Why not buy shares in a very large integrated oil company that pays a good dividend and sell a call option against these shares to generate extra income. A call option gives someone the right (not the obligation) to buy your shares from you at a certain price within a certain time limit.

For example, let’s say you buy 100 shares of Exxon Mobile Corp. (symbol XOM) at today’s price (Apr. 12, 2010) for $6,871.00. You sell a call option for someone to buy your 100 shares (one call option =100 shares) from you between now and the third Friday in October for $7,000. For this you will receive $274.00 (today’s closing price). This $274.00 is yours to keep no matter what.

Assuming prices remain constant (which they will not), what is your annual rate-of-return? You earned $274.00 in six months or $548.00 on an annual basis. Divide $548.00 by the cost of your 100 shares of XOM ($6,871) and you get an annual return of 8.0%. In addition, you earn a 2.40% annual dividend return on your 100 XOM shares. This gives you a total annual return of 10.4%. Not bad, but there are risks.

RISKS: There is no such thing as a riskless investment. If your 100 shares stays at or north of $6,871, you will make your 10.4% return. Of course, if it should shoot up to $90/share, you could have made more by just owning the shares and not selling a call option. But, this is a hedging investment strategy.

The real risk: Oil is a commodity and it can and most often is very volatile in price swings. If the price of oil should plummet, so will the price of XOM stock. You will then incur a real loss. The premium you collected, $274.00, will give you some downside protection but not enough in a highly volatile market.

FINAL NOTE:

You should only employ this investment strategy if you feel it is suitable for your investment objectives

. In the calculations above, I omitted commission costs. If you wish to employ this strategy, do not use a full-service brokerage house. Their commissions will decimate your rate-of-return. You should use a discount broker and do it online.

How to Protect Yourself From Rising Fuel Costs is a post from: Business Speaker

The way to boost your return is by selling a call option against your position.  The buyer of the call option (each call option represents 100 shares) has the right (not the obligation) to purchase your 100 shares of TLT at a certain price (strike price) within a certain time limit.  For that right the call buyer will pay you cash (the premium) directly into your account.  This is yours to keep no matter what.

Let’s go through an example.  Recently, TLT closed at $89.90 per share or $8,990 per 100 shares.  You can sell a call option for someone to buy your 100 shares between now and the third Friday in March (approx. 3 months) at $92.00 per share.  For that right the buyer will pay you $130.00.  This $130.00 is yours to keep.

Assuming prices remain constant (which they will not), what is your annual rate-of-return?  You earned $130.00 in three months or $520.00 on an annual basis.  Divide $520.00 by the cost of your 100 shares of TLT ($8,990) and you get an annual return of 5.70%.  In addition, you earn 3.90% annual interest on your TLT shares.  This gives you a total return of 9.60%. Not bad, but there are risks.

RISKS:  There is no such thing as a riskless investment.  In this case if interest rates decrease, the price of TLT can easily go above they $92 strike price.  Your 100 shares will then be called away.  In this event, you have made your money and then some, so let it be called away.

The real risk to you is that long-term interest rates rise.  If this happens, the price of your 100 shares of TLT will fall and maybe substantially.  The $130.00 premium you received by selling a call option can offset part of the price decline, but probably not all of it.  You can still be left with a negative return. Your $92 call option will expire worthless and you can then sell another three or six month call option.  The premium you receive will depend on market conditions and the price of TLT. 

FINAL NOTE:  You should only employ this investment strategy if you feel it is suitable for your investment objectives.  In the calculations above, I omitted commission costs.  If you wish to employ this strategy, do not use a full-service brokerage house.  Their commissions will decimate your rate-of-return.  You should use a discount broker and do it online.

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How to Boost Your Yield on U.S. Treasury Securities is a post from: Business Speaker

The purpose of ANY investment is to increase one’s net worth. The term “net worth” applies to more than stocks, bonds, or real estate. You, your family, and your community can also be viewed as an investment.

Thinking in terms of increasing one’s net worth forces individuals to expand their time horizons. What actions can I take today that will increase my net worth or value over the next 5 to 10 years?  For example, why do individuals invest their time and money in going to college or trade school?  Obviously, they are not making significant monies while attending school.   But, they are learning a particular profession or trade (skills) that will increase their Net Worth or value in the marketplace.  By so doing, they will have the potential of increasing their income. 

Be Solvent & Prosper,

Sanford Kahn, Business Author/Speaker

The Purpose of ANY Investment is?? is a post from: Business Speaker

Divining the direction of the stock market can be as confusing as being a termite in a yo-yo.  So what would be a good simple gauge we could use to determine if the equity markets are overvalued or undervalued?  Price to earning ratio is one determinant, but it has its limitations.

Enter the Rule of 20—a simple formula that has been around for many years but hardly ever used.  The Rule of 20 is not a magic formula, but it is useful in evaluating if stock prices are over or undervalued. .  What it says is this— from l961 to about l994 the rate of consumer inflation when added to the price earnings ratio (P/E) of the Dow Jones Industrial Average has hovered near 20.  The market was overvalued when it was above 20 and undervalued when it was at 15.  The formula did not work in the go-go years of l995-l999.  These five years saw 20% plus gains per year in the popular stock indexes.  This was the only time in American financial history we ever saw five consecutive years of 20% plus gains.  Painful as it is, we are now returning to a more rational market environment.

What is the Rule signaling now?  The current forward-looking P/E ratio of the Dow is 16.  Consumer inflation is about 1.0% annually.  This gives a rule of 20 number of 17.0 (Markets are always in a state of flux and you can get the current P/E ratio and consumer price inflation numbers from any major financial publication.)

At a Rule of 20 Number of 17.0, the stock market still has room for upward movement.   As stocks rise towards the Rule of 20 number of 20, it may be wise to take some chips off the table—sell in other words.  When stocks fall to a Rule of 20 Number of about 15, think of entering the market by buying good quality equities.

A final note on this Rule.  Like any formula devised by mortals, this Rule has its limitations and should not be used in a vacuum.  The fundamentals of the company you are buying must also be examined.

Analyzing the Financial Market: The Rule of 20 is a post from: Business Speaker

Whether on a personal or business level, what is the most important criterion in making an invesment decision?   Is it rate-of-return?

The paramount investment criterion whether you are purchasing a stock, bond, business, etc. is the Suitability of that particular investment in relation to your financial psychology or business makeup.   No matter how good an investment may seem, if it doesn’t agree with your basic comfort level (your gut feeling), it isn’t suitable for you.  I think recent financial history has show this to be correct.  

Much Success,
Sanford Kahn,  Author of the book, “The Thirteen Great Economic/Business Myths That Dominate Our Lives”
available on amazon.com

The Importance of Suitability is a post from: Business Speaker