Proof is in the PUTting.

So, for those of you who read my last post, your heads are spinning, or you completely shut-down, or you were moderately to considerably interested in my current investment technique.

Lets review:

I'm writing (selling) "naked puts".  Which is a contract (piece of paper with certain conditions and obligations if those conditions are met) which trades on the OPTIONS market.

This is not the "stock options" you have seen in the media that CEOs get.  (Or even Starbucks employees who choose to take a percentage of their pay in the form of company stock).

I'm not going to re-hash my previous post.  I'll just summarize what market conditions are required for them to work:

1. Market goes up = PROFIT
2. Market goes nowhere = PROFIT
3. Market goes down = PROFIT
4. Market tanks = potential to lose

Time exposed to market forces: 2-3 weeks.

The last statement is why I like them so much.

The hardest part about investing for novices (and even many seasoned pros) is getting hung up on wanting your holdings to "keep going up."  Some do, but many do not.

With these PUTS they EXPIRE automatically.  You have no choice.  They just disappear once their term is up.

So if you've sold a naked PUT for $100 and expires worthless, then you're done.  You have your money and you are no longer exposed to the position.  You can't hold on to it forever as they cease to exist once the contract is up.

This FORCES you to re-evaluate your holdings every time something expires.  So you're left with the choices: do I re-write a new contract and expose myself to market forces again for a while?  Or do I use that money to buy something for the long term?  Or do I just cash it out and do something pedestrian like pay rent.  You can of course go on a drunken bender too.  And I'm not one to judge!  Just don't trade drunk!

Now what do I mean by the "potential to lose"?

Say company ABC is trading at $10 per share.  You've rushed out and SOLD 1 contract for a 1 month PUT.  It has a strike price of $9.  When you sell, you get to keep the premium and in this case lets just say the contract is listed at $1.  Seeing as options are listed in price per share, but correspond to 100 shares, it means you get $100 minus your trading commissions for selling 1 contract.

If ABC shoots up in price, the value of your put will rapidly decline in price.  (This is what you want!  You have to BUY IT BACK if you close it out early)  If it stays this way until the option expires, it will expire with a $0.00 value.  So PROFIT.

If ABC just flat-lines for the month, the contract will again expire worthless and you keep your PROFIT.

If ABC falls a bit due to lousy sales, it can fall as much as 10% in value and your PUT will AGAIN expire worthless.

If ABC however falls more than 10% or even goes bankrupt, then you're on the hook for $900 + trading commissions and the "assignment fee" which is often as much as a "phone-in" order.

What happens if it falls beyond your strike?  You take ownership of the shares first day after the market opens AFTER the contract expires.  Your price is the strike price.

I hope this helps somebody!

Stay hungry my friends!

Mortgage insurance?!?! Are you STUPID?

As always, the financial industry provides so many FANTASTIC ways for people to spend their money and get nothing in return.  (Provided you're NOT a shareholder...  I am!)

What do I mean by this?  They have thousands upon thousands of "worker bees" working in the various branches, regional offices, call-centres, and of course the iconic shiny sky-scrapers in my home-town.  All of these people aren't working for free, so these banks and financial services companies have to pay the bills some how.

Where does this money come from?  You guessed it... YOU.

Now to the meat...  It's FANTASTIC business for a bank to sell you mortgage insurance.  You pay the premium, you pay your mortgage, AND if you die, fall ill, they claim the insurance on the loan.  Not you.  THEY keep the insurance claim.

The house gets paid off in full sure, but your estate and/or spouse and children are left holding the can.

Why is that horrible?  It's not entirely horrible but there is a MUCH better way to do.  But if you're the sole-provider for the family, then yes the house is paid off, but there's no longer income to pay for food, heat, water, electric, phone, internet, property taxes, repairs etc.

What crazy steps do I suggest?

Step 1:  CANCEL your mortgage insurance.  It's a waste of money with NO benefit.  You're paying your mortgage already so your debt is decreasing monthly/bi-weekly/whatever.

Step 2: Get yourself to an insurance broker and buy TERM life insurance to sufficiently cover the mortgage.  (In ADDITION to the policies you already hold to provide for your family in case of your untimely demise)

Why is this infinitely better?  Your estate/spouse/children/dog/goldfish will get the cash.  They can do with it as they please.  Sell the house, or stay with sufficient resources in their pocket to keep paying the mortgage.  Ideally they would invest the cash and use the resulting dividend/distribution income to pay the mortgage payments.  You will KEEP the capital gains from the holdings as well as any left-over dividends/distributions.  You will KEEP your house.  And a huge chunk of insurance payoff goes to YOU rather than to your bank.

Seriously too...  It's easy enough to buy/sell homes with a current mortgage.  You'll have the cash on hand to meet the monthly obligations and you can take your time deciding if you want to downsize, move-on, move-up, or continue to live in the house where now a big hole in your life now exists.

Yes, it requires more work on your part.  But it's a MUCH smarter move financially.

Stay hungry my friends!