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I worked for many years in management in the health care industry in the UK, in Bermuda, and for the last 20 years in Florida. The day I turned 59 1/2 I just got out of bed and decided I didn't want to work any more and that I would just take my various pensions from different countries, such as... More
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  • Slicing The Apple Pie Thinner

    The Chicago Board of Exchange on Monday launched a series of mini options that trade just like standard options, but each mini options contract represents just 10 shares of the underlying stock instead of the 100 shares in a standard options contract.

    Mini options are offered on Apple (AAPL), Amazon (AMZN), Google (GOOG), SPDR Gold Trust (GLD)and on the S&P 500 ETF (SPY).

    All of these stocks trade for over $100 per share and the idea is to give smaller investors the opportunity to use various option strategies without having to put up large amounts of capital as collateral.

    100 shares of Apple would cost more than $46,000 at today's price, putting it well beyond the reach of many investors, but a 10 share lot would cost only $4,600. WIth the new mini options investors who own as little as 10 shares can sell covered calls and use other option plays to hedge their position.

    Here's some mini options FAQ information from my brokerage (courtesy of TradeKing):

    Question: How are mini options different from regular options?

    Answer:

    • Trading symbols for Mini Options will also differ with a suffix of "7" (i.e., "AAPL7" or "SPY7").
    • Mini Options carry a deliverable of 10 shares as well as a multiple for premiums of 10 (1/10th of the standard option).
    • Total Value per Mini Options Contract is 1/10 of the standard contract with the same strike and expiration (option price x 10 for Mini Options versus option price x 100 for standard options).
    • Total Value of Deliverable per mini contract is 1/10 of the standard contract with the same strike and expiration (strike x 10 for Mini Options versus strike x 100 for standard options).
    • Like their standard counterpart, Mini Options will have a Last Trading Day (last business day prior to expiration (normally a Friday) as well as "American" exercise style (Exercisable any business day prior to expiration).

    Question: What option pairings/strategies are allowed with Mini Options?

    Answer:

    This brokerage will support all strategies currently allowed on standard options.

    Given your account has the appropriate option approval level and the funds required for such trades, these strategies include:

    • Covered Calls (10 long shares and 1 short call)
    • Spreads
    • Butterflies
    • Condors
    • Iron condors

    Note: All strategies where multiple option legs are involved must all be Mini Options. This brokerage will initially NOT support cross pairings between standard and Mini Options contracts.

    So what will the effect of the new mini-options be? The possibility of Apple splitting its stock, perhaps by 10:1 to make ownership easier for small investors has often been discussed.

    One viewpoint is that it would make no difference, since any investor can buy as little as one share for about $450. Another view is that it would encourage more small investors since hedging strategies using options would be available at a much lower level.

    Well, that has now come to pass and you can write a covered call for as few as 10 shares, or sell a put for just 10 shares.

    It looks to me that the April 26th Apple calls have enhanced implied volatility due to an impending earnings announcement and I could sell a slightly in the money call for something like $20 per share. If I buy 10 shares of AAPL for $4,650 and sell an April 26th call with a $460 price strike for $20 per share, what are the possibilities?

    1) The stock holds $460 on option expiration and my shares are called away for a profit of $15 per share or $150 in one month. In the example given, that would mean a return of $150 on net $9,100 outlay, which represents an annualized rate of about 20%. Not bad.

    2) The stock fails to hold $460 on expiration, and the short call expires worthless. I am now in possession of 10 shares of AAPL at a net cost of $445. If the price is not too low, I can now sell perhaps a $440 call around the next earnings date that will again eventually either lead to my shares being called away at a profit, or else will lower my basis on the original shares.

    The advantage of buying into AAPL like this is that if the stock falls one can continue to build a position by slowly increasing the number of shares owned and lowering the net basis or else if the stock moves up one's stock is called away at a profit.

    Alternatively, I may decide to acquire my AAPL stock by selling puts first. I could sell a weekly mini-option put at the money for about $5 per share. Let's see how that would work out.

    1) If the stock holds $465 that would give me $50 at the end of the week (minus brokerage fees). In a cash account or IRA this put trade would require $4,600 in cash so the $50 return would be represent over 50% annualized. Wow!

    2) If the stock does not hold $465 on expiration of the option, then I am assigned 10 shares of AAPL at a net cost of $460 and I can now sell a covered call with a strike price of $460 and sell another put to try to get some more shares for even less and average down my acquisition.

    To see how this might work out, I started a small AAPL mini-option portfolio put this into practice. I bought 20 shares of AAPL for $465 each, sold 2 April 26th calls with a strike price of $460, and sold 2 weekly puts with a strike price of $465. Here they are displayed in my brokerage account.

    (click to enlarge)AAPL mini-options on first day of trading

    This trade was done in something of a rush and is less than ideal, but in my next article I intend to come back to these trades and see what mistakes were made and how they could have been tweaked for better results.

    In my opinion these mini-options will be wildly popular with smaller investors, not only as a way of building a position in a stock like Apple, Amazon, or Google, but also because they open up a number of options strategies that involve scaling in and doubling up that were previously prohibitively expensive (and risky) for smaller investors. Probably they should be taken as a bullish indicator for the non ETF stocks concerned, though whether the volume will be sufficient to move the needle remains to be seen.

    Disclosure: I am long AAPL.

    Tags: AAPL, SPY, GLD, AMZN, GOOG
    Mar 25 10:39 PM | Link | Comment!
  • Are The Markets Being Manipulated?
    I tend to believe that the markets are being manipulated by unseen forces, but not in the malevolent way that many people believe.

    'Too big to fail'
    is the mantra often used to justify bailing out AIG and the banks, but right now, with baby boomers approaching retirement age it is the PENSION FUNDS that are too big to fail.

    Given the tough unemployment situation, the sinking dollar, inflation, etc. the United States simply cannot afford to see pension funds and retirement accounts decimated for the third time in little over a decade. They really can't.

    What is becoming increasingly apparent is that most of politics is theater, and that while we ostensibly have two political parties at elections here in the United States, behind the scenes there is really only one party, and I don't think The Party is crazy enough to let the markets crash again for the sake of free market ideology. Whether The Party CAN stop the next crash/correction remains to be seen, but I imagine that if enough of the establishment and big money can be got on board, that it can. Maybe this is the secret agreement that was the quid pro quo for the TARP bailout and immunity from prosecution?

    Remember that all these major bankers, your Lloyd Blankfeins etc. already have personal wealth sufficient to support their families to the third generation, so it isn't so inconceivable that they might agree to work for the common good for a change.

    The killing of Osama bin Laden may be a not so subtly coded message to the bankers that those whose seek to destroy America will not be allowed to retire to gated communities with a view of the mountains.

    May 05 9:43 AM | Link | 2 Comments
  • The Art of Finance
    The Only Stock Market Worth Fooling With (1926).



    Way back around 1987 I was working for an antiques dealer in North Carolina and we had an estate sale for a woman who had died in her 90's. She was a retired antiques dealer herself.

    After the sale was over we were cleaning up the house. In the attic I found a bunch of pencil drawings on large stiff cardboard sheets. No one knew what they were and I was allowed to buy them for a relatively cheap sum (though it was by no means zero, as my boss knew a thing when he saw it, even if he didn't know what it was.)

    In the basement of the house the next day I found many boxes of pages torn from the Saturday Evening Post magazine of the 1920's and 1930's. Being a nosy bastard I wondered what they were doing there and took them home with me. At some point I realised that the pencil drawings I had were the originals of some of these Saturday Evening Post cartoons drawn by a man called Wyncie King, a popular commercial artist and cartoonist of the day who had become a friend of the lady antiques dealer in Chapel Hill, N.C. after he had retired.

    There isn't a lot of biographical information available about King, though apparently he got his first name because as a child he was known as "teensy-weensy boy", which was a bit childish, so they called him Wyncie when he grew up.

    These cartoons are very interesting because the subject matter of several of them is the great stock market crash of 1929 and the aftermath. They are not things of great beauty, but they are absolutely genuine financial Americana and quite unique.

    Right now I am trying to sell these cartoons via an antiques dealer in Arcadia, Florida, called Cindy Long of Isabellesantiques57@yahoo.com. Phone: (863)-491-1004. She has had one of them framed with the drawing at the front and the original page from Saturday Evening Post on display through another window at the back and is getting the rest done too.

    They would make a great gift for the man who has everything. Of couse it would be insulting to price them cheaply, and to be honest I can't even remember how much we are asking. Let's just say if you need to ask how much a square foot, then they are not for you.

    Here are some pictures:

    Page torn from the Saturday Evening Post: We Have The Only Stock Market Worth Fooling With. This is from 1926. You can see a detail from the drawing at the head of this page.

    Page torn from Saturday Evening Post

    I think they went out of business, so I'm not too worried about the copyright issue.




    This is part of a two-page spread. The two lifeboats are Investor and Gambler.


    For some reason I like this one a lot.




    May 03 3:07 PM | Link | Comment!
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