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Silver Prices: An Option Trading Strategy That Tells You When to Buy

May 24, 2012

By Larry D. Spears, Contributing Writer, Money Morning

As last week's Money Morning special report pointed out, the long-term fundamentals for silver prices are decidedly bullish.

However, in today's volatile market, picking the right time to buy silver is something of a guessing game.

But if you are familiar with options, you can let them be your guide in learning precisely when to buy.

And here's the best part: This option trading strategy will only cost you a few dollars.

It works with either options on silver futures – e.g., the standard 5,000-ounce Comex contract, recently valued at around $140,000 – or any of the much more affordable silver-based exchange-traded funds (ETFs) on which options trade.

Taking the Guesswork Out of Silver Prices

For ease of explanation, I'll base our example on the iShares Silver Trust ETF (NYSEArca: SLV), recently priced at $27.34. For comparison purposes, the price of a single SLV share typically tracks the price of one ounce of silver, but is usually 75 to 80 cents lower.

Here's what you do:

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Dividend Stocks: How to Soften the Bear's Short-Term Bite

May 22, 2012

By Larry D. Spears, Contributing Writer, Money Morning

For investors, May started out as a month of great promise. On May 1, the Dow Jones Industrial Average climbed 65.69 points, closing at 13,279.

Since then, however, that promise has turned to plummet.

The Dow posted losses on 12 of the next 14 trading days, culminating with a drop of 46 points last Friday. In all, since May 1, the Dow has lost 6.17%.

But did you know there was a way you could have avoided the bulk of the damage?

All you had to do was hold the dividend stocks in the 30-stock DJIA that offer the highest current yield.

In fact, numerous academic studies have verified the impressive contribution of dividend stocks to long-term market performance. According to certain studies, dividend yields have been responsible for as much as 90% of stock returns over the past century.

And Standard & Poor's reported last year that the dividend component was "responsible for 44% of the total return" of the S&P 500 over the 80 years from 1930 through 2010.

That is quite impressive considering nearly a third of S&P stocks don't even pay a dividend.

Dividend Stocks and Downturns

However, what these studies don't show is just how effective dividends can be in cushioning the impact of a short-term decline in stocks – both in terms of resisting downward price pressure and offsetting capital losses.

So, let's look at some numbers from this month as the Dow Jones Industrial Average as a whole fell 836.83 points, or 6.30%, from May 1 to May 17.

Keep in mind, of course, that they're not based on a scientific study, but rather casual observation.

What you'll learn may make you see dividend stocks in a different light.

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Options Trading: Three Ways to Win Big with a Bearish Calendar Spread

May 8, 2012

By Larry D. Spears, Contributing Writer, Money Morning

Think some of Wall Street's higher flyers look vulnerable to a broad market pullback?

If so, they could be perfect candidates for a low-cost, low-risk options trading strategy that could pay off big time if we get another move like last Friday's 169-point Dow plunge.

The strategy is called a "calendar put spread," and it works like this:

  • You sell a slightly out-of-the-money put option with a strike price just below the current market price of the underlying stock – with a near-term expiration date.
  • You then simultaneously buy a put option with the same strike price but with a more distant expiration date.

The cost – and the maximum risk – is the difference between the two option premiums, referred to as the "debit" on the spread. But because the longer-term put you buy "covers" the shorter-term put you sell, there's no added margin requirement.

It may sound complicated, but it's not once you understand how to employ this bearish options trading strategy.

Options Trading Primer: A Potential 900% Gain in Six Weeks

Here's how a bearish calendar spread might work with Exxon Mobil Corp. (NYSE: XOM), which has held up better than many other oil stocks in recent weeks, closing last Friday at $84.57, barely $3.00 off its 52-week high:

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Investing in Emerging Markets with U.S.-Traded ADRs

May 7, 2012

By Larry D. Spears, Contributing Writer, Money Morning

For most of the past decade, the name of the game in worldwide equities has been investing in emerging markets.

If you don't believe me, just take a look at the performance of the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).

It is an exchange-traded fund (ETF) that tracks MSCI's Index of major stocks in 21 emerging countries. Since its inception in April 2003, EEM is up 264.6%, not including the dividend.

By contrast, the S&P 500 gained just 55.7% over the same period.

That's a substantial difference in performance – one well worth pursuing for almost any investor.

But what's the best way to invest in emerging markets?

You might think the answer is just to buy EEM or a similar fund, like Vanguard's MSCI Emerging Markets ETF (NYSEArca: VWO).

However, there are some drawbacks.

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DRIPs: How to Invest in Dividend Reinvestment Plans

April 30, 2012

By Larry D. Spears, Contributing Writer, Money Morning

The real secret to long-term investing success is income – and with stocks, that means dividends.

Numerous studies, both academic and financial, have found dividends accounted for more than 60% of total U.S. stock market returns since 1870.

More recently, a study by Ned Davis Research covering the period from 1972 through 2008 found that dividend-paying stocks provided an annual return of 7.6% versus a mere 0.2% for non-dividend-paying shares.

What's more, companies with a record of steadily raising their dividends returned an even more impressive 8.6%.

But if you really want to boost your returns, investing in DRIPs – dividend reinvestment plans –is a safe, steady road to building true wealth.

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How to Trade Weekly Options

April 26, 2012

By Larry D. Spears, Contributing Writer, Money Morning

To loosely paraphrase Robert Burns, the best-laid plans of mice and stock traders sometimes go awry.

But with some creative use of weekly options, that doesn't necessarily mean you have to take your losses.

Here's an example of what I mean.

Just under two weeks ago, we suggested a "short iron condor" as a possible short-term strategy for playing the release of first-quarter earnings reports for some of the leading financial stocks, using J.P. Morgan Chase (NYSE: JPM) as a specific example.

As it turned out, JPM's earnings handily topped the estimates – coming in at $1.31 per share versus a projected $1.14, on revenues of $26.7 billion ($24.4 billion had been predicted).

That should have sent the stock nicely higher, giving us a quick gain on our condor – and JPM did indeed try to rally – but then our best-laid plans took a wrong turn.

The broad market turned sharply lower that Friday, with the Dow Jones Industrials dropping 136.99 points and the S&P 500 losing 17.31, dragging J.P. Morgan along with it.

Long story short, over the next five days JPM see-sawed higher and lower – but save for a few moments on Thursday, it never moved out of our $43-$45 maximum-loss range. The trade went south.

But had you been on your toes, you would have noticed this about JPM: In spite of the pressure from a weak overall market, the stock demonstrated strong technical support at the $43-a-share level. Both times it tested $43, it bounced quickly back – a pattern it repeated Monday, when it ignored the broad market sell-off and rapidly rebounded from a lower gap opening near $42.

The rest of this week, it's again traded solidly above $43 a share. In fact, a quick look at the long-term chart shows that – with the exception of Monday – JPM hasn't closed below $43 since March 12th. And, given the healthy earnings and a "powerful buy" rating last Thursday from Zacks Investment Research, it probably won't close below that level again.

At least not in the next week or two…

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Four Defensive Stocks for a Market Pullback: MCD, MO, CAG, JNJ

April 20, 2012

By Larry D. Spears, Contributing Writer, Money Morning

If you looked at just the first-quarter results you could be forgiven for thinking that everything in the stock market is rosy.

The Dow Jones Industrials and the S&P 500 turned in their best performances since 1998, rising 8.14% and 12.0%, respectively.

Meanwhile, the Nasdaq was even stronger, riding a tech-stock rally to a gain of nearly 19% – its best yearly start since 1991.

But as every seasoned investor knows, the markets never go straight up or straight down.

Prospects for continued strength may seem bright, but the recent five-day slide that took the Dow down almost 550 points might be pointing to something else entirely.

That's why now is the perfect time to consider shifting at least some of your funds into "defensive" stocks.

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Using Options to Make a Quick Profit on J.P. Morgan (NYSE:JPM) Earnings

April 10, 2012

By Larry D. Spears, Contributing Writer, Money Morning

It's earnings season again!

Among the most eagerly awaited results will be the financial earnings, many of which are still struggling to fully recover from the 2008-2009 financial collapse.

The projections released so far look pretty rosy.

First up is J.P. Morgan Chase & Co. (NYSE: JPM). The heavily watched investment bank reports this Friday the 13th.

According to Zacks Investment Research, J.P. Morgan will earn $1.14 a share versus just 90 cents in the final quarter of 2011.

Other financial earnings winners projected by Zacks include:

  • Citigroup Inc. (NYSE: C) expected to report earnings of 98 cents next Monday, up from 38 cents the prior quarter;
  • Goldman Sachs Group Inc. (NYSE: GS) projected to report $3.22 next Tuesday, up from $1.84 last time;
  • Morgan Stanley (NYSE: MS) expected to report 47 cents on Thursday, April 19, up from a loss of 14 cents in the last quarter.

Of course, life isn't totally golden for all the financials. A few are expected to release less-than-stellar results.

They include:

  • Wells Fargo & Company (NYSE: WFC) which also reports on Friday the 13th (is that a bad omen?), is expected to show flat results – 72 cents a share versus 73 cents last quarter;
  • Bank of America Corp. (NYSE: BAC) is projected to see a drop from 15 cents to 12 cents when it reports April 19.

The point is, the mixed projections reflect the fact there's still a lot of uncertainty surrounding the outlook for the financials.

Even those with good numbers this time could face storm clouds ahead.

The Financial Earnings Season Game Plan

For starters, J.P. Morgan, Citigroup, Wells Fargo and BofA, along with Ally Financial Inc., all face future hits thanks to the $25 billion settlement reached in February regarding foreclosures and malfeasance in handling mortgages left worthless by the housing crisis.

J.P. Morgan must also pay new federal penalties as a result of a settlement last week in the civil suit over actions it took that helped lead to the collapse of Lehman Brothers in 2008.

On the other hand, Wells Fargo, JPM, BAC and many others could get a significant boost from the new and improved version of the Home Affordable Refinance Program (HARP 2.0) adopted last month.

So, given all this, how can you hope to profit from any move in the financial stocks in the wake of their upcoming earnings releases?

Obviously, simply buying the stocks ahead of the reports is not the answer.

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In the Spring a Young Investor's Fancy Turns to Thoughts of… Baseball

April 4, 2012

By Larry D. Spears, Contributing Writer, Money Morning

When Alfred Lord Tennyson penned "Locksley Hall" in 1835, he surmised, "In the Spring a young man's fancy lightly turns to thoughts of love."

Had Tennyson been an American just ten short years later, he might have chosen baseball as the focus of his young man's interest.

According to what's now acknowledged as popular myth, baseball didn't officially come into being until 1839, when Abner Doubleday reputedly "invented" the game in Cooperstown, N.Y.

The first official game – based on rules codified in 1845 by Alexander Cartwright – wasn't played until June 19, 1846.

The host New York Knickerbockers lost that game – contested against a group of local cricket players dubbed the New York Nine – by the embarrassing score of 23-1.

Whether or not that was the first game remains unclear, with some dating baseball's beginning to 1791 in Pittsfield, Mass., and others tracing its origins back to Europe earlier in the 18th century.

But regardless of when and where it began one thing is certain: Baseball became America's favorite game.

Quickly dubbed the "national pastime," its popularity continues to grow.

Baseball Might as Well be Moneyball

Though the recent recession did cut into attendance at Major League Baseball games somewhat, 73,425,665 fans visited ballparks in 2011.

That's down only slightly from 2007 when 79,502,524 filed through the turnstiles, setting an all-time record.

And, while this year probably won't quite challenge the 2007 high, another increase is expected during the 2012 season, which opens today at the new ballpark of the renamed Miami Marlins in downtown Miami. Six more opening-day games will follow on Thursday.

Revenues for Major League teams also continue to grow, approaching $7 billion in 2011, including television contracts and concession and memorabilia sales.

Meanwhile, the value of the teams themselves is certainly not in question – not given the $2 billion just offered for the L.A. Dodgers by a group headed by basketball great Magic Johnson.

Strangely, however, for a sport considered the national pastime and drawing nearly 75 million fans a year, with many more watching on TV and listening to games on the radio, baseball offers a very limited number of opportunities for the average investor.

Indeed, only three of the 30 major league teams are currently owned by publicly traded companies, and baseball represents only a modest portion of their total businesses.

That contrasts with the past, when such notable firms as The Walt Disney Co. (NYSE: DIS), Time Warner Inc. (NYSE: TWX), Anheuser-Busch (InBev NV ADR) (NYSE: BUD) and others owned baseball franchises.

How Buy a Piece of Your Own Baseball Team

Thus, if you want to be an actual owner of a major league baseball team today – at least through your portfolio – you're limited to buying shares in:


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Before Making That 2011 IRA Contribution, Make Sure Your Pension Plan Assets are Safe

March 30, 2012

By Larry D. Spears, Contributing Writer, Money Morning

The middle of April is fast approaching and everyone knows what that means – time to get those 2011 income tax returns filled out and filed.

What few people realize is that they also have until Monday, April 16, to open a new individual retirement account (IRA) for 2011 or make your annual contribution to an existing one.

With the limit for contributions this year set at $5,000 – or $6,000 for those over age 50 – putting cash in a regular or Roth IRA can shave a big chunk off your personal tax bill.

In addition, this year you may also be eligible for a special "Savers Credit" of up to $1,000 for contributions to either an IRA or an employer-sponsored retirement plan.

I like getting added deductions or credits for putting my money in my retirement plan, if only because I'm a big fan of giving the government the least amount of cash I can legally get away with.

I can't, however, say whether such contributions are right for you – your accountant or tax adviser will have to help you with that decision.

What I can say is this…

If you do put money in a pension plan, whether self-directed through a custodial agent or via an employer-sponsored plan, make sure you know exactly where your money is going – and who's really managing it once it gets there.

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