YodZiaN

We have been getting a lot of questions lately about options trading because of our new options trading service, so I wanted to use this week’s article to explain the basics of trading options. There is a lot more to consider when trading options and a lot more terminology you need to know then when trading stocks. Here are the most important things you need to know about options:

An option is a derivative, meaning its price is based on an underlying asset. These underlying assets can either be stocks, ETFs or Indexes. Buying an option gives you the right, but not the obligation to purchase the asset at a specific price (called the strike price).

There are two types of options, Calls and Puts. The value of Call options increase as the value of its underlying asset increases. Traders buy Calls when they think the price of the asset is going to go up. The value of Put options work the opposite way, they increase as the underlying asset decreases.

For Call options, if the price of the underlying asset is below the strike price of the option then it is “out of the money,” when the price of the asset crosses above the strike price it is called, “in the money.” This too works the opposite way for Put options. The price of the option has the greatest percentage moves when it crosses from out of the money to in the money but out of the money options also have the most risk.

Options are not issued by companies like stocks are. All options that exist are “written” or sold by another trader somewhere. So in a way, you are directly betting against that person if you buy an option.

All options have an expiration month. The option will expire at the close of trading on the third Friday of that month. If you are still holding the options at that time they will expire and be worthless.

When you trade options you are buying or selling options contracts. Each options contract controls a block of 100 options on 100 units of the underlying asset. So if the price of a stock option is $2.00 and Read more…

Are you excited about the upside potential of China but can?t pull the trigger because of the significant downside risk? Here is a way to invest in China growth and still sleep at night.

China has been the largest economy in the world for eighteen of the past twenty centuries and it is clearly determined to regain its role as the hegemonic power in Asia and then challenge U.S. global leadership. Will it be able to sustain its 10% economic growth rate, quell rural discontent, build a sound market-based financial system, privatize dominant state-owned enterprises and move towards openness and democracy? This is a tall order and you can put me in the skeptic column.

Nevertheless, China?s raw industrial power, momentum and the palpable ambition of the Chinese people could realistically yield a huge return.
I advise my clients to go ahead and invest in China but emphasize that this is a speculative investment. It is smart to protect against the considerable downside risk.

Here is a simple plan you might want to execute to capture the upside while cutting your losses if the Chinese economy hits a speed bump.

First, take a broad stake in China through investing in the China iShare exchange-traded fund (FXI) that is comprised of 25 of the largest and most liquid China names. All of the 25 stocks included in the China iShare are listed on the Hong Kong Stock Exchange. Some of them are incorporated in mainland China (H shares) and some of them are incorporated in Hong Kong (red chips). The China iShare has been picking up steam in the last few months and is up just over 12% so far this year.

The China iShare provides good exposure to three key sectors of China: energy (20%), telcom (19%) and industrial (18%). This concentration can be viewed as a plus or a minus depending on your perspective. For example, some smart investors are placing a bigger bet on China?s consumer markets. The top five companies represent 40% of the index. The annual operating expenses of the China iShare are only 0.74% compared to 2% plus for other alternatives out there including actively managed China and greater China regional funds. Keep in mind that most of these companies are still largely controlled and owned by the Chinese government.

Next, take out some insurance to protect this position by purchasing a put option on the China iShare (FXI). It sounds complicated but is actually very straightforward. An option is a right to buy (call) or sell (put) 100 shares of a security on a fixed expiration date at a set price (strike price). For this right an investor pays a fee or premium.

While you may grumble about paying the premium with cold hard cash when you might not need it, you probably have home insurance just in case disaster strikes and no doubt you have some life insurance as well. Why not protect your portfolio as well? It is especially important to consider hedging against more risky emerging markets such as China. While countries like China offer tremendous upside potential, the downside risk can be daunting and immobilize even the bravest investor.

Let?s look at a couple of examples. Say you buy 100 shares of the China iShare (FXI) which is trading at $62 per share. Your total exposure is $6,200. Then purchase a put option (right to sell the China iShare) that gives you the right to sell FXI at a price of $60 on the third Friday Read more…

Index funds are investment funds that attempt to emulate the returns of a specific market sector. They usually focus on a particular market indicator or index. The four best-known broad market indexes?Dow Jones Industrial Average, NASDAQ, S

Exchange Traded Funds (ETFs) have been one of the hottest trends in the stock market for the last few years. They have many advantages that both traders and investors should consider.

ETFs are similar to mutual funds, in that you are getting the advantage of diversity by investing in a group of stocks all at one time. However, there are some major differences between these two types of funds. The most important difference is that ETFs trade just like stocks. You can use any broker to buy an exchange traded fund, such as QQQQ, just like you would buy MSFT or any other stock. This is a major advantage over mutual funds, which are much harder to get in and out of.

ETFs are also not actively managed. Mutual funds usually have a group of people who manage the holdings of the fund and try to provide the best possible returns. ETFs simply track a set group of stocks, usually based on an already established index, such as the NASDAQ 100 or other indexes as with the more focused funds like IYF from iShares, which tracks the Dow Jones Financial Sector Index.

Another major advantage to ETFs is that they usually provide a highly liquid asset to trade. According to Yahoo! Finance, which has a large section of their site devoted to information about ETFs, there are around Read more…

In 2005, American investors set a new record with net purchases of foreign stocks of more than $110 billion. American investors’ home bias is waning, research shows that foreign shares represent about 16% of the average portfolio and many financial advisors are now recommending that their clients allocate 10%-30% of their portfolios to non-U.S. stocks and bonds.

American companies have gone global in a big way and stellar returns from investing in global stock markets over the past few years has left U.S. only investors green with envy and red ink portfolios.

But what is still the most-quoted market indicator in newspapers, on TV and on the Internet – the Dow Jones Industrial Index (DJIA).

Let’s look briefly at the history of this index, why it may be out of date and discuss a possible alternative to financial products that track it such as the Dow Diamonds (DIA).

Charles Dow created in 1896 the first Dow Jones Index that included nine railroad stocks, a steamship line and a communications company. In 1916, the industrial average expanded to 20 stocks; the number was raised again, in 1928, to 30, where it remains.

Charles Dow had the vision to create a benchmark that would project general market conditions and therefore help investors bewildered by fractional dollar changes. A revolutionary idea at the time, its implementation was simple. The averages were, well, plain old averages. To calculate the first average, Dow added up the stock prices and divided by eleven, the number of stocks included in the index. A special divisor other than the number of stocks is used to avoid distortions when constituent companies split their shares or when one stock is substituted for another.

Today, the DJIA is a benchmark that tracks American stocks that are considered to be the leaders of the economy and are listed on the Nasdaq and NYSE. The DJIA covers 30 large-cap companies, which are subjectively picked by the editors of the Wall Street Journal. Over the years, companies in the index have been changed to ensure the index stays current in its measure of the U.S. economy. In fact, of the initial companies included, only General Electric remains as part of the modern-day average.

The most recent deletions were when Kodak, International Paper, and AT

The effects of caffeine on the central nervous system were first discovered in the 6th century in the Ethiopian highlands by a sheepherder called Kaldi. After his sheep ate red berries from a coffee tree, they seemed a bit jumpy and had difficulty sleeping.

The berries next made their way to a local monastery where the Abbott made a drink by mixing the beans with water into a concoction that kept him alert through the long hours of evening prayer.

Coffee most likely made its way to Asia in the latter half of the 17th century when a Dutch trader brought a seedling from Yemen to Java where the soil proved hospitable leading to a thriving and profitable industry to this day. Vietnam is now the world?s second largest coffee producer while India and Indonesia are in the top ten.

Despite substantial coffee production in Asia, much of the growth in the popularity of coffee in this predominantly tea drinking region can be attributed to instant coffee and the marketing efforts of Nestle. It rolled out the first commercially viable instant coffee in 1938 and it spread to Asia becoming a prestigious alternative to tea.

As incomes rose in Japan, coffee consumption grew as well making it the third largest consumer in the world. This is a trend that could continue in countries with rising disposable incomes such as China.

Coffee is now big business and as a world commodity is second to only oil.
This size and growth potential for a habit forming product like coffee sure sounds like an investment opportunity to me. But how should you play the rise of coffee in Asia.

Since it takes about 4-5 years for a coffee tree to bear cherries, investing on the production side is not for the faint of heart due to hard to predict coffee price fluctuations. As one of the largest coffee plantation companies in Asia, Tata Coffee Ltd. of India, is worth a good look especially since it is an integrated coffee company with roasting, exporting and retail operations.

Nestle is also a possibility since it is the leader in instant coffee in China and many parts of Asia. A drawback is that the coffee business represents only roughly 10% of the sales of this diversified food powerhouse.

The most attractive option is to invest in the retail coffee market which is highly fragmented. Starbucks (SBUX) is the global leader with 10,500 retail outlets of which 3,500 are outside North America. Starbucks began in Asia with its first store in Japan in 1996 and now has 165 stores in mainland China, 221 in Hong Kong, Taiwan and Macau, 595 in Japan, 64 in Australia and 34 in Singapore.

Starbucks is a classic growth story. It added over 1,000 stores last year and plans 1,800 more in the fiscal year ending September 2006. 35 million people visit a Starbucks store Read more…

The 2005 trade numbers released last Friday are sure to get the China trade hawks riled up. But if you look behind the numbers, the trade imbalance with Japan is likely larger than China.

According to the trade statistics, the trade deficit with China was $201 billion or 28% of America?s total deficit of $726 billion. No doubt these trade numbers capture only a portion of the value traded between countries but nevertheless are rough barometers of trade.

Our 2005 trade deficit in petroleum products was an even larger $210 billion but the China number will certainly get the most political attention. If you look at the numbers a bit more closely, however, you will find a surprising result- Japan is likely a bigger trade problem for America than China.

Here?s why. China custom data indicate that about 60% of China?s exports come from foreign companies manufacturing and assembling in China. Even if we knock this number down to 50%, this is still equal to $100 billion worth of China?s exports last year.

According to research from the think tank ChartwellAmerica, the vast majority of these so-called Chinese exports are controlled by Taiwanese, South Korean, American and Japanese firms. For example, about 75% of manufacturing output by Taiwanese companies takes place in China. Samsung has 23 factories in China and closed down its last notebook plant in South Korea last year. Japan?s Panasonic has 70,000 employees working in China.

This why I have been recommending clients have allocations to the Taiwan (EWT), South Korean (EWY), and Japan (EWJ) exchange-traded funds in order to capture this growth in their global portfolios.

A major reason for Japan?s economic recovery can be attributed to its booming exports to China of which a major slice goes on to America. China has now replaced America as Japan?s largest trading partner.

If we conservatively assume that 25% of $100 billion of foreign-controlled Chinese exports are from Japanese companies in China and add that to Japan?s 2005 trade surplus with America of $82.7 billion, this brings the number to $107.7 billion ? higher than China?s number stripped of its foreign company exports.

The Japan imbalance is often explained by its weak economy and consumer demand but it is amazing that the deficit has stubbornly persisted and that American firms have still been unable to penetrate the Read more…

Last week during his tour of Kyoto Japan, President Bush visited the Golden Pavilion (Kinkakuji) and described it as ?magnificent?. He was probably referring to the 1398 Japanese architecture but may just as well have been referring to gold prices which are at an 18-year high. Gold has been a magnificent investment and still has considerable upside.

It is a rare portfolio that I build for a client that does not have some allocation to gold and other precious metals. There are three basic reasons why investors should still consider adding it to their portfolio.

First, gold prices are not normally correlated to other asset class prices. It therefore serves as a buffer or shock absorber to the value of a portfolio when other assets classes are out of favor.

Secondly, there are supply and demand factors. Central banks have been net sellers of gold over the past twenty years. Gold accounts for about 9% of the $4.4 trillion in world central bank foreign exchange and gold reserves, down from 15% in early 2000.

But some central banks are now going the other way. For example, the Russian central bank wants to increase gold?s share of its reserves from 5% to 10%.

Jewelry demand for gold is also picking up especially in China and India. Global investors are also using gold as a hedge for a global recession and potential decline in value of the U.S. dollar or the Euro.

On the supply side, production of gold has been relatively flat for the last 5-7 years and does not appear to be turning around due to maturing mines and higher extraction costs.

The third reason to have some gold Read more…

With the euro down nearly 15% this year and at a two-year low against the U.S. dollar, the world?s largest exporting nation is worth a good look. So is another country that has thriving exports in spite of a stronger currency. We?re talking about Japan and Germany, respectively, the world?s second- and third-largest economies.

The top lines at leading German industrial companies are rolling in with impressive numbers for an almost zero-growth economy. Quarterly sales at Siemens rose 13%, the fastest since 2003. BMW?s sales rose by 11% in the third quarter, although high raw-material costs and pricing pressure resulted in weak net profits. A bright spot is Asia, where BMW expects to sell 150,000 cars per year by 2008.

Overall, German exports are up for the third-straight month and sales to countries outside of the European Union rose 18% annually from a year earlier. Clearly, the Germans are good at making stuff and selling it to the world, and the weaker euro is helping spur growth. Germany?s DAX stock index is taking notice and is up nearly 20% year-to-date.

Meanwhile, U.S. exports are up a paltry 2% since 2000. Although exports to China are up 35% during this same period, Americans are now buying seven times more from China than we are selling to them. A good reason why is that, according to research by Morgan Stanley’s Stephen Roach, consumer spending represents 71% of America?s gross domestic product. The figure is 42% for China and 55% for Japan.

Speaking of Japan, the aftermath of the financial bubble has obscured the fact that it too, remains an exporting powerhouse, despite a currency that has risen more than 20% since 2002 and 13% this year alone. Just look at Japan?s current account surpluses over the past three years: $113 billion in 2002, $136 billion in 2003 and $172 billion in 2004. China is a major market, and despite political difficulties, bilateral trade between China and Japan now exceeds trade between Japan and America.

A majority of Japan?s exports are manufactured goods and components. Fifty percent of its exports to China in 2004 were electrical equipment and machinery, and its top exports to the world include autos, electronic components, optical instruments, imaging equipment and computer parts.

Much is made over China?s huge trade imbalance with America, which reached $126 billion in the first eight months of this year. No doubt a sizable share of Chinese exports to America are chock full of Japanese components. While some of these components were made in offshore facilities, many were made in Read more…

Managing a global portfolio of exchange-traded funds (ETFs) is a great way to build a diversified portfolio with exposure to equities around the globe. Fortunately, you need not be a rocket scientist to do this, but many investors fail to observe some basic guidelines, and it can get them into real trouble. Follow these eight steps and sleep easier.

1. Liquidity Comes First: Before you even think of building an investment portfolio, you should set aside about six months of income in a ?rainy day? account. This could be put into a money market fund or U.S. Treasury securities. Having this money set aside will ease your mind and allow you to be more open and creative with your global portfolios.

2. Separate Portfolios: You should separate your core conservative portfolio from your growth portfolios. With the core conservative portfolio, your top priority is capital preservation, and growth is a secondary consideration. Your growth portfolios are more speculative, with capital growth as the primary goal.

3. Really Diversify Your Portfolios: You need positions in your portfolios that are likely to offset each other as unexpected events and market movements become a reality. This is not accomplished with different sectors of ETFs or a mix of small-cap, mid-cap and large-cap ETFs. Rather the goal is to have some investments that are on both sides of risks.

For example, if the U.S. dollar declines, have some investments in precious metals or denominated in other currencies, such as Switzerland or Australia or Singapore ETFs. If inflation heats up, have some investments that hedge this risk such as timber, gold or Treasury inflation-protected bonds (TIPs). If political events or policies in one country take a turn for the worst, it is helpful to have investments in other well-developed countries to offset any loss of value. You get the idea, spread your risk and avoid having one ETF account for more than 5%-10% of your core portfolio.

4. Be Careful Which Countries You Pick: You need some guidelines to help keep you from getting carried away and having too concentrated a position in a particular country or region. In particular, take a good look at the following: 1) the stability and overall political and corporate governance; 2) the legal environment, respect for contracts, low levels of corruption, due process and rule of law; 3) the macroeconomic environment including fiscal discipline and currency strength; and 4) political risks that could affect financial markets.

Keep in mind that the quality of the countries you choose to invest in is the primary but not the only factor. The price or valuation of a country?s stock market is also extremely important. Oftentimes, the best time to buy into a country?s stock market is when it is beaten down, but there are signs that its economic and political problems will sharply improve. If you have a long-term perspective, you might consider annuities specially structured for ETF portfolios.

5. Minimize Company Risk by using our ?buy countries, not stocks? strategy. Instead of trying to pick the best three stocks on the Tokyo Stock Exchange, why not just minimize company risk by buying the iShares MSCI Japan Index, which tracks the Nikkei 225 and spreads this risk across 225 Japanese companies.

6. Monitor ETF Country And Company Exposure: Be careful to look under the hood of ETFs to see where your money is going. For example, let?s look at the iShares MSCI Emerging Markets ETF. It invests in 26 different countries, so it is natural to think that you will Read more…