introduction to derivatives · you own 100 shares of harley-davidson stock worth $48 a share on...
TRANSCRIPT
David Scolamiero
Certified Public Accountant
http://www.cpavirginiabeach.net
Partners
HD Vest Investment Services, Inc.
https://www.hdvest.com/story/about-hd-vest
8 Wealth Management Issues
Investment Managment
Cash Flow and Debt Management
Family Risk Management
Retirement Planning
Education Planning
Legacy and Estate Planning
Business Planning
Special Situation Planning
8 Wealth Management Issues
Take more investment risk?
Save more?
Retire Later?
Reduce Estate Size?
Reduce Retirement Spending?
8 Wealth Management Issues
Ideal
Acceptable
8 Wealth Management Issues
What age would you like to retire?
Do you see yourself working in retirement?
What is your desired after tax income in
retirement?
Do you have a current will/trust?
Do you have children/grandchildren to
educate
8 Wealth Management Issues
Do you have life insurance?
Is it sufficient?
Are you comfortable with the risk in your
portfolio?
Are you satisfied with your progress?
Large capital loss carryforward?
State income tax credits?
Obstacles
Taxes
Inflation
Outliving your
Money
Taxes
Inflation
Considering taxes and inflation?
Outliving you money
Which do you fear more?
Death?
Running out of money?
4% RULE
72 rule
Growth of $1
What asset class?
What sector?
Why do investors lose in the market?
Need for cash requires asset
liquidation.
Chasing the trend – buying the top
of the market and then selling in
panic at the bottom.
Speculation – Investment becomes
worthless.
Are you generating Monthly Income From Stock Investments?
How to Generate Monthly Returns From Stock Investments?
You own 100 shares of Harley-Davidson stock worth $48 a
share on July 27 2017. You sell someone the right to buy 100
shares at $50 from you anytime in the next 50 days until
September 15, 2017. For that right, you charge a fee of $107.
Value goes up
The buyer exercises his right to buy the shares for $50. You
keep the $107 premium and realize gain of $136 on sale of
the stock for a 5.1% (36.75% annualized) rate of return and
you'll have to find another investment to buy in order to
continue the strategy.
Value remains the same
Since the buyer won't be willing to pay $50 per share when
the market value is $48 you have made 2.2% over 50 days
(16.2% annualized), and you can even sell the right to buy
100 shares again, presumably for another $107!
Value falls
The $107 premium you received helps to offset the loss. The
buyer walks away when the right expires, and you're also
free to sell another right.
Scenario
The Options Market
Basic Strategies
Calls Puts
Buy
(Holder)
To benefit from a price
increase
To determine the future
acquisition price
To hedge a short sale
To benefit from a price
decrease
To determine the future selling
price
To hedge a long position
Sell
(Writer)
To benefit from a price
decrease
To generate additional income
To benefit from a price
increase
To generate additional income
Covered Calls Pitfalls
Covered-call writing is really quite safe and
simple. But many people think this is a
risky strategy... because most people do it
wrong.
They buy high-risk stocks because the
option premiums are expensive and
generate the largest current return. But then,
the stocks collapse, and investors are stuck
with losses.
Covered Calls Pitfalls
The other pitfall to covered-call writing is that
you sell off your potential for large gains. If you
like the prospects of a stock and believe it could
easily double or triple, then don't sell options
against it. You'd cap your profit potential and
guarantee that you'll be out of the trade before it
goes higher.
Take our example. We are obligated to sell the
100 shares for $50. But if the stock jumps to $55
we will not realize the increased price.
Covered Calls Pitfalls
The secret here is to focus on
buying low-risk value stocks and
then selling the calls.
For my clients, I keep the risk very
low by focusing on conservative,
value-oriented stocks.
Widow and Orphan Stocks
Performance
What annual rate of return would you be
completely comfortable with?