Options – Risk Management

Options – Risk Management

There are more kinds of risk than there are investments, since every instrument carries several kinds. But risk isn’t inherently bad. Without it there’d be fewer opportunities for profit.

The fundamental risk, of course, is price uncertainty. No one knows for sure whether GOOG (the symbol for Google stock) will be higher tomorrow or lower.

Options, like futures or bonds, carry an additional risk – at some point, from a day to several months or years, they expire. On or before that date, the holder has to decide whether to sell the contract, exercise the option to buy or sell the underlying asset, or simply let the option expire.

Each of these choices carries implications for gain or loss and all are uncertain (to some degree) with respect to the size of that outcome.

Complicating the price and timing risks of options is their volatility risk. It’s uncertain, on any given day, how much the price will vary and how rapidly.

Ironically, options themselves are forms of risk management. Since the underlying asset, say a stock or bond, has risks as an investment buying options allows holders to compensate for them.

Leverage is one form in which options help to manage risk. Leverage is the ability to control more than you own. Suppose you want to purchase a 100 shares of Google. At the current market price that’s an outlay of around $40,000 (excluding commission). That’s a hefty sum for the average investor.

But you can control 100 shares of GOOG without owning them for less than 1/10th the cost – currently around $2800 – the price of one option. (One options contract typically is written on 100 shares.)

How is that a form of risk management? The reason is there’s another kind of risk: principal risk. I.e the risk of losing (all or part of) your investment. (Actually this is a form of price risk.)

Purchase a 100 shares of GOOG and you stand to lose $40,000 in the (very unlikely) case that Google goes bust. (Unlikely, but not impossible. Rapid shifts in technology or other factors have tanked more than one high-tech stock. 3Com and Cisco are two good examples. Though not zero, their shares experienced considerable declines in the past few years.)

Purchase one option instead and your principal risk is limited to the – painful if lost, but much smaller – amount of the premium: $2800, the cost of the options. (Excluding commissions.)

Of course, the example is a little unfair since the odds of Google stock going to zero is itself close to zero. But there are companies for whom the odds are not so favorable and the principle (pun intended) is the same.

So, how do you manage these risks? Simple. Simple, but not easy.

Start by identifying all the known risk factors and quantifying them. (Simple in that identifying and measuring them is straightforward, but minimizing them is anything but easy.)

Fortunately, there are several different software product offerings that will help you do that. It’s no longer necessary to be a finance and mathematics wizard. The software incorporates the algorithms used by experts to measure various factors – such as delta, theta, vega, volatility and others – that can affect your potential profit or loss.

Tips to Starting your own Business

We know that starting your own business is the first step for a successful career. Here are some tips on starting your own business. Enjoy!

The 9-to-5 grind can make you feel like a just another cog in the corporate machine, constantly punching the clock for someone else’s vision. One day, while dreaming of the world outside the cubicle, you have your big “Eureka!” moment—you’ve come across an idea so perfect that you need to start your own business around it.
Coming up with the idea is the easy part. Now, you’re thrown into an entrepreneurial world where even the experience businessperson can feel overwhelmed by all the details.
It’s hard to know where to even begin. So here are some tips to starting your own business:

Craft a primitive budget: do you have enough capital to get this idea rolling? First things first, figure out roughly how much it’ll cost you including all expenses, and where that money will be coming from. Call in favors from everyone you’ve even leant money to in the past in need be.
Does the business world need you?: is there a large enough demand for your product? Ask around before even attempting to start your business—check with similar businesses in the area, or around the country. Find out how they started, and what kinds of clients they target, to get an idea of where you’ll fit in the market.
Create a strong management team: your team members should share your vision of the business, and a certain amount of proficiency and credibility. Rely on your connections to find the perfect people for the jobs that will bring their expertise to the business. Remember that you will eventually have to set aside your ego and let them control certain aspects of the company, so your have to feel comfortable around your management team.
Start small: instead of immediately trying to market your product to 5,000 companies at once, focus on a few dozen specialized local companies to network with. This way you can call them each personally, mail them your marketing materials, and then arrange a meeting.
Quality matters: you want to be able to set your self apart from all the other businesses similar to yours. Having an eye-catching yet simple to navigate web site and presentation material is key to succeeding in the modern business world. Creating quality marketing tools doesn’t have to cost you a fortune either; consider hiring a design art or marketing student from a nearby university to help out. You never know, you could even meet your next Junior Executive.
Come up with a good business plan: keep it less than 25 pages, and include information about your management team, who your customers as, and most importantly, why the world needs your business. At this stage in the game, don’t over-focus on the financial side of things yet. A business plan outline can be found at http://www.sba.gov/starting_business/planning/basic.html.

For more tips, including an A-to-Z guide to starting your own business, and 21 ways to draw customers in, go to www.entrepreneur.com.

About The Author

Jessica Klein is a member of the ‘Mount Real Research Team’, whose aim is to seek out and distribute business information to the virtual public. She is a freelance writer based in Montreal, Canada who loves writing about anything from accounting to zebras.
For more info about Mount Real, visit http://www.mountreal.com.

jessica@redchilimedia.com

My interview at Blueprint for Prosperity, and this blog’s new direction.

I recently was given the opportunity to be interviewed by Jim over at Blueprint for Prosperity blog site. Jim wanted to interview other personal finance bloggers to see what makes them tick. I had recently stated that I would be taking this blog in a slightly new direction. In the interview I reveal what I intend to inject into my posts and this blog. I ‘d like to thank Jim for the interview, he asked some very good questions that help me quite a bit.

To read the entire interview click here.

Defining The Millionaire Blog

It has been about 6 months since I started this blog. It has gone through several transformation over the last 6 months. Besides 3 or 4 WordPress theme changes, what I wanted to accomplish has also changed. At first this blog was to have been my journal as I embarked on a quest to make $1,000,000.00. Then it became more of an investing information site, as I wrote posts and referred readers to articles about investing, real estate, savings and other personal finance stuff. As we near the end of the year I have begun to put on paper what I want this blog to accomplish for me and for my readers, as well as to focus the the content and topics.

From a monetary standpoint this blog generates very little revenue, it pays for hosting, as it was never intended to be a big source of income. I am re-evaluating this position and may consider doing more to the blog to increase revenues. If I do, I will post monthly goals and show others what I am doing so it can become a learning experience.

As for the content and topics, I am thinking hard about a change in which I may lose some readers, but will provide me a more gratifying topic and thus better content.

I will make an announcement soon.

Regards

Wal-Mart Is Bad for America, How?

I generally don’t like surveys and polls. I think most of them get skewed by whomever is running the poll so that results support their argument. Case in point is this poll regarding Walmart. Respondents were asked two questions. Is Walmart good for America? or is Walmart bad for America? 56% responded Walmart is bad for America. But to me the questions are just too vague and general to have any real meaning. For example, in what manner is Walmart bad for America. They are one of the biggest employers in the nation, how can that be bad? They drive prices down, that’s good for the consumer. If you work for them they start you off at about $8-$10 dollars and hour. That much better than minimum wage.

One negative that I do seem to read often is that Walmart drives the mom and pop stores out of business. But I also have seen many stories of those that responded to Walmart’s competition by increasing their value, offering better products, or expanding their market online.

Their overseas labor practices have been questioned. If that is the case then those government should investigate any wrongdoing.

Wal-Mart questioned the timing of the poll, which was conducted from Nov. 15 to 18 — a week when many of the retailer’s critics organized events to highlight their concerns about the company, and screened a widely publicized documentary that cast Wal-Mart in a negative light.

Can you blame them?

In my opinion this is just another ” let’s get them cause they make too much money” nonsense formulated by someone who want media attention so they can sell a movie.

People who shop at Walmart do so by choice, if you don’t like them then shop somewhere else. That’s the great thing abou this country, w do have choices.

You can read the complete CNN article here.