Philip Chua Business Blog

Posts Tagged ‘Call’

In currencies, trading saw more turbulence in the Euro Zone thanks to Greece’s second credit downgrade and a negative call out of Moody’s on the Irish banking system. Safe-haven flows out of peripheral debt weighed on the euro throughout the week, while year-end repatriation flows further aided dollar sentiment. Stresses…

A KIDNAP scam was thwarted by alert staff from a bank and a remittance company who promptly called the police on Monday afternoon.

Police said that the victim, a 55-year-old housewife, received a call at about 2.30pm while she was at home, from a male caller who spoke to her in Mandarin.

In the background, the victim said she heard what sounded like her 27-year-old son screaming for help befor… more

The Government will not remove employers’ legal option to cut a worker’s pay at age 60, but Manpower Minister Gan Kim Yong wants bosses to show fairness and flexibility.
Weighing in on the issue after the labour movement’s call to review the longstanding practice, he agreed yesterday that companies should not automatically resort to a 10 per cent salary cut – the maximum allowed by law – without c… more

(SINGAPORE) When it comes to pledged shares and margin loans, disclosure rules that require directors to make a judgment call are inadequate, the CFA Institute Centre for Financial Market Integrity said.
In a paper released yesterday, the CFA Institute Centre urged for higher disclosure standards in this area across Asia-Pacific stock exchanges.
Directors are the ones tasked with deciding whether… more

(SINGAPORE) Call it the Hungry Ghost effect, if you will. But it seems that September has historically been a ‘cursed’ month for stock markets.
For example, it was in September last year that 158-year-old Lehman Brothers collapsed and everything fell apart.
Then there was the 1997 Financial Crisis, which began in late August, and got worse in September.
Black Monday of 1987 came after stocks sta… more

Ron Paul’s legislative history is a lesson in principled failure. But he has galvanized support in the House over with his recent call for an audit of the Federal Reserve.

Hi,

It is good to be here with you again. As promised, I will touch on Option today and how you can leverage on Option to make a gain of 100% or more in your portfolio.

If you are not familiar with Options, kindly go through the video below before proceeding further…

Alright, now that you have the basic understanding of Option, let’s talk about Call Option today.

In my previous blog, I have made a personal recomendation to buy a few ETF.

Lets use OIH ETF as an example in our discussion here. The price of OIH is currently around $100. If you want to buy 1,000 shares of the OIH ETF, you will need to fork out a lump sum of $100,000. With the help of Call Options, you can actually control the same amount of 1,000 OIH ETF shares for only around $17,000 by buying 10 contracts of Jan 10 Call Strke @95 ( Jan 10 Call Strke@ 95 ~ offer price around$17.00)

So suppose if the price of OIH ETF is $130 by the end of December 2009, the price of the Jan 10 Call Strike is in the money and should be worth at least $35 ( Intrinsic Value). The profit by selling the Jan 10 Call Strike @ 95 will be $18,000! ( $35-$17=$18 x 1000) A more than 100% Gain!

The Beauty of Leverage

Here’s another way of looking at it: When I buy an option, I am using
leverage.

Use this analogy:

If I buy a house for $300,000.00, and I put down 10%, and mortgaged 90%,then I have only invested $30,000.00.

If the house goes up in value by 20%, then the house would be valued at $360,000.00 right? So if I sell the house, that’s a $60,000.00 profit.

Although the house went up in value by 20% (from $300k to $360k,) since I only put up $30k, I actually made 100% on my money ($60k profit on my $30k.)

I hope you see the beauty of Using Options as a leverage tool in your investment portfolio.

However, the downside of using Option is that you may lose all your capital if the share go towards the opposite direction. In the above example, if the price of OIH is $95 or below at option expiration in Jan 2010, the value of the 2010 call Strike@$95 is almost nil and you will lose your capital.

As a rule of thumb; below are 07 Important Fundamental Rules that I follow when I buy call Options.

1)Always buy when there are at least 03 technical indicators on the mother share (OIH) that are showing signals to buy ( RSI oversold, MACD inching up,Double bottom chart etc)

2) Always buy 6 months and above time horizon options

3) Always buy deep in the money options ( so that Instrinic Value is 100%; Time Value is zero)

4)Always Buy when the implied volatity is less than the historical volatility ( So that Option is not over-priced).

5) Do not hold the call options till expiry. Time decay is the most in the last 03 months of an option. I will usually close off my position 03 months before the options expiry.

6) Never use more than 10% of your investment capital to buy options. In fact, most of the times, I prefer to sell options than to buy it so that time decay is on my side.

7) Last but not least, Aways have an Exit Plan: You must set the price for yourself to take profit and cut loss when you open a new option position.

Well, if you follow all the above simple rules, then you can use options safely to increase your gain in your investment portfolio.

I hope you have gain some insight into today discussion. Thank you for your time spent and do have a great day ahead!

Sincere Appreciation,

Philip Chua, ChFC CFP FChFP
IARFC AMC B.BUS (Hons)

Mobile: +65-9748-4828

http://www.philipchua.com/

Twitter me @ phichua