Thursday, December 24, 2009

Merry Christmas

I'm taking the week off to celebrate Christmas. I wish you all a very merry one.

Thursday, December 17, 2009

Paying Less for Books: Part 2 – Money Saving Tactics

I am a bibliophile. I prefer holding a book in my hand while I read. I like to own books. I like to look at them on my shelves and recall their main points or stories.

Because it’s important to minimize the cost of the books I buy, I’ve developed a strategy and tactics to substantially reduce the price I pay. The strategy is patience. I put books I’m interested in on a list and wait.

Several good tactics are based on the strategy of patience.

As time passes I validate my interest in the books on my list. About half of them I eventually delete from the list without buying; I’ve lost interest in them or my interest is insufficient to justify the money or the time to read them

I wait for the mass-market paperback edition. I use this tactic for most of the novels on my list. A typical hardback novel lists for around $30. The mass-market paperback typically lists for around $8.

I have a Barnes & Noble membership providing a 10% minimum discount on any B&N paperback or a 20% minimum discount on hardbacks. As a member, Barnes & Noble sends me a discount coupon at least once a month for an additional discount on anything in the store. The additional discount ranges from 10% to 25% with 15% discount coupons being normal.

The B&N discounts are cumulative not additive. That is, they take the 10% membership discount and then they take the 15% coupon discount on the balance; instead of adding the 10% and 15% coupons and taking a 25% discount once. This process reduces the total savings, but it’s still a good deal.

I shop the remainders. Book sellers, including B&N, deeply discount books that fail to meet their sales expectations or to make room on their shelves for newer issues. Sometimes, books on my list show up on the discount displays. When they do I snap them up and still take the 10% B&N membership discount. On those occasions when I buy books on impulse, they’re almost always on the discount shelves.

I shop the used books on When the mass-market paperback edition is published, the remaining hardbacks are discounted, especially by the used book sellers on Amazon. Even with a $4 typical shipping & handling fee, the total discounted cost of used books on Amazon often drops below the $8 price of the paperback edition. I’ve bought several books at a discounted price of $0.01 plus the $4 shipping & handling.

The combination of these tactics – based on the strategy of patience – enables me to buy the books that I really want without busting the budget.

Link to Other Topics in the Special Report: Cutting Expenses

Friday, December 11, 2009

Paying Less for Books: Part 1 – Patience and Making a List

I am a bibliophile. I read – a lot. And I prefer holding a book in my hand while I read. Oh, I read email and email newsletters and articles and blogs on the internet. But, when I hold a good book in my hands my attention span is much better than when I read from a computer screen.

I like to own books. I like to look at them on my book shelves and recall their main points or their stories. Because I like to own books it’s important for me to minimize their cost and so, I’ve developed a strategy that substantially reduces the price I pay for most books.

The key to my strategy for paying less for books is patience. I rarely buy books impulsively. I keep a list of desirable books on my pocket computer with a duplicate of the list set up as a “Wish List” in Amazon.

When I discover a book I’m interested in I add the title and author to my list. Then I wait. Right now my list contains 83 titles; evenly split between fiction and non-fiction.

The easiest way the list saves me money is when, after some time has past, I realize that a particular title doesn’t interest nearly as much anymore. It no longer seems worth the money to buy it or the time required to read it. And so, I delete it from my list.

This is the ultimate fate of half of the books I capture on my “Wish List”.

The passing of time also permits other money-saving tactics to come to fruition. Tactics to be discussed in future posts.

Link to Other Topics in the Special Report: Cutting Expenses

Friday, December 4, 2009

Covered Call Options: Part 3 – How to Analyze a Covered Call Option

Writing a covered call option is the least mysterious and arcane black magic technique of options investing. It’s simple enough that I’ve done it myself and made a few bucks.

My analysis for writing (selling) a covered call goes like this:

1. Select a stock with at least 100 shares in my portfolio that has active options trading; for example Southern Copper – ticker symbol PCU.

2. Determine the minimum price I would be willing to sell PCU if my covered call is exercised.

3. Go to my on-line broker’s web site and look up the “options chain” for the stock – PCU.

4. Choose a selection of PCU call options at acceptable striking prices and several expiration dates (near term, three months out, and six months out).

5. Get the price quotes (bid price or last price paid) for each option.

6. Calculate the profitability of each option applying my broker’s option commission structure. I use an Excel spreadsheet for this analysis.

7. Choose the most profitable option in the selection.

8. Final gut check on the striking price and the price for which I’m willing to sell the option.

9. If I decide to set a price for my covered call option different from the price quotes used in my analysis then plug my price into my analysis model to check its profit.

10. Place the trade order thru my on-line broker.

After that, you wait for the call to sell. If it sells, you wait for it to expire or be exercised. If it expires, you can start the process over and sell another call. If it’s exercised then you have just sold your stock at the option striking price.

After you place the sell order for the covered call you will either sell the call earning the exact profit you calculated or you will not sell the call - you will have lost or gained nothing.

If you sell the call the only risk you take is the possibility of having to sell your stock for a price less than the market price at the time the call is exercised. If you chose a striking price that gives you an acceptable return then the worst case is you miss making a bonus profit on the sale of the stock.

Here is an analysis of a real selection of PCU call options:

My broker’s commission structure is as follows. A $9.20 commission is charged per trade or transaction. In addition, $0.75 is charged for each contract. In this example all of the potential trades analyzed are for one contract so the total commission in each case is $9.95.

The price is the price per share so 100 shares at $0.65 per share is $65.00 – this is the amount the buyer will pay me for selling the PCU AH call. $65 less the $9.95 commission yields my profit of $55.05. If the market price rises above the $40 striking price per share then the option would probably get exercised. Since my current cost basis (the average price I paid for my PCU shares) is $21.04 per share, I stand to make a profit of $18.96 per share or $1,896 for my 100 shares - less my broker’s commission on the stock sale of $5.95.

I chose these specific call options because their striking prices are above the current $36.40 market price for PCU and, since I’m not really interested in selling my PCU shares, I want to reduce the probability of being forced to sell the stock. I also want to ensure that if I’m forced to sell I get a price I’ll be happy with.

The number of contracts offered makes a difference to the profitability of covered calls because of the option commission structure. The same analysis is shown below using four contracts per transaction.
On the PCU AI call you see the difference in profitability due to the increased number of contracts. When one contract is sold the profit is $0.05 but when four contracts are sold the profit jumps to $27.80 – considerably more than four times the original profit.

You also see that a more profitable single contract is less affected by the commission structure when the number of contracts increases.

Another consideration is the expiration date. The more time allowed before the expiration date the higher the probability the stock price will rise above the striking price. Of course, if the stock goes down the option will expire. If you want to sell the underlying stock before the option expires, you will need to buy the option back at the current market price.

Writing covered call options allows you to lock in a profit with the risk of possibly missing out on some bonus profit if the underlying stock goes up above the option striking price.

Links to Other Topics in the Special Report: Covered Call Options

Covered Call Options: Part 2 - Definitions of Option Terms