Covered Call

When people buy a call option, they would make profits if the market price of stocks is higher than the strike price of the call option. If the market price of stocks is lower than the strike price of call option, they would lose the amount of cost when they purchase a call option. When they sell a call option, they also have possibilities to lose or gain. However, if they purchase covered call, their profit could be a double and lose could be reduced an half. This is how covered call works. When people buy stock of A which we call an underlying asset, they also buy a call option of stock A at the same time. Then, they sell the call option. When the market price is lower than the strike price which they are already sold, they could make profits from the premiums by selling the call option. For example, let’s assume the stock price is $50, the exercise price is $55, and the premium of call is $4. The covered call buyers can make $9 profit ($55-$50+$4). If the market price is higher than the exercised price, the covered call buyer’s payoff would be reduced. Nevertheless, some people think when the market price is higher the covered call buyers can make profits from their premiums by selling a call option, and their stock price of A also goes up. I think that also make sense. However, the important thing is how much the market price goes up. If the difference between the market price and exercised price is less than the call option premiums, the covered call buyers still can make a profit. For example, let’s assume the stock price is $57, the exercise price is $55, and the premium of call is $4. Even though the covered call buyers should sell the stock with exercised price, $55, to the call option buyers, the covered call buyers still could make a profit $2 ($57-$55+$4). Nevertheless, if the difference between the market price and exercised price is higher than the call option premiums, the covered call buyers would loss. For example, if the market price goes $70, they would loss $11($70-$55+$4).
In conclusion, the potential profits of covered calls are limited, but the potential losses of covered calls are in unlimited. I think most of financial derivatives also make limited profits and unlimited losses


http://www.investopedia.com/articles/optioninvestor/04/021104.asp

http://www.forbes.com/2009/04/06/options-income-portfolio-personal-finance-investing-ideas-covered-calls.html

http://en.wikipedia.org/wiki/Covered_call

Opinion in " to invest or not to invest"

I agree with Unique that it is time to invest, but I do not think that is realistic for a middle-class. Throughout the 100 years of history in the U.S stock market, the U.S stock market keeps going up and down over 100 years. Thus, investors simply forecast the current crashed stock market would go up and be stable in the future, but they do not know exactly when would that happen occurs. However, I think that theory is only works for people who are available to invest for the long-term. The reason is that as the investors forecast the future stock market, the stock market would go up, but the time is matter. Thus, even though people who have little or no spare money to invest know they would get great returns in the future if they invest into the stock market, it is hard for them to take that action. If people have little spare money to invest, they want to have the returns in the short period of time because a longer time they invest into the stock market, their volatility in financial management would be a higher. In other words, the longer they put their spare money into the stock market; there is less possibility to solve their financial problems. Thus, I think it is not realistic for the most of middle class.
Most of people who want to invest now do not know where to invest. In addition, some investors would recommend investing in gold. When the stock market is unstable, people tend to invest into commodities, such as gold, oranges, and apples. In addition, as we all know gold is limited, so people think the price of gold would never go down. People simply buy actual gold, and re-sell them when the price of gold is higher. Or people buy mutual funds that are related to gold mining companies. However, I want to notice that the gold investments also have risks. First, if people try to buy actual gold, it contains additional 10% of fees to buy actual gold. The cost is a high compared to buy stocks. Next, a volatility of gold price is high. In March 2008, the price of gold per ounce was $1000, but the price fall down to $700 in October 2008. The 30% of gold price was gone down in 7 months. Thus, people should notice that price of gold could be down. Last, the returns in the mutual funds that are related to gold mining companies are also affected by foreign currencies. The reason is that the size of mutual funds is relatively small, so the most of brokers of that funds also invest internationally. Therefore, I would recommend to people to consider seriously before they invest in gold.




http://www.fool.com/investing/dividends-income/2008/10/24/invest-without-the-stress.aspx

http://goldprice.org/gold-price-history.html

http://uniquebl0gs.blogspot.com/2009/04/to-invest-or-not-to-invest.html

Short Selling

Short selling is a method that selling a current stock with the market price, but actually the stock seller did not purchase the stock with his or her money that he or she sold. He or she borrowed the stock and sold it, so he or she should buy back the same stock with the future value, which the stock buyer and his or her broker specified in the contract. Thus, if the future value of the stock value decrease, he or she would make a profit. For example, I sell the Stock A with $15, and I did not purchase that stock with my money. I borrowed that stock and sell it to the stock market, so I gain $15. However, I should buy back the amount that I borrowed before I and my broker specified the period of time. Thus, if the future value of the stock goes below $15, I make a profit. Nevertheless, if the future value of the stock goes over $15, I make a loss, and the amount of loss would be unlimited. The reason is that the price of stock could go up to $100 or more. Thus, if an investor invests through short selling, he or she should consider the short selling could bring unlimited loss. However, the maximum profit of the short selling is limited because the lowest stock price would be $.01. If I sold stock at $10, the maximum profit I can make is $9.99 from that stock.
Personally, I do not like the way of investment like short selling. The reason is that the profit is limited and the loss is unlimited. If an investor buys a stock with his or her money, the investor could estimate how much would the investor loses on his or her investment if the stock defaults. However, if an investor invests through short selling, he or she cannot estimate the loss of worst cases.

http://en.wikipedia.org/wiki/Short_selling

Opinion in CEO Compensation

I read Dwayne’s article about CEO compensation, and he thinks that CEO gets too much compensations. In addition, a company reduces CEO’s compensation, and the company can pay more to lower level workers with that reduced compensation. However, I do not agree with Dwayne’s thought.
As of 2004, when CEOs got their total compensations, only 15% of the compensations was their salaries, a 23% was their bonuses, and a 62% was the long-term incentives such as stock options, restricted stock, and performance units/shares. Thus, basically, if CEOs do not perform their job well or their companies’ shares go down, the 62%, which is the long-term incentive, of their total compensations could be reduced. However, there were some exceptions. Some CEOs’ compensations were increased while their companies’ shares were decreasing. For example, the CEO of Merrill Lynch, Stanely O’Neal, had more than $160 million of total compensation while the company was dropping down 40% of its share value, and imposed huge debts. I think only a few CEOs get their compensations like the way Stanely O’Neal had gotten. In addition, those CEOs cause normal people to think that CEOs’ compensations are too high. Some CEOs got underpaid, for example, Jack Welch, the former CEO of General Electric, raised GE’s assets from about $14 billion to $500 billion before he retired, but he got the compensations relatively lower with his achievements.
Most of CEOs are having too much stress on their heavy works and pressures, the most of CEOs work around 60 hours per week, and they bring their work to home. Even though their pays are about 160 times of the average workers’ salary, I think they deserve it.

http://dwang9.blogspot.com/2009/04/ceos-compensation.html
http://www.investopedia.com/articles/fundamental-analysis/08/executive-compensation.asp
http://equityprivate.typepad.com/ep/2006/03/yesterday_finan.html
http://economistsview.typepad.com/economistsview/2007/09/reich-ceos-dese.html
http://www.blnz.com/news/2009/03/23/Executive_Isnt_That_Excessive_Some_5335.html

Arbitrage

Arbitrage is the method of making profits from different a price of same asset in different markets. The basic idea is that people should buy underestimated assets and sell overestimated assets, so they make profits when the over or underestimated prices go back to their right prices. People easily can find in a currency exchange market. When you buy U.S dollar in London, Seoul, and Beijing, the price of U.S dollar would be the different. Thus, if people buy U.S dollar in London relatively cheaper than Korea and they can re-sell the U.S dollar in Korea, they can make profits from the difference price between the two countries. Many people use statistical arbitrage, and that is people perform arbitrage by using a statistic on the certain events. People estimate the expected value of certain events, and then when the events are underestimated they invest into those events. For example, people flip a coin and the probability of having tail and head are 50% and 50%. If 70 people bet $100 on having tail in next flip and only 30 people bet $100 on having head in next flip. However, important thing is if the 70 people win they will be get only make $42 (30 people (loser) x $100 / 70 people (winner)) of profits. If the 30 people who bet on having head in next flip win they will be get $233 (70 people (loser) x $1000 / 30 people (winner)) of profits. Thus, if people know how to get expected value from there, they bet on having head in the next flip. Arbitrage is a one of the safe ways to invest, so it is used by hedge funds. However, arbitrage also has a weak point that is if an investor forecasts future poorly, the investor will lose on his or her investment. For example, company A tries to take over company B, and the stock price of company B is $30. Let’s assume if company A takes over company B successfully, investors expect the stock price of B will go up to $40. If the Company B’s early trades of stocks are priced at $35, there is $5 difference between early trades and expect stock price. That is we call risk arbitrage. If company A takes over company B successfully, the investors would make $5 profits. Nevertheless, if the company A could not take over company B, the stock price of company B probably goes below $30, and the investors would lose on their investments. Many investors think arbitrage is considered as risk free investment, but investors should consider those unexpected event in the future.



http://www.investopedia.com/articles/trading/07/statistical-arbitrage.asp

http://en.wikipedia.org/wiki/Risk_arbitrage

http://cafe.daum.net/hedgemanagement/6d8t/2?docid=1GKJ2%7C6d8t%7C2%7C20081223163550&q=statistical%20arbitrage&srchid=CCB1GKJ2%7C6d8t%7C2%7C20081223163550

Opinion in "McDonald’s first quarter revenue drop "

The main idea of Tewodros' article is that even though McDonald's sales increase, thier profits decrease due to foreign currency flcutuation and company’s raw materials such as ingredients of burgers and salads costs go up. Tewodros suggested that McDonald should hedge with third party to exchange McDonald’s foreign currencies into close the value of current U.S dollar. In addition, by making forward contract, McDonald could buy their raw material with fixed cost in contracted period. I agree with hedging against the raw material part, but I disagree with the way Tewodros suggested to McDonald to overcome the foreign currency fluctuation.
I would suggest McDonald to use "triangle arbitrage" between different markets to make profits. For example, McDonald makes profits in German with M 100,000(mark), and McDonald could exchange M 100,000 into $(U.S) 100,000 in the past. However, McDonald would exchange M 100,000 into $(U.S) 95,000 in current period due to currency fluctuation. Tewodros said McDonald should find third party entities to hedge the exchange process, but I think in the real situation McDonald would be hard to find third party entities to exchange Mark currency into U.S dollar at close value of current U.S dollar. I suggest McDonald to make profits from “triangle arbitrage”, and this is let’s suppose M 100,000 is equal to $ 95,000 and 1,000,000 Japanese yen in London since 1,000,000 Japanese yen is equal to M 105,000 and $ 100,000 in Japan. McDonald could make $ 5000 profits using “triangle arbitrage”. In order to make profits from “triangle arbitrage”, McDonald should fully understand how the one currency affects to the other currencies.
Tewodros suggested McDonald to grow own raw material such as lettuce, tomato, pickles, and etc in the long-term. However, I suggest that before McDonald grows their own agricultural products, they should calculate Net Present Vale and Risk Adjusted Return on Capital to whether they would make profits from that project.

http://kasmo83.blogspot.com/2009/03/mcdonalds-first-quarter-revenue-drop.html

http://www.gocurrency.com/import-risk.htm