Geldpress

This is the second part in the discussion on butterfly option spreads.  The first part is available at the link below:

• Hit jackpot returns with a Russell 2000 butterfly spread

Part 1 discussed the potential jackpot returns, and also defined the butterfly formulas, including maximum risk and maximum reward.  Now let’s look at an example, as shown from the excel screen shot below.  You can download the excel spreadsheet (geldpress-option-calc) here.  The spreadsheet includes a custom visual basic black-scholes option calculaltor function, and thus will only work on Microsoft Excel (Open Office does not come with Visual Basic extensions).

The butterfly spread in the example above started with the following assumptions:

• Initiated on the Russell 2000 (RUT) on 8/28/08 at a price of 731.6
• Buy to open (1) September 720 strike call
• Sell to open (2) September 730 strike calls
• Buy to open (1) September 740 strike call
• Assume 22.5% implied volatility on the entry of all 3 spreads, along with 3% risk free rate of return
• Use the custom excel function geldpress_call and ignore dividends

Fast forward in time to 9/10/08, with the following assumptions:

• Implied volatility decreases to 20% (decreasing volatility is GOOD for butterfly spreads)
• Russell 2000 gains in value to 750 (outside the expiration day breakeven points!)

The result may be a little surprising.  The original calculations for expiration day break even points were between 720.98 (lower strike plus initial debit) and 739.02 (upper strike minus initial debit).  But the pre-expiration day break even points can be wider then the expiration day break even points.  The example above considers the possibility of the Russell 2000 hitting the 750 mark, 10 points above the upper break even point.  But because there was still time left in the option spread, it was still possible to have an unrealized profit in the spread - $20.48 per spread in our example.

The next logical question is to ask when is the best time to close a butterfly spread.  And the answer to that is not so straight forward.  If you believe the Russell 2000 will remain outside the break even range, then you may consider closing early with a small profit if you can.  If you think it will revert to the middle strike, or at least within the expiration day break even range, then you can take your chances for a higher potential profit.

The other scenario that was not considered is the scenario where your position races against you and creates an unrealized loss.  This could occur if the Russell races to well above the 750 mark, with much less time remaining in the butterfly spread.  Even in this scenario, adjustments can be made, but they are unfortunately beyond the scope of this article.  For more information on adjusting option positions and turning losing trades into winning trades, I recommend the following book:

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

Are you tired of the new Microsoft operating systems slowing your system down and constantly crashing?  How about all those nonsense applications that come pre-installed on your Dell, Compaq or other computer?  Or do you just need a light, fast and inexpensive laptop for the road?

If you answered yes to any of those, then you should check out one of the new ultra light and small Linux based laptops.  See Forget Microsoft and Adobe - use free software instead for more info.  The Linux computers are compatible with your existing windows based applications.

ASUS Eee PC 900 20G - For less than $500 after rebate, you can pick up this laptop direct from Amazon.com.  The screen size is only 8.9 inches, so it may not be suitable for home use.  But it is the perfect companion for those needing a useful and light laptop for the road, or as a spare.  It is 900 MHz Intel Mobile CPU and pre-installed Linux operating system.  It has a 20 GB solid state flash memory drive, 1 GB of RAM, 10/100 Fast Ethernet, 54g Wi-Fi, an integrated 1.3 megapixel webcam, and a battery capable of lasting 3.5 hours.  It also comes equipped with 3 USB 2.0 ports, a VGA output, an SD memory card slot, and headphone and microphone jacks.   And It still comes in under 2 pounds.

Sylvania GNET28001SN Meso - It also comes in at less than $500, and can be pre-ordered direct from Amazon.com.  It comes equipped with a 1.6GHz Intel Atom processor, an 80 GB hard drive, and 1 GB of RAM.  Like the ASUS 900, it also has an integrated webcam, an 8.9 inch screen, 3 USB ports, a VGA output and built in wireless.  It comes preloaded with Ubuntu Netbook and OpenOffice.  It’s slightly heavier then the Asus PC 900, coming in at about 2.2 pounds.

Either of these laptops can be the perfect travel companion or even serve as your main or backup computer.

Today I attended the Seattle area Get Motivated seminar.  According to their website:

This motivational mega-show packs more inspirational firepower than a stick of dynamite!

The Seattle seminar was held at Key Arena, and nearly all of the 17,500 seats were filled.  In any given year, more than 300,000 people attend.  Upcoming additional cities (Asheville, Tulsa, Nashville) for this all day motivational seminar are only $4.95 per person, or $19 for an entire office.  The list of speakers for the event varies, but past speakers included United States presidents and other World leader, famous entertainers and musicians, business leaders, astronauts, and sports legends.  Today’s event in Seattle included General Colin Powell, Rudolph Giuliani, Suze Orman, Zig Ziglar, Terry Bradshaw, Phil Town and others.

Each of the speakers captivated, motivated, educated and entertained the enormous crowd.  There were numerous giant screen displays spread throughout the arena for those sitting far from the stage. At several points throughout the day, there were short bursts of entertainment (Santana), free prize raffles, and even an audience dance contest.

For such a low admission charge, you would be correct to assume there is also a fair amount of up selling included.  My particular event in Seattle included three speakers that marketed their additional training.  But the crowd saw the value in each of the deeply discounted offers, as I witnessed what must have been at least 60% of the arena crowd sign up.  Most people seemed to sign up for all three opportunities, including:

1. Success Magazine Investor Workshop - two day intensive plus investor toolbox access for only $99
2. Financial Success 2008 - three day real estate workshop for only $49
3. Store Online - one day workshop and Internet store creation software access for only $29

A few notable moments from today’s event:

• General Colin Powell was both entertaining and informative.  He stated what he missed most from his days in office - the private plane.
• Giuliani recounting 911 and the aftermath
• Suze Orman announcing the government has recently hired her to redesign the FDIC program and website.
• Zig Ziglar did a unique co-presentation with his daughter in a question and answer format.
• Earl Mindell, author of over 50 nutrition books, energized the audience with information on how to live an optimum healthy life.

At the conclusion of the day, a final drawing was held for $10,000, and final door prizes (Zig Ziglar motivational DVD and CD set) were given out to everyone as they left the stadium.

Related articles:

• Free seminars - Trump, Kiyosaki, Investools, Stores Online

If you haven’t already seen it, you should check out the Nationmaster website. Virtually any government statistic you need is available on that site, conveniently split among 30 different categories, and multiple sub-categories.  In honor of the recent opening of the IOUSA documentary, I’d like to share the national debt statistics from Nationmaster.

From the graph below, the United States is listed as only the 51st worst in terms of national debt as a percentage of GDP.  The chart can be seen in its entirety by selecting the Economy category, and the Debt-External (per GDP) sub-category.  The United States national debt is 86 percent of GDP.  Notable countries ahead (in worse fiscal shape) of the United States are Ireland (758%), the United Kingdom (387%), Netherlands (329%), Switzerland (300%),  Sweden (173%), and many others.

As a side note, I don’t buy into the debt per GDP percentage calculation, and would much rather see national debt statistics measured as a percentage of government tax revenues, not GDP.  But nonetheless, the chart is below:

There are dozens of rent vs buy mortgage calculators out there, but I will offer one more with a unique way of analyzing the ultimate decision - rent or buy. As we have discovered in the recent news of the housing meltdown, many people claim not to understand the terms of the mortgages they signed up for. If that is indeed the case, I would venture to say that they also do not understand the net present value calculations of all those other rent vs buy calculators.

My calculations are based on an equivalent rent value. Add up all the money that goes into your purchase over a given period of time, subtract out the money that comes out at closing, and divide the result by the number of months/years you’ve owned it. As an example, consider a 5 year equivalent rent calculation for buying a house you are considering.  If you can rent an equivalent size place for significantly less then what the 5 year “equivalent rent” calculation shows you, then you may be better off renting. You can download the Excel spreadsheet here. Feel free to modify it for your own liking.  All of the assumptions are listed and the calculations are viewable. Here is a view of the input assumptions, and the equivalent rent calculations:

A walk through the calculations:

• 19: Calculations based on years of ownership
• 20: Calculated based on appreciation assumption (8)
• 21-29: Breakdown of payments, and total
• 30-33: Equivalent payment calculations based on tax savings. Also factors in the standard deduction that everyone gets regardless of home ownership. The useful component of your ownership tax benefit is only that amount over the FREE standard deduction.
• 36-46: Calculations for equivalent rent if the property was sold at the end of each year.
• 40: Assumes there are no capital gains if the property is held for > 2 years and then sold.
• 42: Divides the total dollar value capital gain by the number of months you have owned the property.
• 43-45:  Calculations for lost opportunity cost based on the size of your down payment

Equivalent monthly rent: This is the final calculation that you can base your decision from.  As an example, in many Seattle neighborhoods, a 2 bedroom, 1 bathroom apartment can be rented for about $1000-$1100 per month.  An equivalent sized condo would sell for a $300,000 and likely more.  The 5 year “equivalent rent” calculation shows an average outlay of $1,753 per month, substantially higher then the $1,000 rental cost.  For this scenario, you may be better off renting.

The NTU (National Taxpayer Union) wants to help those of us concerned with fiscal discipline to choose a candidate for president.  On their website, they detail the “fiscal snapshot” of the presidential candidates, and their leading choices for running mates.  But it didn’t take long to discover the obvious Republican bias of the NTU.

It’s no secret that the fiscal record of the last 8 years have been a complete disaster.  Republicans have lost their way, and they know it.  The Republican party’s contract with America is a joke, especially section 2.1 (Fiscal Responsibility Act).  The National Debt has increased almost 60% in only 8 years under George Bush.

Below are the fiscal snapshot’s from the NTU.  I was not surprised to see “F” ratings for both Obama and Biden, because frankly, republicans and democrats alike are to blame for the nation’s fiscal woes. But I was surprised with the “A” ratings for John McCain and the other high ratings of his potential republican running mates.  The useless, and republican biased, ratings are even more obvious in the third chart below.  That chart shows the percentage of “A” ratings for republicans and democrats.   Given the record of the last 8 years, does the NTU really expect us to believe that republicans are much more fiscally responsible then democrats?!?!?!

My personal fiscal snapshot scores:

• Republicans:  D-
• Democrats:    D-
• NTU:              F- (disqualified for cheating)

Other interesting articles:

• The United States has not had a balanced budget since 1957
• CNN continues to report on budgets it does not understand
• Zimbabwe news overshadows U.S. fiscal problems
• The United States national debt limit has become a joke

And a book recommendation:

Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It by Peter G. Peterson

Warren Buffet is a brilliant investor, but it does not mean I would blindly follow his investments.  I am a Berkshire Hathaway (manged by Warren) shareholder, so in a sense, I am blindly following him.  But I don’t pay to much attention to the Berkshire stock holdings report, and when do I learn of new Berkshire holdings, I’m certainly not eager to purchase them in my own account.

As of June 30, 2008, Berkshire Hathaway reportedly owned 48 million shares of Moody’s Corporation.  According to the Yahoo Finance profile for Moody’s:

Moody’s Corporation, through its subsidiaries, provides credit ratings and related research, data, and analytical tools; quantitative credit risk measures, risk scoring software, and credit portfolio management solutions; and fixed income pricing data and valuation models principally in the United States and Europe

Today, Moody’s reportedly (and finally!) cut its credit ratings on Fannie Mae and Freddie Mac to just above junk status.  I’m not interested in investing in Moody’s, whose business model is based on providing accurate and timely credit ratings, but who does not cut ratings until after the damage is done.  Moody’s ratings to me are no better then the predictions of the average Wall Street analyst - calling a sell AFTER a huge sell-off and calling a buy AFTER something is overbought.

I’m happy to own Berkshire Hathaway stock, but I’ll stay away from Moody’s!

The advantages of options trading are many, including the ability to reduce portfolio risk, as well as enhance gains.  Options trading is not difficult to learn, but it does take some dedicated study time.  Some of the ways to learn options trading are:

• Purchasing and reading multiple books on options trading (difficult to learn from just a single book)
• Teaming up with other knowledgeable people (mentors, discussion boards, trading clubs)
• Fee based options trading courses (easy to find, just look at the ads on Geldpress)
• Lots of practice by virtual trading fake money while you learn

I recommend purchasing multiple books because options trading can be a complex subject to someone just getting started, and it really helps to have many points of views and explanations of the various concepts.  If I were just getting started learning options, I’d start with one or more of the following:

Options Made Easy: Your Guide to Profitable Trading (2nd Edition) by Guy Cohen

Profit with Options: Essential Methods for Investing Success by Lawrence G. McMillan

Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper

If you have the basics down, or just want a single definitive and detailed source that covers options from A to Z, then I’d go with the following, and its workbook pair:

The Options Course Second Edition: High Profit & Low Stress Trading Methods (Wiley Trading) by George A. Fontanills

The Options Course Workbook: Step-by-Step Exercises and Tests to Help You Master the Options Course (Wiley Trading) by George A. Fontanills

With any of the above five books, you can learn to trade and make money in the options market.  I refer to so many not as a distraction and information overload, but as an opportunity for you to get multiple points of view of the complex subject.  If you continue your studies of options trading beyond the books above, or you already have the concepts down, but are looking for more advanced information, then I’d recommend purchasing the following two books:

Option Volatility & Pricing: Advanced Trading Strategies and Techniques by Sheldon Natenberg

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

Virtual Trading with options for free - I would never recommend trading with real money while you are learning, but virtual options trading is a crucial element to your learning.  The options industry council has a free virtual trade platform that supports options trading.  By default, you start with $5,000 virtual dollars, but you can easily increase or decrease that amount at will.  A screenshot of the OIC virtual traders is shown blow.  Incidentally, it is almost identical to the optionxpress brokerage virtual trader, and may in fact be licensed directly from optionsxpress.

Agora Financial was one of the sponsors of the IOUSA movie.  Prior to watching the movie, I had previously read Empire of Debt, which the documentary was loosely based off of.  I have also read numerous other books that tackle the national debt subject, and I’ve spent significant time trudging through the United States Treasury website and the historical debt tables from Whitehouse webpage. I have a better understanding of United States government finance than nearly anyone in congress (Ron Paul and a few others being the exception).  And the producers of the IOUSA documentary certainly have a clear understanding of our fiscal situation; they just didn’t do the best job explaining it.

But viewers of the IOUSA documentary will not come out with more than a cursory knowledge of our government’s fiscal situation, unless of course, they had it going in.  The issue I have with the movie is nearly the same issue I have with the Empire of Debt book, but on a lesser scale.  There is a lot of information crammed in, but its just to incongruous.  The premise of the movie is that we have four serious deficits that need to be addressed - the budget deficit, the savings deficit, the trade deficit, and the leadership deficit.  Everybody watching the movie clearly understands the leadership deficit in this country, but the explanation of the other three deficits was rushed through in between comical clips.

Here are just a few issues I had with the movie:

• Turning off the debt clock during the Clinton era - Not since 1957 has this country seen a year over year decrease in the nationabl debt.  There were week over week periods during the Clinton era, but not an annual decrease.  The IOUSA documentary completely ignored this fact.
• Measuring outstanding government debt as a percentage of GDP - In my opinion this is a worthless measurement.  It makes sense to measure the trade deficit as a percentage of GDP, but the national debt should be measured as a percentage of non “trust” fund government revenue.
• Poor Explanation of $53 trillion unfunded liabilitiies - The calculation starts with an $11 trillion figure that had zero explanation (our current national debt as of 8/20/08 is $9.6 trillion).  It then adds in promised but unfunded government liabilitiies, and then throws in a “Miscellaneous” $1 trillion.
• After movie discussion on privatizing a portion of social security taxes - I laughed hearing the oxymoron description of “Trust Fund” - Not funded, and not to be trusted.  But one point they did not make is that the stock market, unlike our federal government, does NOT operate on IOU’s.  Privatizing can only work AFTER we clean up the mess.

For additional and informative reading:

• The United States has not had a balanced budget since 1957
• CNN continues to report on budgets it does not understand
• Zimbabwe news overshadows U.S. fiscal problems
• The United States national debt limit has become a joke
• Inflation Nation and the Fed tightrope
• Washington state debt history - does Dino Rossi understand it?

From Marketwatch:

EBay Inc. said Wednesday that it would cut some listing fees “dramatically” as the online auction giant responds to increasing competitive pressure from such rivals as Amazon.com.  Shares of eBay fell more than 1% to $25.06 by midday trading Wednesday. The stock has shed more than 20% of its value over the last three months.

Ebay is missing the point.  Yes, lower fees are always welcome. But they are meaningless in the eyes of Ebay customers who also want better service.  Ebay customers want want tighter monitoring of fraud, which is reportedly rampant on Ebay, and which Ebay apparently disregards.  Ebay customers defect to Amazon because they trust they will receive exactly what they pay for.  Pricing is secondary.

MSNBC investigated Ebay and reported the following:

…the company doesn’t routinely inform customers when they have been ripped off or regularly notify law enforcement about apparently illegal activity on its site.

…Fraud complaints filed with eBay rarely trigger any disciplinary action against sellers, even when accompanied by extensive documentation of wrongdoing.

…EBay acknowledges that it doesn’t automatically suspend the cheating sellers it catches.

…In a case in which postage stamps were allegedly being altered to increase their value and then resold “as is,” eBay took no action to halt the auctions despite receiving a litany of complaints from a group of stamp experts who assembled detailed evidence on the purported scam.

There are also grass root petitions generated by Ebay customers who were victimized by fraudulent sellers, but apparently with no disciplinary action against the sellers from Ebay.  One such petition, with thousands of signatures, claims the following:

Every day 1000’s of FAKE MP3\MP4 players are being sold to unsuspecting buyers worldwide. These players are being listed as having 2GB\4GB and 8GB (Gigabyte) of storage capacity but in reality they have much smaller memory modules that have been manipulated (Hacked) so that they read as larger than their true capacity. These memory modules can be as small as 128MB. Unfortunately most buyers do not realize they have been scammed until it is too late.

Is eBay aware of that these fraudsters are using their service to scam millions of dollars on a global scale? The answer is yes, every day they receive complaints from buyers through the eBay system. Every day their sister company PayPal receives dispute claims from buyers of these players seeking a refund. Despite the 1000’s of complaints eBay chooses to turn a blind eye to the whole scandal, even blocking buyers from trying to warn other members of the scam.

If Ebay is going to retain their existing customers, and have any hopes of recovering lost customers, then they need to concentrate on customer service.  Lower fees alone just won’t cut it.