Baltimore — (TFN): It’s not an award I would want. First Putin, then Obama, now Bernanke. Big Ben is not joining the best of company with his “Person of the year” award. If history is an indication, the Fed boss’ approval rating will be significantly lower in the next twelve months.

As if being the master of the secret domain known as the Federal Reserve isn’t a hard enough job to handle, Time goes and slaps Bernanke on the cover and tells us the award is due not because of where Bernanke got us today, but because of where we have not ventured.

In other words, it’s like giving out a Nobel Prize to a guy with big plans for humanity, never mind the fact the goal of world peace is further away than ever before and Iran proved today it is just a step away from nuking Israel.

I am not sure what Time’s policy is on awarding this title posthumously, but it may be something worth investigating. After all, the true ramifications of letting one, unelected politically motivated man in charge of a great nation’s monetary future isn’t a near-sighted event. It could be a while to we learn Bernanke’s true merit.

Who knows, this time next year, China’s president, Hu Jintao, could be gracing the glossy’s cover as we hail his decision to extend our debt obligations for just a couple more years while we get things back on track.

I am not saying Bernanke didn’t do a decent job. I’m saying we should wait before sending him any praise. Last I checked, one out of every ten of my fellow Americans was in the unemployment line and currency risk is rising across the globe.

But that can’t have anything to do with free money flowing from the Fed, can it?

*** By now, you’ve got to know my thoughts on gold… sell the stuff. I was all about the precious metal this time last year, but that was a different situation and time. Now, you can’t turn on the radio, TV or open the newspaper without hearing some pitchman’s take on the stuff.

Remember the contrarian motto: when everybody else wants in, you want out.

For those of you that are viewers of late-night cable news parodies, I am a huge fan of Comedy Central’s Colbert Report. When trends get out of control, his dry humor has a way of bringing things back to Earth.

That’s why when Colbert talked about the sudden rush to the gold markets this week, I knew we were in trouble.

Here’s what I told TFN readers this morning:

“Finally an up day for gold. After sliding for nearly two weeks, the precious metal is moving far enough into positive territory today to bother noting it.

“Did Glen Beck up his marketing? Did Rush bring on a few more listeners? Or is this yet another example of the Colbert bump?

“Does it even matter? Nope, when gold is getting this much attention, the only thing that matters is how quickly you dump your position.

“Gold is supposed to be the safest investment around. Just as real estate investors love to say, there is only so much of the stuff. Unfortunately, we all know how well the real estate folks are doing these days.

“Back in the day when gold actually backed the nation’s debt and played an integral role in the monetary system, a horde of gold made sense. But today, when it’s only value comes from the fact we say its valuable, gold’s no different than a fiat currency.

“If the economy collapses like so many gold bugs are sure is about to happen, wouldn’t you rather have something of tangible value? Colbert is right. Sheep are the way to go. Better yet, follow the natives and take advantage of a buffalo’s ability to provide food and shelter.

“While I’m pushing the argument over the top, many investors are using similar logic in their bullish pursuit of gold. It has created a micro-bubble that is ready to burst.

“That is not good news for the investors that have piled into the junior gold miner sector.”

Keep reading to learn why.

*** I cannot believe this is not getting more press. If you think a handful of bank failures dealt a blow to your portfolio, wait until you see what happens when a few heavy-hitting governments begin to drop.

The good-old-boy network is alive and well on Wall Street. Just about every major financial firm has some vested interest in its “competition.” But it is nothing like the international scene where friendships and rivalries date back centuries and nuclear weapons are used as bargaining tools.

Less than a month ago, Dubai started the default-scare trend. Since then, we’ve heard from Greece, Austria and Spain. Earlier this week, Mexico made the list when Standard and Poor’s cut our southern neighbor’s credit rating.

This is not good news. It proves that, although the dollar looks weak, it’s stronger than its competition. In all things financial, value is relative.

Over the next few weeks, the dollar is going to strengthen, the Dow will drop and gold bugs will wonder what all the hoopla was about.

With most investors working on polishing their year-end portfolio, now is a good time to get in position to take advantage of the upcoming action. Come January 1, it’s a whole new game.

Baltimore — (TFN): Somebody get a bucket because I’m about to puke. I am having an impossible time trying to digest what I’m reading and hearing this week.

How could things have gotten this bad?

My sister is one of those liberal teacher types with an ideology that so many of us like to pick apart. It’s sort of a sport of mine, but she understands and takes it like any sister should take a sibling rivalry. She drops her kids off at my house with little to no notice.

With our divergent political beliefs, you should have no problem guessing my reaction when she recently told me she was applying for dual citizenship in France.

“I just want my kids to have the best opportunities available to them,” she said. I just about plopped my pants when she showed me the paperwork. Opportunities… in France? She’s got to be kidding me.

But it turns out, big sis may be getting wise in her old age. After the news I heard this week, I’m thinking about sneaking through her back window tonight and rifling through her drawers. I want to know the process.

France is starting to look like a libertarian’s dream.

What pushed me over the edge? It wasn’t mandatory healthcare. Or a global tax on Wall Street. Or a Nobel Prize. Or pay caps. Or Cash for Caulkers (but that was close).

It was the news that Congress is working on legislation that would force the NCAA to go to a playoff system.

Yes, just days after committing tens of thousands of young men to a savage war and in the midst of figuring out how to redistribute a vast percentage of the nation’s GDP, a House subcommittee took the time and the tax dollars to discuss the BCS bowl situation.

Normally a subject reserved for sports editors and afternoon talk show hosts, our leaders feel this is a vital move for the American people.

Darn I’m glad I’ve got such a visionary sister. She saw this coming months ago. I just hope there’s time to get out before they lock us all in.

*** I know, I know. Many of you are saying what in the world does this have to do with contrarian investing.

My answer… everything.

Just imagine this country’s future, economically and politically if we have a government that believes college football or even mandatory healthcare is any of its business. Do you think we’re ever going to see the Dow hit 14,000 ever again?

Not unless Obama makes it an order.

I know a lot of investors think gold is the answer, but it isn’t. Hopefully this week’s plunge helps illustrate the point. With just the stroke of a pen, Obama could pull a Roosevelt and suck it all back in. You remember Executive Order No. 6102, right?

The answer is international exposure. Just like my sister, your portfolio needs dual citizenship. If you’re sitting on nothing but domestic positions, you are sitting on a time bomb. Tick… Tick… Tick…

Fire your advisor then seek international diversification. My preference is anything Chinese, but Australia, with its rising interest rates, and even Brazil (it already beat Obama once) aren’t looking too bad.

*** Earlier today, I told TFN readers about a Chinese car retailer that’s been making strong headway (i.e. triple-digit revenue growth) over the last year. If you’ve been reading anything from the group’s publisher, J. Christoph Amberger, you know the Asia car market is red hot.

Here’s a section of what I wrote:

“While the Chinese yuan is anything but free-floating against the dollar, a stronger American currency will certainly have an impact on any country exporting goods to the States.

“That’s just part of the reason why shares of AutoChina International (NASDAQ:AUTC) are up by over 15% today. The other major catalyst is the company’s latest fiscal results.

“The Chinese auto retailer is a relatively young company with a market value of $270 million and some 25 dealerships spread across the country. In case you’re not familiar with the Asian market, it’s red hot right now.

“The quarterly figures prove it. Over the last three months, the company recorded revenues of $242 million, a whopping 110% increase over this time last year. It turned the sales into a bottom line of $7 million, yet another triple-digit increase over last year’s figures.

“If you are frequent reader of TFN articles, AutoChina’s action is not new. We’ve been tracking and writing about this stock for months, as it share price quickly climbed from just $7 to over $30 and back to $24 today.

“From here, you can expect shares to top out near the $30 range once again in coming months if current macroeconomic trends (including the strengthening dollar) continue.”

You can read the original piece here.

*** Finally, political incompetency doesn’t stop in Washington. Oh no, state governments are just as useless. Isn’t that right, Arnold?

At home in Pennsylvania, we’ve got a gambling debate on our hands. Right now, slots and electronic forms of poker are perfectly legal, but bring that animated dealer to life and give him a good-paying job, and it’s illegal.

Of course, a political debate like this can’t go on without a little bit of leverage. Tied up with the gambling bill is funding for the state’s major colleges.

That’s right. While the local bozos determine what cut of gambling revenues will go to their campaign funds, tens of thousands of students are looking at higher tuition bills next month as schools like Penn State see their funding held as a political hostage.

In France, my sister’s kids won’t have to worry about tuition… it’s already included in the tax bill.

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