Favorites Archives

Avoid Borrowing Money from Friends and Family

We all get into a bind from time to time, for one reason or another, it happens to the best of us.  How you get through it and come out on the other side not only matters to your financial future, but also the relationships around you.  Whether it is a large sum of money that you could not get a personal loan for, maybe family or friends are offering a lower interest rate (perhaps even no interest) that would save you plenty of money on interest that you could not get otherwise, or need a few dollars short term to get by until the next paycheck, avoid asking family or friends for the money, you will thank yourself in the long run.

When the conversation is initiated it is awkward for both parties.  First the person coming to ask for money has to disclose finances, which whether you are in good or bad financial shape is not smart to discuss with those around you, as it usually can make someone jealous or envious.  Second, the person in the position to lend money may feel obligated to help, so it puts them in a difficult position to say no and feel weird around them going forward, or say yes and begin the process of having this person be indebted to them.

If a sum of money is agreed upon it runs the odds of being open ended, as typically money lent to family and friends tend to have loose terms and have no interest, putting a borrower and lender in a state of where the lender is always nervous wondering when the money will be paid, and the borrower not knowing when to pay it back.  After a period it could come across that the loan is not a priority, making the lender then hove the difficult talk to ask for the money back, and therefore suddenly get-togethers are getting awkward for both parties.  Neither will want to talk about the money that was lent, or anything that costs money for that matter.

When you lend money to family and friends you are sort of enabling them instead of helping them working through their problems, even getting to the point where more money could be asked for.  Not only is the money not collecting interest for the lender, but it also reduces their money if ever needed for emergency.  If you decide that it is ok to lend money, make sure there are terms are agreed upon, but must also be aware that there is a possibility that the money could never be returned, therefore jeopardizing the relationship.

 

 

 

There are tons of personal finance blog outs there, but I want to take a minute to honor the ones that I find are publishing quality content. Consider this a “carnival” of types of blog articles. These are a few of the articles that stood out to me.

Executing the Defensive Plan by Selling Covered Calls – Cash Flow Mantra

image

No one ever gets rich by being frugal Retire by 40

image

The Decision To Get A New Job Modest Money

image

Why Most Bloggers Miss Out on Passive IncomePassive Income to Retire

image

Improving Our Communities Through Real Estate InvestingThe Dollar Disciple
 image

Option Straddles are when an investor takes both long and short positions on the same security via options. To a new investor, you might be confused on how taking both up and down would net any gains, but in reality the idea is very simple.

For this example, we will take a look at my favorite stock, Sprint Next Corporation (Symbol: S). The stock is currently trading at $2.47 (roughly $2.50) and the option changes are shown below for expiration Jan 13th, 2013. The “Buy Calls” are outlined in green and the “Buy Puts” are in orange (these are the prices you will have to pay to obtain the call and put options).

option straddles

Assuming we wanted to take a “straddle” position on Sprint Nextel Corporation, we would most likely take a position of “Buy Call” @ Strike Price $2.50 AND “Buy Put” @ Strike Price $2.50. The cost of our options are $.51 and $.54 cents respectively, totally $1.05.

I believe the best way to understand this concept is through examples.

What did you purchased with these options in simple terms?
You have paid $.54 for the right to claim ALL upward movement of the Sprint Nextel Corporation Stock.
You have paid $.51 for the right to claim ALL downward movement of the Sprint Nextel Corporation Stock.

Now time for some examples.


 

Example #1: Stock goes up or down $1.00

The stock appreciates $1 a share. Your “Call” Option is now worth $1.00 more because you can buy the stock for $1.00 less than current market prices. Your “Put” option is sadly now worthless because it entitles you the right to sell your stock for $2.50, but the market is currently paying $3.50 per share!

Overall net gain: $-1.05 (cost of options) + $1.00 appreciation of “call” option = –$.05 loss. This example would be the same for the stock going down, but it would be vice versa. Your “put” option would have appreciated $1.00 and your call would have depreciated to a worthless value.


 

Example #2: Stock Finishes on the Strike Price ($2.50, +$.03 overall)

If the stock price finishes on the strike price, both options have no value. You have the right to buy or sell the stock at the current market price, which is the same right everyone else can execute without an option. Your loss? The entire premium you paid for both options – $1.05 loss.



 

Example #3: The Stock Goes Up or Down $2.50+ a Share.

Suppose the stock completely tanks to $.00.  You own the right or option to sell (“put option”) this stock for $2.50. What is your overall gain going to be?
$2.50 selling price$1.05 premium = +$1.45 gain (or +138.09%)

The same overall net would occur if the stock went up $2.50 a share, but once again you would simply sell or execute the “call option,” instead of the “put option.”

Also it’s important to note that although the stock could only go down $2.50 a share, this stock could go up an infinite amount, which leaves your straddle the ability to generate infinite returns.


Ultimate a straddle comes down to this, you want EXTREMELY HIGH volatility. If you purchased a straddle today on Sprint Nextel Corporation, you would need the stock to move roughly $1.05 a share before breaking even. I even drew you a nifty picture.

straddles

So why would you want to use a straddle? Because you are utterly clueless to which way a stock is going to move, but you are fairly certain it is going to move.  Maybe you think earnings will be weak or strong for a company or that the macro economic factors will hurt or help the company. Of course there are multiple strategies and trading styles that use straddles, but the take home message is that with straddles, you need price movement.

You might think, why wouldn’t everyone just buy straddles for all of the crazy high volatility stocks? Because the higher the volatility, usually the higher it costs to hold a straddle. In the example with Sprint Nextel Corporation, you are paying $1.04 for the straddle, which is 40.78% of the stocks’ value! Remember if the stock doesn’t move, you could lose 100% of the premiums and walk with nothing.

The one research tool anyone going towards utilizing straddles may want to consider is using the Beta Factor of a stock. Beta Factors represents how the stock reacts to the market as a whole, Beta 1.0 being equal to the market. This factor is an estimate, but generally speaking the higher the beta the better for straddles.

Find Options Interesting? Let me know and check out some of my other articles reading to trading options.

Disclaimer: Nothing on this site should be used for making decisions of any kind. This site is for educational and entertainment purposes only. Always consult a professional financial advisor before making investments.

Some finance bloggers talk about being a landlord as if it is very easy, but is it?

A lot of people are searching for ways to increase their income and many people find investing in rental real estate and being a landlord as a viable way of increasing wealth over the long term. The idea is simple and easy for most people to understand, so it’s natural that so many people are being a landlord now a days.

Real estate is what I enjoy to research. First I want to look at real estate in my nearby area, particularly a single family home. I live in a better suburb of Cincinnati, OH. The taxes are reasonable (slightly higher than other areas of Cincinnati, but overall fairly cheap).

Putting a Pencil to it First:

Single Family Home – Listed $69,900, Annual Taxes: $2251, Insurance $700
Assume a 20% down payment, lets say you buy the property for $65,000 after all fees and closing.

Owning Rental PropertyMortgage Payment: $349.33
Monthly Taxes: $187.58
Monthly Insurance: $58.33
Maintenance Cost: $50
Disaster Fund
($1000 a year / 12) = $83.33 – Roof, A/C, Furnace, Water Problems, Deductible, Etc.
Lets call these two items: $130

Total Cost: $725.24 a month
How much can you rent it for – This is a debate. Lets say you can get $950 for this home. It is in good condition, but not in the best place within the good suburb. Also I want to state this is the cheapest single family home within the area.

So now lets talk about what you get out of this:

Deduction: You can depreciate the value of the Structure, but not the land. Lets be favorable and say you can deduct $50,000 of the $65,000 over 27.5 years (what is current permitted). That is $1818 a year. We will come back to this.

You financed your home – $52,000 worth of financing in Fact. How much equity are you building with a standard 30-year mortgage at 4.25% with no additional payments:

Year 1 $877
Year 2 $914
Year 3 $955
Year 4 $995
Year 5 $1039

 


 

What about occupancy rate. Are you planning on having this rented 12 out of 12 months? Sure, but that’s not realistic. You make get a tenant that lives there 30 years straight, but more likely than not you should plan at least 5-11% vacancy. Lets call it 1 month a year (8.3% vacancy). Note: Rehab and Repairs can increase this greatly.

 Page 1 of 2  1  2 »

Social Widgets powered by AB-WebLog.com.