As Gordon Gekko in the movie Wall Street once said, “the most valuable commodity I know is information.”

Individuals, such as you and me, can use the same financial strategies as the mega-machines, i.e. Big Dogs, but it takes a little bit information first.

When it comes to real estate and a mortgage for your personal finances, as well as other business and financial information, if you want to protect your assets, increase income and grow wealth, you’ve got to be Barking With The Big Dogs.

Only, you can’t get the book at Amazon, online or a Kindle version any longer and the financial strategies online are no longer available for viewing.

I will, however, discuss it with you in detail privately.

Simply contact me…it’s that easy.

In my previous post, I discussed and linked an article about following the rich’s lead to hold cash and buy bond when rates rise.  However, I am still suspect to when rates rise given the amount of cash already held and the enormous amount printed in the last couple of years as I also mention in my previous article.

But, to continue on with the idea of holding cash, a couple of sayings have come up.  First, with the drought and wild fires in Texas, April showers bring May flowers doesn’t look so possible at this point.  Next, with May approaching, the other saying in the world of finance is sell in May and go away.

Today, I was reading another article from Seeking Alpha called “Sell in May and Go Away?  Yes“  The idea is to protect your positions, using several strategies but doesn’t mention ways to increase cash by using money sitting in money markets for example.  Sitting on cash, but waiting to buy is not a bad idea, but the returns could be enhanced by selling naked puts.

Selling naked puts are simply collecting cash for selling an option at a particular price.  If the price of the underlying asset meets the target price, you buy the stock, ETF or whatever at the strike price.  If the price does not go to the target price, a nice premium (cash) is collected for money sitting in a money account earning virtually nothing right now.  (Thanks, low interest rates.)

Whether or not to use option strategies such as selling naked puts, renting stocks (i.e. covered calls), dividend funds, or selling in May and going away, the point is having cash and creating income allows the ability to take advantage of opportunities – and that’s why following the rich is better might just allow us all to stop and smell the roses a little more often.

Today I was reading an article at Yahoo Finance.  The title to their article was “Fed’s Lacker says must let ailing big firms fail“.  The idea of the article, as I see it, is to let the big firms fail so that financial institutions will stop taking risks knowing they will be bailed out.

Okay, so let’s look at risk.

Banks are not risk lenders, they are asset lenders meaning they want collateral to back the money they loan.

In reality, the government is the risk taker (putting tax payers on the hook) and can be seen with GSE’s.  GSE stands for Government Sponsored Entities.  Take FHA or the SBA.  These agencies will partially guarantee loans, allow for reduced requirements such as down payments, lower credit scores, reduced rates, etc. and actually encourage risky activities.

The SBA guarantees are to partially guarantee loans to banks so that borrowers have access to capital when they cannot seek funding elsewhere.  The SBA has been called the lender of last resort and is similar to an insurance policy for the bank.  I think the bank, by getting collateral and guarantees, is not acting risky, but smartly.

Let’s continue with risk.

Derivative.  What an ugly word in the financial section of the newspaper, written by  a writer and editor that doesn’t even know the Treasury is the one who prints money.

A derivative is simply a contract between two or more parties based upon an underlying asset.  It allows for leveraging.  Let me explain…

Take a stock option.  Let’s say you want to buy GM at $30 per share (trading at $32.33 right now).  You could buy a call option allowing you to purchase GM at $30 and pay a person $3.38 per for that right to do so.  If the price goes to $35 by June 18th for example, your cost is actually $33.38 and you would have made $1.62 per share.  If the stock price goes down, the most you would lose is $3.38 per share per contract, meaning 1 contract is 100 shares or $338.  If the price of the stock goes to $0 like GM did in the past, the option holder is out $338; whereas, the owner of the stock loses $3,233 for those 100 shares.  Therefore, derivatives are not always risky, but don’t take my advice…look at the Treasury….

I wrote an article about how the Treasury makes money and you can too.  Read about it here (it’s short and sweet).

Sure there are investment parts to the bank as well.  Banks buy and sell money and yes some action is risky and can be greedy.  In order to earn higher returns, more risks have to be taken.  (True for banks and business owners, etc.)  I’m not here to defend the bank, but a quick news clip or article doesn’t tell the story, and I’m not going to put 460 pages of Barking With The Big Dogs in this little article either.  Just don’t always buy the hype in a 30 second slot or the talk at the water fountain or break area.

To continue on with the Yahoo article, let them fail, in the Fed’s opinion as I see it.  Why?

Someone else will buy the assets and the government has a huge stake in the assets too.  You don’t think your loan is going away do you if you bank fails?

Take Citibank.  The government had warrants (options) to buy the company!  The sold the warrants and made money.  Of course I haven’t seen my check and wonder if I will have to pay income taxes on the gains.  The government may have sold any ownership they had in some banks, but they didn’t in GM.

Too big to fail hurts the average Joe, in my opinion, and some groups get very wealthy in the process.

Finally, take the Frank / Dodd finance reform bill; it can actually limit competition disguised as consumer protection and plays in to the hands of the big institutions or players.

It is interesting that the last line in the Yahoo article mentions the government should consider getting out of subsidizing.  Maybe that should include more than just housing.

Earlier, I wrote how the Treasury made money using derivatives (options, warrants, etc.) and those financial instruments really are not that risky. In reality, options can be less risky than investing a large principal amount of money. Anyway, the government received money by selling warrants to the banks. This act gave the government the right to own companies if they so desired to exercise their options. However, instead of owning the companies, the Treasury sold their warrants to other investors which made some big profits for the taxpayers. (I haven’t seen my cut yet, though.)

Yesterday, the U.S. Treasury was at it again.  (Read here from Yahoo)  During the financial crisis they bailed out the banks by giving them money in exchange for ownership or the rights to ownership; but they did something else as well. With the financial crisis, the government bought low (troubled assets in a distressed market) and sold high as the mortgage backed securities business is more “robust” now, thus netting a profit.  So what is the key – cash is king.

Individuals can take the same approach as the Big Dogs (I mean the Treasury). Increasing cash flow allows people to build up more cash reserves. Cash allows people to take advantage of opportunities.

I had written an article called “How To Make Big Money With Options…Ask The Treasury” back in March.

Well it looks like the Treasury is set again to make some big profits on Citi Bank using derivatives, I’m mean warrants – which are basically options.

Warrants and options are derivative financial instruments which allows a party the right (or option) to take ownership in a company if they chose to exercise their option.  However, as with all things, the financial instruments can be sold.

Selling is what the Treasury plans to do.  They first bought the warrants by giving cash to the bank (in the bailout) for the option to take ownership in companies – such as Citi Bank.  Now to complete the transaction, the Treasury will sell the warrants they purchased at auction and get paid – or profit on the sale of the “derivatives”.

Getting beyond the terminology, the act of buying and selling is pretty simple; and, the product really doesn’t matter.  What does matter is what goes on in Washington as it relates to our everyday lives and freedoms.

See the Dodd-Frank Bill looks to provide “consumer protection” when in reality it limits what the Average Joe can do, or has access to.

The talking points coming out of Washington and the media blasts Wall Street and the private sector and wants to control the private sector activites, yet continues to do the very same things it bashes.

The real risk though is not so much derivatives as much as the lack of knowledge about the products invested in (for the Average Joe).  Therefore, if it is good for Washington and the Treasury…why not do as they do…make money using the same financial strategies and tactics and… bark with the big dogs?

In my previous post, How To Make Money Going Naked, I described selling put options. Selling put options is a very safe and conservative way to make money and potentially own a stock or fund at a specific price versus the market price.

The price of the particular exchanged traded fund I wanted to own was around $28 per share last month. However, I was willing to purchase the fund at $25 per share, so I sold a put option set to expire in January 2011 and received a premium. (As a reminder, one option contract controls 100 shares.) Therefore, the net premium I received was the dollar amount of the option x 100, for each share. The net premium was $1.38, or $138 per contract. Three contracts mean I would receive $414 cash.

For every contract (option), I had $2,500 set aside in my money market funds to purchase the appropriate number of shares in the event the option exercises in the future. If I had one contract exercised, I would pay $2,500 and receive 100 shares of XYZ. If I had three contracts, I would pay $7,500 and receive 300 shares, and so on.

Rather than wait to see if I would purchase the shares six months from now or if the contracts would expire worthless in January, meaning I would keep the premium and not own the fund, I decided to close my position. By closing my position, I simply bought the option back.

Buying the option cost a net amount of $65, but I sold the option originally for $138, which resulted in a $73 net profit per contract. Taking $73 and dividing the amount by the money set aside ($2,500), I earned 2.92% on my money in one month. Further calculating the return, 2.92% x 12 (months), my return on investment, or money sitting in a money market fund, was 35.04% annualized!

Although the return is annualized and by stopping after only one month and potentially sitting on the money for a while, the investment beats many long term CD rates.

One last note on the option strategy; selling naked puts can be done in an IRA.

Supeman can leap tall building in a single bound. Therefore, let’s look at building wealth using a conservative strategy to leap tall financial buildings too.

Are options risky? I hear people talk about the risk in options all of the time. Even the disclaimers from companies such as Scottrade, Schwab, etc. provide handout material on the risks associated with options.

However, people are risky.

Let’s say there is a company that I want to own. XYZ’s stock is trading at $50 today with a target of $60 in twelve months.

If I buy 100 shares it will cost me $5,000. If I have a stop loss of 15%, I could lose $750. If the price goes up to $60 per share I would gain $1,000.

$1,000 / $5,000 = 20% gain with a 15% stop loss as protection.

However, I like options.

In all likelihood, I won’t own a stock for three years. I’m not a buy and hold person, because too many things go on. See my post Buy and Hold is a thing of the past.

So let’s say I want to control the stock without owning it. I’ll buy a LEAPS option. (Long-Term Equity Anticipation Securities). These options are good for up to three years. I could gain, or lose, on the stock without owning it for a long period of time. The thing about options in the U.S. is I can buy/sell at anytime and do not have to wait until expiration to do so.

Let’s say today’s price on a January 2012, $50 option is $8.10. One contract controls 100 shares. It would cost me $810.

Options use Delta as a way to gauge its performance, price, etc. If the Delta is .5, in simple terms, that means the price of the option moves $.50 for every $1.00 the underlying shares move. If the stock goes to $60, that’s an increase of $10. The option price moves $5.

My profit would be $500 on an investment of $810. The gain is 62% and my risk is $810 if the option expires worthless.

Here is one more thing to consider.

If I took the difference between owning the stock and buying the option, I would have $4,190 sitting in the bank. At 3% interest (although it might have to be in a 5 year CD right), I would make approximately $125 per year. Take $810 – $125 and now my cost is really $685.

Also, I can close out my option and lose less if the stock goes bad. However, my loss is much less than if I purchased the stock outright. If the stock drops to $40, my loss on ownership would be $1,000 for my investment, but the option should only lose around $500 which reduced my loss by 50%.

Although the gain is not as large in dollar amounts as owning the shares, neither is my cash outlay. And if this option is considered expensive, by looking at the implied volatility, I may just sell the option instead and get paid versus paying money. See my post How To Make Money Without Spending Money.

Options are really pretty easy to understand, but there are things you must learn about them. I keep doing homework (homework is not just for kids in school). Maybe someday I’ll be able to LEAP tall buildings in a single bound just as Superman does; and, as Mark Whistler stated in his book Volatility Illuminated – Superman wears his underpants on the outside which is something else not every one does either.

I was asked if I understood beta when dealing with stocks. My answer was pretty simple.

To begin, I really do not care about the complex calculations in determining the beta value, I’m more interested in what beta means. Understanding beta is easy and important.

What makes beta something worth noting is beta has to do with profits and losses. When looking stocks, beta gives an idea about how the particular equity moves in relation to the overall market.

If beta is greater than 1.0, the stock will move either positive or negative at a larger rate. If beta is 1.0, the stock will move proportionally. And, if beta is less than 1.0, the stock will move at slower rate.

To put beta in perspective, if beta on a stock is 1.16 and the stock market moves 3%, the stock should move 3.48% (3 x 1.16), or 16% more. If beta is 2.0 on a stock is 2.0 and the market moves 3%, the stock should move 6%, and so on.

Beta gives a bit of information about the volatility, or risk, of a stock and can be used with other factors in determining whether or not to purchase the equity.

One last note on beta; the previous examples have to do with stocks. Beta on options is different. (More on that later.)

From my post How To Make Money Going Naked, I described selling puts. It’s really simple to do. The terminology is the hard part. So here’s what I did.

Since we are in April, I’m going to change the example from March puts as used the previous post to May for illustration purposes.

Let’s say I sold a May $10 put for $1. I got paid $100. ($1 x 100 shares since 1 option controls 100 shares.) I secured the option with cash equal to $1,000. ($10 x 100 shares).

Uh oh, the price of the shares is now below $10 down to $7. I’m going to have to buy the shares when I the options get exercised and lose $2 per share or $200 dollars next month if the price stays at $7. ($10 – $1 = $9 – $7 = $2 per share) Or, I could close out the position and take the loss on the option.

However, I don’t want to do either. I don’t feel like losing right now.

So, to prevent getting exercised, I rolled out my option from May to July. Maybe I should wait, but time is my friend and I don’t have time to be a day trader.

Here’s the math. I will lose on buying back the May option. Selling first, buying later. The price of the option is $3.25 and I sold it for $1. Therefore, I lost $2.25 per contract. But at the same time I’ll sell a July option for $3.50 for a net gain of $.25 or $25.

In my example, this is an exchange traded fund that I really want to own or I wouldn’t have done it. If the fund goes out of business, I would have lost if I purchased the shares at $10 anyway. But I don’t see it happening. Some of the companies within the fund may go out of business, but they should be replaced with new ones.

To continue on, I have my original $1,000 sitting in an account earning a small amount of interest. I have sold two options – one for $1 and the other for a gain of $.25 for a total of $1.25 or $125. To double check my math, the sequence of buying and selling the put options were: sold for $1, bought for $3.25, sold for $3.50 = $1 – $3.25 + 3.50 = $1.25

My plan is if the price of the fund stays below $10, I’ll roll it out again. If it goes above $10, I’ll let these options expire worthless and keep the money that I was paid and have pure profit.

I’ve earned $125 so far. If I have to buy the shares, my basis is $8.75 per share. I’ve reduced my loss and risk down from $10 simply by not purchasing them in the first place.

Here’s the cool part.

I have my $1,000 sitting tight not losing money, except for inflation. If all I do is roll out my option and earn $25 every 3 months, that amount is equal to $100 per year, or 10%.

In reality, I haven’t invested my money, so I’m making money – 100% pure profit.

The reason I like exchange traded funds vs. mutual funds is the first reason on the list.

The other reason I ETFs is because some Exchange Traded Funds have options, and I like options – getting paid is fun!

I’ve mentioned how I generate additional income, which you can do with ETF and not mutual funds, in How To Make Money Renting – Stocks and How To Make Money Going Naked.

I was looking at reasons for having Exchange Traded Funds, so I thought I would put the list on my website.

Why ETF’s?

1. Instant Diversification -The purchase of a single ETF gives investors exposure to a basket of stocks creating diversification and eliminating company-specific risk (similar to mutual funds).
2. Tax EfficiencyDue to low turnover, most ETF’s do not have large capital gains that need to be paid out to investors which result in phantom income. Mutual funds on the other hand are known for paying out year-end capital gains even if the mutual fund has lost value.
3. Intraday Pricing – An ETF can be bought and sold throughout the regular trading session in the same manner as a stock. A mutual fund can only be bought or sold at the Net Asset Value, which is computed at the end of the trading session.
4. Low Expense Ratios – The annual expense ratio of ETF’s is lower than that of mutual funds. For example the Vanguard Emerging Markets ETF (VWO) has a low annual expense ratio of 0.3%. The category average for an emerging markets mutual fund is 1.83%. Over time this will eat into your profits.
5. Low Fees – The cost of buying and selling an ETF is the same as an individual stock. Some mutual funds charge loads that can be as high as 5% of the initial investment.
6. Passive Investment Vehicles – ETF’s are passive investments that track a set index and the composition is only changed a couple times per year. Most mutual funds are actively managed and therefore trades are taking place daily. The chance of your mutual fund outperforming the market by trading is approximately 20%.
7. Ability to short and buy on margin – Traders that would like to bet against a specific ETF moving higher can short sell the ETF. Investors also have the ability to leverage their account with margin when buying ETF’s.
8. Convenience – ETF’s can be purchased the same way as a stock through an online brokerage firm. When it is time to sell it can also be done online with the mere cost of making a stock transaction.
9. Exposure to niche sectors – A new advantage of ETF’s is exposure to niche areas in the market that mutual funds do not offer. For example, there is a water infrastructure ETF, an ETF that concentrates solely on Singapore, or an ETF that moves with the price of natural gas futures.
10. Transparency – Nearly all ETF’s track an index that is reallocated wither every quarter or twice per year. Therefore, on any given day you can determine what stocks make up your ETF’s.

To summarize, an ETF acts much like a mutual fund, only with more advantages. Easy to buy and sell – especially during the day, when I want it purchased and sold, and I don’t have to wait while games are being played with my money. I know what companies, for example, make up the fund daily. Options – I can write covered calls or naked puts and generate extra income.

(If you want to read more about them, check out the company Penn Financial Group. I don’t get paid, receive compensation or anything from PFG. I just saw their list and thought it was worth sharing.)

Copyright secured by Digiprove © 2010 Mark