Pricing
When buying or selling either an open-end or closed-end fund, an investor usually knows the current value of the fund’s assets per share (NAV).
For example, to buy an open-end fund with a NAV of $15, an investor pays $15 per share. The fund simply issues new shares to the investor at the current NAV. The assets the fund manages have increased, but the value per share remains the same because the new shares have exactly the same value as the other shares. If the investor sells, he or she is paid the NAV. The amount of assets the fund manages has been reduced, but the NAV of outstanding shares has not changed because the shares redeemed were equal in value to all others.
With closed-end funds, the shares are traded in the open market and are consequently subject to demand/supply imbalances. They may trade at a price greater than their NAV (termed a premium) or at a price below the NAV (termed a discount). Read the rest of this entry »
Focusing on the Investor, Not the Investments
Every day, defined contribution plan participants make investment decisions that will affect their income in retirement. Some make these decisions easily; others are less confident that they are making appropriate choices. Benefits, Inc. understands that participants‘ investment decisions should be driven primarily by an accurate assessment of their retirement income needs and the time they have to accumulate the appropriate nest egg. But Benefits also understands that participants‘ own personalities and attitudes toward investing are often a barrier that prevents them from doing the right thing. Benefits therefore attempts to target the plan design and communication programs it develops for its clients to take into account these behavioral differences. By understanding that there are different types of investors with varying concerns and needs, plan sponsors have an opportunity to provide employees with suitable investments—ones that improve the likelihood of being utilized effectively by participants. Read the rest of this entry »
What if a stock has run out of steam and we’re anticipating a period of consolidation or lower volatility for a period of time? What if we have identified a range-bound stock and we want to take advantage of this price pattern behavior? We can achieve this by trading low-risk, high-reward options strategies! The two strategies we’ll discuss in this chapter are the Butterfly and the Condor, both of which produce profits provided the price remains within a certain price range, determined by the Exercise prices we select.
Butterflies
The Butterfly involves the following steps (you can use all calls or all puts with the Butterfly—you cannot mix the two):
Butterfly with Calls
Step 1 Buy 1 lower strike (ITM) call
Step 2 Sell 2 middle strike ATM calls
Step 3 Buy 1 higher strike (OTM) call
There are two key points here:
- The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
- The distance between the three adjacent strikes must be equal, with the middle strike being ATM or as close to ATM as possible.
Read the rest of this entry »
Delta The speed of a Straddle’s position accelerates dramatically Near the Money. Delta is
negative when the stock price is very low and accelerates into,a positive value when the stock price is nearer and above the strike price. This shows us that when the stock price is lower than the strike price, further down movement is profitable, and when the stock price is higher than the strike price, continued up movement is required from the stock to make the Straddle profitable. Delta’s profile is somewhat “S’ shaped. Delta will generally be less than one (for one contract) when the stock price is ATM. This signifies that at that point, the value of the Straddle will vary with the stock price, but at a reduced speed.
Gamma Gamma is always positive with a long Straddle and peaks where delta is rising at its
steepest angle. This invariably occurs Near the Money, indicating that the Straddle is very sensitive to swings in the stock price at these levels.
Theta Time decay affects the Straddle detrimentally. Theta assumes a “V” shape and is almost
entirely negative, forming its trough At the Money. This makes total sense because with a long Straddle you are buying two options premiums and are heavily exposed to time decay. Where the stock price is far lower than the Straddle strike price, theta can have a fractional positive value.
Vega Vega is entirely positive and forms a mountain-top shape, peaking At the Money. With the
vega value peaking ATM this indicates to us that a small increase in volatility is going to increase the value of our Straddle position markedly. Read the rest of this entry »
This one is simple. Don’t invest with vengeance in your heart or any heated emotion driving your decision-making. Wrath, envy, and vanity are three of the sins that can cause you to invest in highly emotional states. You need to be aware of your emotional temperature when considering an investment, and if you find yourself upset, thinking about getting revenge, or furious at friend, foe, or the investment vehicle itself, give yourself a time out for a day or longer. Calm investors have a far better track record than highly emotional ones, and you need to keep this in mind or you’ll become even angrier when your hot-tempered investment doesn’t pan out.
Thou shall not commit adultery chasing some flashy little stock of the moment.
As much as I repeat this commandment, I know that daily price movements seduce people into betraying their long-term commitments and go for the most attractive investment at that particular moment. To Put it more bluntly: Don’t buy something just because it’s “hot.” Once you recognize that it’s hot, you’re probably already too late. Force yourself to think long-term, even when you’re tempted by what seems to be a short-term sure thing.
I talk with prospective brokerage clients all the time, and find it revealing, although not surprising, that while they’ll lose sleep worrying about how many dollars their holdings are worth, it rarely occurs to them to worry about the worth of the dollars themselves.
That’s an enigma that shouldn’t be an enigma. In a well managed economy, dependable purchasing power should not be a problem. Domestic investors shouldn’t have to worry about the dollar.
The fact that the declining dollar is a domestic problem and people aren’t generally aware of it shows how successfully the government has used the consumer price index (CPI) as a red herring to divert attention from the real cause and extent of inflation. Read the rest of this entry »
