Investing in Stocks and Options

1. Chloe Sowers Investing in Stocks and Options

2. Proof

3. 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%.

4. Dividend History

5. 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.

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

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

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

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

14. Stock Selection • Must have consistent dividends.

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

16. 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%

17. 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) = 3.125. Premium received = 3 x 100 x 1.60 = $480. ROI = 60%. • You can sell 15 naked puts: $10,000 / .20 / 32 / 100 = 15.625. 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!

18. Options Selling

19. 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.

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