Covered Calls – Trading Covered Calls on LEAPs — Part 1

Covered calls are a great strategy for reducing account volatility and earning income against your long stock positions.?And?long-term equity anticipation securities, or LEAPs, are a way to “lease” stocks for less money than it costs to acquire the stock outright.

Is there a way to combine the benefits of these two investing strategies to get the best of both worlds? Yes there is — by selling covered calls against a long LEAP option position.

This series of articles will focus?on covered calls on LEAPs, aka diagonal spreads strategy. If you have a basic understanding of covered calls and LEAPs, this should be something you will be interested in.

In this first part of the series, we will start the discussion about covered calls on LEAPs by looking at the risk profile of the trade compared to its potential benefits. Covered calls on LEAPs have distinct advantages, but understanding the risks is important as well.

Here are a few of the key concepts to keep in mind when trading covered calls on a LEAPs:

1. You are short a call without an underlying stock position. This means that if you are “called out,” you will find yourself short the stock.

2. A LEAP option has time value that is melting each day as you near expiration.

3. Option trades are often at a higher commission rate, and this will increase your trading costs.

The benefits of trading a covered calls on LEAPs are significant, and I?will outline a few of those in the list below:

1. The LEAP contract is cheaper than the underlying stock, and that increases your leverage and potential return on investment (ROI).

2. Because the LEAP contract is cheaper, you have less risk in absolute dollar terms than if you were holding the underlying stock.

3. This is a strategy that can be used with index options as well as stocks and ETFs.

4. Using it on index options with European-style expiration eliminates the possibility of early ex! ercise o f the short call.

Balance the risks and benefits to decide whether this strategy works for you and to help you decide the best way to implement it within your portfolio.

In?this series of articles, I will use a case study to illustrate the concepts. Repeat the steps in the case study on an option of your choice in a paper trade. Repeating the method yourself will help you understand the strategy and remember how it works.

Go on to Part 2.

This article originally appeared on the Learning Markets Web site.

Introducing the 24/7 Wall St. Wire

Starbucks (SBUX) seems hell bent on cutting its way to profitability. It may work, but it is also possible that the economy has gone through such an upheaval that the coffee chain no longer has much of a place in the fast food restaurant business.

According to The Wall Street Journal, ?”After years of broadening its customer base and making forays into entertainment, Starbucks has made its top priority retaining its existing patrons.” But, what if those “existing patrons” have left the building?

Most of the moves that Starbucks has made involved firing people and closing stores. The firm does offer cheaper coffee and has a breakfast menu that is less expensive than it used to be, but the chain may not be able to escape the image that it spent years building. Starbucks is perceived as a place which serves the best $4 cup of coffee in the world and charges $3 for donuts. Customers who have turned away from that kind of spending may not have been into a Starbucks for a year. Convincing them that Starbucks coffee?is cheaper than the local deli may be tough.

Starbucks has certainly become more focused on its original business of selling coffee. It does not push?marketing CDs as hard as it used to. The $500 latte and espresso machines that the stores used to try to sell customers have been moved into the back room or are used as paper weights for the copies of The New York Times that the chain still?offers in most stores, but those changes are not likely to bring back enough consumers during a recession to get Starbucks revenue growing as fast as it did for the last decade.

Starbucks may put on a good show about how much it has changed its plans to increase store traffic. But, the recession is deepening and coffee that costs more than $1 a cup is a luxury. The near-term future for the company is about cost cutting and nothing more.

Douglas A. McIntyre

Diamond Crushed on Prosecutor Report

Diamond Foods (DMND) fell 9.2% after hours as the Wall Street Journal reportedthat prosecutors have opened an investigation into payments the company made to walnut growers. The probe could result in criminal charges, the Journal notes, and could undo the company’s deal to buy Pringles from Procter & Gamble (PG).

The SEC has already been looking into the payments, and will coordinate with the U.S. Attorney’s office in San Francisco. The company is also conducting an internal inquiry.

Invest Like a Billionaire: Diamond Bling

photo: Swamibu

This Sunday, the Red Carpet at the 83rd Annual Academy Awards (alright, the Oscars) will drip with diamonds from the likes of Fred Leighton and Neil Lane. Someone may even top the 7,645-diamond, nearly 1,400-carat L��Wren Scott necklace Nicole Kidman wore to the star-studded event three years ago. Diamonds are truly a girl��s best friend.

Diamonds can also be a good bet for investors, especially in a market fraught with geopolitical turmoil. Diamonds are considered by many to be a store of value similar to gold; as global demand for diamonds increases, prices will pick up. The IDEX Diamond Price Index has increased 10% over the past year, against reported shortages. According the latest IDEX market report, some diamond dealers are saying they are seeing the highest demands in a decade due to the lack of goods.

Though there is no diamond fund or ETF yet, word on the street is that diamond giant De Beers, owned by billionaire Nicky Oppenheimer and family, is considering offering ownership of its diamonds without physically taking receipt, similar to other physically-backed commodity ETFs. In the meantime, there are several opportunities to take part in the diamond dash.

At the Counter

To be clear, a diamond purchased at the store (be it Tiffany’s or your local independent jeweler) is far from an investment. Diamonds are meant to grace your fingers, wrists or neck, but don’t expect to recoup their value by reselling one you bought at the retail level. (They’ve been marked up one too many times by the time they reach the end customer.)

That said, there is opportunity for those looking to invest in diamond retailers themselves.

De Beers, which has been in the Oppenheimer family for over 80 years and controls about half of the world��s rough diamond supply, is looking for growth at the retail level where customer demand has been spiking, especially in emerging markets like India and China.

��Broad-based diamond and lux! ury sale s [are] strong domestically and abroad as consumers, particularly if they are well-employed, breathed a sigh of relief and increased spending, often on small luxuries,�� says Morningstar analyst Paul Swinand. He adds that this pent-up demand, along with an uptick in engagements, makes both high-end and low-end retailers attractive investment opportunities. (Note: Research from the University of Virginia’s National Marriage Project suggests that marriages decline in the mid-single digits during recessions, but rebound when the uncertainty resides.)

Well-known brand retailer?Tiffany��s (TIF), is one of the publicly-traded diamond retailers (De Beers is private) benefiting from the boom. The company��s trademark little blue box enables it to charge a premium for his offerings; it also promotes its unique jewelry collections by famous designers, such as the Frank Gehry line. Also new and doing well: its collection of exclusive yellow diamonds. The stock is up 43% over the past year.

Swinand adds that on the other side of the price spectrum, Blue Nile (NILE), the online diamond retailer, is also benefiting from the engagement surge. The company is able to provide lower prices because of its diamond-sourcing model: it sells suppliers’ inventory without having to buy it first like traditional retailers. Blue Nile then passes on some of those savings to consumers.

Mining Diamonds

Jewelry is only one of the end applications for diamonds. Diamonds are also increasingly being used in industry. They have the hardness and conductivity to polish and cut any material; they are used in saws, abrasives, construction, computer chip production, lasers and surgical equipment �C basically every industry that touches your life. Indeed, the majority of diamonds mined today are used for industrial purposes.

RBS Capital Markets analyst Des Kilalea says that the diamond mining world is small: four large producers account for about 90% of ! the worl d��s rough diamond production: privately-owned De Beers, Russian state diamond monopoly Alrosa, Rio Tinto (RIO)?and BHP Billiton (BHP). Though the diamond mining industry is about one fifth the value of the gold mining industry, Kilalea says it is attractive because it is widely profitable, with over 80% net margins. In addition, existing mines are getting old and new supply takes time to ramp up, so shortages may drive rough diamond prices up.

Rio Tinto has interests in three diamond mines; it also has a relatively stable cash flow and lower operating risk than many of its mining peers, according to Morningstar, which expects the company to grow. Over the past year the stock price increased 35%. The other advantage: because Rio Tinto mines iron ore as well as other metals, the company is less susceptible to market imbalances than single-commodity producers.

The same is true for BHP Billiton, the world’s largest publicly traded mining conglomerate. With its proximity to China, the company is well positioned for future expansion, according to Morningstar. The company��s stock price has risen 25% over the past year. Even India��s mining billionaire Anil Agarwal has stated he plans to spend $9.6 billion to replicate the strategy of BHP Billiton for his own portfolio.

The End Game

To be sure, unless you have a sizable portfolio and feel comfortable investing in individual stocks, you may simply consider investing in a proxy such as sector specific iShares S&P Global Materials (MXI), which focuses on large global materials firms; 58% of the fund is comprised of metals and mining companies including Rio Tinto and BHP Billiton. However, because this?exchange-traded fund?is a concentrated bet on a very narrow segment of the market, investors should treat it as a tactical investment, suitable only ��as a complementary satellite holding in a diversified portfolio,�� writes Morningstar��s Robert Goldsborough in a recent report.

As always, diversification should remain a key part of your investment strategy. According to Morningstar, a 4%-10% total weighting for all direct commodities exposure is sufficient, any diamond exposure would be a subset of this. Many individual investors may be better off dedicating a smaller share to that �C or any other �� industry. Be sure to consult with your financial planner or adviser (if you have one) before making any radical portfolio moves.

What Happens When I Close a Credit Card?

Last Friday is affectionately known as Black Friday, and and today is Cyber Monday. ?These colorful monikers are used to describe two of the heaviest shopping days of the year, both of which kick off the holiday shopping season.? This isn��t a secret and the retailers see you coming.

The National Retail Association will release the official results of Black Friday shopping on November 28^th,?but we already know that the numbers are going to be massive, because they always are.? In fact, the billions that will be spent from Black Friday until the after Christmas sales will likely outpace what we��ve spent at retailers in the preceding 47 weeks.

So, why am I telling you all of this?? I��m telling you because many of you have, or will open, new retail store credit cards or general use credit cards during the holiday shopping season because their offers are very enticing this year.? Retail card issuers will offer between 10 and 20 percent off daily purchases, and some of the general-use card issuers are offering $100-$200 cash back bonuses if you charge more than $500 over the next three months.

Because you��re likely to spend more than normal, you��re more likely to consider at least one of these offers. ?While many of you will permanently add the card to your wallet��s inventory, some of you will use the initial discount offer and then close the credit card after the holiday season.? For those of you who��ve followed my Mint blog,?you know that closing a credit card can cause problems for your credit scores.? So, what gives?? Is it a good idea or not to close a credit card?

The Good News

The good news about closing credit cards is that you eliminate the potential for fraudulent use, which shouldn��t be much of a concern to you since the Fair Credit Billing Act caps your liability to only $50.? There��s also no way you can use that card to get yourself into excessive (or even modest) credit card debt, and that��s not! a bad d eal either.? Although, I��d argue that getting into credit card debt is a choice, not a requirement.

Generally, it��s ok to leave your credit cards open and use them all from time to time just to prevent the issuer from closing them because of inactivity.? Having unused credit limits is actually very good for your credit scores, even if you never use the card. ?Of course, you only have unused credit limit if your cards are open.

The Bad News, and More Good News

The bad news when closing a card is made up of one big deal and one myth.? When you close a credit card you lose to access to the credit line, which can lower your credit scores.? The amount it can lower your scores is going to depend on how much of a line you just lost AND how much credit card debt you carry on other credit cards.? If you have no debt, then the closure might be meaningless.? If you carry a lot of debt, then the closure will likely be significant.

If you��ve ever explored the downside to closing a credit card on the Internet, then you��ve inevitably seen someone talk about how you should close newer cards and leave the older ones open.? This is the myth and it suggests that closing older cards can make your credit file look younger, which lowers your credit scores.? Credit scoring systems take the average age of your accounts when calculating your scores.

The problem, and what makes this one a myth, is that the average age of your credit accounts considers both open and closed accounts, including credit cards of all types.? According to Craig Watts, a FICO spokesperson, ��When assessing length of credit history, the FICO score considers the origination date on all accounts on the credit report,?open and closed.��

This is great news for consumers who want to close down unused or unwanted credit card accounts.? Now they can choose which ones to close based on how expensive the rate is or how high the annual fee, and not based on whether it��ll hurt the average age of your credit! report.

I��d strongly suggest when you��re choosing which cards to close that you consider closing retail store cards instead of general-use cards like Visas, MasterCards and Discovers.? The reason is the limits on retail cards are generally very low, at least when they��re initially issued, compared to the limits on your general use cards.? This will limit the damage you��re going to cause to your credit scores because you��re probably not closing credit cards with thousands of dollars of credit limits.

Happy shopping!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.? He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

 

 

Earning A Living From Home: Why It Has Gained Acceptance

In the past, people typically desired to work from home for personal reasons, such as spending more time with the family, improved quality of life, and enjoying more leisure time. There are numerous arguments why working at home, at least some of the time, is so attractive to people. But in the current economic climate, people are seeking to earn a living from home because of financial reasons, as a means to survival because they are unemployed.

Starting a small business might be one way to make some money from home. Another is to look around and see if there are any services you could provide that might be needed and you could get paid for. There are many work from home jobs if you put your mind to finding them. Just because you are at home doesn’t mean you can’t start some money-making enterprise. Remember, Bill Gates started Microsoft out of his garage.

For example, a stay-at-home mom could establish a daycare business. They are already taking care of their children, so it might be easy to make some money by watching a few more kids. If you are a skilled cook, you could try baking or cooking to make some additional money. If you have a computer at home, you could try doing freelance writing. As you can see, if you can find a way to effectively use your skills, you can earn a profit from the comfort of your home.

The Internet has created an entirely new way for home businesses to thrive. The possibilities are endless as to what you can do to earn money on the web. In addition, the Internet facilitates communication with customers and clients, saving time and money on reduced travel and enabling you to spend more time in the office. It is now entirely possible to conduct seminars and business meetings on the web!

People who have work from home jobs might have the opportunity to take a home office deduction on their taxes. Many people do and can legitimately make a deduction for a home office but a certain number try to get that deduction when they are not really en! titled t o it. This has led the IRS to clamp down on the “home office” deduction so it is wise to claim it with caution.

Please take a look at my site Home Jobs to learn more.

Medco Health Solutions Inc. posted a Year Record Price - NYSE:MHS

Medco Health Solutions Inc. (NYSE:MHS) achieved its new 52 week high price of $66.38 where it was opened at $65.87 UP 8.05 points or +14.43% by closing at $63.83. MHS transacted shares during the day were over 70.98 million shares however it has an average volume of 3.24 million shares.

MHS has a market capitalization $25.52 billion and an enterprise value at $27.16 billion. Trailing twelve months price to sales ratio of the stock was 0.33 while price to book ratio in most recent quarter was 6.20. In profitability ratios, net profit margin in past twelve months appeared at 2.16% whereas operating profit margin for the same period at 3.80%.

The company made a return on asset of 9.66% in past twelve months and return on equity of 31.55% for similar period. In the period of trailing 12 months it generated revenue amounted to $66.68 billion gaining $155.99 revenue per share. Its year over year, quarterly growth of revenue was 4.30% holding 3.90% quarterly earnings growth.

According to preceding quarter balance sheet results, the company had $171.10 million cash in hand making cash per share at 0.43. The total of $5.03 billion debt was there putting a total debt to equity ratio 139.78. Moreover its current ratio according to same quarter results was 0.91 and book value per share was 9.00.

Looking at the trading information, the stock price history displayed that its S&P500 52 Week Change illustrated 22.87% where the stock price exhibited up beat from its 50 day moving average with $56.08 and remained above from its 200 Day Moving Average with $59.44.

MHS holds 399.80 million outstanding shares with 397.29 million floating shares where insider possessed 0.09% and institutions kept 76.60%.

Massive Merger Creates World's "#1 Mining Predator"

Commodities trader Glencore (LON: GLEN) and mining company Xstrata (LON: XTA) are working toward a merger, which would create the world's "number one mining predator".

The companies would make a pretty neat match—their merge would put them in the global lead in exporting coal and producing zinc, as well as close to the top in copper mining.

Analysts expect the merger to be worth roughly $80 billion, though neither company has released specifics on the deal.

But officials have expressed positive outlooks. Glencore CEO Ivan Glasenberg told The Telegraph:

“We’ve always had the belief these two companies should be together.”

And both company heads seem to be on good terms. Many expect Xstrata CEO Mick Davis to take over, though others believe he’d only be in charge for a short time before turning the merged company over to Glasenberg.

Currently, Glencore owns a 34% stake in Xstrata. Once combined, analysts expect the new company would be 57% owned by Glencore shareholders.

And while Glencore will hold the majority shares, the assets will come from Xstrata. Analysts believe 64% of the merged companies’ assets will be Xstrata’s.

The new company would have 30% of its efforts in copper production. 28% would be coal, 14% zinc, and 2% oil.  28% of the company would be the trading sector, coming from Glencore.

There has also been speculation that the merger would lead to an investment in iron ore. 

The iron ore sector is currently dominated by Vale, Rio Tinto, and BHP Billiton, but Xstrata has expressed interest in entering the field, and the merger might give it the power to do so.

The merger announcement had a positive effect on both companies. On Friday, Glencore was up 2.82% to $474.71. Xstrata jumped to $1,280.