Do you have a stock position that you have owned for a long time? Maybe it’s a position that you inherited, or one that was given to you years ago. Maybe it is company stock that you methodically accumulated as an employee. #-ad_banner-#Many investors hold long-term positions that have grown tremendously over time. In most cases, it doesn’t make sense to sell this stock because of the tax implications — not to mention the aversion to selling an asset that has been growing for so long. But what are you giving up by holding on to this stock? Is it… Read More

Do you have a stock position that you have owned for a long time? Maybe it’s a position that you inherited, or one that was given to you years ago. Maybe it is company stock that you methodically accumulated as an employee. #-ad_banner-#Many investors hold long-term positions that have grown tremendously over time. In most cases, it doesn’t make sense to sell this stock because of the tax implications — not to mention the aversion to selling an asset that has been growing for so long. But what are you giving up by holding on to this stock? Is it really the best investment that you can make with your capital? Are you missing out on an opportunity to make more money by sitting on this long-term position? Now, before you quit reading, let me tell you that I’m not suggesting you sell your long-term position. You have your reasons for holding this position and I respect that. But what I am suggesting is that you consider a strategy to help you create additional income from your long-term position. Case Study: A 20-Year Investment I once worked for a hedge fund manager named John who held a large block… Read More

Discount retailer Target (NYSE: TGT), which operates more than 1,900 stores in the United States and Canada, has fallen more than 20% since its summer highs. The selling has been especially pronounced since the company announced, on Jan. 10, that the massive credit card breach that occurred during the holiday shopping season was even worse than originally reported. In addition to the original 40 million people that had card numbers stolen, up to 70 million had their personal information compromised in some way. TGT sold off more than 13%, hitting a new 52-week low of $54.66… Read More

Discount retailer Target (NYSE: TGT), which operates more than 1,900 stores in the United States and Canada, has fallen more than 20% since its summer highs. The selling has been especially pronounced since the company announced, on Jan. 10, that the massive credit card breach that occurred during the holiday shopping season was even worse than originally reported. In addition to the original 40 million people that had card numbers stolen, up to 70 million had their personal information compromised in some way. TGT sold off more than 13%, hitting a new 52-week low of $54.66 on Feb. 5 before recovering slightly. #-ad_banner-#In my opinion, the breach did not warrant such a big drop. (My colleague Marshall Hargrave offered a similar take last month.) And in addition to the market’s overreaction, keep in mind that TGT was caught up in the broader market selling that hit almost all equities in the latter half of January. On the fundamental side, TGT’s price-to-earnings (P/E) ratio of 15 is in line with the SPDR S&P 500 (NYSE: SPY), and its forward P/E is just over 13. Additionally, its price/sales (P/S) ratio of 0.49 is superb. The company pays… Read More

It’s been more than two years since gold prices peaked. Since then, precious metal prices have been in a well-defined bear market despite the widespread belief that the Federal Reserve’s stimulus programs would naturally send them higher. #-ad_banner-#Ironically, as the Fed finally begins to taper its bond purchasing program, precious metal prices now appear to be bottoming. Although it may seem counterintuitive at first, the fact that gold is rallying right now actually makes perfect sense. For quite some time, the Fed has kept interest rates artificially low and injected capital into the U.S. economy by purchasing massive… Read More

It’s been more than two years since gold prices peaked. Since then, precious metal prices have been in a well-defined bear market despite the widespread belief that the Federal Reserve’s stimulus programs would naturally send them higher. #-ad_banner-#Ironically, as the Fed finally begins to taper its bond purchasing program, precious metal prices now appear to be bottoming. Although it may seem counterintuitive at first, the fact that gold is rallying right now actually makes perfect sense. For quite some time, the Fed has kept interest rates artificially low and injected capital into the U.S. economy by purchasing massive amounts of Treasury bonds and mortgage-backed securities. Gold bugs claimed that these capital injections would lead to high levels of inflation as more dollars were forced into the financial system. This didn’t happen because the velocity of money was so very low. Despite the low interest rates, banks were not lending capital to borrowers, and businesses were not borrowing money for growth investments. In short, the cash was just sitting stagnant instead of being put to work to help the economy grow. Today, however, the tide is beginning to turn. The U.S. economy is finally showing signs of a recovery,… Read More

The covered call strategy has some tremendous benefits. It allows us to boost the amount of income we receive from our investment portfolio, while also helping to protect our investments from losses if stocks trade moderately lower. #-ad_banner-#However, the strategy has one primary drawback. If the underlying stock that we own moves dramatically higher, our gains are capped. This is because our covered call strategy leaves us obligated to sell our stock to another investor at a specified price (the strike price) should the stock close above this price when the calls expire. Generally, I’m happy… Read More

The covered call strategy has some tremendous benefits. It allows us to boost the amount of income we receive from our investment portfolio, while also helping to protect our investments from losses if stocks trade moderately lower. #-ad_banner-#However, the strategy has one primary drawback. If the underlying stock that we own moves dramatically higher, our gains are capped. This is because our covered call strategy leaves us obligated to sell our stock to another investor at a specified price (the strike price) should the stock close above this price when the calls expire. Generally, I’m happy to take this trade-off. I would much rather have a high-probability opportunity to make a solid 25% to 35% per year on my investments than a low-probability chance to make a much larger gain. After all, I consider myself to be a stable, systematic investor rather than a long-shot gambler. However, there are times when the long-term opportunity for an investment is just too good to completely pass up by selling covered calls. But does this mean that we need to give up the income opportunity available to us as covered call traders? Not necessarily… Creating Income While Still ‘Letting… Read More

When setting up a covered call trade, it is important to estimate ahead of time what that trade is likely to return. Not only will this allow you to evaluate the expected return on your current trade, but it will also give you a benchmark for comparing this trade with other opportunities that may be on your radar. I have set up a simple spreadsheet that allows me to input the necessary data to determine what a covered call setup will return if the position is called away at expiration. The sheet also tells… Read More

When setting up a covered call trade, it is important to estimate ahead of time what that trade is likely to return. Not only will this allow you to evaluate the expected return on your current trade, but it will also give you a benchmark for comparing this trade with other opportunities that may be on your radar. I have set up a simple spreadsheet that allows me to input the necessary data to determine what a covered call setup will return if the position is called away at expiration. The sheet also tells me the amount of risk that the covered call protects me against should the stock trade lower. Below is a screen shot of the spreadsheet, which can be easily replicated in Microsoft Excel. The blue cells represent numbers that are entered manually, and the white cells represent data calculated by the formulas. #-ad_banner-#The first three cells are fairly clear. For a covered call setup, we will enter the market price of the stock, the strike price of the call option that we are selling, and the premium (or price) of the option. So, for the example above, we… Read More

Using a covered call strategy can be a great way to generate steady returns in your portfolio. As a general rule, I expect my covered call trades to increase my capital by about 25% to 35% per year, depending on the market environment. (If you’re new to the covered call strategy, click here for an introduction to how this strategy works.) Whenever I set up a new covered call trade, there are a number of different dynamics to be aware of.#-ad_banner-# I always want to start with an underlying stock that has a high probability of increasing in price. I… Read More

Using a covered call strategy can be a great way to generate steady returns in your portfolio. As a general rule, I expect my covered call trades to increase my capital by about 25% to 35% per year, depending on the market environment. (If you’re new to the covered call strategy, click here for an introduction to how this strategy works.) Whenever I set up a new covered call trade, there are a number of different dynamics to be aware of.#-ad_banner-# I always want to start with an underlying stock that has a high probability of increasing in price. I typically look for stocks with strong fundamental growth and a chart pattern that indicates investors are steadily buying the stock. Next, I want to make sure that the option contract we use has plenty of premium built into it. Since we make our income by selling attractively priced call options, we need to make sure we’re getting a good value for the contracts we sell. There are a number of variables that go into picking the right options contract. In previous articles, we’ve discussed the need to carefully select the right strike price and the right expiration date. It’s also… Read More

As investors are undoubtedly aware, the broader market, as measured by the SPDR S&P 500 (NYSE: SPY), is down 5% since the beginning of the year.  Yet one stock that is actually showing a small gain for the year is private equity firm Blackstone Group (NYSE: BX): #-ad_banner-#While SPY is below its 50- and 100-day moving averages, BX is still above its 50-day (blue line) and its 100-day averages. BX has a price-to-earnings growth (PEG) ratio of 0.43, signaling that it is undervalued. The PEG ratio compares a stock’s… Read More

As investors are undoubtedly aware, the broader market, as measured by the SPDR S&P 500 (NYSE: SPY), is down 5% since the beginning of the year.  Yet one stock that is actually showing a small gain for the year is private equity firm Blackstone Group (NYSE: BX): #-ad_banner-#While SPY is below its 50- and 100-day moving averages, BX is still above its 50-day (blue line) and its 100-day averages. BX has a price-to-earnings growth (PEG) ratio of 0.43, signaling that it is undervalued. The PEG ratio compares a stock’s price-to-earnings (P/E) ratio with its earnings growth rate. A PEG ratio of 1 is considered fair value. The company pays a $2.32 annual dividend, for a current yield of 7.1%. But we can turbocharge the income on this high-yielding stock with a covered call strategy. A call option is an option to buy or sell shares at an agreed-upon price (the strike price) within a certain period of time. The buyer of a call option purchases the right (but not the obligation) to buy the shares at the strike price. The seller of a call option… Read More

Bear markets bring lower prices and increased volatility. The increase in volatility is at least partly caused by the lower prices. As prices fall in a bear market, investors become worried that prices will continue falling. These worries will lead many investors to sell, and this adds to the downward pressure on prices. We can see both of those forces at work in this chart for SPDR S&P 500 (NYSE: SPY): #-ad_banner-#In a bear market, volatility increases, and it can remain at elevated levels for some time. Sustained volatility could be helpful to traders… Read More

Bear markets bring lower prices and increased volatility. The increase in volatility is at least partly caused by the lower prices. As prices fall in a bear market, investors become worried that prices will continue falling. These worries will lead many investors to sell, and this adds to the downward pressure on prices. We can see both of those forces at work in this chart for SPDR S&P 500 (NYSE: SPY): #-ad_banner-#In a bear market, volatility increases, and it can remain at elevated levels for some time. Sustained volatility could be helpful to traders looking to minimize their losses in a bear market. Covered call options can help investors boost their profits at any time. This is a conservative strategy that generates income from exiting positions in your portfolio. A call option gives the buyer the right to buy a stock at a predetermined price (called the “strike” or “exercise” price) for a predetermined amount of time. Call sellers have an obligation to sell the underlying shares to the buyer if the buyer exercises that right. With a covered call, you sell a call option on a stock that you own. The risk is… Read More

Many of you might remember Crocs (Nasdaq: CROX) as the growth stock darling that ran up several hundred percent before falling like a stone and nearly having its shares delisted. A bearish collapse like this can become seared in the mind of any trader, causing many to swear off the stock for good. To be sure, Crocs had some very serious problems that almost put the company out of business. Supply chain issues made it difficult for the company to keep shoes on retailers’ shelves, and… Read More

Many of you might remember Crocs (Nasdaq: CROX) as the growth stock darling that ran up several hundred percent before falling like a stone and nearly having its shares delisted. A bearish collapse like this can become seared in the mind of any trader, causing many to swear off the stock for good. To be sure, Crocs had some very serious problems that almost put the company out of business. Supply chain issues made it difficult for the company to keep shoes on retailers’ shelves, and this was during a period of high demand. Following its near extinction, shares rebounded from less than $1 in 2008 to a high above $32 in July 2011. Since that time, however, CROX has once again been pressured, falling more than 50%. #-ad_banner-#The stock has been largely challenged by management’s inability to build on its brand. Over the past year, operating margins have been cut by a third as management focused on expanding the company’s global footprint. Revenue growth has also been disappointing, with the most recent quarterly report showing a year-over-year sales decline of 2.4%. So why,… Read More

I want to let you in on a secret: Wall Street doesn’t make most of its money from the stock market.#-ad_banner-# While trading equities constitutes a large part of “big banking,” if you were to add the value of all the stocks in the world it would only come out $36.6 trillion. Don’t get me wrong, that’s a big number. It’s also one reason brokerage commissions have been the bread and butter of Wall Street firms since the New York Stock Exchange was founded in 1817. But the truth is there’s a much bigger market out there. This market, which… Read More

I want to let you in on a secret: Wall Street doesn’t make most of its money from the stock market.#-ad_banner-# While trading equities constitutes a large part of “big banking,” if you were to add the value of all the stocks in the world it would only come out $36.6 trillion. Don’t get me wrong, that’s a big number. It’s also one reason brokerage commissions have been the bread and butter of Wall Street firms since the New York Stock Exchange was founded in 1817. But the truth is there’s a much bigger market out there. This market, which is valued at over $790 trillion, has grown exponentially since the Securities and Exchange Commission deregulated it in the 1990s. Unlike most stocks and bonds, which tend to be “boring” and relatively stable, the securities in this market allow investors to make bets on the outcome of certain asset prices. For instance, right now traders are betting $56,880 that the price of Apple (NASDAQ: AAPL) will be over $610 on March 22 — 22% above its recent price near $500. Investors in this market are also betting over $874,000 that Google (NASDAQ: GOOG) will be trading at $1,300 — or… Read More