t get the shares at that price, then you want to be paid for trying – something that happens nearly 80% of the time.

Key Points to Remember When Using DITM Covered Calls

Here are a few things to remember whenever using deep-in-the-money covered calls:

• You can execute a deep-in-the-money covered call strategy in any trading account.
• If you do end up with the shares, you can sell additional calls against your position to reduce your cost even further. The goal is to own the shares for zero dollars or even a negative cost over time.
• Always make sure you employ position sizing – i.e. never put too much in a single investment.
• At expiration, if the shares are trading above your strike price, they’ll be automatically taken from your account.

Source: Deep In The Money Covered Calls: Lower Cost, Risk & Win 75% Of The Time

You see, there are no upgrades or downgrades for covered calls, LEAPs, or puts.

It’s because most mutual fun managers can’t see beyond what they have been taught, which has predominantly been to “buy stocks.”

Sure, they’ve heard of options and even know how they work, but they are scared of showing options on their portfolios because the “Average Joe” that invests in mutual funds still looks at options with tremendous skepticism.

They’re dead wrong.

The options market was created for professionals and institutional money managers, who don’t report to the general public, but to their wealthy or sophisticated constituents.

When George Soros took down the Bank of England to the tune of billions of pounds, he did so by using the leverage that options provided him. He saw a trend and figured out how to best capitalize on it with risking less money . If it went against him, he would have lost big, but not nearly as big as someone who was risking it all.

The key to trading options is knowing how to use them to maximize the efficiency of your money. The first – and easiest – strategy for using options is the covered call trade. Here’s how you can use it to separate yourself from the average investor.

Why a Covered Call is “Covered”

In order to execute a covered call trade you need to use both a stock and an option.

The reason it’s called “covered” is because it means that your trade using the option is covered by the underlying shares that you own.

There is no risk to the broker when you execute this trade because if it goes against you, there is protection of equity by the shares you already own. That is why this type of trade can be done by anyone in any type of account, including your retirement account.

When you enter into a conventional covered call trade you are pledging to sell your shares at a certain price (strike price) on a certain date (expiration). For pledging your shares, you will be paid money (premium).

Consider yourself a stock landlord. You are renting your property for any given time, and expect to be paid for it. The money or rent that you receive is yours to keep, spend or reinvest.

In other words, you will have reduced the basis of your stock by receiving money back for the “rental.” Remember that anytime you reduce your cost basis, you have also reduced your risk.

How to Place a Covered Call Trade

An example of a conventional covered call trade would be something like this:

• You buy 1,000 shares of Yamana Gold (NYSE: AUY) for $8.50 per share. You think that Yamana can go to $10 by year’s end. You look at the options chain (a listing of the options available) and find out what the market is buying and selling Yamana’s $10 options for.
• Just like stocks, you buy at the offer/ask and sell at the bid. In this case, you see that the option is trading for $0.90 on the bid and $0.95 on the offer.
• Options are priced in increments of $0.01, $0.05 and $0.10 depending on volume traded, and selling price. In the case of Yamana, this set of options is priced in $0.05 increments.
• Options trade as contracts and each is equivalent to 100 shares of stock. The price is listed in per share amounts but is for 100 shares. So, while the Yamana options are priced at $0.90 by $0.95, the minimum dollar amount that you need to be aware of is for one contract or $90 by $95.

It also means, for the purposes of covered call investing, that you need to own at least 100 shares of Yamana to execute the trade.

• The strike price of $10 means that the buyer or seller of the option is has the right to either buy or sell Yamana at $10 depending on the strategy used and if the contract is bought or sold.
• If the option is sold, as in the case of a covered call trade, the seller of the option is obligated to deliver shares of Yamana to the buyer if the shares close at $10 or higher.

The buyer of the option has the option of taking delivery of the shares or selling the option back into the market.

Getting back to our covered call example, let’s get some other details:

You bought 1,000 shares of Yamana at $8.40, so you paid $8,400. You then sold 10 contracts of the Yamana January $10 call option. (Remember each contract equals 100 shares so for 1,000 shares you must sell 10 contracts.) You sell the options at the bid price of $0.90 receiving proceeds of $900. The $900 comes from 10 contracts, or 1,000 shares, times $0.90 per share.

Your cost in Yamana has now been reduced by 90 cents per share, so it is now $7.50 (8.40 minus $0.90) and the money you received, 90 cents per share is yours to do with what you will.

So how does it all end?

There are three possible scenarios in the works now.

• First, if Yamana closes at $10 or higher at the expiration date in January, your shares will be automatically sold to the buyer of the option at $10 per share, regardless of what price Yamana is trading for, as long as it is $10 or higher.That buyer who you sold the option to was betting that Yamana would close at $10.90 or higher in order for him to make money. Anything less and he loses. The $10.90 comes from the $10 strike plus his cost of $0.90 for the option. If it closes at $10 or higher you will make 33% on your money ($10 strike minus $7.50 cost = $2.50 profit. $2.50 profit divided by $7.50 cost equals 33%).
• If Yamana goes nowhere at stays at $8.40 at expiration you will still make money because you took in 90 cents when you sold the option. Therefore, your return on the trade would be 12% ($8.40 minus $0.90 = $7.50. $0.90 divided by $7.50 = 12%). Since the shares weren’t higher than $10 at expiration, the contract wasn’t executed and it would expire worthless. But you still retain ownership of the shares, free to sell another covered call.
• Finally, if Yamana closes below $8.40, you will still make money since your cost was $7.50. You can only lose money if Yamana closes below $7.50, your adjusted cost and your breakeven point.

Profiting From Covered Calls

As long as Yamana closes below $10, you will retain ownership of the shares and face two options. The first would be to sell your stock and the second would be to sell even more CALL options against your position further reducing your cost. As the owner of the shares you are entitled to any dividends that are paid to shareholders during your period of ownership.

To summarize:

• A covered call trade requires you to own the shares that you then sell options against.

• The money received from selling the options is yours to keep immediately.

• If the shares close above your strike price, they will be taken away (called away) from your account automatically and the money will be deposited in your account.

• Covered calls can be done in any type of account, including retirement accounts.

• Covered call trading can generate additional income while reducing your risk.

Stay tuned over the next few weeks as we break these profitable option trades down even further and we will explore a variation on covered call trading that can reduce your risk substantially while still providing double-digit returns.

Source: Covered Calls: Five Steps to Make Profitable Option Trades

Most mutual fund managers can’t see much further beyond Investing 101, and too many people in general are skeptical of options altogether. The problem is that they have no idea what they’re missing.

The options market was created for professionals, institutional money managers, and those who report to their wealthy, sophisticated constituents instead of the general public. But that doesn’t mean that the average Joe and Jane can’t use it too. They just need to get a few pieces of inside information first.

When George Soros took down the Bank of England to the tune of billions of pounds, he did it by using the leverage that options provided him. Basically, he saw a trend and figured out how to exploit it legally and with a surprisingly small amount of risk.

Sure, if it went against him, he would have lost out big time, but not nearly as much as someone who played the game the usual way. You see, the key to trading options is knowing how to use them to maximize the efficiency of your money. And the first and easiest strategy for doing that is the covered call trade…

Get “Free” Money

In order to execute a covered call trade you need to use both a stock and an option, hence the term “covered.” It means that your trade is covered by the underlying shares that you own.

There is no risk to the broker when you execute it since there is protection of equity by the shares you already own even if it goes against you. And that’s the reason why covered calls can be used by anyone in any type of account, including your retirement account.

When you enter into a conventional covered call trade, you’re essentially pledging to sell your shares at a certain price – known as the strike price – on a certain date, commonly referred to as expiration.

For pledging your shares, a buyer pays you an amount of money called a premium. And it doesn’t matter what the final outcome is; you still get to keep that premium regardless of who ends up with the shares in the end.

Since it’s yours to keep, spend or reinvest, you reduce the basis of your stock. Remember: Anytime you reduce your basis or capital risk, you also reduce your risk.

The One, Two, Threes Of A Covered Call

A typical covered call trade would go something like this:

Step 1: You buy 1,000 shares of Yamana Gold (NYSE: AUY) for $8.40 per share, totaling $8,400, and since you believe that the stock can go to $10 by year’s end, you look at an options chain (a listing of options available) to find out what the market is buying and selling the Yamana $10 options for.

(Note: This market is open to anyone who wishes to buy or sell options)

Step 2: The option is trading for $0.90 on the bid and $0.95 on the offer, so you sell 10 contracts of the Yamana January $10 call options, receiving proceeds of $900.

Now a few things to keep in mind before we go on…

• Just as with stock, you buy at the offer and sell at the bid.

• Options are always priced in increments of $0.01, $0.05 and $0.10 depending on volume traded and selling price. The Yamana options are priced in $0.05 increments and the price reflected is per share x 100 shares.

• Options trade as contracts, and each contract is equivalent to 100 shares of stock. So while the Yamana options are priced at $0.90 by $0.95, the minimum dollar amount that you need to be aware of is for 1 contract or $90 by $95. And it also means for the purpose of covered call trading, that you need to own at least 100 shares of Yamana to execute the trade.

• The strike price of $10 means that the buyer or seller of the option has the right to either buy or sell Yamana at $10 depending on the strategy used. If the option is sold – as in the case of a covered call trade – the seller of the option is obligated to deliver shares of Yamana to the buyer of the option if the shares close at $10 or higher.

The buyer of the option then has the option of taking delivery of the shares or selling the option back into the market.

As Close To A Win-Win Conclusion As You Can Possibly Get

Step 3: With your cost now reduced by 90 cents per share to $7.50 ($8.40 – $0.90), you wait for one of three possible outcomes.

Yamana closes at $10 or higher at expiration in January, in which case your shares will automatically be sold to the buyer of the option at $10 per share.

(In order for the buyer in this case to have made any money, Yamana would have to close at $10.90 ($10 strike price + cost of $0.90 per option) or higher. Anything less, and it wasn’t worth it.)

If it closes at $10 or higher you make 33% on your money ($10 strike minus $7.50 cost = $2.50 profit. $2.50 profit divided by $7.50 cost equals 33%). Or…

Yamana stays at $8.40 come expiration. In that case, as the seller, you still make money because you took in $0.90 per option you sold. Therefore, your return on the trade would be 12% ($8.40 minus $0.90 = $7.50. $0.90 divided by $7.50 = 12%) and you would still retain ownership of the shares since they didn’t close above $10. Or…

Yamana closes below $8.40, in which case you still make money, since your cost was $7.50. The only way you lose money if Yamana closes below $7.50, your adjusted cost and your breakeven point.

Covered Calls: As Simple As That

Basically, just as long as Yamana closes below $10, you retain ownership of those shares. And from there, you can either sell your stock at a time you see fit or keep it to sell even more call options against your position, reducing your cost even more in the process.

And as the owner of the shares, you’re entitled to any dividends paid out to shareholders during your stint as owner.

So let’s summarize:

• A covered call trade requires you to own the shares that you then sell options against.
• The money received from selling the options is yours to keep immediately.
• If the shares close above your strike price, they will be taken away (called away) from your account automatically and the money will be deposited in your account.
• Covered calls can be done in any type of account, including retirement accounts.
• Covered call trading can generate additional income while reducing your risk.

Next week, we’ll explore a variation on covered call trading that can reduce your risk substantially while still providing double-digit returns.

Karim

Source:  What You Need To Know About Covered Call Trading

Paralysis is not an option. Neither is making 1% or less on your cash every year when there is a high probability of out-of-control inflation in the years ahead.

You need to have a plan that can take advantage of what the market offers. And simply put, that means employing strategies that work both the long and short sides…

Expand Your Investment Horizons

Until recently, most investors have feared executing anything but the most basic investment strategies: Buying stocks, trading stocks, and in many cases, just buying and holding stocks.

While there’s nothing wrong with any of those moneymaking methods, they only scratch the surface of what the market really has to offer.

And in an increasingly complex and volatile market, there’s no better time to expand your horizons and learn how to execute the strategies that can enhance your returns, protect your portfolio and get you excited you about investing, rather than fearful.

Are Options Dangerous?

My specialty is options.

When I mention that to people, I’ll often get a rolling of eyes, or some kind of, “Wow, that’s kind of risky, isn’t it?” reaction.

Are options “dangerous” investments?

Well, any investment is dangerous if you don’t understand it. Even having money in a CD can be a painful experience when interest rates are rising and you’re locked into 2% for five years. Just ask those who locked up their money at 8% in U.S. Treasuries in the mid 1970s, only to watch rates eclipse 18%.

So options can be dangerous… if you don’t know what you’re doing. Then again, investing in Worldcom, Enron, WAMU, Fannie Mae and General Motors was dangerous, too.

And if you don’t take the time to learn how options work and what’s happening with your money when you use them, options most likely will prove dangerous for you.

The people who lose money in the options markets are the ones who view it like Vegas on Wall Street. They use options to gamble. But options aren’t weapons of financial destruction. They are, in fact, the opposite…

A Barrage Of Options Benefits

I’ve spent years telling people that far from being scary, options are very efficient instruments that allow you to control your money like no other tool on the market today.

Many investors have realized that once you do your homework, options make you a smarter investor, less dependent on the market’s vagaries and whims.

Among their benefits, options allow you to…

• Buy stocks for less than their current prices… or get paid for the effort.

• Protect your downside by offering insurance against downward movement in price.

• Generate greater income than dividends from your current holdings.

• Control stocks and benefit from their movement, while using significantly less capital to do so and giving you the luxury of more time for the situation to work in your favor.

• Play both sides of the market or a stock simultaneously for potentially unlimited gains.

So why do people think options are dangerous?

To answer this question we must take a look at the other side of the trade…

Winning Without Gambling

For every option seller, there is a buyer.

For every covered call, put-sell, straddle, strangle, etc, there has to be a counter-party. Most of the time, youdon’t want to be in this position.

These are the gambling types I mentioned a moment ago. In their eyes, options represent a lotto ticket to fortune. The chance of winning the lotto in a state like Florida is one in 18 million. But that doesn’t stop people from buying tickets. The losers in the options market adopt the “you can’t win if you don’t buy a ticket” mentality, giving the entire subject a bad name.

But you don’t have to join them. Instead you can execute proven strategies that work – and work well in any type of market, especially volatile ones. Over the next few weeks, I’ll explore several strategies in-depth (a mini-workshop if you will), so stay tuned, Meantime, feel free to browse our archives to get a head-start.

Source: The Options Market: Overcome Your Fear And Embrace These Lucrative Instruments

The Short Sale Is Selling Everyone Short

The U.S. has an excess supply of housing. What’s more, it shows no sign of decreasing. And in this case, the culprit isn’t just overextended homeowners, but the banks, too.

Case in point: I’ve spent the past two weeks shopping for a house that I can use for investment purposes. What I’ve found is that while there are many bargains available, few will actually materialize.

The problem is that true sellers – those unencumbered by losses and not just intent to ditch the property at almost any cost – cannot sell their homes because they face competition that they simply can’t beat.

That competition is coming from distressed sellers – those who are advertising “short sales.”

A short sale is a way of getting out of a mortgage without enduring the pain of going into foreclosure. So the seller basically agrees to sell the property at a lower price than the mortgage – i.e. at a loss. But the sale can’t proceed without consent from the lender. It’s then a matter of negotiating with the lender to figure out how much responsibility the seller has for the loss.

The trouble is, short-sellers are making an already bad situation even worse for the rest of us because they’re under the impression that they can simply walk away from a property as long as they’ve found a buyer. So they list their properties at often ridiculously low asking prices, thus depressing the market around them.

But, wait… that’s good for buyers, isn’t it? Not so fast…

The Short-Sale Saga

Once a short-seller set a price and gets offers, he takes them to the bank, which then decides if it wants to eat the difference between the loan amount and the amount offered by the buyer.

In most cases, the banks come back with a different, higher amount – and then the circus begins.

The seller naturally balks at the higher price because he wanted less burden – i.e., a free lunch).

The buyer balks because the price is much higher than the listing price – which was a joke to begin with.

By the time the process churns through, three to four months have passed because the bank is obviously in no hurry to take the hit on its books. Moreover, it’s in no rush because the government is subsiding its operations and providing cheap money to lend.

And who’s the fall guy from this fiasco? The real sellers.

A Three-Year, $225,000 Price Depreciation

As a result of short-sellers squashing their market, true sellers have to lower their asking prices to reflect what shows up on the Multiple Listing Service as the average price for the area.

And you guessed it… these average prices include grossly mispriced short sales. Sales that aren’t based on the true value of the market, but the whims and wishes of a seller who got in over his head.

For example, one place I looked at was listed at $300,000 just three years ago. Today’s price: $75,000.

Not only that, the carrying costs are high because it’s a condo that comes with high monthly homeowners fees and property taxes, which were based on higher assessments.

A similar property sold a few weeks earlier. It was a “short-sale,” listed at $75,000. The bank had returned with a counter-offer to the buyer of $150,000. The home eventually closed for $135,000. The seller was lucky. The buyer must really have wanted the place. But it still took three months for the process to close.

And don’t expect any help from the realtors listing the property either. Sure, they’re doing it in hopes of making sale, but they won’t spend much time on it – and sometimes won’t even respond to a short sale.

Why? Because the prices are low… they’re artificial prices that don’t reflect the home’s real value… and the short sale can take months to consummate. Not only that, it will often result in a lower commission because the bank will ask all parties for concessions.

And if the short-seller has moved out and is renting the place, tenants rights can interfere with the sale, with many paying below-market prices and not compelled to keep the place in showable condition, or be available for a showing.

Here’s the deal…

The Bargains Are Out There… But You’ve Got To Work For Them

A low selling price means absolutely nothing in this market if the home is in pre-foreclosure.

The better deals are available on “bank-approved prices,” which means the properties are already in foreclosure and the bank has already agreed on a price.

And of course, the best possible price will come from a non-short-seller who is forced to compete with short-sale prices – i.e. artificial competition.

And remember, while there are bargains available, there’s no such thing as a free lunch. Getting what you want requires more work than the media lets on.

And as for U.S. housing prices… they’re going to stay low until the real selling prices are determined. And that’s not happening yet.

Karim Rahemtulla

Source: The 800 Pound Gorilla on the Housing Market’s Back