Friday, June 19, 2009

The 5 Best Financial Stocks Of 2009

By Billy Fisher

2008 is a year that the financial service sector would rather forget. The Financial Select Sector SPDR (NYSE: XLF) crumbled 55.2% over the course of the year. So far in 2009, the sector has begun to regain its footing. After a rocky start, financials are now approaching break-even. Year-to-date, here are the top five financial stocks with a market cap of at least $10 billion.

Shunning a Bailout

The top performer in this class of stocks has been Barclays (NYSE: BCS) with a year-to-date return of 80%. In an effort to shore up its balance sheet, the company recently agreed to sell its Barclays Global Investors (BGI) business unit to BlackRock (NYSE: BLK) for $13.5 billion. BGI includes Barclays' much sought after iShares asset management business. Earlier in the year, Barclays exhibited a sign of strength when it declined to receive government bailout funds in the wake of the global credit crunch. The bank was able to overcome steep write-offs during its Q1 thanks to incremental revenue that was generated as the result of its purchase of Lehman Brothers' U.S. assets.

Repaying Uncle Sam

The second-best performing financial stock with a market cap above $10 billion as we approach the midway point of 2009 is Morgan Stanley (NYSE: MS). After losing two-thirds of its market value in 2008, the bank holding company has been able to steady its ship in 2009. Shares of Morgan Stanley are up 75% so far this year. The horizon looks even more promising for shareholders as the company was recently approved to repay its TARP money which has come to be viewed as a scarlet letter in the industry. Another bank that was also approved to repay its bailout money along with Morgan Stanley is Goldman Sachs (NYSE: GS). Common shares of Goldman Sachs have risen 70% year-to-date. In mid-April, the firm checked in with a strong Q1 and was able to take advantage of its rising stock price by making a $5 billion common equity offering.

Hitting Their Stride

Denmark-based Danske Bank (OTC: DNSKY.PK) turned in a mixed bag of results in its most recent quarter. The firm reported record Q1 income as it benefitted from strong banking activities. The gains were partially offset by a large amount of loan impairment charges. Nevertheless, the company has seen its stock appreciate 67% so far this year, making it the fourth-best performing stock in this group.

Switching focus to the other side of the pond, CME Group (NYSE: CME) has surged 58% up the charts in 2009. The futures and options products company is bouncing back from a tough Q1 in which pro forma diluted EPS was down 30% on a 21% drop in total revenue when compared to its year-ago quarter. On the plus side, the company has been able to maintain relative strong margins while operating in a brutal macro environment.

The Bottom Line

Coming off of a horrendous 2008, the financial sector has been starting to work its way back towards a state of normality. Some of last year's biggest losers have been among the biggest winners in the space as we approach half-time. We will revisit this race at the end of 2009 to see which companies were able to pull through and which companies ultimately could not keep pace.

Tuesday, June 9, 2009

Top 4 Things Successful Forex Traders Do

by Selwyn Gishen

Trading in the financial markets is surrounded by a certain amount of mystique because there is no
single formula for trading successfully. Think of the markets as being like the ocean and the trader as a
surfer. Surfing requires talent, balance, patience, proper equipment and astute discrimination. Would
you go into the water if there were sharks swimming all around you or dangerous rip tides? Hopefully
not. (Benjamin Graham pioneered cutting edge concepts that propelled other top investors to fame.

The attitude to trading in the markets is no different to that required for surfing. By blending good
analysis with effective implementation, your success rate will improve dramatically and, like many skill
sets, good trading comes from a combination of talent and hard work. Here are the four legs of the stool
that you can build into a strategy to serve you well in all markets.

Leg No.1 - Approach
Before you start to trade, recognize the value of proper preparation. The first step is to align your
personal goals and temperament with the instruments and markets that you can comfortably relate to.
For example, if you know something about retailing, then look to trade retail stocks rather than oil
futures, about which you may know nothing. Begin by assessing the following three components.

Time Frame
The time frame indicates the type of trading that is appropriate for your temperament. Trading off of a
five-minute chart suggests that you are more comfortable being in a position without the exposure to
overnight risk. On the other hand, choosing weekly charts indicates a comfort with overnight risk and a
willingness to see some days go contrary to your position.

In addition, decide if you have the willingness and time to sit in front of a screen all day or if you would
prefer to do your research quietly over the weekend and then make a trading decision for the coming
week based on your analysis. Remember that the opportunity to make substantial money in the markets
requires time. Short-term scalping, by definition, means small profits or losses. In this case you will have
to trade more frequently.

MethodologyOnce you choose a time frame, find a consistent methodology. For example, some traders like to buy
support and sell resistance. Others prefer buying or selling breakouts. Yet others like to trade using
indicators such as MACD, crossovers etc.

Once you choose a system or methodology, test it to see if it works on a consistent basis and provides
you with an edge. If your system is reliable more than 50% of the time, you will have an edge, even if it's
a small one. If you backtest your system and discover that had you traded every time you were given a
signal and your profits were more than your losses, chances are very good that you have a winning
strategy. Test a few strategies and when you find one that delivers a consistently positive outcome,
stay with it and test it with a variety of instruments and various time frames.

Market (Instrument)
You will find that certain instruments trade much more orderly than others. Erratic trading instruments
make it difficult to produce a winning system. Therefore, it is necessary to test your system on multiple
instruments to determine that your system's "personality" matches with the instrument being traded. For
example, if you were trading the USD/JPY currency pair in the forex market, you may find that Fibonacci
support and resistance levels are more reliable in this instrument than in some others. You should also
test multiple time frames to find those that match your trading system best. (Uncover the history and
logic behind this popular trading tool in Taking The Magic Out Of Fibonacci Numbers, and Advanced
Fibonacci Applications.)

Leg No.2 - Attitude
Attitude in trading means ensuring that you develop your mindset to reflect the following four

Once you know what to expect from your system, then have the patience to wait for the price to reach
the levels that your system indicates for either the point of entry or exit. If your system indicates an
entry at a certain level but the market never reaches it, then move on to the next opportunity. There
will always be another trade. In other words, don't chase the bus after it has left the terminal; wait for the
next bus.

Discipline is the ability to be patient – to sit on your hands until your system triggers an action point.
Sometimes the price action won't reach your anticipated price point. At this time you must have the
discipline to believe in your system and not to second-guess it. Discipline is also the ability to pull the
trigger when your system indicates to do so. This is especially true for stop losses.

Objectivity or "emotional detachment" also depends on the reliability of your system or methodology. If
you have a system that provides entry and exit levels that you know have a high reliability factor, then
you don’t need to become emotional or allow yourself to be influenced by the opinion of pundits who
are watching their levels and not yours. Your system should be reliable enough so that you can be
confident in acting on its signals. (Find out how your mindset can play a larger role in your success than
market influences Trading Psychology And Discipline.)

Realistic Expectations
Even though the market can sometimes make a much bigger move than you anticipate, being realistic
means that you cannot expect to invest $250 in your trading account and expect to make $1,000 each
trade. Short-term time frames provide less profit opportunities than longer term, but the risk with
longer-term time frames is higher. It's a question of risk versus reward.

Leg No.3 - Discrimination
Different instruments trade differently depending on who the major players are and why they are
trading that particular instrument. Hedge funds are motivated differently than mutual funds. Large banks
that are trading the spot currency market in specific currencies usually have a different objective than
currency traders buying or selling futures contracts. If you can determine what motivates the large
players then you can often piggy-back them and profit accordingly.

Pick a few currencies, stocks or commodities and chart them all in a variety of time frames. Then apply
your particular methodology to all of them and see which time frame and which instrument is most
responsive to your system. This is how you discover a "personality" match for your system. Repeat this
exercise regularly to adapt to changing market conditions.

Leg No.4 - Management (Implementation)
Since there is no such thing as only profitable trades, no system will trigger a 100% sure thing. Even a
profitable system, say with a 65% profit to loss ratio, still has 35% losing trades. Therefore, the art of
profitability is in the management and execution of the trade. (Learn more in The Myth Of Profit/Loss

Risk Control
In the end, successful trading is all about risk control. Take losses quickly and often if necessary. Try to
get your trade in the correct direction right out of the gate. If it backs off, cut out and try again. Often it
is on the second or third attempt that your trade will move immediately in the right direction. This
practice requires patience and discipline but when you get the direction right you can trail your stops
and almost always be profitable at best, or break even at worst.

The Bottom Line
There are as many nuanced methods of trading as there are traders. There is no right or wrong way to
trade. There is only a profit-making trade or a loss-making trade. Warren Buffet says there are two rules in
trading: Rule 1: Never lose money. Rule 2: Remember Rule 1. Stick a note on your computer that will
remind you to take small losses often and quickly - don't wait for the big losses. (Start your own
investing adventure with the help of some simple guidelines: Tailoring Your Investment Plan.)

Good investing, Kingsley.

Tuesday, June 2, 2009

7 Types Of People Who Fail In Finance

by Marv Dumon

To earn a career (or even a job offer) in finance, you needed to have sufficiently impressed your interviewers. The finance setting in the real world is competitive. Occasionally, HR will let in finance professionals with uber personalities. They have spark, personality and commendable accomplishments. Unfortunately, as their peer group begins to work with them, these peers come to a realization that there are certain dysfunctional behaviors that serve as roadblocks to teamwork, realizing team objectives and smooth execution. Here are seven personality types that you find that injects poison into finance's unique corporate culture.

1. The Pontificator

Pontificators tend to lurk around and blow their own horn at inopportune times, usually when you have a report due in two hours, right before the meeting starts or when you are rushing to the bathroom. Pontificators are focused on themselves, and spend less time thinking about organization or team goals. They also tend to tear down colleagues with biting remarks, and suck up to the boss, but when they meet someone with significantly higher standardized test scores, or well-regarded position within the firm, they worship that person.

Why they fail:

Pontificators waste people's time and irritate everyone. They sap the group's energy through de-motivating and aggravating remarks, and teamwork suffers as a result. A well-functioning organization can boot these people out after input from members of the team. Unfortunately, pontificators can be high performers and some managers are reluctant to let them go.

2. The Selfish Jerk

"Selfish jerks" can occasionally profess to care about organization and team goals – if this opportunistically helps with their image within the company. These people are really only aligned with their personal desires. When the company experiences some kind of adversity – when it becomes critical for each worker to rise to the occasion - the selfish jerk takes off for a new organization in a heartbeat or works at protecting his or her job. The selfish jerk is typically well-versed in financial subjects and industry benchmarks, is obsessed with researching industry statistics on salary and bonus, and runs a covert operation trying to figure out what co-workers are making in terms of salary and bonus.

Why they fail:

These types of personalities repel managers. Finance professionals who show promise as potential leaders possess managerial and leadership characteristics. The underpinning of leadership is service in the interest of the company and the team. Selfish behaviors lead to a nasty corporate culture that nobody wants, that includes "one-upmanship," territorialism, back stabbing, sabotage and lack of teamwork.

3. The Nerd/Doormat

The nerd/doormats have succeeded in a plethora of academic subjects in high school and college. They are widely read, but unfortunately, doormats have completely ignored their communication skills and have difficulty conveying even simple issues in a succinct and understandable manner. Because doormats are usually bright individuals, they can reject receiving training or courses that will help improve communication or management skills.

Why they fail:

The doormat's desire to be left alone – and avoid co-workers when the need for teamwork arises – produces costly miscommunication and disconnects. Often, if there is conflict within the group, the doormat cannot muster the necessary backbone to stand up for what is right. They are passed over for promotions for more assertive colleagues.

4. The Procrastinator

Procrastinators have succeeded in school and in prior work experiences. This track record of success leads them to believe that their successes were more of a function of individual personality rather than hard work, insights and sheer execution. The procrastinator has become complacent, and waits for quasi-emergencies before stepping up.

Why they fail:

Being late with monthly, quarterly and annual financial reports is unacceptable in finance. Alternatively, when procrastinators turn work in on time, the quality suffers significantly. In finance, bottlenecks produce missed deadlines or poor work product. In an effort to make the team more efficient and effective, managers fire the procrastinator. (If you're interested in improving your time management skills, take a look at Time Management Tips For Financial Professionals.)

5. The Excel Lightweight

The Excel lightweight excelled in college accounting and finance classes. The lightweight's prowess in understanding the theoretical concepts, however, is no longer sufficient in the real world. In a finance setting, practical skills such as advanced Excel knowledge are a driver for garnering increased responsibilities, higher productivity and spreadsheet formula accuracy. How can you succeed in finance without excelling in its major form of communication, spreadsheets? The Excel lightweight doesn't understand much about keyboard shortcuts, macros, advanced formulas and add-ins.

Why they fail:

The Excel lightweight causes blow ups from time to time in the form of inaccurate Excel numbers and formulas. Those with little or no prior real world experience think that their superior knowledge of finance theory translates into practical application on the job. The Excel lightweight can cause tremendous amounts of re-work as well as investigation of the root cause of spreadsheet or database problems, especially with large projects. They can also torpedo careers. Embarrassment and anger run amok and are directed towards the Excel lightweight's managers by higher-up executives or clients.

6. The Error-Prone Dummy

The error-prone dummy is typically a junior analyst or junior associate that had connections and got into the firm through the back door. He or she went to the same college as the interviewer, or has a dad who is an investor in the company. You won't find senior people that are error-prone dummies because they've already been ushered out, even with their connections. Accuracy, dependability and reliability are critical success factors in finance. Unfortunately, the error-prone dummy spends time daydreaming about prospective nighttime activities or is more interested in college football scores than work. His or her work product suffers, and the team is stuck wasting time doing re-work or researching what went wrong.

Why they fail:

They get fired because doing so is an effective cost-saving correction action. Error-prone dummies are not able to catch redundant adjustments, incorrect industry assumptions, overly optimistic forecasts and missed calculations. If finance is viewed as a game of football, then the error-prone dummy is equivalent to a player who never catches a pass or fumbles the ball when he or she does catch it.

7. The Apathetic Cyborg

Apathetic cyborgs do not care; they will work only as much as needed to prevent being fired - nothing more. In a setting where people are rushing to meet deadlines, the apathetic cyborg never displays passion. Don't bother telling him or her anything of importance, as it's going out the other ear.

Why they fail:

The apathetic cyborg is perpetually uninformed. It doesn't matter if the CFO repeatedly blasts emails about the importance of complying with Sarbanes-Oxley, or that 12% is the new cost of equity for the company. The apathetic cyborg risks non-compliance with critical regulatory statutes, or provides field operators with the wrong cost of equity percentages to use to evaluate new projects. Because the apathetic cyborg is out of the loop, pretty soon he or she be out of the company.

Parting Thoughts

If you want to succeed in finance and within your organization, constantly gather feedback from your peers and managers. There are unique issues and objectives that are critical within finance: teamwork, meeting deadlines on reports, alignment with organizational objectives, excel prowess and clear understanding of initiatives (Sarbanes-Oxley compliance). If you know where you stand, you will be in a position to take concrete action to improve certain areas. Finance is a competitive field and there are not that many chances given to those who are on the radar for getting the boot.

Monday, June 1, 2009

The Biofuels Debate Heats Up

by Zoe Van Schyndel,CFA

Concern over pollution, air quality and the availability of gasoline has elevated biofuels as a key solution to environmental and energy problems. However, a closer look at the issue reveals that these fuels are unlikely to be a magic potion for energy needs. There are a host of problems associated with biofuel production ranging from water, air and land pollution to the distortion of agricultural commodity prices and the destruction of sensitive ecosystems. In addition, these fuels make up a very small percentage of the energy marketplace, which would require difficult and expensive measures to change. In this article, we'll take a look at biofuels, examine their benefits and drawbacks and examine what these new energy products might mean for the environment and for investors.

What are biofuels?
Biofuels originate from some type of biomass, or biological matter that can be used for fuel. The two most common types of biofuels are bioethanol and biodiesel. Bioethanol is created by fermenting sugar or starch; corn and sugar are most often used. Biodiesel, on the other hand, is made by combining alcohol, usually methanol, with vegetable oil, such as that found in soybeans, palm oil, animal fat or recycled cooking grease. Once biomass is converted into liquid fuel, it can be used for a variety of energy needs. Ethanol and biodiesel are often blended with gasoline and diesel as additives to reduce vehicle emissions or may be used in their pure forms as renewable alternative fuels.

Corn Crazy
In corn-belt states like Illinois, ethanol additives appear in close to 50% of the gas sold in the state, according to the Illinois Corn Growers Association. Ethanol is a home-grown fuel, but it is also an attractive additive for several other reasons. Adding ethanol to gasoline reduces the amount of hydrocarbons and carbon monoxide in vehicle exhaust, and in its pure form, ethanol has a very high octane rating, which generally means it will provide more power.

However, although ethanol is considered a cleaner burning fuel with less carbon monoxide and other toxic emissions, the troubling thing about using corn for energy is that the fossil fuel energy used to create ethanol is very high. According to a 2002 report by the U.S. Department of Agriculture, ethanol yields only 34% more energy than is used in its production; however, other studies, such as one by David Pimentel and Tad W. Patzek published in Natural Resources Research in 2005, suggest that corn and other ethanol crops require more fossil fuel energy that the fuel they produce. In addition, corn production also requires herbicides and fertilizers, which can contribute to soil and groundwater pollution.

Despite these issues, the U.S. has vastly expanded the amount of acreages devoted to corn, a move that has been driven in part by subsidies and tariffs that restrict imports. According to a 2004 report by the California Energy Commission, the U.S. government has also maintained national tax incentives to encourage ethanol production since 1978.

The Sweet and Sour of Sugar
Brazil is the current poster child for biofuels usage. Unlike the U.S.'s dependence on corn, Brazil relies on sugarcane as its primary ethanol feedstock. After OPEC crippled the Brazilian economy with its oil embargo in the 1970s, Brazil's government made a concerted effort to wean itself from oil. After years of heavy subsidies and tax incentives, by 2005, 73% (according to a January 2006 article in Fortune magazine) of cars sold in Brazil came with "flex fuel" engines, which are capable of running on any mixture of alcohol or gasoline.

Sugarcane has also proved more efficient than corn; sugarcane provides 570 - 700 gallons of ethanol per acre, while corn yields 330 - 420 gallons (Nature, December 2006).

Sugarcane does have its negative side as well, in both human and ecological terms. Most Brazilian cane is cut by hand, which can be a dirty and deadly business for workers in the heat as some sugarcane growers host terrible working conditions. In addition, the cane fields are often burned before harvesting to make it easier to harvest and to flush out pests like snakes. Unfortunately, this burning process contributes to the release of green house gases. Furthermore, each additional acre allocated to sugarcane means that natural vegetation is displaced somewhere to make the crop land available, further exacerbating the negative impact of this fuel.

Palm Oil
Palm oil is relatively inexpensive to produce and that can make it attractive as a feedstock for producing biodiesel. Biodiesel is biodegradable and nontoxic, and can be used alone or blended with petroleum diesel. In addition to being used as motor vehicle fuel, biodiesel can be used as heating fuel in both domestic and commercial applications.

Southeast Asia, Indonesia and Malaysia in particular account for the majority of palm oil production, most of which goes for human consumption or other uses besides energy. Unfortunately, oil palm trees are often grown on newly cleared rain forest or peat swamp, thereby destroying habitat and opening up the remaining forest to poaching. While the oil itself may be a more environmentally friendly alternative compared to fossil fuels, the processes that are used in growing palm may contribute to significant damage to the environment.

Biofuels Reduce Food Supply
Corn kernels and sugarcane juice are common feedstock for creating ethanol, while palm oil has a central role in biodiesel. What these commodities all have in common is that they have a competing purpose of being a source of food and fuel.

The conundrum of food versus fuel and the increased demand for these products as a feedstock for biofuels can cause increases in commodity prices. Such an increase generally translates into higher food prices for consumers. Furthermore, even if price isn't a concern, the supply available is also a hotly debated issue, and some critics contend that these competing interests could lead to food shortages. In November 2007, Oxfam, a leading humanitarian aid agency, cautioned the European Union to ensure that its plans to switch to biofuels won't hit farmers in poor countries. The agency warned that increases in biofuel production could trigger a "land grab" that could force poor farmers off their land and reduce the land available for food production.

Specific Stocks
Investment opportunities to participate in the biofuels boom range from newly listed companies like, Biofuel Energy Corp. (Nasdaq: BIOF), which is a development-stage company that builds and operates ethanol production facilities in the midwestern U.S., to long-established giants like Archer Daniels Midland (NYSE: ADM) and ConAgra Foods (NYSE: CAG). Furthermore, as venture capital flows into startup biofuel companies, this will provide additional opportunities for investors to participate in the boom as these companies become public traded.

The Way Forward
Biofuels may be one of the keys to weaning ourselves off the petroleum merry-go-round, but several issues must be addressed to make them a true competitor with petroleum. Until the holy grail of biofuel feedstocks is found, it is likely that there will be continued pressure on agricultural products as the dual interests of food and fuel fight for the same raw commodities. Opportunities for investors are growing in this niche and, as more companies go public, there are likely to be additional options to choose from.

Good investing, Kingsley.

Wednesday, May 20, 2009

The Greatest Currency Trades Ever Made

by Andrew Beattie

The foreign exchange (forex) market is the largest market in the world because currency is changing hands whenever goods and services are traded between nations. The sheer size of the transactions going on between nations provides arbitrage opportunities for speculators, because the currency values fluctuate by the minute. Usually these speculators make many trades for small profits, but sometimes a big position is taken up for a huge profit or, when things go wrong, a huge loss. In this article, we'll look at the greatest currency trades ever made.

How the Trades Are Made

First, it is essential to understand how money is made in the forex market. Although some of the techniques are familiar to stock investors, currency trading is a realm of investing in and of itself. A currency trader can make one of four bets on the future value of a currency:

* Shorting a currency means that the trader believes that the currency will go down compared to another currency.
* Going long means that the trader thinks the currency will increase in value compared to another currency.
* The other two bets have to do with the amount of change in either direction - whether the trader thinks it will move a lot or not much at all - and are known by the provocative names of strangle and straddle.

Once you're decided on which bet you want to place, there are many ways to take up the position. For example, if you wanted to short the Canadian dollar (CAD), the simplest way would be to take out a loan in Canadian dollars that you will be able to pay back at a discount as the currency devalues (assuming you're correct).

This is much too small and slow for true forex traders, so they use puts, calls, other options and forwards to build up and leverage their positions. It's the leveraging in particular that makes some trades worth millions, and even billions, of dollars.

No. 3: Andy Krieger Vs. The Kiwi

In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the Black Monday crash. As investors and companies rushed out of the American dollar and into other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become fundamentally overvalued, creating a good opportunity for arbitrage. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.

Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions. In fact, his sell orders were said to exceed the money supply of New Zealand. The kiwi dropped sharply as the selling pressure combined with the lack of currency in circulation. It yo-yoed between a 3% and 5% loss while Krieger made millions for his employers.

One part of the legend recounts a worried New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi. Krieger later left Bankers Trust to go work for George Soros.

No. 2: Stanley Druckenmiller Bets on the Mark - Twice

Stanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for George Soros' Quantum Fund.

Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping push the returns of the Quantum Fund over 60%.

Possibly due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss's bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound.

No. 1: George Soros Vs. The British Pound

The British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM).

Many speculators, George Soros chief among them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a drop in the pound. Britain raised its interest rates to double digits to try to attract investors. The government was hoping to alleviate the selling pressure by creating more buying pressure.

Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion off this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.

A Thankless Job
Any discussion around the top currency trades always revolves around George Soros, because many of these traders have a connection to him and his Quantum Fund. After retiring from active management of his funds to focus on philanthropy, Soros made comments about currency trading that were seen as expressing regret that he made his fortune attacking currencies. It was an odd change for Soros who, like many traders, made money by removing pricing inefficiencies from the market. Britain did lose money because of Soros and he did force the country to swallow the bitter pill of withdrawing from the ERM, but many people also see these drawbacks to the trade as necessary steps that helped Britain emerge stronger. If there hadn't been a drop in the pound, Britain's economic problems may have dragged on as politicians kept trying to tweak the ERM.

A country can benefit from a weak currency as much as from a strong one. With a weak currency, the domestic products and assets become cheaper to international buyers and exports increase. In the same way, domestic sales increase as foreign products go up in price due to the higher cost of importing. There were very likely many people in Britain and New Zealand who were pleased when speculators brought down the overvalued currencies. Of course, there were also importers and others who were understandably upset. A currency speculator makes money by forcing a country to face realities it would rather not face. Although it's a dirty job, someone has to do it.

Tuesday, May 19, 2009

Play Foreign Currencies Against The U.S. Dollar - And Win

by Todd Shriber

For decades, if not longer, the U.S. dollar has been known as the world's reserve currency. Foreign investors and central banks have gobbled up greenbacks and debt issued by the U.S. government on the premise that the dollar is the world's dominant currency and American economic strength will bolster returns on dollar-denominated investments.

While the conventional wisdom regarding dollar strength has proved to be true over the years, it is important that investors remember that currencies act just like stocks or other financial instruments. They enjoy runs of success and suffer through periods of doldrums. And while the dollar has been a highly desired currency for the international investing community, it experiences periods of decline.

A fall in the dollar isn't cause for panic, though. Savvy investors can exploit the mighty greenback's decline when it happens and profit from it. Best of all, the avenues to profit from a dollar drop continue to increase.

Where to Turn When the Dollar Tumbles
There are generally a few key warning signs that indicate a decline in the dollar is on the horizon. A consistent pattern of key interest rate cuts by the Federal Reserve, a surge in the national debt and rising commodity prices, especially among gold and oil, can all help investors identify potential peril for the dollar.

And when the dollar falls, that likely means other key currencies are rising, because investors are flocking to perceived quality. For example, a tumble in the dollar combined with rising exports and economic growth in Japan would lead investors to the Japanese yen. On the other hand, if U.S. economic growth is stagnant, but Europe and the U.K. are performing well, the euro and British pound become safe havens for currency investors. (For more insight, read Top 8 Most Tradable Currencies.)

Another avenue to consider is the Swiss franc. While Switzerland is in Europe, the country doesn't participate in the common currency and likely never will. In addition, the Swiss government and central bank take almost painstaking efforts to keep the franc strong relative to competing currencies. As such, in 2009 the franc ranked as the world's fifth most-traded currency behind the U.S. dollar, euro, pound and yen.

Watching the Dollar? Watch Commodities, Too
Because many commodities are denominated in dollars, meaning their quoted price is in dollars, investors should watch certain commodity markets to get a sense of where the dollar is headed. For example, rising oil prices have generally resulted in dollar weakness because the dollar's purchasing power suffers and consumers get less gas for their cars and heating oil for their homes when crude oil prices rise.

To hedge against the dollar's fall when commodities are in a bull market, look toward commodity-based currencies such as the Australian and Canadian dollars. When precious metals, such as gold, are in high demand, the Australian dollar often benefits. Likewise, Canada's dollar rises when demand for crude oil surges. Another more recent play on a commodity currency is the Brazilian real. Formerly an emerging market, in 2009 Brazil stands as the 10th largest economy in the world and is rich with natural resources, particularly oil.

Plenty of Options to Profit From the Dollar Decline
Trading in the foreign currency markets can be daunting as the daily dollar volume in these markets dwarfs that of U.S. equity markets. Investors need to be aware that playing in FX markets is not for the faint of heart and they can lose more than their initial investment. For many, the best choice is to leave this arena to the professionals and seek out other methods for profiting from a fall in the dollar.

Fortunately, there is no shortage of products to help investors do this. One is the U.S. Dollar Index, which tracks the dollar against a basket of foreign currencies. It is updated 24 hours a day, seven days a week and trades on the New York Board of Trade. There is also a plethora of mutual funds that track foreign bonds or short the dollar against the other currencies. These funds give investors the international exposure their portfolios need without the headache of directly tracking wild intraday swings in the currency markets.

Equities, both international and domestic, provide another area for investors to profit from a dollar slide. If the forecast appears grim for U.S. equity markets, certain foreign markets may be poised to benefit. Of course, there are U.S. stocks that can benefit from a fall in the dollar, too. Large multinational firms that count on overseas markets for a fair amount of their profits benefit when the dollar is weak as they convert a British pound or Japanese yen back into a greater amount of U.S. dollars. Names like Procter & Gamble (NYSE:PG), General Electric (NYSE:GE) and PepsiCo (NYSE:PEP) come to mind.

Investors need not suffer at the hands of a weak dollar. The methods to protect one's dollar-based investments are plenty and effective hedging can serve as more than just protection: it can boost a portfolio's bottom line. In addition, the global economy means there are global opportunities to help investors sleep a little easier when the dollar drops.

Good investing, Kingsley.

Monday, May 18, 2009

Trade Of The Day - Natural Gas ETF Shows Continued Strength

by Houghton and Atkeson.

United States Natural Gas Fund (UNG) -- As Sam mentioned on Friday, this trust invests directly in futures contracts on natural gas and is traded on the NYMEX. We see further evidence of UNG's strength.

The price of UNG has been in a steady decline since July 2008 when it was trading at more than $63. Today, it is about $16.

Virtually every market-traded asset has seen appreciation since the March low, including oil, which has rebounded from about $30 per barrel to the mid-$50s. Natural gas typically has a high positive correlation with oil. (see image above)

In the past few days, a lot has changed for UNG. From a technical standpoint, it is beginning to breakout from its 10-month decline on rising volume. We believe UNG has hit its lows and there is a high likelihood the gas ETF will climb above $20.

Join me tomorrow as a bring you another hot trade of the day in this new segment; Trade of the day.
Good investing, Kingsley.

Friday, May 15, 2009

5 Penny Stocks to Buy Now

By Jamie Dlugosch, Editor, InvestorPlace.

A Great Buying Opportunity in Low-Priced Stocks
Last December I wrote about the Top 5 Penny Stocks to Buy Now. At the time, I suggested that readers could enhance returns by speculating on stocks with market caps of less than $500 million. By taking a chance on these beaten-down stocks, investors could reap a huge reward.

And now six months later, we can see how true that statement really was. Four of the five stocks have generated positive returns, with three of the four up more than 50%. Only one stock is down, posting a small loss of just 6%.

Those are fantastic returns and are even more remarkable considering that they have been generated during a time when the market has fluctuated greatly.

The market meltdown has created a great buying opportunity in low-priced stocks. Keep in mind that I'm not talking about non-listed pink sheet garbage. These are real companies with some on the list with market caps of more than $250 million.

Here is an update on my top five penny stocks…

Penny Stock 1 WPT Enterprises Inc. (WPTE)

The company that kicked off the recent craze in Texas hold 'em poker with its franchise World Poker Tour became a low-priced stock due to its inability to sufficiently monetize its brand equity.

While other companies shunned U.S. law with online poker sites that operate illegally in this country, WPT Enterprises Inc. (WPTE) made the decision to stay out of the U.S. online poker market. At the same time, interest in poker appears to have peaked based on attendance at last year's flagship event, The World Series of Poker. In addition, a global recession impacted even so-called recession-proof companies, including those involved in the gaming space.

In December, WPTE traded at 52 cents per share. Since then, the stock is up more than 50% to 79 cents per share. In its recent earnings report, WPTE announced that its season seven was doing well on the FSN Network and that the company inked a deal for season eight on the same channel.

Although the company shuttered its WPT China effort, its continues to grow. The company is engaged in discussions with customers and other parties in order to best leverage the WPT brand. The translation is that the company may be sold. If so, it will be at a higher price than 79 cents per share.

Penny Stock 2 TriQuint Semiconductor (TQNT)

If you believe that the economy will eventually recover to begin a new growth cycle, investing in technology makes sense. While the rest of the market is struggling to move higher in 2009, the technology-heavy Nasdaq is well into positive territory.

Within technology, the semiconductor space is really seeing stocks surge higher in value. That is certainly the case with TriQuint Semiconductor (TQNT). The stock is up more than 65% so far in 2009. Even so, the stock is still down more than 50% from where it traded in early September 2008.

Assuming the next business cycle lasts the typical four years, the recent move in TQNT could be just the beginning. This is a stock that has the potential to triple in value or more. The timing is right, and the valuation is attractive.

It's a must-own penny stock for those looking for such risk exposure.

Penny Stock 3 ION Geophysical Corp. (IO)

Oil prices are on the rise again. As a result, it's highly profitable for oil companies to increase exploration activities. Serving that market is ION Geophysical Corp. (IO).

Thus far, IO is the one stock that has failed to yield any gains in 2009. Shares are down approximately 6%. This includes being down more than 10% on Wednesday of this week due to a less-than-stellar earnings and future guidance report.

The market appears to be missing the mark. IO is a lagging indicator on the economy. When oil prices are falling, lower prices will adversely impact IO results for months after. It should be no surprise then that the company is struggling with oil prices dropping hard over the last 10 months.

That said, oil has been trending higher this year. Such a state should bode well for IO, and the company did say that they are seeing more land-based exploration activity as of late.

It may be late in coming, but I expect IO to do very well in the last half of this year as oil prices continue to rise.

Penny Stock 4 U.S. Home Systems Inc. (USHS)

Another lagging stock on this list has been U.S. Home Systems Inc. (USHS). The stock is very thinly traded and down nearly 10% this year. The credit crisis has negatively impacted USHS as many of its sales are done on credit through its relationship with Home Depot (HD).

This week, the company announced that sales decreased during the first quarter as loan approvals fell to 79%. USHS lost 13 per share in the period.

Fortunately, it would appear that the economy is turning. When it does, look for USHS to move higher. The company's relationship with Home Depot has been challenging as that partner has struggled, but ultimately a recovery will take hold, and with such a strong partner like Home Depot, the future looks bright for USHS.

Penny Stock 5 Osteotech (OSTE)

The baby boomers are aging, and yet they want to remain active. That bodes well for Osteotech (OSTE), a maker of biologic products for orthopedic and spinal surgeons.

Shares of OSTE are up 70% since December, and according to analysts who follow OSTE, the stock has much more upside as profits are expected to come in 2010. Last quarter, OSTE lost 10 cents per share, and even though analysts expected a smaller loss, OSTE's share price held up well given future expectations.

But the past is the past, and demographics being as they are, profits should be forthcoming in coming years. OSTE has the potential to reach double-digit figures in a very short period of time. OSTE represented the high risk, high reward opportunity perfect for those interested in penny stocks.

Good investing, Kingsley.

Tuesday, May 12, 2009

Get Paid to Trade Options!

by Bryan Perry

Let's face it: It's not our parents' economy, and the ways they made their money isn't likely to work in this environment.

The good news is that it isn't our parents' market, either. Gone are the days of simply buying and selling stocks … that is, if you had enough capital left over from the extraordinary fees that brokers charged simply for the privilege of working with them.

With the arrival of more trading exchanges, armies of brokers competing for your business and the explosion of the derivatives markets (i.e., commodities, options, single-stock futures) during the past few decades, it's exciting to wonder what new ways of making money our children and grandchildren will be using.

In the meantime, we've got plenty of strategies to tap into, to turbo-charge our portfolios today.


When the markets are non-directional (i.e., up one day, down the next, with no clear pattern or predominant bullish or bearish bias), some folks cash out their holdings and wait for an "all-clear" signal when the market starts trending higher on a more-regular basis. Others leave their money in the same securities they liked before the craziness started and hope that things don't get too much worse before they get better.

You may trade options for a variety of reasons -- the potential profits you can make on a relatively modest investment, the rush that comes with cashing in a winning trade, or the ability to keep some skin in the game while you wait for a better opportunity to tend to your long-side portfolio.

We all know that you can make money -- oftentimes pretty quickly -- by trading options, whether stocks or the market itself are going up or down.

But using options as a speculative tool is only one way to pad your portfolio with "extra" profits. There are other strategies out there -- using both options and something called "hybrid options" to help investors to use their existing stocks to generate income.


Making a million bucks with stock trading has gotten increasingly difficult during the past year, but options traders are finding it easier than ever to practically print money for themselves, thanks to the influx of new options and innovative strategies.

You might not automatically consider options when it comes to building your retirement wealth or for generating income, but think again. Options are one of the fastest-growing investing strategies -- and with good reason.

There are multitudes of ways to profit from options but some are more attractive to income investors than others, namely covered call writing, put selling and newer hybrid options securities like Stock Return Income Debt Securities (STRIDES).


There's an options income strategy for every level of investor, and one of the easiest to implement and understand is covered call writing. Simply put, covered call writing means selling calls against stocks that you already own.

Covered call writing is a bet that a stock you already own will continue moving up or will trade sideways for a bit. (That's when it's trading within a range and not making any significant jumps or drops.)

The calls you sell (also known as "writing") are considered "covered" because you already own the underlying stock. This means if you are "called" to produce the stock, you are covered because you already have the shares.

However, if you are new to investing or simply don't hold many stocks long in your portfolio, you can benefit from the action that covered call writing can bring by buying into an Exchange-Traded Fund (ETF) like the S&P Covered Call Fund (BEP).

The best part is that you don't have to do any of the call writing yourself, but you can profit from the legwork being done for you!

This basket fund invests in stocks that the S&P 500 Index (SPX) holds and the professionals who run the fund write call options on the S&P 500 Index. Funds like this one are as liquid as common stocks, and you can buy them as you would any other security through your online trading platform or your broker.

The downside with funds like BEP is that someone else is deciding what calls to write, and finding out the particular transactions can be difficult.


The converse of the covered call is the naked put-write, which simply means you sell puts on stocks that you don't currently own but might like to. With this strategy, you get income up front for selling, or writing, the put.

Don't be intimidated by this strategy. If you can buy an option, then you can sell an option.

The caveat, however, is that you might end up owning the stock, which is why it's imperative that you only establish put-writes on fundamentally solid stocks that you would be happy owning -- even at reduced prices. Investors like writing puts because it helps them to buy stocks at a discount or to get paid while they wait.


While the two strategies I mentioned above are easy to understand and execute, there are a host of new options income strategies that require just a little bit more work -- but have shown that the profits are worth it.

Earlier this year, I began using Callable Stock Return Income Debt Securities, or STRIDES, to generate income with my options trading experience.

STRIDES use a short-term bond coupon that paired with an option strategy. They are Merrill Lynch (MER) products that serve as hybrid-types securities. They are structured like bonds that mature in a fairly short time frame (one to two years), which allows you to get fairly quick profits while still enjoying long-term taxation.

Even better, each pays a dividend yield. The amount varies, but the STRIDES' name will tell you exactly how much.

For example, a name might read the Apple (AAPL) 12% STRIDES.

I like these kinds of products because they pay 9%-12% in a world where one-year CDs are only paying 2%.

The downside here is that these types of positions are often less liquid than traditional options because, in most cases, you must go through a broker to get them. They do have ticker symbols, but the more important identifier is the nine-character Committee on Uniform Securities Identification Procedures (CUSIP) number to identify the security.

The American Bankers Association owns the CUSIP system and it's operated by Standard & Poor's to identify stocks of all registered U.S. and Canadian companies, as well as U.S. government and municipal bonds. Your broker will know how obtain these for you.


Just consider that at one point the stock market was a new idea. In time, investors will come to understand that options can make millions and you don't have to be one of the laggards. Bottom line: Start trading options today help secure your tomorrow.

Should You Have More Than One Forex Dealer?

By John Jagerson.

I was recently involved in an interesting conversation about forex dealers and there was discussion and debate as to whether certain companies were financially sound. I think that is certainly a great question to ask, because when financial institutions run into trouble, as many are now, the account holders are the last group to recoup their money, if they ever do.

When it comes to your forex trading account, there are some great solutions to deal with this potential uncertainty.

Don't miss reading: 10 Rules for Surviving This Bear Market

Dealer Diversification

I am sure all of us have either been affected directly, or through someone we know, by a dealer or broker's solvency problem. Any of us that have been in the forex business for more than a few years can remember Refco, the largest futures dealer in the market, going out of business in a period of just a few weeks.

To deal with these potential risks and to optimize their own performance, I think traders should consider dealer diversification.

Risk Mitigation

Just like diversifying across asset classes and strategies, having more than one account is a great way to minimize your exposure to the risk of a dealer problem. A collapse or closure by a regulator agency can happen quickly, leaving all your money exposed or in the hands of someone you don't even really know.

Let your dealer know they don't have all the money you could deposit to keep them on their toes and

Strategy Optimization

Some of us are long-term traders, others are carry traders, and a lot of us are short-term traders. Each dealer competes on their relative advantages, and I haven't seen a one-size-fits-all solution.

A dealer that pays great rollover rates may have wider spreads. They may be great for long-term traders, but terrible for short-term traders and scalpers. Pick the dealer that fits your strategy. Most of us probably use a blend of strategies and should pick a dealer for that part of our account that offers the best advantages.

Product Breadth

No dealer is created equal. Some may offer very tight spreads but don't have the breadth of crosses you may want for other strategies. One important differentiator right now is options. If you want to trade options but don't want to abandon the dealer you have currently, what can you do? Work with both of them.

If you have ever been torn between two attractive dealers but felt like it may be difficult to manage your accounts, I think you may be surprised how useful a good spreadsheet can be. Use all the tools that you have available and you may be shocked about how much the variety keeps your trading creativity flowing.

Good investing, Kingsley.

Taking the Pain Out of Real Estate Investing With REITs

by John Jagerson

Investing in real estate has been a strategy that falls in and out of favor depending on what the general economy is doing.

In 2008-2009, real estate investors took a hard hit with prices dropping significantly, but now that the economy seems to be flattening, real estate bargain hunters are beginning to reemerge.

This article will discuss how a savvy investor can include some exposure to the real estate market within their portfolio without all the headaches.

Real estate investors are drawn to the market because of the perceived potential for large returns. However, what many investors don't understand is that the unusually large returns in a strong economy are due to the use of leverage through loans.

Because of the high cost of real estate, excessive leverage is one of the only ways most individual investors can participate in the market, but it comes with significant and often unanticipated risks.

Excessive leverage in a fairly illiquid asset like real estate can become an account killer quickly. This is the situation so many investors find themselves in now. Leverage has left them upside down on their losses and, in many cases, has wiped out years of profits.

The stock market offers opportunities to invest in real estate, including the possibility of large profits without the usual problems. This can be done through Real Estate Investment Trusts (REITs) that are publicly listed as a stock and available to almost any investor.

A REIT invests in real estate and then sells shares of ownership in the trust on the public market. When you buy a share of a REIT, you are buying partial interest in a real estate investment. This allows you to buy real estate without having to use leverage.

Many REITs are specialized in a specific kind of real estate like Plum Creak Timber (PCL) that invests in land used for lumber production.

Through REITs you can own a share of stores, commercial properties, residential neighborhoods or other income properties that would otherwise be inaccessible to most individual investors.

If investing in a single REIT or real estate strategy doesn't offer the level of diversification you desire, then you may want to consider REIT exchange-traded funds (ETFs). (Learn more about investing in ETFs.)

These ETFs pool investments in many REITs so that diversification can be improved. The iShares FTSE NAREIT Industrial/Office index (FIO) (commercial property) and the iShares FTSE NAREIT Residential index (REZ) (residential property) are good examples of these kinds of ETFs.

An ETF or REIT adds the advantages of liquidity, low entry prices and transparency to the possibilities of profits.

REITs are usually (but not always) negatively correlated with stocks, which helps to smooth your portfolio's growth over the long term. While REITs can experience share price growth, most profits come from dividends that can reach 10% or more. This makes them an interesting addition to tax-sheltered accounts held over the long term.

When compared to the management requirements, financing hurdles, liability and liquidity issues of a real estate investment, REITs present an attractive alternative.

Good investing, Kingsley.

Monday, May 11, 2009

4 Ways to Generate Instant Options Profits

By Chris Rowe

There are two fundamental reasons why we trade options: leverage and protection. (See also the Top 7 Reasons to Trade Options.) We want the big gains that options trading can provide, and we also use options trading strategies to preserve those hard-earned portfolio profits.

Even though we're all searching for those double- and triple-digit wins that options trading can provide (i.e., leverage), in a wild market like this where our profits can practically evaporate within the space of a few days or even a few hours, I want to focus a profit-protecting topic that many of you may already be familiar with: selling covered calls.

I know that talking about conservative strategies might cause some of you to turn away. But for those of you still with me, I can change your life even if you are very familiar with the strategy, because I can guarantee that you are probably under-utilizing this powerful trading tool.

Think about this for a second: If you can generate 2.5% on your investment by selling a covered call each month, that's a 30% annual return. And that's only when you calculate the income you'd get from selling covered calls -- assuming you don't make any money on the underlying stock position. But you have to consider that you might profit from your stock position, too!

To understand why you should make covered calls a regular part of your investment diet, ask yourself one question …

Why Do Gaming Establishments Make so Much Money?

That answer is simple, and it applies to your portfolio, too. It's because there are millions of people who are OK with taking bets, even when they know that the odds are against them.

Sure -- every now and again, the casino loses and the gambler wins. But does "the house" ever really lose? I mean, is the gaming establishment ever really gambling at all?

Nope -- the guests are doing all of the gambling. The casino is simply running a business. The house knows that, every now and again, it will have to pay up. But the amount that it pays out once in a while is dwarfed by the amount that it collects from most of the other guests. Everyone knows that!

But when you are the buyer of (i.e., "buying to open") short-term, out-of-the-money options, you might not realize that you are the same guy as the gambling casino guest.

When you are the person who is selling (aka, writing, or ""selling to open") covered calls, you are the dealer!

You are the one who is accepting payment after payment after payment from the guy who wants to see his $2 call option trade up to $10.

Feel at Home Being 'the House'

Once you have sold a covered call against stock that you hold long in your trading account and received your payment, either you will keep the premium and your stock position, or you will keep your premium, and you will be "called" to sell your stock at the option's strike price. Big deal! Just be sure to sell covered calls only if you are willing to sell your stock at the strike (or "exercise") price.

Ideally, you want to sell calls with a strike price that's slightly higher than the stock's current price. It's also OK to sell calls with a strike price that's at-the-money (i.e., the same as the stock's current price) or slightly in-the-money (i.e., slightly lower than the stock's price). The idea is to profit from the decaying time value of the option that you have sold.

Ideally, you also want to sell calls that will expire in 30-45 days, because that is when time value will decay most rapidly.

Like the Song Says, 'We're in the Money'

How can you make your money work (or work harder) for you while it's in your trading account? Here's a quick look at how easy it can be to make money with minimal effort.

Let's say you buy 1,000 shares of "Bob's Car Wash" (BOBC) at $50 per share.

The stock now trades to $58 per share.

You say to yourself, "I would be willing to sell my stock at $60. Let's see what the BOBC June 60 Call options are trading at," because you know that someone is willing to pay something for the right to buy your shares of BOBC at $60.

You find out that you can "sell to open" the BOBC June 60 Calls for $2.

Again, the stock is trading at $58, and so far you are up $8,000 on your stock position.

Remember these two keys:

* Each option contract represents 100 shares; 10 option contracts represent 1,000 shares. So, if you own 1,000 shares of BOBC, and you want to sell someone the right to buy your 1,000 shares of BOBC, then you would sell 10 call options (to open, to establish your short position in these call options), because 10 option contracts represents 1,000 shares.

* Some people get confused about selling first, and buying second. Traditionally, people are trained to understand only buying something first and selling it second. But when you write an option contract (or sell that option contract), then you are essentially "short" the option contract. You can first sell an option contract at $10 (to open), and THEN buy the option (to "cover" your short position) three weeks later at $6 (to close) for a 4-point profit ($10 - $6 = $4, or 4 points).

Generate Instant Income With Covered Calls

So, to review, BOBC has traded from $50 to $58 per share.

You sell 10 June 60 Call options ("sell to open"), and you receive an extra $2. (That's $2 per share. Remember, because there are 100 shares of the underlying stock represented in each option contract, multiply that number by 100. In this case, you would collect $200 for each contract that you sell to open.)

That part of the transaction is now done. Assuming you hold 1,000 shares of BOBC, you now have an extra $2,000 in the bank, no matter what happens to the stock. (That's $2 per share, times 100 shares in a contract = $200, times 10 contracts to cover your 1,000 shares, for a grand total premium collection of $2,000.)

Now, take a look at the difference.

How Will This Trade Work Out?

1. BOBC trades to $60.

Your stock position in BOBC is called away (sold) at $60 per share and, instead of $10,000, you net a profit of $12,000. (You paid $50,000 to buy the stock and sell it at $60,000. That's a profit of $10,000 on the stock plus $2,000 on the option that you sold.)

Special note: Your stock will not necessarily be sold at $60 just because it trades above $60. Your stock may or may not be called away at any time before expiration. If, at 4 p.m. on expiration Friday, the stock is 25 cents in-the-money or more (which means BOBC would be trading at $60.25 or higher), then the call that you wrote will automatically be exercised, and your stock will automatically be "called" away (sold) from you.

Here is a quick picture of what this would look like (see picture above).

2. BOBC trades down.

You don't feel so bad because you picked up that extra $2,000 from writing the covered call. If you didn't "sell to open" that call option, BOBC would have still traded lower, but your account would be worth $2,000 less than it is worth right now! Whatever dollar amount the stock trades down by, the decline in value is reduced by $2,000.

If, after you take in that $2 premium, your stock trades from $58 down to $55, then instead of losing $3,000 in value, your 1,000 shares of BOBC would lose $1,000 in value since you will have been paid $2,000 for the call option that you sold. So if the stock trades down 3 points, you really only lose 1 point in value, because while the stock lost 3 points, you made 2 points by selling the call option.

At least you take in an extra $2,000, and you will be free of any future obligation once the option contract expires. (Or else you can just close out the call option position by buying the same call back (i.e., "buy to close") at its current lower price (see below).

Now, here's a fun twist: You actually have two choices if your stock trades lower.

a) You can do nothing and maintain both the "long" stock position, as well as the "short" call option position, until the option contract expires.

b) You can simply buy the option contract (that you previously sold at $2) at a cheaper price. Imagine selling a gold watch for $2,000 and then buying it back from the person that you sold it to for $300. Not bad. That's a $1,700 profit.

As the stock trades lower, the call option that you sold also trades lower. This means that if the stock trades lower, you can always buy the call option (that you've sold) at a cheaper price than what you received for it when you sold it. This is a profit on the option trade that will reduce the loss incurred on your stock position. Once you buy back the call that you shorted, your position is closed (i.e., "covered") and you are no longer at risk for assignment, or having your stock called away.

For example, if BOBC trades from $58 down to $55, then the call option that you sold at $2 (to open) might trade down to 30 cents. You can now buy the call option at 30 cents (to close). That's a difference of $1.70. Since you originally sold (or shorted) that call option at $2, that $1.70 difference is a profit.

Said differently, if BOBC traded from $58 to $55, the stock position lost $3 in value. But since the call option that you sold at $2 (to open) is now at 30 cents, you have a profit of $1.70. So the net result is that, instead of your position losing $3 in value, it really only lost $1.30 in value.

In other words:

Stock lost $3
Option gained $1.70
Total loss is $1.30

Or -- as I said originally -- you can let the option expire worthless and realize the entire $2 gain on the call. In this case, if the stock traded from $58 to $55, then your entire position would have lost $1 in value instead of $3.

Stock lost $3
Option gained $2
Total loss is $1

After the option expires, you are free of your obligation. If you wish to do so, you can sell another call option and start the process over again.

3. BOBC doesn't trade up or down, but sideways.


As time passes, the call option that you sold (to open) is losing its time value. Since you are "short" the call option, this is a good thing for you. Basically, as time goes by with the stock trading flat, you are making money as the call option loses value due to time decay.

If the stock pretty much trades flat until the option expires, even though that stock did absolutely nothing, you pocketed an extra $2,000! Even though the stock never got to $60 per share, you still made $10,000, as you had originally hoped for. (You made $8,000 on the stock plus $2,000 on the call option that you sold.)

Meanwhile, there is someone out there who was in the same position as you, but since they didn't sell covered calls, they are sitting on a $58 stock, wondering whether or not it will trade to their target price of $60, so that they can make the $10,000 that you just made with zero movement in the stock.

The call option expires worthless, you now have two choices:

a) You could either sell BOBC at $58 and skip down the street thinking about how cool you are for making $10,000 on a stock that only traded up 8 points.

b) Or you could sell another call (to open) that expires the following month or two out. Maybe you can sell the July 60 Call (to open), or the August 60 Call (to open) and collect even more "extra" premium.

4. BOBC trades somewhere between $58 and $59.99.

Again, GREAT! I can't wait to brag!

Let's say, for example, the option expires worthless, and BOBC is trading at $59 at the time. This means that you made $2,000 by selling the call option (i.e., you had sold that casino guest the right to buy your BOBC at $60) and you are also up 9 points on the stock. You are now up $11,000, and the stock never even hit your price target of $60!

The Moral of the Story

When you are long the option contract (said differently: when you are the owner/buyer of the option contract), time decay is your worst enemy because, as time passes, your option loses value.

When you are "short" the covered option contract (said differently: when you are the writer/seller of the covered option contract), time decay is your best friend because, as time passes, the option that you sold (to open) to someone else, loses value.

You can either buy the option back (to close) cheaper, which will result in a profitable option trade (offsetting your stock's loss of value), or you can let the option expire … which will also result in a profitable trade.

If this covered call lesson has helped you learn something new, then you are probably eager to get out there and write some covered calls on stock that you own, and start grabbing all of that extra money that you have been leaving on the table each month.

But, before you do, first consider this last possible outcome …

A Long Shot on a Short Call

What would happen, and how do you think you would feel, if you wrote a covered call on BOBC, which obligates you to sell BOBC at $60 per share, but two weeks later BOBC traded up to $90 per share? Hmm.

Before you read any further, think about that for a minute.

Do you know what would have to happen in that case?

Well, here it is:

You would have to sell BOBC to someone at $60, even though it is selling at $90 in the open market. Now, that might drive you crazy, even though your original plan was to sell at $60 anyway.

Ask yourself, how much heartbreak would it cause you, if you sold someone the promise that they could buy your stock at $60, only to see it trade up to $90 two weeks later?

Answer: You should feel like a loser much as the casino feels like one when someone puts $2 in a slot machine and wins $30.

Sure, this isn't an ideal situation. But remember, the reason why a casino is happy to give up a profit every once in a while is because it makes so much more in the long run.

I hope that I have given you a clearer picture of why options can be used as a way to gamble, but also as a conservative way to reduce risk.

Good investing, Kingsley.

Thursday, April 30, 2009

Start 'Charting' Your Path to Profits With the 50% Retracement Rule

by Chris Rowe.

Since early March, demand has been in control of the stock market, and this trend is set to continue for the intermediate term (i.e., weeks to months).

To stay ahead of the market curve, I've been reducing bullish exposure lately, as I have seen signs of weakness in the stock market. But, nonetheless, demand is still in control until further notice. So, if there are some stocks that you want to take a bullish position in, you might be asking yourself when the best time to buy would be.

You Don't Have to Wait for a Bull Market to Be a Buyer

First of all, what you want to do, if you are going to be bullish, is to buy the strongest stocks within the strongest sectors -- but you want to buy them on a pullback.

But, how do we know how much a stock is going to retreat before its next advance?

There are a number of ways to predict a stock's behavior, most having to do with past support levels.

A stock's support level is exactly what it sounds like -- a floor through which the stock has trouble breaking. The opposite term is resistance, which is a ceiling through which a stock has difficulty penetrating. When a stock is trading between these two levels, it is said to be in a trading channel.

I have a number of simple indicators that I use to decide what to trade and when, some of which come in the form of popular moving averages and trendlines.

But today I'm going to go over one of the most basic "technical analysis 101" principles that will lay down a foundation for understanding how far a stock is likely to retreat before the next bull run.

Don't forget, these are just the basics, but knowing them will help increase your accuracy, especially when you consider the following principle in conjunction with identification of past support and resistance levels.

The Secret is Not So Secret After All -- Just Trade the Trend!

Bottom line, you always want to trade in the direction of the trend. And a trend is obviously a series of zig-zags. These zig-zags move in the direction of the trend and then retrace before continuing in that same direction. (Like I said, it's technical analysis 101.)

While secondary parameters are set at 33% and 66% (as outlined in the chart above), the most-common percentage retracement before resumption is the (approximately) 50% retracement.

I know, this might sound absolutely crazy if this is your first time hearing it, but if you look at a bunch of stock or index charts after reading this article and apply these percentage retracement principles, you'll be absolutely amazed!

Two Steps Forward, One Step Back

The way that traders use this application, for example, would be to look for approximately a 5-point retracement after a stock advances by 10 points from a low to a new high (because 5 points is 50% of the 10-point gain).

So, when a stock trades 10 points higher from $15 to $25 and then reverses lower, traders would look for support around $20.

Again, this is certainly not a strict rule, and the secondary parameters wouldn't have been set near 33% and 66% if it were. In fact, other theories set retracement parameters around 62% and 38%, while maintaining the 50% point as the average retracement.

Secondary Parameters

When it comes to retracements, 66% is a critical area. For instance, in the case of an uptrend, if a stock advances higher, and then retraces 66% of the recent move and starts to bounce higher again, it's considered to be a relatively low-risk buying opportunity.

But if the 66% retracement area is violated (if the stock retraces by more than 66%), a reversal of the prior uptrend is very likely.

This is also true in the case of a downtrend, so listen up if you are looking for a good place to enter bearish positions to take advantage of the next downtrend in the general stock market. (Learn How to Pick the Right Put Option.)

If a downtrending stock retraces about 66% of the recent decline and begins to resume its downtrend, that area is a good place to sell short the stock or buy put options. If the downtrending stock retraces more than 66% of the recent decline, then the downtrend is likely to reverse to an uptrend.

In 'Support' of Trading on Retracements

Let's take a look at how to find retracements, which can serve as fantastic buying opportunities.

• he stock moves from about $2.20 to about $3.50 (not counting intraday movements). This is a $1.30 advance, half of which is 65 cents. The stock retraced by about 60 cents. (This retracement also coincided with the gap higher, which tends to act as the new support level.)
• The stock then moves from about $2.90 to $3.25 (a 35-cent move). Fifty percent of that is 17.5 cents. The stock retraced by nearly that amount before moving higher.
• Then focus on the blue box. You can see that after a 50% pullback, the stock gapped even lower, and the trend reversed from an uptrend to a downtrend.
• Between August and September, the stock traded from about $2.60 to $3.20 (a 60-cent move), followed by a retracement of about 30 cents.
• Then, if you check out the blue line, the intermediate move was from $2.90 to about $4.20 (a $1.30 move), followed by a retracement of nearly 65 cents.
• If you look at many of the short-term retracements and resumptions within the intermediate move (blue line), you'll see similar action.

This chart happens to have lots of 50% retracements. But remember the secondary parameters, and try to match them with past established support or resistance levels to estimate retracements.

And remember, this is a very basic principle. I thought I would give you something today that was far from complex. The good news is that other, more "sophisticated" parameters that traders look for are just as easy to understand!

Good investing, Kingsley.

Tuesday, April 28, 2009

Top Swine Flu Stocks To Own

by Michael Shulman

Swine flu, first identified in Mexico, has spread to the United States, Canada and many other countries.

What makes pandemic flu like this more dangerous than regular flu is its virulence -- it kills (more than 100, according to press reports) -- and the inability of current vaccines to prevent the spread of the disease.

A few years ago, the bird flu scare put a few companies on traders' and analysts' radars, and these stocks have already exploded in value, beginning Friday and accelerating today.

Is it too late to get in on the swine flu stocks?

It all depends on the severity of the outbreak. If it passes quickly, these stocks will probably come down. If the flu spreads, they may go up. Sorry, I am no an epidemiologist.

But here are some of the most prominent swine flu stocks:

4 Swine Flu Stocks to Watch

As the news plays out, there are four companies you should take a look at: BioCryst Pharmaceuticals (BCRX), Novavax Inc. (NVAX), Crucell (CRXL) and Cerus (CERS).

Swine Flu Stock #1: BioCryst Pharmaceuticals

BioCryst Pharmaceuticals (BCRX) has a flu treatment for common and pandemic flu in development called Peramivir, which is much more potent than Roche's Tamiflu. Due to previous trial for an oral version of the product (the new version is injected), most of the scientific community believes it will pass through final trials.

There is a special provision that allows the federal government to stockpile a treatment after it has passed a 12-person safety trial, and Peramivir has done this. So even though the company is going forward with all trials to get a general approval, in a real emergency the government could legally buy and distribute this treatment.

More importantly, it is made in the USA, and it is the only flu treatment of note that is made here.

Swine Flu Stock #2: Novavax Inc.

Novavax Inc. (NVAX) has exploded on the recent swine flu news. This vaccine company's primary focus is the flu, and it can actually make a new flu vaccine in roughly thee months. And it has a manufacturing platform that is extensible to other manufacturers.

Novavax has a broad-based vaccine development program that is heavily, if not completely, dependent on government support. The company is cash-poor and burns cash at a furious pace. And it has committed heavily to a new development program in India with pharma company partner, Cadila Pharmaceuticals.

Swine Flu Stock #3: Crucell

Crucell (CRXL) is the 21st-century vaccine technology company, and its business model is to be the "Intel Inside" for many vaccine makers. Crucell owns a traditional vaccine business and is also developing new vaccines for many infectious diseases.

Its technology platform -- cell-line manufacturing -- is much more efficient than traditional egg-based vaccine production, and the company has partnered with many of the major players in the vaccine business.

Swine Flu Stock #4: Cerus

Cerus (CERS) is the oblique play on this scare. I wrote about Cerus recently, saying that it was one penny stock you have to own.

This company has the technology and products to clean blood, removing infectious pathogens and making blood banks indifferent to the health of donors' blood. Cerus' INTERCEPT Blood System has been shown to work on HN51 flu strains (avian flu) in laboratory work that has been published and subject to peer review.

The INTERCEPT Blood has approvals in 18 countries, and with the pressing need to make sure the blood supply is safe from pandemic flu, HIV and other pathogens, there is a huge market for its product line.

The biggest upside catalyst for CERS would be the creation of a shortened regulatory pathway by the FDA for approval in the United States.

How to Play Swine Flu

I see these four stocks as long-term plays, albeit risky ones, especially is the swine flu pandemic takes hold. But these stocks shot up today, with BioCryst and Novavax actually doubling.

And if the swine flu scare dies down in the next 24-48 hours, these four stocks will be excellent shorting candidates.

A Bonus Swine Flu Options Trade

Tamiflu is the recognized treatment for the flu and has been shown to work on the swine flu strain. Governments stocked up on this product a couple of years back, but then slowed down purchases. However, they may begin buying it again.

Tamiflu is made by Roche -- possibly the best Big Pharma company in the world -- but the play here is Gilead Sciences (GILD).

Gilead invented Tamiflu, and gets a roughly 20% royalty on sales -- 100% pure profit. Any uptick in government purchases for stockpiles or use puts a new floor under Gilead's already incredible profits, earnings and real cash flow.

Look at a call option with a longer-term expiration date if you are a longer-term player, but consider a short-term call option if this scare gets worse.

Good investing, Kingsley.

Thursday, April 23, 2009

How to Use Insider Trading to Your Advantage

From LearningMarkets.

Insider trading is an often misunderstood investing tool. It can be helpful for traders, but its value is usually overstated.

This is a good topic to tackle right now as we are seeing an uptick in the number of insiders buying in late 2008 and early 2009 compared with the last year. This could indicate that insiders are becoming a little more optimistic about the market's prospects in the near term.

Insiders are technically classified as anyone with material non-public information. Usually this means employees, officers, directors or shareholders who own more than 10% of the company's stock. Insiders can trade their own stock but have certain restrictions on how, when, and how much they can sell or buy. Part of those restrictions are reporting requirements.

Because insiders must report their trades to the SEC, ordinary investors can get access to that information and can see what insiders are doing.

It makes some sense to assume that if insiders are selling stock, then they are pessimistic about the company, or if they are buying, then they must be optimistic.

On average, stocks with high insider buying do show some correlation with a rise in price; however, selling does not appear to be reliably predictive.

Peter Lynch famously said, "Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise."

This statement seems reasonable and may be a good explanation for why insider buying is more predictive than selling.

There have been many studies on the topic of returns and insider trading, and one notable example suggests that a diversified portfolio of stocks with high insider buying outperformed large stock indexes by as much as 9%. This justifies some time and attention paid to the subject.

In the following video, I will cover the definition of insider trading and show an example of the impact that this activity can have on a stock's price.

Two Ways to Make Insider Trading Work For Your Portfolio

As I mentioned above, insider trading information can be useful, but it can also be overstated or over-relied on. Used prudently, it may alert you to increased risk in stocks you already own and could even be used to find stocks and options to add to a watch list as a potential investment.

Insider trading information be used in two ways:

1. Monitoring insider sentiment in stocks you own.

If insiders are suddenly buying a stock you own, it may indicate that there is some very positive sentiment inside the company. That may change your risk control behavior by encouraging you to leave the position uncovered or to add to the position within your portfolio. Before making a decision based on insider trading, you should consider who is buying and how much they are acquiring.

For example, if an officer like the CFO is buying, that may be much more relevant than a director. Similarly, if an officer or director is buying very large quantities of stock, that may be something that deserves attention.

Yahoo (YHOO) experienced significant insider buying by Carl Icahn in his effort to increase his strategic influence on the company's management in late November 2008, and the stock rallied.

2. Using insider buying to find stocks for investment.

The filtering process to find stocks that you do not already own with high insider buying could be very daunting if it were not automated. Fortunately, there are both free and pay services that do an excellent job at filtering and reporting the data for you. In the video below I will cover three services that I recommend for this kind of research.

Insider buying should not be the only qualification you use to decide on a company to buy. It is merely an alert that something interesting might be happening. Doing fundamental analysis, and making sure a potential investment conforms to your portfolio diversification strategy is still critical.

Good investing, Kingsley.

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Monday, April 20, 2009

What's the Better Currency Trade: Forex Futures or Spot FX?

From Learning Markets.

There are a lot of marketing materials out there explaining why the spot market is so much better and cheaper than the currency futures market, but how much of it is fact and how much is hype?

What are the real differences between these two closely related markets? Is it really cheaper to trade spot forex? Aren’t there also advantages to trading futures? This is an important topic because so many of the differences are related to trading costs, which is often a neglected subject among new and experienced traders.

Let’s begin by analyzing the major attributes of each market -- futures and spot. Doing so will help us determine if either market really has an advantage.

24-Hour Market -- Advantage: Neither

Some spot forex advertising makes it seem like the only place you can trade 24/7 is in the spot forex market. That is not actually true. Both currency futures and spot forex effectively trade 23-24 hours a day, five days per week. The market is essentially closed from Friday afternoon through Sunday afternoon if you are in North America.

Spread -- Advantage: Currency Futures

The spread in the currency futures market is not fixed. Depending on the liquidity of the market at the time, the spread can be one pip or less, and an effective limit order may cut the spread to nothing. In the spot forex market, you can have a variable spread like this, which may widen with market conditions or a fixed spread, which does not change but is usually wider (2-3 pips on the majors) on average than a variable spread.

It is important to note that some spot dealers offer spreads on some pairs that are below one pip, but that is not the case for all pairs they offer. On average, the spread in the futures market is narrower across the majors and major crosses than the spot market because the futures market has more liquidity and price competition than an individual dealer.

Commissions -- Advantage: Spot Forex

Spot forex dealers do not usually charge commissions. The spread is where they make their money, which is one reason it is a little wider on average than the currency futures market. However, let’s put this in perspective.

A quick survey of good futures brokers put the average commission costs at $3.15 per side. That means an entry and exit (round trip) would cost $6.30 per contract or 6/10ths of a pip. Once commissions are added to the spread cost above, the advantages between currency futures versus spot forex become much closer to neutral.

Flexibility -- Advantage: Spot Forex

Spot forex dealers are extremely flexible on lot sizes. This is great since a full 100,000 unit lot may be too large for many new traders. Some dealers will slice the lot sizes anywhere from 10,000 to 1,000 units. The currency futures market generally has two lot sizes.

A full-size contract is usually a little larger than the 100,000 unit lot in the spot market. A mini contract, which is only available on some pairs, is usually about one half the size of a full-size contract. Larger lot sizes can make money management in a small account extremely difficult and may be the only clear advantage spot forex has over the currency futures market.

Roll Over Interest vs. Carrying Charges -- Advantage: Currency Futures

Because one of the ways a forex dealer makes money is by trimming the interest payment or increasing the interest charge on a particular pair, this premium tends to be a little higher in the futures contract. However, the cost or benefit of this interest is integrated into the price of the futures contract itself, which makes it harder to see at first glance.

Here’s how it works. Imagine that you are 45 days away from the GBP/USD futures contract expiring. That contract’s current price is 1.9811 but the spot price is 1.9866. This difference (also known as the cost of carry) is created by the value of the interest that will accrue between now and expiration. By the time this contract expires, in 45 days, the futures price will equal the current spot price exactly. That means that if prices were held steady you would make the equivalent of 55 pips as the futures price came up to meet the spot price. By contrast, the highest rollover rate we could find from a forex dealer on the GBP/USD would pay the equivalent of 38 pips in interest premium during the same 45 day period. Similarly, the charges for being on the non-interest paying side of the transaction is less in the futures market than with a spot forex dealer.

Transparency -- Advantage: Currency Futures

Currency futures are exchange traded, which means that you can see order flow, volume, open interest and outstanding orders. Forex dealers do not share that information, and because the market is so distributed, information available from any one dealer is probably not comprehensive enough to give a clear picture of what is happening in the market as a whole. $83 billion worth of currency futures trade on the CME exchange every day alone. The largest retail forex dealer in the market trades $11 billion a day in total notional value.

Which is Right for You?

The fact that forex dealers will split up a lot into very small slices makes the spot forex market the hands-down winner for small traders.

Larger retail traders should seriously consider the futures market as an alternative to the spot forex market. Trading costs are nearly identical, the exchange is more transparent, the product breadth is equivalent and interest is better.

Every trader should realize that trading cost differences are not just limited to whether or not you are paying commissions. Trading costs include average spread, commissions and interest premiums or charges. When looked at together, these two markets look a lot more similar than you may have thought.

Good investing, Kingsley.