Investing Pursuits

Saturday, May 31, 2014

Put Option for Rogers Communications

I have written a post recently, on selling put options which you can read about here

Recently, I placed a limit order of $0.69 for a put option on Roger's Communications. This was a "sell to open" a put option, which means if the order goes through I am paid a premium. Since 1 contract represents 100 shares, I was paid $58.05 after commissions. I am paid a premium as I make a "promise" that I will buy 100 shares of RCI.B at the strike price of $44.00 if the stock price falls below $44.00 and it is assigned.

3 possible outcomes :

            (1) If the stock goes up, I made $58.05 without putting up any money.

            (2) If the stock goes sideways and the stock doesn't fall far enough, I made $58.05.

           (3) If the stock goes down below the strike price of $44.00 and is assigned, then my cost basis is lowered.


What is my adjusted cost base if put is assigned?

ACB= # of contracts*100 shares*strike price - [option premium - option premium commission]   +commission for option being assigned.
                                  = 1*100*$44.00 -[$69.00 -$10.95]+$24.95
                                  =$4366.90

RCI.B currently pays an annual dividend of $1.83/share.   YoC=1.83/43.6690=4.191%

How is this different if I bought the shares outright without an option?
   Cost of 100 shares =$4400
   Commission = $4.95
   ACB/share = $44.05
   YoC= 1.83/44.05= 4.154%

The yield on cost is greater where a put was sold and assigned over just buying the stock outright. This means my money is now working harder for me. Selling a put option allows me to get paid while I am waiting for the price of a stock to go down to a point that I am comfortable buying it. The other option is to but in a limit order to buy the stock at $44.00 and wait.

EDIT : In the section about if I bought shares outright, the commission is $4.95 instead of $9.95. My numbers above have been corrected.

NOTE: Selling puts is deemed to be risky, as the stock can go to zero or decrease in value really quick.

DISCLAIMER:

Sunday, May 25, 2014

One Solution to a Rising Market

The stock market seems to be rising and rising. As an investor, it is more difficult today to find stocks that are deemed undervalued. How can an investor make money in this rising market? If a stock that you are interested is trading higher than what you willing to pay, an investor can still make money on this by using options.

An investor can make income by selling a put option. A buyer of a put pays a premium for the right, but not the obligation, to sell 100 shares at the strike price before or on the option expiration date. The seller of a put gets paid the option premium up front for the promise, or obligation, to buy 100 shares at the strike price before or on expiration date.

So lets say, shares of fictional company XYZ is currently trading at $46.00, and you are willing to buy 100 shares at $45.00 . You look at the option table for that stock for a $45.00 strike price. Since you are selling a put, you look at the bid price. If you do a market order, this is the premium you will receive. So, in this case you would receive $100 in premium directly into your account. If the stock price goes up, the seller keeps the premium. If the stock price goes sideways but stays above strike price, the put seller keeps the premium. If the stock price falls, the put seller is PUT the 100 shares of XYZ at the strike price plus still has the premium which lowers his or her cost basis.


3 Scenarios When selling a PUT OPTION

Note : Commissions were not included above for simplicity.

The risk of selling puts is that the stock can go to zero. The maximum profit when selling a put is the premium minus the commission. Selling puts allows an investor to be paided why trying to buy a stock at a cheaper price. If the investor is PUT the stock, then they become owners of the stock and are now LONG the stock.

An individual must ask for the option level permission from there broker in order to be able to sell puts. So, this past week I was granted permission (Option level 4 ) from my broker to sell puts within my margin account.

DISCLAIMER:

Tuesday, May 20, 2014

Some Youtubes Videos

I went on YouTube tonight, to listen to some music. One of the videos that popped up was a song about the stock market. Click here to go the the video. This channel apparently has a few videos related to finance. There is one on money management. A third video is about The Way to Wealth.

As people go through there lives, the light bulb comes on for some people. They realize that they need to make better financial choices in their lives. The money you put in a savings account pays very little interest these days. With the rates so low these days, the saver is losing moving due to inflation.

Some options for people are to get a second job, invest in the markets or real estate, or start a small business. With a second job, this could be used to help pay expenses or pay down bad debt at a quicker pace. When investing, people have there money work for them though the companies they are partial owners in, which means they are shareholders. When a company like McDonald's make a profit, they may share some of those profits with shareholders via dividends. McDonald's pays a dividend and has done for year. So after the purchase, a person will get a quarterly check from McDonald's as dividends in proportion to the amount of shares they own on the dividend record date. This income comes in with zero effort, besides the investment, on a quarterly basis for most companies.

An investor can also purchase real estate that he or she can rent out. Then rental income should be large enough to pay the mortgage payment on the property, insurance, property taxes and other expenses related to running the property.

DISCLAIMER:

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