Archive for February, 2012

Announcement: Joining the Yakezie Challenge

Epicfinances.com has officially joined the Yakezie Challenge!

About Yakezie:

The Yakezie is the web’s largest personal finance and lifestyle blog network.  We started in December of 2009, and have since grown to become a thriving community eager to help others.  We strive to optimize reader’s personal finances and allow people to lead better lives.  We are over 80 Members strong of individual voices, individual owners and different opinions who have all gone through a 6-month Challenge to join the network.  Only the finest blogs who we have developed relationships with are admitted.

I am thankful for the opportunity and appreciate all of the hard work put into making this network.

My current Alexa Ranking: 584,881

Value of a Stock Based on Option Chains

Did you know that you can get a feel for the value a of stock based on the stock’s option chain? More specifically you can get a read on the short and even long-term opinion of volatility of a particular stock.

This can be a rather complex concept for some, but if you have any questions or comments – leave them and I’ll try to explain.

I am going to compare two stocks, one that is known to be very volatile and one that is relatively low volatility.
The highly volatile stock is S (Sprint) and the low GE (General Electric). I am going to use an expiration of Jan 2013 for both examples.

Let’s first take a look at the option chains for each stock. I want to talk  about selling an option on a stock that you own (commonly called a buy-write).  I have highlighted the price you would sell the option for in green.

 

value of stock

value of options

 

I first want to talk about “in the money” options for GE. “In the money” means that the strike price is lower than the current market price (they have a background color of blue). When you sell a “in the money” option, it’s much like renting your stock out entirely. You will participate in zero gains (since any upward movement will be realized by the buyer), but you usually have a large downside protection. It’s best to look at an example.

GE – Strike $17.50, Expiration Jan 19th, 2013 – Premium $2.70 (14.00% of stock current value)

If you purchased GE stock today for $19.28 a share and sold the option mentioned above you will receive a $2.70 premium for the option, but you paid $1.78 more for the stock than the strike price of $17.50. This means your actual net would be $2.70 – $1.78 = $.92 (4.77% gain). If the stock stays above $17.50, it is assumed the option holder will execute and take your stock and therefore you would have netted 4.77% in 11 months (or earlier if they decided to execute). It does not matter if your stock finished $17.50 or at $5,000 – you will net 4.77%, plus any dividends (this is for a future topic).

Could you get a gain less than 4.77%?
Yes, when the stock goes below $17.50 it hurts your gain. In fact, if the stock went $.92 BELOW $17.50 – you would be at break even. Therefore the stock price would be $16.58 to be at the point that you make 0%. This represents the purchase price minus the premium ($19.28 – $2.70)

Let’s sum it up this way, you receive at a gain of 4.77% (plus dividends) for letting someone else take over your stock until Jan 19th, 2013 – but if the stock tanks below $17.50 – it’s starting to hurt your bottom line and return.

Now let’s talk about how this chain will help you find the value of a stock. You are only getting 4.77% for “renting out” your stock for about 11 months. If the market thought this stock had a good chance of going to $30 within those 11 months, the premium they would be willing to pay would be greater. The market is showing that the valuation of this stock is about where they think it will remain for these 11 months.

Summation of GE Option: What the market is saying is effectively “I will take all of the downside until $17.50 and and any upside of your GE stock from now until Jan 2013 and I’ll pay you $2.70 for that right, and if GE finishes anywhere above $17.50 you will get 4.77% return in 11 months.”

Now let’s talk about Sprint.  Go to Next Page.

Rant: Can a Blog Really Be a Full Time Job?

Blogging Full TImeThe dream of working full time on your blog is one that many people share, but is it viable? I am here to offer my opinion on the matter.

First off, you will notice that most bloggers (especially financial bloggers) commonly publish articles very similar to the one I’m about to present. The reason why is that many people want to monetize their blog is they hope they potentially strike it big and generate some money! Sadly I am not here to paint a very bright picture of the blogging world.

What kind of money would you need to make to go at full time? Well that depends on your lifestyle, but remember that taxes and health insurance can be very expensive. I personally would want to be in the 80k to 100k range, but I am confident I will never be generating that kind of income off my blog/websites. Remember of course you will have no retirement as well, so you are completely on your own.

Who does make it full time? Well most bloggers are not full time.

I would like to say that I admire the blogging community and it is full of quality people, and I want people to understand what I’m about to describe is for educational purposes for future potential bloggers.

Something that is very common in the blogging world is semi-successful bloggers  stall out revenue wise and often find themselves searching alternative ways to boost their profitability. If you follow bloggers, how many bloggers do you see that suddenly do something kind of “off the wall” way to generate revenue? Maybe they publish a book or another web based concept. Some people develop affiliate networks and are for hire consultants for other blogs. The point being here, many bloggers tend to stray into non-content generating activities in attempts to generate enough income to become full time. Some people even flat out buy blogs and hire their authors to continue producing their articles, with hopes that revenues will surpass expenses.

You would be surprised to find out how little actual content generation matters in the blogging world. There are actual services that will “write” content for you for virtually nothing. Some of these services offer 100s if not 1000s of “unique” articles for your website – and some cost as little as $1 an article. These articles are usually generic and very bland, but the right content manager can use these type of articles to generate some real income. Just for the record, most of these articles are most likely not truly “unique”, but the internet really is the wild west and has the “come and get me” mentality.

So what does it boil down to then! Someone has to succeed!

Well some people have success with generate some money, but I would argue that the people who truly make a living off blogging are either the less than 1% who really have quality content and get lucky or are the the Search Engine Optimization geeks who produce almost entirely trash. Search Engine Optimization (SEO) is about formatting and scripting your site in a way that will allow search engines to rank your site higher. When you site ranks higher, it gets more traffic – which is the ultimate goal.

These SEO magicians will take articles that they often do not even write and publish them on 10’s, 100’s, or even 1000’s of their websites. Do they care about community? Absolutely not. Their goal is get passive income. Often times the content they product is “evergreen” content. “Evergreen” content is content that does not age poorly. An example of evergreen content would be an article about “How to Cook an Omelets.” If you made for example – makingbetteromelets.com and you were able to get a high page ranking (through SEO), you could potentially capture 10,000’s or 100,000’s of global hits a month!

So what’s the point of the article? Blogging can be a good source of extra income, but most likely it will never replace your full time career. The sad reality is, that most bloggers usually end up in trying to generate revenue in other ways than their actual writing/blogging.

I never once believed that it would a career changer for me, but the more I got involved with blogging – I realized how dark the internet has truly become. Now a days it is all about fake networking and producing backlinks to your site. I see blogs with quality and interest articles that have no traffic and I see blogs that absolutely no meat to them, that are generating 100’s if not $1,000’s a month.

If you want to get traffic and generate revenue, just be prepared to spend more time on the site than the content.

rate calculatorOwning a home might be one of the worst investments you can possibly make in the foreseeable short-term, but not for all of the obvious reasons. I am going to talk about the most overlooked cost of ownership that people rarely realize. The opportunity cost of your equity.

Let’s say you are a young couple in their 30’s and you buy a $250,000 house @ 4% (or less) in today’s market. You then make extra payments and by age 40, you have no mortgage! Just think about it, that $1193 monthly(rate calculator) payment is gone forever, but at what opportunity cost.

I am not here to talk to you about the money you could have earned at age 30 to 40, even though you surely have lost a lot if you were able to obtain a larger than 3% return on your investments (approximate effective rate of mortgage until non-itemized), but let’s put that aside.

I want to talk to you about the $250,000 you have your house, in equity.

I personally was able to achieve double digit growth 11 out of the last 13 years in stocks. Let’s say you were able to earn just 7% on investments – your equity is tied up in your home. If you had $250,000 in cash and earned 7%, you could earn $17,500 a year or $1,458 a month – MORE than what you are saving by not having your $1193 monthly payment. If you were able to obtain 10% it would be $25,000 or $2083 a month!

Let me break it down to you this way, if you are able to get a 10% return you would save $890 a month or $10,680 a year by putting the money into stocks and into your home.

Your cash is locked up in your home and odds are 10 years from now you can no longer borrow cash for an effective rate of 3% or even 4% – you have destroyed your mechanism for cheap borrowing. If the market does recover and people start earning 10% annually, I promise rates will sky rocket.

Hypothetically you might be able to get a HELOC (Home Equity Line of Credit) during this time, at a higher rate, let’s assume 7+% versus your old effective 3%. If you were to borrow that $250,000 you would pay $10,000+ more in interest a year at 7% vs 3%. A harsh penalty for paying down your mortgage. I know most people simply would rather live mortgage free, but I for one always like to maximize  the amount of money I have, but hey – that’s me.

Moral of the story – Your home is a very cheap form of debt now a days and should not be paid down unless you either get an extreme psychological benefit or you are sure you cannot out perform your effective rate on your loan. But I’ve said it before and I’ll say it again – if you think 3 or 4% rate of return is good enough, then you are going to have some struggles ever obtaining real wealth.

I know this article makes a lot of assumptions, but I hope you take home the message that if things turn around in the economy or if you think you can out perform 3% in stocks/options – then paying down your mortgage might not be a smart financial move.

Useful to people searching for:
rate calculator
money saving
pay off house
amortization

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