Geldpress

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.

The butterfly option spread is a neutral option strategy that can profit within a pre-determined trading range, but can produce jackpot returns if you nail the exact expiration day strike price.  Butterfly spreads have limited risk and limited reward.  The spread is constructed at three different strike prices with the same expiration – purchasing a lower strike call, selling two middle strike calls, and purchasing a higher strike call.  It is usually created for a net debit.

Let’s take a look at an *arbitrary example using the September option Russell 2000 (symbol ^RUT on Yahoo Finance).  The current near the money September option chain for the Russell 2000 is shown below:

Let’s analyze the profit potential of a September 720/730/740 butterfly spread, with the following assumptions:

• Purchase (1) September 720 RUT call option at $27.10 (mid point of BID/ASK spread)
• Sell (2) September 730 RUT call options at $21.20
• Purchase (1) September 740 RUT call option at $16.10
• The total net debit of the butterfly is .80, or $80 per butterfly spread (27.10+16.10-21.20-21.20)
• The option expiration date is 30 days out on September 19th

Just as with other options positions and spreads, the butterfly can be closed or adjusted in numerous ways prior to the September 19th expiration.  Early closing and adjustments are not covered here, nor is the pricing of the spread prior to options expiration.  Below is a chart of the expiration day pricing and profit potential of our above example.  Expiration day pricing is pretty simple to understand because the extrinsic (time) value of options decreases as expiration nears, and vanishes completely at expiration.  The expiration pricing chart and graphs are shown below:

Notice that the maximum loss of this butterfly is the initial debit of $80, but the maximum profit potential is magnitudes higher at $920.  The expiration break even points are $720.8 on the low end and $739.2 on the high end.  The range of profitability falls within the two break even points.  Hitting the middle strike on the nose at expiration is the path to the jackpot returns, but smaller returns are still possible within a reasonable spread of values.

The butterfly expiration formulas are:

• Maximum Loss:  Equal to the initial debit of placing the butterfly spread
• Lower Breakeven:  Lower strike of the butterfly + Initial Debit
• Upper Breakeven:  Upper strike of the butterfly – Initial Debit
• Profit Range:  From Lower Breakeven to Upper Breakeven.
• Maximum Profit:  (Upper Strike – Lower Strike) / 2 – Initial Debit

Note: Adjustments and pre-expiration option pricing is critical to understand before executing butterfly spreads.  I recommend the following workbook (with end of chapter quizzes and answers included) for a more detailed view of butterflies, adjustments, and pre-expiration pricing:

Option Strategies for Directionless Markets: Trading with Butterflies, Iron Butterflies, and Condors by Anthony J Saliba

Other Geldpress option articles:

• Understanding the bear call credit spread
• Modeling theta time decay in a bear call credit spread
• Option price modelling – Black Scholes and Excel
• From LEAP to calendar spread and back again
• Covered calls – removing the covers and going naked
• Iron condor traders can make 25 percent per month
• Getting started with stock options
• The VIX index and covered calls

(*) Disclaimer: The example used is arbitrary and in no way considered a recommendation.  Options trading is dangerous and you can lose money!  Trade at your own risk!  There is no guarantee to the accuracy of the above information!

Congratulations, you beat the casinos at their own game. And it was so easy, anyone could do it. But you didn’t beat them at Blackjack, Roulette, Craps or slot machines. How did you do it? By not going.

That’s right, you Won! Casinos, and shares of casino related companies are suffering in 2008 because you stayed home. Marketwatch reported last week that:

It’s now clear that fewer people are going to Las Vegas — and the ones who do are staying for shorter periods and spending less. In June, according to the Las Vegas Convention and Visitors Authority, volume was off 3.1%, an accelerated slip that finally dragged the year-to-date figure into negative territory, down 0.5% to 19.5 million.

Hotel occupancy was off 2.5% for the month, but it took a lot of discounting to keep the drop that modest as average daily room rates, or ADRs, plunged 16% in June.

Throwing all your financial eggs into a small basket of individual securities can be wildly profitable when you are right, but devastating if you are wrong. Diversification is key, especially in the highly volatile markets of 2008. I’ve lost count of how many times this year the market indexes have gained and lost two percent and then re-gained again and re-lost that same two percent – all in a single week.

Trading the indexes is one way to get instant diversification. You may lose out on a potential jackpot return from an individual stock, but you are also not likely to lose everything either. But in order to trade the indexes effectively, it helps to know the indexes you are trading, and also have a plan in place to match your trading style. The number of ETF indexes available for trading today is incredible when you you count all the main indexes, foreign indexes, sector indexes and inverse indexes and inverse sector indexes. But probably the three most commonly traded indexes are the following:

Dow Jones Industrial Average – The most widely known index. It was started on May 26, 1896 by financial reporter Charles Dow to provide a quick financial gauge of the nations largest firms. It is composed of only 30 companies but is considered highly diverse. The actual components can and do change over time. Only General Electric has managed to survive its membership in the index since 1896. Trading the Dow Jones is easily accomplished through the Dow Diamonds ETF (symbol DIA). The performance can also be easily tracked by monitoring the DIA ETF directly, or by catching highlights of the actual Dow Jones that is broadcast on virtually every medium that discusses the market. One oddity of the Dow Jones index is that it is price weighted, and not market cap weighted. Comapnies with the higher stock price (not higher market cap) have a larger weight in the index. The latest DIA sector weightings, from Yahoo Finance are shown below. The top two sectors are currently industrial materials and energy, but these weighting can and do change.

S&P 500 – The S&P 500 index is comprised of 500 leading companies across over 100 unique sectors. Unlike the Dow Jones, the S&P 500 index is weighted by market cap. The largest firms by market cap value have the biggest impact on the S&P market reading. The top two sectors from Yahoo Finance are currently energy and financial services. It is interesting to note that the percentage weight in financial services has dropped significantly over the last year due to the severe losses incurred from financial institutions. One of the easiest ways to trade the S&P 500 is through the State Street S&P 500 Spider ETF (symbol SPY).

Russell 2000 -While the Dow Jones and S&P are concentrated in big cap names, the Russell 2000 measures the performance of the small cap segment of the market. But it leaves out the tiny mini and micro-cap securities. The Russell 2000 is derived from the Russell 3000 index. The Russell 3000 measure the performance of the largest 3000 U.S. companies. The smallest 2000 of those 3000 companies is the index of the Russell 2000. It can be traded easily with the iShares Russell 2000 index fund (symbol IWM). The top two sectors, per Yahoo Finance, are financial services and industrial materials. But the financial services components in the Russell 2000 index are the small cap financial services components, and not the same as the S&P 500 financial services components.

Trading a plan for the indexes – When trading any of the three indexes above, you should keep in mind the top sectors within your preferred index, as well as the support, resistance and trading channels of your preferred index.

For a more detailed view of trading the indexes, I recommend:

The Index Trading Course (Wiley Trading) by George A. Fontanills

From the Los Angeles Times in June 2008, “Music sales decline 8% on piracy, industry group says”:

Music sales fell to the lowest level in at least 10 years as a surge in digital content failed to make up for declines in compact discs and the effects of piracy, an industry group said today. Global music sales dropped 8% to $19.4 billion in 2007, according to a report from the International Federation of the Phonographic Industry…

But the “industry group” has failed to recognize the real answer to slowing sales, and that is the result of media hyperinflation. Hyperinflation occurs when there is so much of something available that the value of that something goes down. It is most often used to describe the money supply, such as with Zimbabwe’s currency. But the explosive growth in the information age of the last decade has also caused hyperinflation in digital content. Just count the number of albums or DVD’s for sale at Amazon or iTunes and you will see; the numbers are staggering, and increasing rapidly every year. There are also dozens of new ways to obtain free or nearly free and legal music, that will not hit the sales books of the recording industry:

• Direct consumer to consumer sales on Amazon.com, half price books or similar
• 25 cent older generation music CD’s at garage sales
• Legal downloads of free albums from up and coming bands that the labels never picked up
• Internet streaming and legal radio
• Satellite radio

Instead of recognizing the obvious, and adapting to the current operating environment, the music industry continues to blame piracy and charge the same 1990 prices ($15 for 10 cent piece of plastic) for a rapidly declining commodity with infinite supply. Perhaps the music industry would be interested in purchasing my 1990 era computer for $1500. I’ll even make a fair trade – my 1990 computer for 100 music CD’s of my choice.

Option prices have two components – intrinsic value (portion in the money) and extrinsic value (time premium). Modeling the prices of options is very simple at expiration because all of the extrinsic value has been evaporated, and only the intrinsic value is left. Theta is the option traders term that represents the rate of decay in the time value of options.

Theoretical option prices at times other then expiration day can be calculated using the Black Scholes model. For an option spread, such as the bear call credit spread, it is crucial to understand how time decay affects the value of your positions. Take a look at the following example:

Assumptions:

• Russell 2000 index closes August 14 trading at 754.38
• Enter a 780/790 September bear call credit spread on the Russell 2000 on August 14
• Sell to open the September 780 for $10.4 ($1040 per contract)
• Buy to open the September 790 for $7.6 ($760 per contract)
• The net credit is $280, and the risk is $720 ($1000 spread – $280 credit)
• The potential percentage gain on this trade is 28% for only 36 days, but the potential loss is 72%
• Assume 20% implied volatility for the life of the spread

With the above trade, if the Russell 2000 closes on September expiration (19th) at less then 780, then both call contracts will expire worthless, and the profit is the $280 initial credit collected. However, the credit spread could show significant paper losses prior to September expiration, even when the Russell is below that critical 780 level. And closing the position early would require realizing those paper losses early by buying the spread back for a debit that could be larger then the initial credit received.

The graph below models the value and time decay of the spread, starting from August 14th all the way through September 19th expiration. Take note of the the following:

• The break even point on expiration day is 782.8. (780 + 2.8 initial credit received)
• The yellow line represents the theoretical gain or loss on August 23rd, 27 days prior to expiration
• If the Russell hits 780 on August 23rd, the spread position would show a significant paper loss (roughly $190), even with the Russell below the 782.8 expiration day break even point.

Key takeaways:

• When trading options, it is crucial to understand how time decay affects the value of your positions
• It is also crucial to plan your exit, or adjustment strategy prior to entering the trade

For related reading:

• Understanding the bear call credit spread
• Option price modelling – Black Scholes and Excel
• Iron condor traders can make 25 percent per month
• Getting started with stock options

Also, I recommend the book below for detailed info on option adjustments. Purchase directly from the link below to help support the geldpress site.

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

Disclaimer: Option trading is dangerous and you can go broke and wind up homeless or working as a fry cook at a burger joint. Trade at your own risk. There are no guarantees as to the accuracy of the above information!

According to the anti-Gregoire Dino Rossi political flyer I received in the mail today:

Gregoire inherited a strong, growing economy and by March of 2007, state coffers were bursting with a $2 billion surplus.

…Gregoire turned a record surplus into a $2.7 billion deficit.

Of course there were no citations from where these “facts” came from, so I did some digging to present the real truth in the numbers.

First a few definitions. A yearly budget deficit is the difference between the tax revenue a government entity brings in for any given year, and the amount of expenditures for the same year, when the expenditures are higher then the tax revenues. The total debt is the amount of leftover unpaid and accumulated deficits from prior years. There is a minor twist. Government agencies often under report and lie about annual deficits. But they are honest about the cumulative and total debt. So the easiest way to calculate the REAL yearly deficit is to subtract the total outstanding debt from one year to the next. The outstanding debt for Washington state can be seen by looking at the outstanding and unpaid bonds that were issued to finance the yearly deficits in Washington state.

On to the numbers. Here is a history of the total outstanding Washington state debt, directly from the source – Washington State treasury website. The image below is from the debt management summary link.

From the image above, it is crystal clear to me that the total outstanding debt of Washington state has increased every year since at least 2000. The annual budget deficits of Washington state can be calculated by subtracting the outstanding debt from one year to the next. Dino Rossi has apparently not seen this, or just does not understand the numbers, because his fliers mistakingly report record surpluses that Gregoire inherited in 2007. In fact, for fiscal year 2007, Washington state had a $1.089 billion DEFICIT (11,673-10,584).

The real mystery here is how I will cast my vote for Washington state governor. Do I vote for Gregoire and her budget deficits, or do I vote for Rossi and his confusion on all things economics? It’s going to be a tough choice, and I may need the assistance of my magic 8 ball.

For related reading on Federal Government budgets:

• The United States has not had a balanced budget since 1957!
• States crumbling under the weight of their debt
• California’s exploding debt problem
• Zimbabwe hyperinflation could be followed by United States
• The United States national debt limit has become a joke
• The choice is clear on Obama vs McCain – fiscal responsibility

Also check out this excellent book:

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

From Marketwatch:

Best Buy Co. said Wednesday that it will begin selling the 3G iPhone from Apple Inc. next month – making it the first retailer to carry the popular wireless device…

…In a statement before the opening bell, Best Buy said it will begin to carry the 3G iPhone in its stores on Sept. 7. This will be the first time since last month’s launch of the device that it will be available outside of Apple and AT&T stores.

From my part of the country in the great northwest, the Apple stores are currently the only ones who have inventory of the 3G iPhone, and the lines are still HUGE. You can pay for one with no lines at any AT&T store, but AT&T carries no inventory. They just take your credit card, and call you in 2-3 weeks when it is available. If you want one today, they are already sold out at the Apple stores. You may be able to get one tomorrow, by checking the tomorrows expected iPhone inventory at your local Apple store.

It’s not clear from the story, but somehow I doubt that Best Buy will use the AT&T sales model of just taking credit cards for the iPhone and calling customers 3 weeks later. If that thesis holds true, and 3G inventory levels remain scarce, then the 3G iPhones will be mainly sold at Apple and Best Buy stores. Very few consumers will wait 3 weeks for an iPhone from AT&T when they can get it today from Apple or Best Buy. It makes me wonder what Randall Stephenson, CEO of AT&T, is thinking. He is now subsidizing Apple’s profits on the front end (device subsidy), and most likely selling the iPhone data plan at a loss. And he is doing this all on a device that Apple does not provide enough inventory for AT&T to sell. By my calculations, Steve Jobs is the man in charge and dictating the rules for this “partnership”.

Got SPAM? I know I do, and I despite my efforts to steer clear, I get an annoying daily dose with strange subject lines such as:

• Contact Global Trust Courier Company
• Federal Bureau of Investigation (FBI)
• Goodness for you, kindly reply immediately
• Now contact my secretary for your compensation
• Re: WESTERN UNION MONEY TRANSFER
• Unsecured/secure offer***Apply Now***

The body of the messages are even stranger. Here is one example:

ATTN: BANGKOK BANK BERHARD,KUALA LUMPUIR,MALAYSIA

HELLO,

THIS IS TO INFORM THE GENERAL PUBLIC THAT THE MANAGAMENT OF BANGKOK
BANK BERHARD(MALAYSIA)IS GIVEN CHEAP AFFORDABLE LOAN AT A VERY LOW
RATE AS THEIR YEARLY BONANZA LOANS OFFER WITH NO COLLATERAL FOR
APPROVAL.CONTACT THE BANK SERVICES VIA THEIR PUBLIC EMAIL ADDRESS NOW
AT <e-mail address removed> FOR MORE DETAILS.

Then there is usually a request to reply with additional contact information: Full name and address, telephone number. The bolder idiot spammers even request bank account and social security numbers.

We need to find the SPAMMER from above, just to remind him to TURN HIS CAPS LOCK OFF.

So how do you STOP SPAM? Unfortunately, there is no way to stop it completely. Many email programs have SPAM filters, but often the filters are burdened with false readings on SPAM. Although you can’t stop it completely, here are a few tips for reducing SPAM:

1. Protect your e-mail addresses. Everybody wants them for their rewards type program. Tell them NO!
2. Use multiple e-mail addresses, such as john.smith@yahoo.com and jsmith-spam@yahoo.com. Give the spam account address to the public, and save john.smith for trusted friends and family.
3. Don’t reply to SPAM. Answering SPAM just confirms to the SPAMMER that your e-mail address is valid. It is OK, however, to reply to trusted SPAMMERS, such as e-commerce sites that you regularly do business with. You may have accidentally opted in to newsletters you did not want, and it is OK to request to be removed.
4. Never contribute to charity as a result of an e-mail message. If you want to donate, go directly to the charity websites and submit your donation.
5. Don’t forward chain e-mail messages.
6. Turn off automatic READ and DELIVERY receipts. It will only confirm the legitimate e-mail address to the SPAMMER.
7. NEVER submit personal information through e-mail, regardless of the request. If you get an e-mail from your own bank asking you to confirm your personal information through e-mail, it is most likely a SCAM. Legitimate Banks (are there any left?!?!?!) will almost never request personal information through e-mail.
8. Check out the FTC SPAM web site. As instructed on that site, you can even forward SPAM e-mails directly to spam@uce.gov.
9. For extreme SPAM fighting techniques, you can pay for special software or services to help you FIGHT SPAM.

Is your bank safe? If it does most of its business in Florida, California or other areas severely affected by the housing downturn, then there’s a good chance it is not. But the FDIC, the government institution designed to secure your deposits, won’t tell you whether your bank is about to fail, for fear of inciting a depression era run on the banks. From the FDIC website:

The FDIC never releases its ratings on the safety and soundness of banks and thrift institutions to the public.

The FDIC does disclose the list of failed banks (rescued with your tax dollars), which includes some pretty big names:

• ANB Financial, National Association, Bentonville, Arkansas, with approximately $2.1 billion in assets was closed in May
• First National Bank of Nevada, Reno, Nevada, with approximately $3.4 billion in assets was closed in July
• IndyMac Bank, F.S.B., Pasadena, California, with approximately $32.01 billion in assets was closed in July
• First Priority Bank, Bradenton, Florida, with approximately $259 million in assets and approximately $227 million in deposits was closed in August
• NetBank, Alpharetta, Georgia, with approximately $2.5 billion in assets and $2.3 billion in total deposits was closed in September, 2007

Other financial institutions (i.e. Bear Sterns, Freddie Mac, Fannie Mae) have been deemed “to big to fail” by the United States government, and are being given free reign to the government coffers and your tax dollars.

It is widely expected that many more banks will fail this year and next due to the irrational lending habits of the now collapsing housing bubble and likely soon to collapse commercial real estate bubble. Many banks have learned a painful lesson that it is very easy to get an unqualified person to sign their name on the mortgage, but it is much more difficult to collect the payments.

In light of all the failures, the FDIC recently published the FDIC’s depositor Bill of Rights. From number four on that list:

You have the right to deposit insurance coverage of $100,000 for your deposits at an FDIC-insured bank – up to $250,000 for your IRA deposits.

But if you are not ready to deal with the uncertainty and hassle of collecting on that insurance, you may want to check your own bank with the independent bank ratings. There are many of them available, including Bankrate’s Safe and Sound ratings. You can easily search by institution, state, zip code, asset size or rating.

Also see:

• Mortgage insurance won’t help banks who ignored it
• The United States has not had a balanced budget since 1957!
• The United States national debt limit has become a joke
• Reading the comics – aka Real Estate section
• The coming crisis in foreign banks?
• Video explaining the incompetency of financial professionals
• States crumbling under the weight of their debt
• Financial crisis – recommended derivative primer books