In trading on Monday, precious metals shares were relative leaders, up on the day by about 2.6%. Leading the group were shares of Minefinders Limited (MFN), up about 26% after an announcement that Pan American plans to acquire the company.

Investing in Options: An Insurance Policy Against a Volatile Market

by Jason Jenkins, Investment U Research
Monday, January 23, 2012

During the current market environment a good number of investors who lost money did so because they failed to keep the profits they attained or cut their losses. What they needed were strategies that could effectively help provide a means for exiting an equity position or offsetting losses when your stock moves against you.

One technique that Investment U recommends is using a trailing stop. Trailing stops are simply a stop-loss order set a certain percentage below the value of the stock – and then adjusted as the price rises. Whenever a stock in our portfolio pulls back 25% from its closing high – or from our original entry point – we sell the stock at market. This strategy keeps us from selling our stocks while they’re in a major uptrend – and prevents small losses from becoming unacceptable losses.

But this isn’t the only strategy available to us to protect against losses in a volatile market.

A Stock Insurance Policy

If you hold a stock that might take some losses in the short term, but your heart and valuations tell you that this is something you should be long on, a protective put may also provide short-term protection against all the current volatility we’ve been facing. 

A put option gives its owner the right, but not the obligation, to sell 100 shares (options work in lots of 100) of the underlying asset (in this case, shares of stock) at a definite price known as the strike price until a specified expiration date. No matter how low the stock price falls, you still can sell the stock for the strike price until the option expires.

When an investor also owns the common stock and a put option on that same stock, the position has limited downside risk during the life of the put.

Here’s an example:

Assume you own 1,000 shares of stock ABC worth about $72,000. If you do nothing and the stock suddenly drops to $50 a share, you could lose $22,000.

To help reduce this risk, you can buy “insurance” on your stock. If you decided to buy 10 put options with a strike price of $70, at a price of $2 (total cost $2,000), you could exercise your puts at any time prior to the expiration and sell your stock at $70, 20 points above the current market price, or sell the puts themselves to offset most of the loss on your stock.

If you chose to sell your stock at $70 by exercising your puts, the premium you paid for your put options ($2,000) would be your “insurance premium,” and the 2 points you would lose on your stock (because you paid $72 for it, and only sold it for $70) would be your “deductible.” Overall, your loss would be about $4,000 to $2,000 on the stock and $2,000 in premium (the amount you paid for the puts).

If your stock stayed above $70 by the expiration date, your puts would expire worthless, and the $2,000 you paid for the puts would be lost – just like the insurance premium you paid on your car if you didn’t have any accidents.

Options Provide More Options

To determine whether buying protective puts makes sense or not, consider how low you think the stock might drop. Keep in mind that there are different protective puts on the market to buy depending on the strike price and the expiration date.

If the stock price drops, you can hold the put until you decide to either sell the put for a profit or exercise the sale of the shares. If you believe in the company and the stock price drops below the strike price of the put, you can sell the put and use the profits to buy more shares of the stock at a lower price – the put is its own investment vehicle thereby providing a great deal of flexibility.

Good Investing,

Jason Jenkins

Article by Investment U

The Great Minds of the Market:
Charles Dow

by Alexander Green, Investment U Chief Investment Strategist
Monday, January 23, 2012: Issue #1692

This week I’m beginning a series about the great men and women – often unknown – who shaped the modern investment landscape.

Why should you care about these individuals, especially since many of them are dead? Because Sir Francis Bacon was right: Knowledge is power. This is especially true in the financial markets. And, as you’re about to learn, the type of knowledge you accumulate is likely to be a primary determinant of your success as an investor.

So let’s kick things off today with a man whose name is legendary on Wall Street:

Charles Dow.

Dow is a significant figure in the annals of financial history for two reasons. He created the first financial bible, The Wall Street Journal, and the first market barometer, the Dow Jones Industrial Average. In doing so, he revolutionized the way we talk about the financial markets.

(By the way, Charles Dow is sometimes credited with creating Dow Theory, too. This is not so. The market-timing strategy was extracted fom his WSJ editorials 20 years after his death by a market technician named William P. Hamilton.)

Charles Dow founded Dow Jones and Company with a partner in New York in 1882. At the time, most financial data was simply outdated news and unreliable gossip. But Dow Jones and Company published daily financial updates in a two-page newspaper called the Customers’ Afternoon Letter – The Wall Street Journal’s predecessor.

It was in the Letter that Dow first published his average, initially comprised of 14 companies – 12 railroads and two industrials.

Today the Dow consists of 30 large companies meant to reflect the U.S. economy. (There are, however, few holdings in heavy industry – and no railroads!) The average, price-weighted to compensate for stock splits and other adjustments, is the most closely watched benchmark for tracking stock market activity.

Yet the Dow is actually a poor representation of the broad market. If you’re looking to capture its performance, you’re much better off owning the better-diversified S&P 500 (NYSE: SPY) or the Wilshire 5000 (NYSE: TMW).

The most important thing we can learn from Charles Dow is the primacy of financial information. More than a hundred years ago, he realized that it was essential for investors to have not just opinions, rumors and forecasts, but verifiable facts. You simply must be well informed and up-to-date beyond this week’s headlines.

I’ve known investors who will buy a stock and not keep abreast of how the company is performing relative to its competitors, the direction of sales, or even the growth in profits. This is an act of faith, not rational investing.

Charles Dow created a daily business publication to give investors essential facts. Today, of course, you can get your financial news in real time off the internet. But the important data isn’t today’s government statistics or a new pronouncement by Ben Bernanke, but rather the hard numbers that tell us how individual businesses are performing.

The kind of investment news you accumulate is crucial. Listen to economic analysts, for example, and you’ll hear gloom and doom about high unemployment, the housing slump, consumer confidence, or problems in the Eurozone.

Listen to market analysts and you’ll hear trivia about short-term trends, changes in volume, support and resistance levels, and so on. This is not the type of information that will not make you rich.

But listen to business analysts today and you’ll hear plenty about corporate innovations, new medicines and technologies, and, not incidentally, all-time record corporate profits.

Is it any great surprise that investors who follow business news are making a lot of money in this market and those who listen to economic and market forecasts are sitting on their hands and earning miniscule returns?

Charles Dow knew better. And you should, too.

Good Investing,

Alexander Green

Article by Investment U

Bargain hunters are wise to pay careful attention to insider buying, because although there are many various reasons for an insider to sell a stock, presumably the only reason they would use their hard-earned cash to make a purchase, is that they expect to make money. Today we look at two noteworthy recent insider buys.

Source: ForexYard

As investors cautiously await any news regarding a Greek debt swap deal, the EUR/USD has slipped following last night’s bullish run. That being said, the pair has managed to stay above the 1.2900 level, well above the 17-month low hit last week. The EUR/USD saw significant upward momentum yesterday following successful debt auctions from both Spain and France. While the pair was not able to break the psychologically significant 1.3000 level, the positive news boosted investor hopes that the euro-zone may be slowly heading toward some kind of recovery.

As we close out the week, traders will want to pay attention to any developments regarding Greece’s efforts to avoid defaulting on its debt. While positive news is likely to boost the common currency, it should be noted that the euro-zone is still in an extremely fragile place, and that full recovery is still no where in sight. Additionally, traders may want to note the result of the US Existing Home Sales figure, set to be released at 15:00 GMT. A better then expected figure may boost investor risk taking, which could also benefit the euro in evening trading.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Investors will be paying attention to what the Euro Zone Finance Ministers will be saying regarding debt restructuring for Greece, and will also be keeping an eye on the EU decision regarding the ban on new contracts for Iranian oil, among other measures. Good morning, this is Kristin Bianco with the Week Ahead Market Report for Tuesday January 23, 2012.

UBS (UBS) downgraded ConocoPhillips (COP) from neutral to a sell rating. ConocoPhillips will be announcing earnings later this week.

European finance ministers meet in Brussels, where they’re due to decide on what terms of a Greek debt restructuring they are ready to accept as part of a second rescue package for Athens.

Source: ForexYard

Following the losses the US dollar took during the European trading session today, investors will be eagerly watching for news out of the two-day Federal Reserve Policy Meeting scheduled to start tomorrow. The USD started off the week on a bearish note following an increase in risk taking due to apparent signs of a euro-zone economic recovery. The trend brought the EUR/USD above the 1.3000 for the first time in nearly three-weeks, while the AUD/USD shot up over 100 pips over the course of the day.

Whether the greenback will maintain its downward trend for the rest of the week will largely be determined by the results of the Fed meeting. While the Federal Funds Rate is not expected to go up when the indicator is announced on Wednesday, investors will be watching the meeting closely for clues as to when US interest rates will go up. Should the Fed decide to maintain its current policy of record low interest rates for the near future, traders will likely take it as a sign that the US economy still has a long way to go toward full recovery. Such an event may lead to further losses for the greenback.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

The Bank of Israel cut its benchmark interest by 25 basis points to 2.50% from 2.75% previously.  The Bank said “The decision to cut the interest rate to 2.5 percent for February is consistent with the interest rate policy aimed at keeping inflation within the price stability target range and is intended to support real economic activity, against the background of the slowdown in global demand.”

Previously the Bank paused, after cutting its monetary policy interest rate 25 basis points in November and September, leaving it unchanged at its June, July, and August meetings, and increasing the interest rate by 25 basis points to 3.25% at its May meeting this year.  Israel recorded annual inflation of 2.6% in November, 2.7% in October, 2.9% in September, 3.4% in August and July, 4.2% in June, 4.1% in May, and 4.0% in April and just inside the Bank’s inflation target range of 1-3%.

The Bank expects the Israeli economy to grow about 2.8 percent this year.  The Israeli Shekel (ILS) has weakened about 5% against the US dollar over the past year, while the USDILS exchange rate last traded around 3.77.  The Bank next meets on the 27th of February 2012.