Investing in Stocks and Options Chloe Sowers

Proof

Dividend History Growth is only half the story. Appreciation is only part of the win. It is gravy. Real value comes from dividends, 8% - 30%.

Dividend History

Stock Cons Dividends are only paid quarterly, not monthly. Company can cut dividend payments. Ex: BBEP cut dividends to pay down debt. Still a good company, just not paying out. Some funds pay monthly – however transaction costs is higher.

Options Even more income can be generated from options, 60% cash-on-cash return.

Insurance Business I'm in the insurance business. I insure other people's stocks. Warren Buffet loves insurance companies because they have a high cash-flow. He bought GEICO. Stocks are great now because everyone is scared. “Be greedy when others are scared and be scared when others are greedy” - Buffet

Put Options An option is a contract to purchase/sell 100 shares at a given price by a given time. Most options expire worthless. Use time to your advantage. Buy puts to “insure” your own stocks or if you think the market will go down. Sell puts to insure other's stocks or you think the market will go up. Selling puts is like getting paid to place a limit order. Use the strike price you wouldn't mind purchasing the stock at.

Tricks Just like paying fire/auto insurance – be that company that gets the checks. Only “insure” what you wouldn't mind owning yourself. Hard part is finding a good value to insure. Don't insure an outhouse for $1M. Be careful not to overextend yourself – AIG! Only sell options for 1-2 months out – monthly cash flow. If you are assigned the shares, then sell covered calls to continue the cash-flow, + get dividends. Always use limit prices for options. Else you'll get spanked.

Benefits Very liquid. Can sell any time. Margin accounts - Can borrow against value of stocks owned. 50% - 70% automatic secured line of credit that is not reported on your credit report at a low interest rate, 4% - 8%. High current monthly income. Leverage – 30% down for stocks on margin and 20% down for selling options. $10k could insure $50k.

Risks Company can go bankrupt. GM, Lehmann Brothers. Temptation for overextending yourself is high – AIG. Losses can be mitigated by rolling down, rolling out, rolling up, etc. If option will expire in the money, you can re-purchase the contract at a smaller loss than if it is assigned.

Stock Selection Only buy stocks of profitable companies with positive earnings.

Stock Selection Must provide cash-flow, i.e. dividends.

Stock Selection Must have consistent dividends.

Stock Selection Plus if insiders are buying. Use a stock screener to find good investments based on fundamental values.

Option Selection Always sell out-of-money options. Find options with a high bid / strike price. VNQ Jul 32 PUT = 1.50 / 32 * 12 = 56.25%

Option Selling Cash-secured put is covered by money you have. Naked put is leveraged with money you don't have! Depends on brokerage. VNQ Jul-09 $32 Put, last price 1.60, and $10k cash: You can sell 3 cash-secured puts: $10,000 / (32 * 100) = Premium received = 3 x 100 x 1.60 = $480. ROI = 60%. You can sell 15 naked puts: $10,000 /.20 / 32 / 100 = Premium received = 15 x 100 x 1.60 = $2,400! ROI = 300%! 15 naked puts = $32 x 1500 = $48,000 at risk! If assigned, must come up with $48k - $10k = $38,000 fast! As in wire transfer, no checks!

Options Selling

Brokerages Sharebuilder – Buy stocks regularly and automatically with very small fee. Like ING savings. Owned by ING. Etrade – Lots of features and tools TD Ameritrade Charles Schwabb Selling puts requires Options Level 3 account – they want to see experience and disposable income.

Questions / Demonstration Pick any stock and I'll show why it sucks.