Another strategy utilized by investors is the Stock Collar. This strategy involves owning or purchasing 100 shares of a particular stock, buying a put option and selling a call option. An investor sells a call option to finance the “insurance” put option. While doing this does limit the downside, it also limits the upside potential. This strategy tends to be used less by money managers because of the possibility of missing a big positive move.

In Figure 4, the investor purchases 100 shares of Yahoo, Inc. (YHOO) on April 20, 2007, buys the July 2007 $25 put option, and sells the July 2007 $32.50 call option. From the breakdown of the trade in July 2007 at the maximum and minimum extremes, the positions could show a profit of 17.08% or a loss of 9.94%. This type of trade would be most suitable for trading a stock that an investor feels has a good probability of increasing in value, but about which he still holds some hesitations.

Figure 3 is a fictitious trade involving the purchasing or holding of 100 shares of Google, Inc (GOOG) on March 22, 2007. The reason for this hedge was Google planned to announce earnings after the bell on April 19, 2007, and to hedge against any downside risk the investor purchased a $470 put option, limiting the total risk of loss to $1,750 while maintaining the unlimited upside potential minus the $15.60 put option premium.

Figure 3

One way to play the income aspect of the Covered Call is through a strategy known as Cash-Secured Put Selling, which involves selling a put option, keeping the premium, and—if the option is exercised by the buyer—purchasing the 100 shares per contract. This might sound risky, but the idea is for the investor to keep enough cash in the account to purchase the shares should he receive an exercised notice. This strategy is ideal if used on a stock that an investor would not mind owning in their portfolio should they receive an exercised notice.

In figure 2 below, the investor is taking a hypothetical trade in Cisco Systems (CSCO) on March 22, 2007. The investor sells the July 2007 $27.50 Put option at $1.42, which results in a cash premium received of $142 (representing a 5.44% return from the total cash requirements of $2,608). The trade is very similar to the Covered Call strategy and has the same Profit/Loss chart layout. The Cash-Secured Put Selling strategy is more appropriate on stocks that do not pay large dividends because, with it, the investor does not have the incentive to hold the shares to receive the dividend.

The portfolio, as of Saturday, January 5, 2008, has a Net Asset Value of $143,364.22, which represents a 43.36% gain over the initial $100,000 balance. The Net Asset Value is broken down into three components: Initial Investment, Unrealized Gains (Losses), and Interest Income. The below table shows the breakdown of the current portfolio:

The most popular options strategy among all investors today is Covered Call Writing. The basic idea of this strategy is to hold a stock with a near-term outlook that shows the stock will remain stagnant at its current price. In this situation, an investor could create a “synthetic” dividend by selling one call option and receiving the premium for every 100 shares of the stock that they own.

For example, Figure 1 below is a fictitious trade involving the purchasing or holding of AT&T (T) at $39.19 on March 22, 2007 and the selling of a $40 July 2007 Call Option, paying the investor a premium of $1.15 or $115 for the entire option. The figure also illustrates the amount of gain or loss at different stock prices. This analysis does not take into account the $.355 dividend paid in July, but if it were included, it would be an additional $35.50 at each profit/loss breakdown.

Almost daily, I receive emails asking how traders, drawn to the high interest rate feature of the currency, can profit from the Turkish Lira. It is easy to forget about the huge volatile moves that has plagued the currency since its re-release. To look for a safe hedge currency, I examined the available currencies of surrounding countries with economies in the same development phase. The logical choice would have been a bordering country, but since there are few choices that offer enough liquidity, the closest match was Hungary.

Examining the following calculations of volatility and correlation, you can see the two currencies appear to provide the necessary hedge that will allow traders to profit and at the same time sleep comfortably at night.

With all the fear that exists in the markets today, it seems all the world is waiting on what Mr. Bernanke decides to do with the Fed Fund Rates on Tuesday.

1) No rate cut
2) 25 bps rate cut
3) 50 bps rate cut

“When there is blood in the streets, it’s time to buy.” Obviously, this saying could not be any truer than the situation that investors all over the world are experiencing at the time of writing this post. Fear and risk grip the global marketplace in a way that hasn’t been seen since 2003. Investors everywhere should soon be taking advantage of the readjusted asset prices in all areas of the market, and because of this, I believe there will be a re-emergence of the carry trade that has been driving the currency markets over the past few years.

The currency carry trade involves the buying of high yielding currency and the simultaneous selling of a low yielding currency. The idea behind this type of trade is that an investor looks to lend at the interest rate in the high yielding currency and finance or borrow at the low yielding rate of another currency. This is similar to the operations of domestic banks that “borrow” money from depositors, in the form of paying interest on a savings account, and then lend that money out to borrowers on higher-interest loans and profit from the spread between the two interest rates. The carry trade has been popular in the currency markets due to the amount of leverage available to traders who wish to exploit the spread between a high- and low-yielding currency pair.

Investors who hold oil and natural gas stocks in their portfolio likely find that the movement of those stocks is tied more to the underlying commodity than to the broader markets. Investing in energy stocks can therefore come with sharp volatility that may keep small investors on their toes and awake at night. But the introduction of new Exchange Traded Fund products provide investors a way to keep the overall movement to a minimum.

Example: An investor has a $50,000 long exposure to oil companies and $25,000 long exposure to natural gas companies. To hedge his investment, the investor would sell short $50,000 of an oil commodity ETF, such as the iPath S&P GSCI Crude Oil Tot Ret Idx ETN (OIL), U.S. Oil Fund ETF (USO), Claymore MACROshares Oil Up Tradeable Tr (UCR) or PowerShares DB Oil Fund (DBO), and then sell short $25,000 of the United States Natural Gas ETF (UNG). This effectively gives the investor a neutral exposure to underlying commodity movements, while still enjoying the value added feature of investing in quality oil and natural gas companies, such as buybacks and dividends.

The currency carry trade involves the buying of high yielding currency, and the simultaneous selling of a low yielding currency. The idea behind this type of trade is that an investor looks to lend at the interest rate in the high yielding currency and finance or borrow at the low yielding rate of another currency. This is similar to the operations of domestic banks that “borrow” money from depositors, in the form of paying interest on a savings account, and then lend that money out to borrowers on higher-interest loans and profit from the spread between the two interest rates. The carry trade has been popular in the currency markets due to the amount of leverage available to traders who wish to exploit the spread between a high- and low-yielding currency pair.

Over the past few weeks, I have been bombarded through email, internet searches, newspapers, and TV media with articles proclaiming, “Unwinding of the Yen Carry Trade” and “Forex Carry Trade Unwinds Nearly 6 Percent, History Says it May Go Further.” The media obviously has done a great job at painting a gloom, and doom picture into the minds of the majority of the investors in the world. The market has now taken out the weak hands as well as the hands that were over-leveraged. Now, the selling pressure is looking to have leveled off, and the market appears poised for a rebound over the next few weeks.

The first pick is a company that many people may never have heard of, even though they manufacture products that we use everyday. The company is Genlyte Group Incorporated (GLYT) and the industry is lighting. The company operates in a historically recession-proof industry and has recently come under pressure—falling 25% from its 52-week high of $87.80.

The company is trading at a forward price to earnings ratio of 12.19 and has a projected five-year growth rate of 16%. Genlyte Group has averaged a P/E ratio of 15 over the past 5 years. It appears that the stock has caught support at the $66 level and is currently trading at $67.16. My 1 year target price for GLYT is $82.65 [Forward EPS of $5.51 times the average P/E ratio of 15], which represents a 23% return from the current level.

When Joe Investor goes home to check his IRA and notices a 7.5% drop in two weeks, of course he wants to find out why. Look at the Alexa reach for CNBC (Financial, Blue) and MSNBC (World News, Red) websites:

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CurrencyShares Euro Trust (FXE)

CurrencyShares Mexican Peso Trust (FXM)

CurrencyShares Swedish Krona Trust (FXS)

CurrencyShares Australian Dollar Trust (FXA)

CurrencyShares British Pound Trust (FXB)

CurrencyShares Canadian Dollar Trust (FXC)

CurrencyShares Swiss Franc Trust (FXF)

According to the Rydex Prospectuses, the ETFs allow investors to buy into a trust denominated in the particular currency that bears interest according to that currency’s particular interest rate.