Category Archives: Stocks
La Deuxième Partie: Stock Options
Une Part provided a basic overview of stock options. Time to continue along our path learning about this not-so-fun, but need-to-know topic.
There are certain components that identify a stock option’s value. Since option contracts are traded on regulated markets, their values undoubtedly fluctuate throughout the trading day. The price of a stock option is based on several factors. These include the current price of the underlying stock, the price volatility of the underlying stock, the time to maturity, and interest rates.
Let’s talk about intrinsic value. This is the difference between the exercise price and the price of the underlying security. You will make money off an option when this value is positive.
Second, we have volatility. Let’s take a moment here. If you haven’t taken a finance class, this term may be slightly confusing. Volatile means tending to rapid and extreme fluctuations. It is used to describe how big and how often a stock price fluctuates. If a stock price is highly volatile, there is a higher chance that the option will make you money at its expiration date. Thus, the option will carry a higher premium than an option on a less volatile stock.
Time, oh time. Next is time value. The more time remaining until the expiration date of the option, the greater the potential for significant change to occur in the price of the underlying security. This can result in the option gaining more value. Time value diminishes as the expiration date of the option moves closer.
Finally, we have interest rates. The option premium is a cash payment that can be invested by the seller to generate interest income. Higher interest rates allow for greater earnings.
All of these components play a huge role in the determination of a stock option’s value. Once these terms are fully understood, you will really start to understand how they affect an option’s worth.
To test it out, it may be a good idea to take a peek at the market. Head to Yahoo Finance, choose a stock, and watch it for a week or two. Record the price and price fluctuations over this time period. After comparing the numbers from your list, it should be easier to understand the stock’s volatility and value. This is a more hands-on approach to understanding the terms mentioned above. Once you realize how the stock market works, you may feel more confident when the time comes to invest. After all, it’s hard to complain when you’re making money!
Une Part: Stock Options
I have had a number of requests regarding some sort of article on a topic many my age know little to nothing about. Investing.
Stocks, bonds, mutual funds, CDs, 401Ks. If you haven’t heard of these terms, I suggest you open your eyes… and quick. You could attempt googling “investing strategies” until your fingers fall off. Or your could peruse the business section in Barnes & Noble with a latte & an open mind. Or for starters, you could read this blog.
Ever wonder how people turn $1,000 into more than 5 times that amount? It’s called investing, my friends. And I’m going to give you an introduction to it. (Thank you W.P. Carey School of Business for making me and my fellow colleagues uber savvy in this area.)
First of all, what exactly is stock? Stock is an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation’s assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. Huh? Let me break it down for you. A stock represents a small ownership piece of a company. There, that wasn’t so bad, was it?
Now that we know what stock is, let’s move forward. Stock options provide investors with additional opportunities for potentially rewarding returns. BUT stock options do possess risks that require an in-depth understanding of how they work. Options on stocks and stock indexes are derivative instruments. Stock investors may use stock options to hedge against (avoid) a price decline, to secure a future purchase price, or to speculate on the future price of stock. Employees usually receive stock options through a compensation plan. These options have the potential for value growth and the possibility that this high value will be taxed at a favorable rate.
What are stock options? A stock option is basically a contract that gives one party the right to purchase or sell a stated number of shares of stock at a specified price. Layman’s terms: Sally bought 4 shares of Wal-Mart’s stock & now “owns” a small portion of the company. Sally can either keep her stock, or ideally, sell it once the price/value increases in the market. So that’s why those crazy investors frantically run around on their cell phones at the NYSE…
The price at which the shares may be purchased or sold is known as the strike or exercise price. The right to exercise lasts for a stated period of time, which may be months or years until the expiration date. If not exercised on or before the expiration date, the option expires.
What forms of stock options are there? They come in two forms: calls and puts. A call option gives the option purchaser the right to buy the underlying stock. A put option gives the option purchaser the right to sell the underlying stock.
Here’s where it gets tricky. A call option is valuable only when the exercise price is below the market value of the underlying stock. For example, if a stock is being traded at $100/share and you hold a call option which entitles you to buy the stock at $72/share, your option has an immediate value to you of $100-$72= $28. This is a smart idea because you end up “making money”- $28 on that specific share.
Now that we understand that, a put option is the mirror image of a call option. A put option becomes more valuable as the price of the stock moves below the exercise price. For example, if you have purchased a put option with an exercise price of $90 and the stock price moves to $80, you may choose to exercise the option and sell that stock at $90 for an immediate per share gain of $10. Because $90-$80 is $10.
With both calls and puts, the purchaser has the right to exercise, while the seller is obligated to respond if the option is indeed exercised. The purchaser would then have to pay a premium (or upfront fee) to the seller in return for the right of exercise. The buyer now has a known investment risk- if the option expires unexercised, the purchaser recognizes that premium paid as a loss. Conversely, the seller takes on unlimited market risk in return for the premium received.
I think that is enough for today. I’ll allow this mumbo jumbo to sink into your overworked, exhausted cranium. Une Part complete. La deuxieme partie will commence tomorrow. That means part two.
Nerd on.
Finance: Learn it, live it, love it.
Finances. We all know it isn’t fun, unless of course you majored in it. But even then, you probably still don’t thoroughly enjoy it. This article has been one of the most (if not THE most) helpful when it comes to financial decision making.
After countless hours of studying, late nights, final exams and some parties, it’s now time to head out into the “real world”… or at least that’s what everyone has been calling it as long as you can remember.
When moving on to the adult phase of your life, be sure to take care of your financial situation. Your actions now will have significant impact on how the rest of your life shapes up financially.
Many older adults look back and say the number one thing they wish they would have done differently was learned about money management while they were young. Here’s your chance to jump start your finances!
Financial Tips for New Grads
- Get health care coverage immediately. If it hasn’t already, your parent’s health care coverage will probably end with your graduation. Get a quote for an individual health insurance plan or sign up with your new employer’s plan. Going without coverage could have a devastating effect on your finances if you have a severe illness or accident. Make this the first thing you do… and don’t put it off!
- Get your own home and auto insurance. Now that you aren’t a student, you’ll need to get your own auto and renters insurance policies. Start by calling your current insurer, you might be eligible for a discount based on the length of time you’ve been with the company, but don’t forget to shop around to save on insurance premiums.
- Save money for your future self. Join the retirement plan at work. If you are young and your company offers it, you may want to explore the Roth 401k at work. In addition to your plan at work, begin saving money on your own for both retirement and other goals. Now may be the perfect opportunity to save a lot and use the reverse savings strategy before you have lots of financial obligations (kids, house, etc.)
- Start an emergency fund. Earmark some of your first dollars from your new job to build up a savings account to serve as an emergency fund. You never know when an emergency will hit, but it is inevitable.
- Learn about taxes. What? I know, this isn’t a fun one. However, hopefully you’re going to go from a poor college student to a highly paid worker. With that luxury comes higher taxes. Educate yourself about taxes, and you’ll be able to take advantage of incentives and deductions to cut your tax bill. Pay particular attention to the student loan interest deduction and the savers credit for retirement savings contributions.
- Begin payments on student loans. Begin paying your student loans right away. Your future self will thank you.
- Handle credit cards wisely. Use credit cards carefully to earn cash rewards. Always pay your balance in full every month. If you ran up some credit card debt while in school, begin paying it off aggressively. To save interest while paying it off you may want to transfer the balance to a 0% balance transfer credit card or explore other ideas in how to payoff credit card debt.
- Create savings goals. Before you commit your paycheck away, create savings goals. As a new grad, you may want to focus on retirement or a down-payment for a house.
- Spend money slowly. It can be very tempting with a new job to buy a new car and rent a fancy apartment. Not so fast! Wait a few months to see how your finances work out.
- Follow your heart. Did you meet the man or woman of your dreams at school? If so, and you are planning a wedding in the future, don’t forget to keep these money-saving tips in mind! Especially when planning a wedding or buying the ring!
This isn’t necessarily fun stuff, but it’s stuff you have to know. Keep things in perspective: at least now you won’t look like an idiot when filling out your tax forms!
Thank you to mydollarplan.com for this amazing article!
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