When it comes to investors, one thing is true; they all have to deal with brokers. It doesn’t matter if you are involved with penny stocks or looking towards long term stock options, you are going to have to associate yourself with a broker that fits your needs.
pubDate:Fri, 27 Nov 2009 22:31:25 GMT
Original Link:How to Choose Just the Right Investment Broker for Your Financial Planning Needs – iloveinvestments.com

Cue the background music [link to a streaming music play].

Watching the gyrating reports on the price paid for Apple’s purchase of music streaming service LaLa reminds me that acquisition prices are widely misreported and often misunderstood even when correctly reported.  Some people only want to know one number – the price paid – without caring about the many other numbers that are relevant to understanding who got what:  the company’s cash on hand, outstanding debt, financing history, and other numbers relevant to the capitalization of the company.

Even the best reporting often misses one important element of the analysis:  newly issued options (or other equity) shortly before the deal.  I like to call this the “options icing” – and it’s a very important concept for understanding what really happened.  For company founders, management and especially employees, it can mean the difference between a happy and tragic outcome for their startup.  The “icing” is both icing on the cake for employees, and also a good way to ice a bad cap table.

The options icing doesn’t come into play very often, but it is more common when the acquiror is a large, sophisticated tech company that historically rewards employees with equity incentive.  This kind of acquiror understands that the future success of the acquired product is less about the technology and more about the personnel continuing to prosper in the big company environment.

Let me make up an example.  A big company has got a problem if the market value of a 50-person company they want to acquire is only $20 million, while the investors have already put in $35 million into the company.  Typically, the investors have to be paid back first before anyone else gets paid, which means that employees would get nothing, which means that the big company would spend $20 million and get a bunch of seriously disgruntled employees, who will probably leave the company pretty soon after the deal. Even if the investors agree to restructure their liquidation preference, say by half, you still have very little left over:  $17.5 million to investors, $2.5 million for employees.  Let’s say that 1/2 of the employee stake is owned by 2 founders, and then you’re down to only $1.25 million for 48 other employees.  Nobody is happy with that outcome.

Here’s where the options icing comes in.  The company could issue a huge pool of options to employees who would be critical to carrying the product forward (in any scenario, whether acquired or not).  Say they issue $10 million worth of new options.  The magic here is that a smart acquiror will be willing to pay for some or all of those new options.  Even though the company is still only worth $20 million, the acquiror could be happy to pay $30 million if the options are issued to the right folks with the right terms.

The “right terms” include typical vesting terms, so the employees receiving options are incented to do great work for the acquiror.  From the employee’s perspective, this is fair because it is a whole lot better than the stick in the eye they would have been getting under the $20 million scenario.  From the acquiror’s perspective, this is a good deal because rather than flushing $20 million down the toilet, they are making a rational $20 million purchase, with a nice $10 million compensation package that addresses the compensation disadvantage that big companies face in competing with startups.

One of the key reasons that people work in startups is that you can really move the needle for the company’s value.  In financial terms, if you are part of a startup that creates, say, $100 million in value, then it’s a pretty neat feeling to have made nothing into $100 million, and you can get rewarded handsomely for that.  But if you are in a big company that is worth $100 billion, nobody will really notice, or even be able to tell, that you added $100 million in value – it certainly won’t make much of a difference in the stock price.  And that creates a compensation disadvantage for big companies that are trying to motivate their employees with equity grants.

But in the scenario above, the big company can pay for $10 million in stock grants to motivate a relatively small number of employees to execute on a product they clearly understand.  If these employees can turn that $20 million business into a $100 million business, they will be rewarded for it in a manner comparable to their rewards if they had remained an independent company.  That kind of compensation is generally not possible to award in a big company other than in this scenario because of internal “fairness” issues.

The beauty of all of this is that it is one of the few situations in this rotten ol’ world that deal dynamics favor the rank-and-file employees.  Most corporate dynamics, especially in big deals, have a tendency to screw the little guy.  But in order for this situation to be a good outcome for everybody, the rank-and-file employees have to be rewarded in a fair manner.  Coming back to my example above, the options icing can be win-win-win all around:  The investors can get a little tip for agreeing to the restructuring and the new equity; let’s say they get $18 million, just a bit more than they would have made otherwise.  That leaves $12 million for the employees – say the two founders take $3 million, more than twice as much as they would have made under the $20 million deal.  The other employees get $9 million, more than 7 times as they would have made.  The acquiror paid $10 million more, but as described above, this is money that really makes sense to spend, and it’s more like incentive compensation than it is acquisition consideration.

And this deal gets reported as a $30 million price paid.  But really from the right perspective it should be regarded as a $20 million deal.  Now, I am not saying that anything like this is what happened in the Apple-LaLa deal – actually the discrepancy in the reported numbers is too large to be explained by options icing alone.

JavaFit Executives announced an exciting new promotion in late September that involves Javalution Coffee Company Stock Options being awarded to affiliates in addition to existing compensation! 

It has been extended through Decemeber 31st!

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Conflicts of interest? Dr. Oz owns 150,000 option shares in vaccine technology company

Natural News
November 10, 2009

Something sounds fishy here…

Dr Oz Will Propagandize For H1N1 Vaccine But He Wont Give It To His Kids

Doctors Bribed To Push Swine Flu Vaccine On Reluctant Public
Health authorities offer extra bonuses for each shot in an attempt to counter mass resistance to H1N1 shot

Watch a clip from the CFR meeting below.

A lot of us are pretty pissed off that our companies are doing poorly. We’re seeing our stock options lose what worth they had; we’re not getting raises or actual promotions — just new titles that mean “here’s another responsibility we’re not going to pay you for”; we’re working unpaid overtime because we can’t finish our jobs in the allotted day because we have so many meetings to attend that we can’t get into a groove and finish more than half a task at once.

But it’s not just the corporate office that’s the problem. Some companies are rotting from the bottom up.

Jim Hopkins, formerly of USA Today, used to run a watchdog blog that took USA Today’s parent company, Gannett, to task for its misdeeds. Here’s something that a blog commenter posted a while back that you might be interested in reading:

I can’t help feeling that lots of little stories were missed here. Combined, all the many smaller issues are what really makes or breaks a workplace. Employee spirits and productivity are often broken by bosses who hit the bottle a bit too much or by managers sleeping with the help. I know of one Gannett editor who was emotionally/clinically disturbed to the point where he should have been removed from his job years ago, before he inflicted so much damage on so many careers of people who worked for him. He went undetected because higher-ups refused to open their eyes to realities, a common problem at Gannett properties of all sizes:

* Staffers who have to pull double duty because of a coworker’s incompetence.
* The general lack of accountability for some while others are held to impossibly high standards.
* The huge workloads and all the rework that is necessary because of territorial misbehavior.
* The inability of mid-level editors to truly lead without being either mean or over-the-top friendly (in sort of a fake way).
* The lack of respect that comes in all forms.

Which of those five things have affected you already?

Double duty: I’ve written on several occasions — and in fact just last week — that employees often find themselves covering for the less-skilled workers so that everyone doesn’t get dinged. They do it without getting paid extra or even getting recognized, and if they go to their bosses because someone’s slacking… well, the boss might do something, or the boss might not, but it will trickle back down that you’re the person who tattled. It’s just like grade school except without dodgeball.

Accountability: The only person held accountable is you. Not your co-workers, who keep screwing up. Not your boss, who keeps overloading you and expecting you to continue to perform but doesn’t even thank you for making him look good. Not the CEO, who keeps his job and his expensive car and his two months off a year when you’re barely keeping your head above water.

Rework: The last person to know that the entire focus of the project has been changed is the person who has to do the most work, or the most detail-oriented work at any rate. And that person is always told at the last minute, right after turning in something that he or she thinks is some of his or her best work. And that person is always, always you.

Lack of leadership: Who’s in charge around here? No one! No one wants to take responsibility or make any decisions because that creates an accountability situation. People run around like beheaded chickens until the Big Boss finally tells them what to do, and that doesn’t help much either because the Big Boss just gets grumpy and takes it out on the peons — you again.

Respect: If your boss doesn’t respect you, then you don’t respect your boss. And you don’t respect your boss’s boss because s/he isn’t making sure your boss is respectful of how much work s/he is dropping on your head on a daily basis. Oh, and “employee of the month” doesn’t cut it. Not anymore.

Is your company rotting from the bottom up? Or just from the top down?

The correct answer is probably “both”, and you know it.

I changed jobs during my career in order to get higher pay, but I have never really “worked for money” nor ever “worked harder” because of so-called incentives. For these reasons I view the current debate about incentives and bonuses as a sign of decadence, unworthy of us as a people. That’s the gist, but let me enlarge.

Lest my view is dismissed out of hand, yes, I have held jobs where management could earn a bonus. And, yes, I did earn bonuses. But the results I achieved would have been exactly the same with or without bonuses. They would have been the same even if my bonus had been three times as big as it was. I also had stock options. And these influenced my performance—not at all. They never have.

Next, let me be precise about that other phrase: never worked for money. What I mean is that I’ve always separated the two concepts, work on this side, money on that. I did not come from an independently wealthy family. For that reasons, I always needed wages or salaries to maintain my family and myself. Thus I made my contribution to society in occupations that were paid. But once I took a job, I pretty much forgot about the money and just got on with the work.

A third comment by way of background. I’ve never worked for a commission—on principle. I figured that if my income depended entirely on what I could sell, my employer was just using me without making any commitment to me, without taking any risk. I bore all the risk. And if so, why split my earnings with some leech above me? Why be an employee? I have worked for myself and, therefore, made my own weather. I worked just as hard for others as for myself. The work-money division remained even then. The worries were greater—especially after I had others whom I employed.

The notion that people only perform if they are goaded by a carrot always just a little out of reach is demeaning to the human spirit. I’ve never hired lazy people knowingly, and if I did, I let them go quickly. I looked for dedicated, honest, self-motivated, and responsible people. When I paid them I paid them as much as the system would bear. When we had surpluses, we paid bonuses too.

Survey after survey of the American labor force—and Brigitte and I answered such surveys during our work-lives—always showed that what employees really wanted was just a little more control. Why that? So that they could be more effective. They wanted more ownership of that which they were doing, less busy-body hovering. Pay always came close to the bottom in such surveys of motivation—and always to the surprise of the survey takers. Why? Did those social scientists think that people are ducks?

I am convinced that the vast majority of people in the workplace resemble me a lot more than they resemble the few highly placed ducks that compete so fiercely for bits of bread tossed into the lake and just swim away when the bag is empty. I know the kingdom to which those folks belong. I’ve always aimed higher. The collective mantra repeated unthinkingly over the media by countless business pundits—namely that performance only emerges when the gains are very rich—is never experienced in 99.99999 percent of the workplaces in America. What are these people talking about? Whom are they kidding? To use an old-fashioned expression, I spit it out. I don’t buy it.

Stock Options – An Introduction to Trading Stock Options

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This morning while visiting my local Starbucks, I was given a sample of the latest product to come from the caffeine giant: a packet of its new Via instant coffee. While I have yet to try it I was told by employees how it can be mixed with hot water, cold water or milk to create an instant, great tasting cup of coffee.

My town was one that had a few Starbucks close down during this past year, including one in our downtown area which I hoped would make it. One in a shopping center in which I am part-owner never made it past the lease. When people stop feeding their caffeine addiction, you know something serious is going on.

However, there are some positive signs which may have the public going for the leaded fuel again. Schultz just exercised nearly $20 million in stock options and rather than cashing them in, he is taking the $15 million paper profit and holding them for the long run. I always like seeing when a CEO can take the easy road but puts his or her money where their mouth is, believing in their own company and its potential.

Starbucks stock is up over 120% year to date as well trading at 20+ times EPS looking at future earnings projections. Schultz says he is incredibly bullish on his company and its outlook.

I’ve always had the view of stock purchases in one of two ways: either you should look at buying stock in a product you use or stock in a company of which you are a fan. Based on that thought process, I am also very bullish on Starbucks and its future, as I’m sure are the folks who I see every morning in line at my local store.

In addition, with my wife being from Seattle, the land of coffee houses on every corner, we cannot help but be fans of Starbucks. No matter how large the company gets, there is still a sense of the local kid making it in the big time.

Here’s to you, Howard Schultz, and to your success and the success of Starbucks. I’m rooting for you.

All my best,

Thomas J Powell

Unificando la jurisprudencia de los Tribunales Superiores de las CCAA, el Tribunal Supremo ha dictado una Sentencia en virtud de la cual Los trabajadores que se encuentren fuera de la empresa con motivo de un despido improcedente pueden solicitar la ejecución de su plan de opciones sobre acciones (stock options), incluso aunque en éste se haya incluido expresamente una cláusula que obligue a encontrarse de alta en la empresa para poder ejercitarlo.

Más información: http://ping.fm/HM8PC

Leido en Expansión.

 This post is the Introduction to my book, which should be available on Amazon.com in December of 2009.

This book started as a project based on my observations.  I deal with technology start-up entrepreneurs everyday as a patent attorney.  I noticed a difference between the sort of projects my clients were undertaking since the technology downturn of 2000-2001 and the 90s.  Clients, in the 90s, would come into my office with plans to build businesses that were disruptive or revolutionary.  The technologies underlying these companies held the potential to completely redefine a market.  Some of these of these ideas would increase the available bandwidth by 10x for minimal costs or allow data searches that were 10-100x faster than existing technologies.  It was extremely exciting talking with these entrepreneurs.  Their energy was infectious and the potential implications of their work was mesmerizing.  The technology downturn of 2000-2001 forced a reevaluation of these aggressive business plans.  I expected that after a couple years of the technology market taking a breath, I would again be working with companies trying to change the world. 

This expectation never came to fruition.  The start-up companies I came into contact with were all looking for narrow niche markets.  Instead of trying to change a whole area of a technology and go public, these companies were looking to develop incremental changes in technology and be bought out by an existing company.  I started wondering if other people in the technology business were seeing similar trends.  My informal surveys centered around the question of whether this decade (2000-2009) was as innovative as in the 90s.  While I would say that most of people I surveyed felt this decade was not as innovative as the 90s, there were people who disagreed. 

Some of the innovations that the dissenters pointed to were the iPod, the tremendous amount of money Intel was spending to build their next microprocessor plant, and the social media industry.  While these are certainly innovative, these innovations did not drive the whole economy like the Internet of the 90s.  The Internet in the 90s affected almost every business in the U.S.  For instance, it drove PC sales, retail, electronics, telecommunications, professional businesses, marketing, newspapers, etc.  It also redefined whole areas of life, with email, online shopping, online advertising, it was impossible to escape the effects of the Internet unless you crawled under a rock.  The personal computer revolution of the 80s had a similar, although somewhat less pronounced effect.  The iPod is cool, but it hardly effected the whole economy, in fact it did not even drive the electronics or software business.  The same can be said of Intel’s gigantic investment in a new microprocessor and social media sites. 

I began to wonder about the reasons for the differences in the 90s and this decade.  What were the causes and implications for these differences?  Since the main difference centered around the level of innovation, I began to explore some the structural factors that effect innovation.  It also caused me to explore in depth what the implications of innovation were for the U.S. economy.  My quest caused me to question whether my concern about innovation was egocentric or whether there were more fundamental reasons to be concerned about America’s level of innovation.  This book is the result of this inquiry. 

There is no attempt in this book to have determined or exposed every cause for the decline in our innovation.  I have only focused on those causes that are most critical.  For instance, I do not focus on the limited number of H-1B visas.  While I agree that we need to increase the number of H-1B visas, I do not think this by itself will change the U.S.’s level of innovation.  FASB’s elimination of the “pooling of interest” accounting for mergers definitely hurt the technology start-up community.  However, the impact was somewhat reduced by the new rules on accounting for goodwill.  While I think “pooling of interest” accounting for mergers should be allowed, again I am skeptical this by itself will significantly change the level of innovation. 

Each chapter in this book is intended to be self-standing.  Chapters 1-8 build on each other to make a larger point about innovation and its effect on our economy.  Chapter 8 ends with some recommendations to jump start the high technology start-up community and the U.S. economy.  Chapter 0 sets up a number of themes examined in this book.

Chapter 0 is about the musings of a mythical Fed Chairman in the late 90s.  He is concerned with the rapid rate that treasury securities are being paid off and how the Federal Reserve will control the money supply without treasury securities.  This leads to questions about the causes for the incredible economic growth of the 90s.  His musings take him on a journey covering the financial innovations that made the Industrial Revolution and Information Age possible.  He also explores the history of technology including the anti-technology attitudes of the 70s and the business model underlying the innovation of the 90s.

Chapter 1 compares and contrasts the U.S. economy in the 90s and this decade (2000-2009).  The chapter shows how far our economy has deteriorated using a variety of graphs and statistics.  The recession of the 2008-2009 is likely to be the worst recession since the recession of the early 80s and may surpass it. 

Chapter 2 demonstrates that U.S. innovation since 2000 has been anemic.  This is in sharp contrast to the innovation of the 90s, which made the U.S. the envy of the world.  From the decline in the number of Initial Public Offerings (IPOs) and the brain drain the U.S. is experiencing to the fact that in 2008 fewer patents were issued to Americans than foreign applicants by the U.S. Patent Office, U.S. innovation is declining.

Chapter 3 discusses the three broad theories of how to stimulate economic growth: 1) spending side economics, 2) supply side economics, and 3) innovation side economics.  This chapter explains that production precedes consumption and invention precedes production.  It establishes that real long term per capita growth is the result of innovation.

Chapter 4 demonstrates that the U.S. economy is built on innovation.  The first colony of the U.S. was only possible because of two new technologies.  The U.S. has been a leader in every major technology innovation since the constitutional convention.  The U.S. is wealthy because of its technological innovation, not because of its natural resources.

Chapter 5 provides a tour of the history of patent law, particularly the development of patent law in the U.S.  Particular emphasis is placed on the changes in the patent laws since 2000 and how these changes affect the incentives for inventors.  This chapter is longer than most of the other chapters because I found that attitudes towards patents track attitudes toward innovation, the free market and entrepreneurs.  Patents are the free market process of encouraging innovation.  There are many pundits pointing out that the U.S. in not innovating, but most of these pundits suggest updated versions of NASA to jump start innovation in the U.S.  The evidence is clear that a strong patent system does more to encourage innovation than any NASA like program at less than 1% of the cost.  A strong patent system mobilizes the private sector to focus on innovation in ways that dwarf any project undertaken by the government both in the quantity of innovation and resources devoted to innovation.  The Internet in the 90s ably demonstrates this.  While the Internet was based on a DOD project (ARPANET), it did not drive the economy of the whole world until private industry was mobilized to utilize the Internet.

Chapter 6 discusses the effect of Sarbanes Oxley on the technology start-up ecosystem.  The history of financial regulation in the U.S. is explored.  The effectiveness of financial regulation, including Sarbanes Oxley, is reviewed.  Suggestions on how securities regulations can be amended to encourage innovation are provided.

Chapter 7 reviews the history of the accounting rules associated with employee incentive stock options.  After 30 years of debating the accounting rules on stock options, FASB changed the manner in which companies account for stock options.  The logic behind this rule change is explored in the context of accounting’s role in society. 

Chapter 8 provides a summary showing that the economic growth of the 90s was the result of innovation.  The innovation was driven by high technology start-up companies built on intellectual capital, financial capital, and human capital.  Since 2000 the U.S. has changed the rules governing each of these pillars on which the innovation of the 90s was built.  Changing these laws and regulations would be inexpensive, politically uncontroversial, and reinvigorate America’s economy.

Next week will be very pivotal for both the October and November Long Iron Condors (LICs) I’m holding in SPY.

In brief, we’ve seen the market push aggressively higher over the past few weeks, despite September’s reputation for stocks selling off.  In fact, SPY was up more than 2% since Monday.

With November – January a traditionally bullish period, I wouldn’t be surprised to see markets jump the gun and continue adding to gains before then.  October is now the best month for SPY over the last 15 years (excluding 2008), so I have concerns about crossing our upper curb of 109 on both condors in the weeks ahead.

S&P 500 Technical Indicators, Early July 2009 - Present

The good news is that there are a number of positive technical factors heading our way that could lead to some form of a correction.

First is the twelve-day MACD Histogram–the blue bar chart in the middle of the graphic (right).  We very well might have peaked in the near-term and are heading towards some sort of sell-off, probably mild to modest.  Other technicals are also “rolling over” to suggest a change in sentiment.

Further, September 24 is one of the most bearish market days–only 38% of them in recent years have yielded gains.  And prior to then, Monday-Wednesday are each positive only 43% of the time.  The week after September options expiry is just traditionally bad, plain and simple.

If I had to prioritize my moves, the October LIC is most important because its profit and loss (P&L) slope is the steepest.  In other words, if the markets sell off, we’ll profit more quickly in this condor than November’s.  But since both condors hold the same targets, I’m most interested in dissolving both and re-establishing new positions.

For October’s LIC, peak profitability is currently at 102.5 for SPY and sliding towards 103.25 by next Friday.  In a perfect world, we’d see these targets hit, but I won’t get too cute in this trade due to the increased pressure of a steep profit/loss slope.  The call side of this condor breaks even at 105.5 next Friday, so if I can get near that, I’ll be content, and then I’ll see for how long I can hold the put side until the position turns disadvantageous–stay tuned, I’ll provide updates as the situation develops.

November’s LIC isn’t terribly different–peak profitability with SPY at 101.25 followed by a 101.5 level on Friday.  The P&L curve is still relatively modest, so I’m able to take a bit more risk here.  In fact, if the market does correct significantly–e.g. past 101.25 and down to as low as 98.5–I’d be willing to hold the condor ‘as-is’ and enjoy a (hopefully) modest recovery through October.  Note that peak profitability at the end of October lies at around 102.5, which could nicely match a market rebound through the upcoming month.  But there I go, wandering off into the theoreticals…

I feel comfortable waiting for a mild sell-off through next week; it’s a fair argument to say that the odds are more on the bears’ side through Friday than the bulls’.  In any case, even if we approach next Friday at around the same levels as today, we’ll see a nice profit.  Currently, both condors are up a total of 4%–despite the runaway market–and seven days from now, we’ll be looking at 8% gains.  If we manage to get out next week at peak profitability, we will have pocketed 14% profit for the past few weeks.

Liabilities are essentially obligations; these can include financial and social matters. We usually accept liabilities due to our preferences. Financing the purchase of your dream car, student loans, and credit card debt are all liabilities that expose us to risk. Liabilities however can be used in combination with assets to engage leverage. This can be useful to maximize potential investment power.

An asset can be anything that has value. The term is used to differentiate from liability, which is the alternative. Assets are the things we should try to create because over the long run they themselves with generate income for us. Liabilities are debt obligations and cost us money. A savings account is one of the first assets that most individuals develop. Unfortunately for most that is the extent of their assets. If you own a home it could be considered an asset even if you had to finance the purchase. Homes are a unique asset and if purchased and financed correctly can provide an inexpensive line of credit. There are many ways to benefit from holding assets.

Economics and Me

Every day we are faced with more and more opportunities. As these options expand so does the difficult task of deciphering the information about each and making a selection. It is the roll of the economist to comprehend these situations and deduce verdicts using reasoning.  The science of economics is Unique because the experiments that economists conduct have a person as a variable of their equation. Any need or want that the individual expresses should be considered. This can have profound effects on the dynamics of any study.

Economics can be big (Macroeconomics) or small (Microeconomics) these two branches use similar fundamentals to conduct and express situations and experiments. Microeconomics focuses on the individual and their market interactions. This can represent a firm, individual person, or household. Macroeconomics in contrast focuses on the market as a whole. It is most commonly applied to the study of countries and their income or GDP. Either form of the term economics can be defined as the allocation of scarce resources. Both use tools and theory to answer questions.

One of those tools that economists use is Game theory. Most people use this principal on a daily basis. If you consider your time to be valuable it can be though of as a resource. You and I can only be in one place at a point in time we are confronted with such decisions. Left or right, work or home, bowling or golfing. We make our decisions based on what economists call utility. Each individual decision has an amount of utility.  These preferences for whatever reason influence our decisions.  For most people in common situations once a path has been chosen little consideration is given to the alternative. Economists however give consideration to those untraveled paths. First they are given the term Opportunity costs.

Think of some resources that are scarce. Most people will mention money and many people associate economics with money for perhaps that reason. Using the Keynesian economics we can understand the impact that money and spending has on the overall economy. Well review topics as the micro/macro trap and how it affects the markets today. Topics such as the stimulus bill, Government spending, and Taxes can be easily understood using the tools the economists have developed. You will be able to better understand the trade deficit and national debt and what effect they have on the individual.

With a solid understanding of how economics works anyone is capable of increasing his or her overall satisfaction. There are many economic pitfalls along the way I would like to use my knowledge to help others avoid them. The fore mentioned topics are a good understanding to expand upon. I will be publishing periodic writings this fall and winter and encourage your questions and comments.

Figure 1: Recent AAPL Performance.

I’d like to introduce a simple and straightforward way to use options to inexpensively protect an investment.  This method–known as the collar–essentially establishes a trading range for a stock in your portfolio, which is good over a period of time of your choosing.

Suppose you own 100 shares of Apple Computer (AAPL) stock and have realized a very nice gain.  You are tempted to now take profits but believe that the upcoming Christmas season could push the stock higher.  On the other hand, something disastrous could happen (e.g. Steve Jobs heading to that great big Macintosh in the sky), which could suddenly and swiftly punish the stock, leading you to believe that protection from such a liability is warranted.

It’s always a good idea to first see what a stock’s recent price action can teach us.  In Figure 1, we see that the shares have enjoyed a very nice gain (priced at $170.31 as of Sep. 4, up 99% for the year) and find support at $160 (green line).

The conventional approach for protection is to establish a trailing stop sell order–in essence, you pick an amount of decline you’re willing to accept in a stock, and anything more than that triggers an immediate sell.  The upside to this approach is that if the stock continues to rally higher, the point at which your sell order will be realized rises in tandem with it.  For example, if you set a sell order for AAPL with a trailing stop at $10, the stock will sell as soon as it hits $160.31–but if the stock moves to $180, your new trigger is $170.

I like trailing stop sell orders, but I only use them when exiting a position with no plans to re-enter the stock.  That wouldn’t serve my needs in this case since my hypothesis is that AAPL might rally through the Christmas season.  If AAPL even simply hit a period of volatility (it is a high beta stock, after all), my trailing stop sell order might be prematurely fulfilled.

Establishing a collar guarantees a floor and ceiling on the share price through the expiration date of your choice.  Expiration dates are typically on a monthly and/or quarterly basis, occurring on the third Friday of the given month.  So, if I’m looking for protection today through Christmas, I might consider the January 16, 2010 options expiration time period.

Options are typically offered in units that each cover 100 shares of stock.  So, my lot of 100 AAPL shares will nicely match up with one call and/or put, depending on what I’m trying to do.

A put is a contract entitling me to sell a stock at a certain price through the expiration of the option.  So, I might buy one put (which covers 100 shares of stock) for AAPL in the January ‘10 expiration period with a strike price of $160.  That means that no matter how low AAPL’s stock is on January 16, 2010, I can still sell it for $160.  Did it fall 100 points to $70/share?  Fine with me–I’m still selling at $160, since that’s the floor established with my put purchase.

Of course, if AAPL closes out January 16 at $300, my put is worthless.  The current market price would be far above the strike price, so I’m better off holding onto my stock than exercising this option.  (Most brokers will automatically make the best choice for you, while you retain the option to give them instructions that override their judgment.)

To get this put–essentially, guaranteeing me a floor of $160 for my 100 shares of AAPL stock through the January 2010 expiry, I have to pay $1,050.

Sticker shock!?  Most likely.  While my 100 shares of AAPL are worth $17,031, paying 6.1% of their value to protect them against a 5.8% move for a finite period of time may seem like a bad deal.

Part of what makes the deal worthwhile is the fact that you can sleep well each and every night while under put protection, not having to worry about what tomorrow will bring.  Think of how many folks wished, in hindsight, that they had purchased puts for their stocks before the 2008/9 market meltdown.

In any case, the better news is that financing is available.

A call is a contract entitling me to purchase a stock at a certain price through a certain time.  So, if I buy a call for AAPL stock with a $180 strike price and January 2010 expiry, I’ll be able to purchase 100 shares of the company at the given price at any time between now and expiration.  AAPL trading at $300 on January 16?  Great–that’s a $120 discount that I’ll enjoy.  What about AAPL at $70/share?  I simply don’t exercise the call option, and I can buy the stock at that day’s lower market value.

In the case of a collar, instead of buying a call (I already own the stock, after all), I’ll sell a call.  That means that I’m willing to part with my shares once the stock rises above a certain price point.  Since AAPL is at $170.31 today, selling a call against my shares with a $180 strike still allows for a potential 5.8% profit while collecting the guaranteed premium from selling the call.  And how much is that premium?  $1,082, thank you very much!

Hmmm…so we just looked at holding 100 shares of AAPL stock, buying insurance for $1,050 to guarantee a floor of $160 on the stock price through expiration, and then selling possible upside on the stock for $1,082, which caps our profit if/when AAPL moves beyond a $180 share price.  Minus commissions, that’s just about break-even. ($1,082-$1,050-your broker’s transaction fees=$0ish.)  Congratulations, you’ve just established your first options collar!

To get a better feel of what happens to your investment, I’ve posted some charts to walk us through profit/loss scenarios.  Owning the stock without any options play looks like this:

Figure 2: Owning 100 shares of AAPL stock.

The dashed lines walk us through time. “Time decay” is essentially the effect of an investment losing value over time. An extreme example is owning a 2008 Ford F-150 pick-up truck–I guarantee it’s not worth as much as when you bought it. (Someone please tell those folks who sell their year-old vehicles in the Classifieds.) Owning the stock while simply buying the aforementioned put results in this:

Figure 3: Straight AAPL ownership (green) vs. stock & put (blue).

The green lines show us, again, the results of simply owning stock from now until January 16, 2010, while the blue lines highlight a stock plus purchased put combination.  Notice the floor that’s established at the $160 price point–you cannot lose more than that.  Notice, however, that your break-even line shifts from the present value of $170.31 to $182.74–ouch!  Better look at selling some calls to get this picture back in order:

Figure 4: Straight AAPL ownership (green) vs. stock & put (blue) vs. collar (red).

The red designates the collar (note the floors and ceilings) while the green and blue represent the previously disclosed stock-only position and stock-put combination, respectively.  A little more cleanly, at expiration, the setups would look like this:

Figure 5: Straight AAPL ownership (green) vs. stock & put (blue) vs. collar (red).

Note that the profit/loss line is now nearly identical between straight stock ownership and owning the collar.  The only material difference is that floors and ceilings have been introduced.  Finally, the collar all by itself:

Figure 6: AAPL January 2010 Collar

Note that the change in valuation to this collar occurs more dramatically the closer time approaches the expiration date.  This means that if AAPL stock enjoys a sudden rally to $180 in the next week, it may be worth sliding your puts and calls accordingly to lock create new upside targets.  The cost should be nearly negligible.

Also, note that I can adjust my strike prices for my collar according to what kind of risk I’m willing to take.  While the $180/$160 collar we’ve reviewed effectively pays for itself, so does a $190/$150 collar.  Or, let’s say you don’t mind paying a bit more now not to limit your future upside, you can set up a $190/$160 collar for a cost of about $310.  Again, options are like LEGO–build with them what you want.

A few extra notes: most stock brokers (E-Trade, TD Ameritrade, et al) require approval to trade options, and they’re offered in four steps.  “Level 4″ is most desirable, but you can also do the most damage to yourself, so upgrades typically come only every 90 days.  The upshot is that if you ever think you’ll trade options, start requesting options upgrades now.

It’s also important to note that Level 4 also requires margin.  So, if you’re trying to use options in your IRA or 401(k) account–where margin isn’t available–so Level 3 is as high as you can go.  For the most part, this isn’t terrible, and the rule is in place to ensure you’ll have something left for retirement.  Contact your broker to learn more about what each of the limit levels entail.

Further, keep in mind that a lot of these trades can be made in tandem–collars, call/put spreads, etc…  So, in the case of our collar, instead of having to first pay $1,050 for the put and then collecting $1,082 for the call,  you can simply specify the desired spread between the two that you’re willing to pay or receive in payment.  (At your broker, this is called net debit or net credit.)

In any case, I encourage you to evaluate your portfolio–especially as we enter into the historical “scariness” of September and October market drops–and see how collars can keep you safe during this spooky season.  Happy trading!

Aggregate of October and November 2009 Long Iron Condors for SPY

As of now, we’re up 5% since the initial establishment of the October (August 14) and November (August 26) condors. More importantly, we remain within about one point of peak profitability.

Individually, the October condor is up about 9.5% while the November condor is up about 3%.

On the call side, there is not much worry: both upside spread curbs (106 for October and 109 for November) are outside the first standard deviation of potential market trajectories. Personally, I don’t have a stop loss on these at this time, simply because I have doubts about a spontaneous 6% market rally occurring before I have a chance to get to the computer in the morning.

On the put side, I’m a little more cautious. I’m tentatively holding stop limits for the sold puts at 98. In a perfect world, I’d buy those back early in the day and/or week and then try to ride the purchased puts as the market moves lower. This, of course, is risky, and requires strict supervision of minute-by-minute market conditions, with plenty of trailing stops set to cover potentially sudden changes in momentum.

Financial Armageddon: The Argument in Favor of Buying Back Sold Puts First

Should SPY move to 95, an immediate 63% profit would result. At 92, a 100% profit is realized, and 200% total profit is found at around 86.25–close to the recent market bottom in July. Sure, the odds are against such a dramatic and profound move, but there are a lot of perma-bears out there who will argue that such a scenario is rather plausible for any number of reasons.

That’s it for tonight. Watch carefully on Friday during the jobs report. If things don’t melt down, enjoy the earnings from time decay (theta) over the long weekend.

Stock options trading can be dodgy business–very dangerous. Of course, folks get entangled with it because it may also be extremely rewarding. With options, you leverage underlying assets for a certain period of time. You do not have to buy the assets, just pay a premium up front in order to have control over them during the stated time. But , as with all investments, the more you stand to doubtless make, the more you stand to possibly lose.

So. You want to know what you are doing for stock options to work for you.

First, you have got to have a strategic plan in mind up front. There are numerous stock options strategies that different investors use. You need to study them and select those that you think are best suited to your risk toleration and your objectives. Never enter into a trade without knowing in advance why you are taking that approach and what you’ll do under certain circumstances, irrespective of how you’re feeling about them.

In line with this, you have to select a good stock options broker. Find those online who are renowned for good reputations and good experience, and then compare their fee structures and what you get for your money. A good broker will be a good guide, but will not try to tell you what to do.

Another aspect of preparing your strategy is knowing the market. This implies that you can understand the fundamental assets of the stock options you select. Follow online stock charts and economics stories concerning those assets so you can make informed choices and anticipate wisely, not shooting from your hip.

And yet more preparation for the arena of stock options trading will comprise good money management. You will keep your investment cash budgeted and separated from the money that you need to live on and cannot risk. If you run out of that money, stop investing till you have rebuilt your bank account thru careful savings and judicious spending. However–don’t get out of an option contract too shortly. You will take losses, especially when you are getting your first experiences. You may expect to always take some losses, but the way to success is sort of simply to make more than you lose over time . Never give up too simply.

At the same time, with stock options, you don’t want to hold it too long. Know when it’s time to sell an option so you can lessen your losses. But when it does come to your earning profits, do not blow it by taking a heavy loss shortly after. That is the worst experience in the world. Instead, understand how to use trailing stops. You must also be informed in the simplest way to calculate a break-even point. Study both these basic and necessary stock options trading systems before you dig into this world.

But in the final analysis, accomplishment in stocks options all comes down to ceaseless research. Again, know the market, know the stocks, know the companies, know the basics, and know what strategies to use when. And how can you be most assured of keeping up with all this? Thru reading a high quality options newsletter. An options newsletter authored by experienced, successful options trading execs can be like gold itself to you. So, let your research begin with finding such a service.

The economy and the stock markets may be perking up, but not nearly enough to push many stock options back above water. That’s especially true in the technology sector. At 90 of the 100 largest publicly held tech companies, at least some options granted in the past 10 years remained sunk as of July 31, says executive-compensation consulting firm Steven Hall & Partners.

At 21 of the companies, there were no outstanding options with any current value to their holders, including both senior executives and other employees. For the group as a whole, 57% of options held by companies’ five top executives were under water, at an average of 42% below exercise price, Steven Hall research shows.

Go to Article

Nov 2009 SPY Condor - Updated

In light of that, I’ve added 21 lots on the put side of this condor (SWGWQ/SWGWN) for net credit of $0.57. ($2.36-$1.79) This helps to make me a little less delta negative while also boosting the long-term income potential of this trade. The attached chart is updated to reflect the new position.

UPDATED YIELDS:

Maximum yield on September 17 is 5% at 100, with a 37% chance of being profitable.

Maximum yield on October 9 is 27% at 101, with a 67% chance of being profitable.

Maximum yield on October 30 is 58% at 101.75, with a 72% chance of being profitable.

Maximum yield on November 21 (expiry) is 83% at 95-109, with a 72% chance of being profitable.

As mentioned yesterday, one of the key benefits of trading through stock options is your ability to control exactly how much risk you take as well as how quickly that risk is realized.

Options are to stocks as LEGO is to a pre-fabricated toy: you still can end up with the same result, but with the former, you have much greater control on the specifications of what you want.

Here are some real-world, everyday examples of how you can use options to meet your own requirements:

• Insurance.  Suppose you were smart enough to buy 100 shares of Apple (AAPL) stock earlier in the year and have enjoyed a very nice gain.  You believe that the stock still has considerable upside going into the Christmas season, but you also know that there might be a few bumps along the road.  How can you continue to own the stock while protecting your gains?
  

  Stock only:  Set a sell order trailing stop for a few dollars below the current valuation.  So, for example, if the stock ($169 today) were to go below $165, the shares would automatically be sold in order to lock in the gains from the past few months.  With a trailing stop, if the stock headed to $179 without any major turbulence, the trailing stop would rise with the appreciated stock price to $175 and be triggered if AAPL then dropped below $175.
  

  The downside to this strategy is how to re-enter AAPL.  At what price?  Did you pick the correct bottom?  What if you buy in again at $160 and the stock just continues to drop?  This is where options can provide significantly improved cover.

  Stock with a purchased put:  A put is a guarantee that you can sell your stock at a pre-determined (“strike”) price on or before a pre-determined (“expiration”) date.  Most puts cover 100 shares of a stock.  Buying one put for AAPL with a strike price of $165 through September 19 costs $342.  That’s still less than the $400 you’d lose if AAPL dropped below $165.

  Stock with a purchased put and sold call:  If you don’t like the idea of paying $342 to insure your investment, there’s good news: financing is available.  You can sell a call and essentially cap the maximum reward you can realize on the stock by the expiration date.  The proceeds of the call help to finance the purchase of the put.  So, for instance, if you’re willing to limit your profit on AAPL stock to a $180 share price between now and September 19, you’ll earn a $159 credit towards the put protection being bought, bringing the net cost down to $183.  For reference, this sort of transaction is called a collar.

• Leverage.  With stock, the percentage of profit made from a single position holds a 1:1 relationship to the share price.  In other words, if the Acme Inc. stock you own rises from $100 to $110, you’ll make a 10% profit.  The same goes for losses, as well.
  

  Some folks indulge margin from their stock broker in order to try to double returns.  Here, they literally borrow money (up to 100% the value of their portfolio) to buy even more of the stock.  Again, this is great if the stock price goes up–you now own twice as much stock for the same amount of capital–but if it goes down, all of the losses come out of your balance.  To me, this is high-risk and unnecessary.
  

  A much safer way, again, is with options.  With a small amount of money, you can position yourself to enjoy additional upside from a stock.  Your loss is never greater than the amount of money invested into the options, which is most often a very small fraction of the share price.  (Going back to AAPL, holding a call that is the equivalent to 100 shares of the stock at $165 costs merely $782.  Just remember that any value under $165 on the September 19 options expiration date becomes worthless.)  So, if the stock increased another $5 tomorrow, your call would be worth around $1,140.  Down $5 tomorrow?  About $502 in value.

• Inversion.  Let’s say that you believe AAPL is about to tank, but you don’t want or aren’t able to short the stock directly.  Instead, you can buy puts–the guarantee that someone will buy your shares from you at a fixed price.  You don’t need to own any shares to benefit from this.  One September expiry put of AAPL with a strike price of $165 costs you $342.  If the stock dropped $5 tomorrow, the put that you purchased would be worth about $560.  The opposite holds true, as well: if the stock went up $5, the put’s value would fall to roughly $202.
• Income Generation.  My favorite options strategy is this one: buying and selling puts and calls in order to generate income.  Here, you’re essentially calculating a range where a given stock should remain, and the longer the stock stays in the range, the more money you make.  The risk is controlled by how tight or loose a range you make: betting that AAPL will close between $165 and $170 on the September 19 options expiration date could yield you a 26% return while a range of $145-$190 nets you only about 5%.
  

  There are several different ways to configure this sort of trade, all of which I’ll get into in forthcoming posts.

So think of options as your LEGO set and think about what you’d want to build.  There are a lot of different elements available to spark your imagination and trading strategy, so stay tuned as we dive through several of the most successful ones.

Starting in fall 2008, we have gradually built a family of customizable capitalization table templates with ModelSheet. Capitalization tables track investments, securities, preference rights and liquidiation payouts through multiple rounds of financing of a company. Cap tables are notorious for their complexity and their need for customization to reflect investment terms. This makes cap tables an ideal application for ModelSheet, which improves reliability, auditability, and manageable complexity.

Types of securities:

The cap tables includes several types of securities.

• common stock
• preferred stock with preference rights
• convertible notes, with conversion terms and preference rights
• options and warrants, with exercise terms

Each type of security can have any number of series with different seniority that you specify when you customize your template (limited only by the template version and Excel file size).  Using ModelSheet Authoring, you can modify security types to fit your situation. However, you can’t modify the number of series of securities or the types of securities in the exported Excel templates.

The template has built-in assumtions about the conversion and exercise decisions, to make it easy to get started without inputting all the data required to specify these decisions. You can override the default conversion and exercise decisions as you like.

The cap table does not yet track classes of investors or individual investors. We plan to improve the cap table model in this and other ways in the near future.

Investment rounds and trading protocol

When you specify your customizations, you can choose the number of investment rounds to fit your situation.  Each investment round starts and ends in one day. The templates track the holdings and valuation of of each class of stakeholder,  and payout depending upon conversion and exercise decisions by stakeholders.

Each investment round has five phases that occur in this order.

1. Start Phase: Stock splits occur and dividends in kind are paid at the start of each investment round.
2. New Sales Phase: Sell new securities (convertible notes, preferred stock, warrants, options, common stock)
3. Post Sales Phase: Record investments and share units after sale of new securities.
4. Conversion Phase: Stakeholders can convert notes and preferred shares and can exercise warrants and options to obtain common stock.
5. Exit Phase: Record security holdings, prices and values at the end of the investment round.

You can edit the dates of the investment rounds in Excel after you have received your customized template. The number of phases and their characteristics are fixed in each customized template. (You can edit the trading protocol using ModelSheet Authoring. Editing the trading protocol is a fairly complex process, but it is much easier to do with ModelSheet than with conventional spreadsheets.)

The Advanced version and Extra large version of the template have three investment scenarios and three valuation scenarios built in. ModelSheet Authoring can easily alter the number of scenarios of each kind.

Return on investment

The valuation of investments is largely determined by the change in valuation of the company over time, which you can specify in the Excel template. The templates report three measures of return on investment for each series of each type of security.

• Return multiples: the multiple of investment that is paid out
• Present value of the cash flow for each series of each type of security. The discount rates can differ across  series and types of securities to reflect different risk profiles.
• Internal rate of return for the cash flow from each type of security

All versions of the cap table template report return multiples, and the Advanced version and Extra large version report all three return measures.

Usability

For such a complex application as a cap table, usability and transparency are particularly important. (The cap table is probably the most complex model we offer at this time.) As for all our Excel templates, the free sample and paid templates contain

• an Excel comment on each display table for each variable explaining what it is and how it is used in the model
• an Excel comment for each dimension explaining what it is
• a worksheet named “Formulas” that displays all the symbolic formulas in the model. Although the formulas are not executable in Excel, it is much easier to figure out what is going on from readable symbolic formulas (and far fewer formulas) than from the cell formulas in Excel.

To use the templates, you don’t have to look at or learn anything about ModelSheet Authoring (our SaaS authoring environment for spreadsheet models) ; but if you do, you get more features to help you build and understand the model.

You can learn more, get sample templates or customized templates at http://www.modelsheetsoft.com/store_captable01.aspx.

If you use capitalization tables in your work, we would like your suggestions for improving the current model.

–Dick Petti

we are very pleased to announce that the many great features you’ve come to associate with stay-in-your-name securities loan program now apply also to Rule 144 restricted stock! Now your clients can avail of the powerful flexibility and unmatched security that our stock Lender  provides.

Qualifying? Easy. If your stock would qualify for a stock loan or its stock-secured loan variants as free-trading shares, it will most likely qualify for our restricted program as well. The usual requirements apply – the stock must be marginable and have listed options. But if it does, then your restricted stocks are now eligible.