When you look through the option chains in your brokerage application software, you might notice the individual options have ticker symbols just like stocks do. The symbol identifies the underlying stock, the expiration month, the strike price and the type of option. There are a series of letters which identify the option. They appear in the order of root, expiration month and strike price. The letter that is used for expiration month is also used to identify whether the option is a call or a put. The 1st letter or group of letters (up to 3) identify the underlying stock and is called the root (not necessary be the same as stock symbol). The next-to-last letter in an option symbol indicates the expiration month. If option is a call, the first half of the alphabet is used. If the option is a put, the second half of the alphabet is used.

The last letter of the option symbol indicates the strike price. Here are codes to decipher the strike price.

Have you heard about CAN SLIM method? If yes, you probably had read the book ‘How to Make Money in Stocks’ (one of the books in my recommended list). If not, here are some general investment rules that I learned from Investor’s Business Daily (IBD)

• Consider buying stocks with each of the last three years’ earning up 25%, return on equity of 17% and recently earnings and sales accelerating
• Recently quarterly earnings and sales should be up 25% or more
• Avoid buying cheap stocks
• Learn how to use charts to see buying points
• Cut every loss when it’s 8% below your cost (I believe different people have different risk level; some may set this figure higher, some lower). Make no exceptions so you can always avoid huge losses. Never average down in price
• Follow selling rules on when to sell and take profit on the way up
• Buy when market indexes are in an uptrend. Reduce investments and raise cash when general market indexes show five or more days of volume distribution
• Pick companies with management ownership of stock
• Select stocks with increasing institutional sponsorship in recent quarters
• Current quarterly after-tax profit margins should be improving, near their peak and among the best in the stock’s industry
• Don’t buy because of dividends or P-E ratios
• Pick companies with a superior new product or service
• Don’t try to bottom guess or buy on the way down. Never argue with the market. Forget your pride and ego
• Find out if the market currently favors big-cap or small-cap stocks
• Do a post-analysis of all your buys and sells. (I suggest you keep a trading report for all your trades). Post on charts where you bought and sold each stock. Evaluate and develop rules to correct your major past mistakes

If you have traded in US market before, you might came across different type of orders, type of fills and type of validity. What is stop loss, stop limit or GTC means?

Type of Orders
Market Order
This is an order to buy or sell a stock immediately at the best available current market price. This is considered as ‘unrestricted order’. Never use this order unless you want your order to get fill immediately, always exercise your right to bargain for the best price.

Limit Order
An order you placed with a brokerage to buy or sell a stock at a price equal to the specified price or better. Limit order guarantee a price (or better price than specified) but do not guarantee an execution.

Stop Order
This is a contingency order to buy or sell a stock when its price reaches a particular level. When the price reaches that level specified in the stop order, the stop order becomes a market order and is executed at the best possible price. Also referred to as a ‘Stop-Loss Order’

Stop Limit Order
A stop limit order combines the features of stop order with those of a limit order (you have to specify stop price and limit price). A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better.

Example: Assume company XYZ share is trading at $60 and you want to buy the stock once it begins to show uptrend signal. You put in a stop-limit order to buy with stop price at $65 and the limit price at $66. If the price of company XYZ moves above $65 stop price, the order is activated and turns into a limit order. As long as the order can be filled below $66 (the limit price), then it will be filled. If stock gaps above $66, the order will not be filled.

Type of fills
ANY
Any fill type allows your order to be filled in different quantities
Example:
You placed an order of buy 3,000 XYZ shares at $1.28 LIMIT. Your order may be filled in the following to complete your order:
1000 at $1.28
500 at $1.28
400 at $1.28
200 at $1.28
900 at $1.28
With ANY fill, orders may be partially executed if there is not enough liquidity or if the market moves away from your limit price.

AON (All or None)
AON fill type allows your order to be filled in entirely or nothing at all. It indicates that you do not wish to complete a portion of your trade if all the shares are not available. ANY file type takes priority over AON file type.

Kind of validity
DAY
Day order is only valid for the trading day the order is placed. It will automatically lapse when not executed by the end of the trading day.

GTC (Good-Until-Canceled)
GTC order is active until you decide to cancel it or the trade is executed. The order is valid as long as it has not yet been executed and will be automatically sent to the exchange the next trading when the market opens.

If you are familiar with value investing and fundamental analysis, you might want to check out this website which provides you the free tools that can assist you in your personal account management. These free tools include balance sheet template, income statement template, stock intrinsic value calculator, stock price projection calculator and internet profit potential formula.

I recommend you to read this book Secrets of Millionaire Investors by Adam Khoo & Conrad Alvin Lim. This book covers the steps on how to carry out value investing (Warren Buffet’s Secret Recipe for wealth) and momentum investing. Unlike other investment books, this one is easy to read and understand. Hope you will enjoy it like me!

Economic Indicators

Today is 13th May, coincidently today is also the monthly Retail Sales and CPI figures release date for USA. I found out as I was reading this book 'Options made Easy' by Guy Cohen. One of the points mentioned in the book for basic Fundamental Analysis (FA) is key economic indicators. I listed the indicators here for reference purposes.

CPI: Consumer Price Index
The CPI is the most widely cited inflation indicator and is used as a measure of the price levels of goods and services purchased by consumers. The CPI is seen as the best measure of the underlying inflation rate in the USA economy. The figures are released at 8:30am EST around the thirteenth of every month, reporting with respect to the prior month.

The Employment Report
The Employment Report is made up of two separate surveys, the Household Survey (60,000 households) and the Establishment Survey (375,000 businesses); this report produces the unemployment rate figures. The Employment Report figures are release at 8:30am EST on the first Friday of every month, reporting with respect to the prior month.

Gross Domestic Product (GDP)
The broad components of GDP are consumption, investment, net exports, government acquisitions, and inventories. GDP figures are released at 8:30am EST on the third or fourth week of the first month of the new quarter with respect to the prior quarter’s activity. Subsequent revisions are made in the second and third months of the quarter.

Housing Starts and Building Permits
Housing Starts are a measure of the number of residential units on which construction has begun each month. A start is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Housing Starts are led by Building Permits (which allow the excavations to subsequently happen), but permits are not required is all regions of the USA; therefore, the Starts figure is more telling. The Housing Starts figures are notoriously volatile, being affected as they are by extreme weather and natural disasters. The figures are released at 8:30am EST around the sixteenth of the month, with respect to the previous month’s data.

National Association of Purchasing Managers (NAPM)
The NAPM report is a national survey of purchasing managers and is calculated by way of a weighted average of items including new orders, production, employment, inventories, delivery times, prices, and export and import orders. NAPM only covers the manufacturing sector, but is seen as a leading indicator for other economic releases. The figures are released at 10am EST on the first business day of each month with respect to the prior month’s data.

Producer Price Index (PPI)
The PPI is another measure of inflation. It measures the prices of goods at the wholesale level. The figures are released at 8:30 EST around the eleventh of each month, with respect to the prior month’s data.

Retail Sales
This is a measure of the total receipts of retail stores. Often analyzed excluding figures for automobiles, food and gasoline, it’s the changes from month to month here that we’re looking for to identify shifts in consumer demand. Retail sales figures exclude spending on services, which nowadays makes up over half of total consumption. Total personal consumption figures are normally available around two weeks after the Retail Sales figures are published. Retail Sales figures are published at 8:30am EST around the thirteenth of each month.

The Power of Compounding

Let me ask you a question, if you won a cash prize and you are given the following payment options:
a. Received $10,000 now
b. Receive $10,000 in three years
Which option will you choose? The answer will be ‘a’ if you understand the time value of money. Receive $10,000 today allow you to increase the value of the money by investing and gaining interest out of it. As for option b, you may lose the opportunity to create the increase because you are only been promised the future value of $10,000. This is known as Time Value.

Future Value (FV)
If you choose option ‘a’ and decided to invest the money at annual rate of 5%, your return value at the end of one year will be $10,500. How to calculate this future value?
The equation to calculate the return is
= ($10,000 * 5%) + $10,000 = $10,500

Rearrange this equation and you get
= $10,000 (1 + 5%) = $10,500

Future value = Present value (or original value) * (1 + interest rate)

If you continue to leave your money in that investment for another year, your return value at the end of two years will be $11,025. To calculate this,
Future value = $10,500 * (1+0.05) = $11,025
This is the same as rewriting equation as
$10,000 * (1+0.05) * (1+0.05) = $11,025

Now, think back to your math class, you can rewrite multiplication of similar terms by adding their exponents
Future value = $10,000 * (1+0.05)(1+1) = $10,000 * (1+0.05)(2)

You can continue to calculate future value for 3years, 5years etc using the following future value equation.

Future value = Present value * (1 + interest rate per period)^(Number of periods)

Similarly, you can use Microsoft Office Excel equation to perform you calculation. Open a new excel document, click on ‘insert function’ (fx) button and look for ‘FV’ under financial category.

FV(rate,nper,pmt,pv,type) – returns the future value of an investment based on periodic, constant payments and a constant interest rate. The equation is very self explainable.
• Rate is the interest rate per period
• Nper is the total number of payment periods in the investment
• Pmt is payment made each period; it cannot change over the life of the investment
• Pv is the present value, or the lump-sum amount that a series of future payments is worth now, If omitted, Pv = 0
• Type is a value representing the timing of payment: payment at the beginning of the period = 1; payment at the end of the period = 0 or omitted

For this above example, to calculate future value for 2 years, you will enter value as FV(0.05,2,0,-10000,0); and you will get the similar answer of $11,025. Note that you have to set -10000 which represent the outflow of your money.

Compound Interest
Take another step future, imagine you have opportunity to invest your money at same interest rate of 5% for longer period of time (e.g. 10, 20, 30 or 60 years, etc). How much is your return will be? What is it like if you can invest with higher interest rates (e.g.10%, 15% or 20%)? Look at the following table

Look at the return for 20% interest rate. This is what the power of compounding interest can do for you if you choose to use it smartly by selecting the appropriate interest rate versus number of periods. Someone had said that the power of compounding was deemed the eighth wonder of the word.

Rule of 72

Have you heard of ‘Rule of 72’? You might come across this rule in article or book on investment. What is ‘Rule of 72’?

Definition from Wikipedia

In finance, the rule of 72, the rule of 71, the rule of 70 and the rule of 69.3 are methods for estimating an investment’s doubling time or halving time. These rules apply to exponential growth and decay respectively, and are therefore used for compound interest as opposed to simple interest calculations.

Using the rule to estimate compounding periods
To estimate the number of periods required to double an original investment, divide the most convenient “rule-quantity” by the expected growth rate, expressed as a percentage.
• For instance, if you were to invest $100 with compounding interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $200; an exact calculation gives 8.0432 years

Similarly, to determine the time it takes for the value of money to half at a given rate, divide the rule quantity by that rate
• To determine the time for money’s buying power to halve, financiers simply divide the rule-quantity by the inflation rate. Thus at 3.5% inflation using the rule of 70, it should take approximately 70/3.5 = 20 years for the value of a unit of currency to halve
• To estimate the impact of additional fees on financial policies (eg. Mutual fund fees and expenses, loading and expense charges on variable universal life insurance investment portfolios), divide 72 by the fee. For example, if the Universal Life policy charges a 3% fee over and above the cost of the underlying investment fund, then the total account value will be cut to ½ in 72/3 = 24 years, and then to just ¼ the value in 48 years, compare to holding the exact same investment outside the policy

Choice of rule
The value 72 is a convenient choice of numerator, since it has many small divisors: 1, 2, 3, 4, 5, 6, 8, 9, and 12. However, depending on the rate and compounding period in question, other values will provide a more appropriate choice.

Typical rates / annual compounding
The rule of 72 provides a good approximation for annual compounding, and for compounding at typical rates (from 6% to 10%). The approximations are less accurate at higher interest rates.

Low rates / daily compounding
For continuous compounding, 69.3 gives accurate results for any rate (this is because In(2) is about 69.3%; see derivation below). Since daily compounding is close enough to continuous compounding, for most purposes 69.3 – or 70 – is used in preference to 72 here. For lower rates than those above, 69.3 would also be more accurate than 72.
Adjustments for higher rates
For higher rates, a bigger numerator would be better (e.g. for 20%, using 76 to get 3.8 years would be only about 0.002 off, where using 72 to get 3.6 would be about 0.2 off). This because, as above, the rule of 72 is only approximation that is accurate for interest rates from 6% to 10%. Outside that range the error will vary from 2.4% to -14%. For every three percentage points away from 8% the value 72 could be adjusted by 1.

A similar accuracy adjustment for the rule of 69.3 – used for high rates with daily compounding – is as follows:

E-M rule
The Eckart-McHale second-order rule, the E-M rule, gives a multiplicative correction to the Rule of 69.3 or 70 (but not 72). The E-M Rule’s main advantage is that it provides the best results over the widest range of interest rates. Using the E-M correction to the rule of 69.3, for example, makes the Rule of 69.3 very accurate for rates from 0%-20% even though the Rule of 69.3 is normally only accurate at the lowest end of interest rates, from 0% to about 5%
To compute the E-M approximation, simply multiply the Rule of 69.3 (or 70) result by 200/(200-r) as follows:

For example, if the interest rate is 18% the Rule of 69.3 says t=3.85 years. The E-M Rule multiplies this by 200/(200-18) giving a doubling time of 4.23 years, where the actual doubling time at this rate is 4.19 years. (The E-M Rule thus gives a closer approximation than the Rule of 72.)

This table compares the three rules, using periodic compounding, and illustrates the error of the estimation over a range of typical values.

Emotional Spending

Is shopping part of your favorite pastime?

Yesterday I went for my routine facial appointment and I ended up spending more money purchasing another series of beauty products. Although I knew I’m spending within my budget, it just made me wonder how a person become a emotional spender as I came across an article today about emotional spending from Investopedia.com

Emotional Spending occurs when you buy something you don’t need and, in some cases, don’t events really want as a result of feeling stressed out, bored, under-appreciated, incompetent, unhappy, or any number of other emotions. In fact, we even spend emotionally when we’re happy, what did you buy yourself the last time you got a raise? There's nothing wrong with buying yourself nice things from time to time as long as you can afford them and your finances are in order, but if you're spending more than you'd like to on non-necessities or are struggling to find the cash to pay the bills or pay down your credit card debt, learning to recognize and curb your emotional spending can be an important tool. While avoiding emotional spending completely is probably not a realistic goal for most people, there are some steps you can take to decrease the damage it does to your wallet.

Here are 5 tips to shop smartly suggested by the article.

Tip 1: Make the Store Your Last Choice
Most people go to a store by default anytime they need something, but that’s not the only way to obtain a needed item. Ask yourself whether you can get it for free? Or can you borrow it for item that you only need it once a year?

Tip 2: Negotiate When Possible
Most of the prices in the store are fixed and it’s a waste of your time trying to negotiate but if you do see the opportunity, do consider negotiating for a lower price like asking for a discount, etc.

Tip 3: Time Your Purchase
If you wait to purchase something until you really need it, you’re likely to pay the sticker price, but with a little advanced planning, you can save a lot of money.

Tip 4: Substitute
If the item you want to buy doesn’t quite fit into your budget, think about similar but less expensive alternatives.

Tip 5: Expand Your Shopping Universe
If you normally go straight to your favorite store or the mall when you need to buy something, consider other shopping options that can save you a great deal of money like consider buying in bulk or buy during garage sales.

Oniomania
The most serious condition on overspending is called oniomania.
(Definition from Wikipedia - A medical term for shopaholic (from Greek onios = ‘for sale’, mania = insanity) more commonly referred to as shopping addiction or shopaholism, is the compulsive desire to shop.)

Options Strategies

I attended the preview of live training seminar of Options University by Ron Ianieri at AKLTG.

It is an education session for me as I learned the basic options strategies from Ron Ianieri himself.

Stock Replacement Strategy
Idea is this strategy is to trade option that mimics the stock (go for small Theta and Vega but high Delta)
• Buying a call versus buying the stock
• Do not simply buy a call if you think the stock is going up
• Do not simply buy a put if you think the stock is going down
• Learn where the ‘sweet spot’ is for optimal profitability
Where is the ‘sweet spot’? Refer to choosing option with high delta (in the ranges 80-85)
• Which month of option to choose? Suggest to look at the stock movement to determine the appropriate month

Stock Replacement (Roll up)
• Stock replacement ‘Roll up’ is a bullish strategy
• Selling your long call with a lower strike while simultaneously buying a new call with a higher strike in a one to one ratio
• This trade produces a credit which is money received
• This credit is part of your profits being locked in

Example:
Imagine you buy a call option for stock XYZ with the strike price of $160, when stock XYZ price reaches $200, you sell that call option and at the same time buy another call with strike price of $180. You now have locked in a profit of $40 (simplified intrinsic value calculation for illustration purpose). As stock XYZ continue to move up to $220, again you sell that call option and buy another new call option with strike price of $200. By doing this, you again locked in a profit of $40. Repeat this cycle as stock XYZ continue to move up (as a form roll up) for a few times.


The Greeks
Delta
Change in option price relative to change in underlying asset price (Speed)

Gamma
Change in option delta relative to change in underlying asset price (Acceleration)

Theta
Change in option price relative to change in time left to expiration (Time Decay)

Vega
Change in option price relative to the change in the asset’s volatility (Historical Volatility)

Rho
Change in option price relative to changes in the Risk Free Interest Rate (Interest Rates)

So much more to learn about options trading. One of the books that I find very useful is Options Made Easy: Your Guide to Profitable Trading (2nd Edition) by Guy Cohen (listed as my recommended reading)

Investments

Welcome to my blog! I’m very excited as this is the first posting on my newly created blog. I hope to share the knowledge that I learned on investment on this blog.

I recently read an article on Invest magazine (Apr/May 2008) on how to make a proper insurance plan. I must confess that I share the same sentiment like many people who still clueless about what they are covered for despite having bought numerous policies. Thank God I can rely on the expert to help me in finding the right protection and I believe I’m in a better situation now.

Here are some of key points from the article.

A well known classification of financial planning known as the 4Ws, is often used as a guide to achieve financial well-being. The 4Ws are:
• Wealth Protection
• Wealth Accumulation
• Wealth Preservation
• Wealth Distribution

The first step of a proper financial planning process is known as Wealth Protection or Protection Planning. This involves the concept of transferring financial risks to an insurance company through a contract.

Protection Planning can be represented as:
1. Identify Current Financial Status
2. Define Financial Needs and Aspirations
3. Evaluate and Select Strategy and Solution
4. Apply and Monitor Selected Strategy

One shouldn’t stop just after going through one cycle but should be continuous. Periodic review should be done to cater to the changes in a person’s life cycle. What is enough now may not be adequate in the future.

An Assets and Liabilities and Cash Flow Analysis should be carried out to identify your current financial status. Assets and Liabilities would deduct all liabilities including mortgages, loans, bills, etc, and deduct from the assets including property, stock, CPF savings etc. The result is the Net Worth.

Cash Flow measures the monthly/yearly spending/saving habits and shows a positive or negative result. Positive indicates there is excess income/savings while a negative points to overspending.

To help in define his/her financial needs and aspirations in Step 2 of a Proper Protection Planning, the article has listed the following main areas as the personal views of author.

Hospitalization Expenses
Protection against hospitalization expenses is the most basic coverage one should get, for both children and adults. Hospitalization expenses could cause a great outflow of financial resources which could be crippling to one’s financial health. (In the Sunday Times article “40 years of his Medisave wiped out in the savings in Mr Mohammad’s Medisave account, which took him over 40 years to build up, was used up in 3 months after his daughter was diagnosed with ovarian cancer.

Death
The main reason for getting Death coverage is to provide for one’s liabilities – dependents, debts, funeral expenses etc. The death payout would enable the dependents e.g. spouse, children and parents to continue their current lifestyle and continue their various plans like funding education.

Total Permanent Disability (TPD)
Similar to Death coverage, when the insured suffers from TPD, the payout can cover for needs of dependents and debts. However, unlike Death, TPD care can be prolong and no one knows for sure how long the insured will suffer before passing away. Additional expenses like paying for a domestic helper and miscellaneous medical apparatus are also needed. Disability Income (DI) can be used to meet the needs of such recurring expenses.

Critical Illness (CI)
CI coverage provides a payout if the life assured is diagnosed with a pre-defined illness. Similar to TPD, CI care can also be prolonged with miscellaneous expenses needed. Although a good Hospitalization and Surgical (H&S) plan will cover a big portion of the hospitalization expenses, it is important to know that not all cancer drugs are covered by the MediShield plan. Such cancer drugs can be very costly.

Disability Income (DI)
For those who rely on a source of income for living expenses, losing the ability to generate this income stream due to disability or illness would be financially disastrous. Having a DI coverage would help to protect against such a scenario and offer the insured a chance to continue his/her life plans. It also offers a source of regular income to offset the regular expenses such as employing a domestic helper if such need arise.

Personal Accident (PA)
Accidents can result in Disability, Death or Partial Dismemberment. Such coverage only extends to the above scenarios due to accidents only. Partial Dismemberment should be the main consideration for getting coverage for PA as Death and Disability coverage should not be limited to accidental causes only. The premium for PA coverage is much lower than others due to the low probability of claim.

Long Term Care (LTC)
LTC coverage means getting a monthly payout if one is disabled and is unable to perform a certain number of Activities of Daily Living (ADL). ADL includes washing, dressing, feeding, toileting, mobility and transferring. Disability coverage post age 65 would be the most useful aspect of this coverage as TPD and DI coverage normally ends at age 65.