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Archive for January, 2011

Dow 12,000…Now What?

Thursday, January 27th, 2011

With the Dow Jones Industrial Average trading above 12,000 (intraday) the last several trading days, we felt compelled to share some thoughts and opinions on the markets.  For starters, what a wild ride it has been.  It was just under two years ago (in March of ’09 ) that the Dow dipped all the way down to 6,440.08  from a previous all time high of 14,279.96 back in October of ’07.  Simply put, the Dow declined 54.9% and has rallied 86.33% and now remains down 2,279 point or 16.28% off it’s all time highs.

Dow Jones Industrial Average

So what’s an investor to do when “The Market” is up 86.33%, interest rates remain at multi-decade lows and commodities (materials, metals, agricultural, and oil to name a few) are teetering near their all time highs? If you don’t pay taxes, don’t need to spend your money and aren’t worried about inflation, the answer might be nothing.  It is possible you might even “beat the markets” (all of them) by sitting in cash.  The problem is that “relative returns” don’t put food on the table, pay the mortgage or take you on vacation. Furthermore, after taxes and inflation, you really end up going backwards when you go sideways.

If you’re concerned about the markets getting a bit “toppy” and that we are either long in the tooth for a correction of if you are optimistic that  the economy is in a legitimate recovery yet we just need some time to catch up with the strong rebound, click below on “read the rest of this entry”  and see 4 suggestions to help enhance returns and put the risk of your portfolio in check.

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Option Series #2 Put Selling

Thursday, January 27th, 2011

Conversation with client…

Client: “I see that ABC company is trading at $50 a share. I love the company for the long term but feel that they are currently over- valued at this level.  If it sinks to $40, I think it would be a bargain and accordingly, I would like to place a GTC (good till canceled) limit order to buy 100 shares at $40.”

Decision Investments: “Sure Mr. Client…Would you like to get paid TODAY  for your order?”

In our second series on investing with options we would like to introduce the strategy of “Put Selling”.  When an investor sells a put, he or she receives an up-front payment to stand ready to buy a stock at a given price for a given period of time.  It can be a very lucrative strategy and it  can also be implemented in a manner that greatly reduces risk as compared to simply owning the underlying stock. 

Put Sell

Like a covered call strategy, selling  puts can provide downside protection  and furthermore  you choose the price level at which you are willing to step in and buy the underlying stock (the put “strike price”).  Among other benefits of the strategy, you hold onto your cash while waiting to see if you get “exercised” or if the stock will be “put to you”. You won’t receive the dividend of said stock like in the case of a covered call but you may leave your cash in a high yielding money market fund or wherever you’d like.  Conservative investors should  avoid buying more securities with the cash because if the market declines your losses will be leveraged and when the stock is put to you it could result in your account being on margin (having a negative cash balance). 

Put selling can be a great opportunnity to pick up quality companies “on sale”, add substantial income to your portfolio AND reduce the risk of an equity portfolio.  What’s not to like? Really, please give us your comments and feedback.