Investment Strategies
This page is more appropriate for investors who have above average market experience.
Asset Allocation
Zero Coupon Bonds
Who would use Zero Coupon Bonds?
Zeroes are good for investors that want to spend a little money, remember you buy at a discount,
and want to know how much money they will receive at a specific time in the future.
Another way to use Zeroes is in conjunction with stocks. Say you have $50,000 to invest. You
also want the best of both worlds.
You want to be sure that you will make a decent return, and want the opportunity to
participate in the rates of returns the the stock market offers.
First, you could buy a discount Zero with a face value [face value is the amount you will get back at maturity] of $60,000
and it will cost you $39,000. The $11,000 that remains can be invested in high growth areas.
This is where you can try to attain above average returns.
If the unthinkable happens, each stock that you bought goes bankrupt,
you will still be left with a guaranteed bond that matures in 7 years at $60,000. So in effect,
you will guarantee yourself that you will have more money than you started with, while also
giving yourself the chance to score big returns in the stock market.
Option Strategies
What is an option?
There are two types of options: a call option and a put option. A call option give the
option holder the right to "buy" the stock at a specific price and a put option gives the option holder the right to "sell"
the stock at a specific price.
Advantages
Disadvantages
For this discussion we will be examining call purchases, call writing and put purchases. Other
strategies including naked call writing, spreads, straddles, butterflies etc. are too risky
to get into here. Call the office and we can mail you information regarding these strategies.
These option strategies work for investors that have substantial stock holdings.
Volatility Option Plays
Asset allocation is the exercise of dividing up your portfolio between stocks, bonds, cash,
real estate and other investments to create a mix that will attempt to give you the best
return for a comfortable level of risk. History shows that no one sector outperforms every year.
It is more important to properly allocate your assets into the right 'mix' than it
is to pick the hot stocks of the moment.
Zero Coupon Bonds, or zeroes, are bonds that don't have a coupon rate like a normal bond.
The issuer is still borrowing money from you, but is promising to pay you back in a slightly
different way. Instead of the bond paying you back interest twice a year, you buy the zero at
a discount. So if the bond will be worth $1,000 at maturity, you might buy the bond at
a 'discount' for, say $600. The difference between what you bought the zero at, $600, and the amount
the company will pay you back at maturity $1,000, is the interest, or $400.
An option gives the holder the "right" to buy or sell a stock at a specific price up to a certain date.
That specific price is called the "strike price" and that certain date is called the
"expiration date".
If you dont have a clue about which way the market will move, but you have a good feeling it will
be a big move, whichever direction it is, a 'STRADDLE' might be for you.
This strategy involves buying BOTH a put AND a call on a stock. You might buy both JUN 30 puts
and JUN 30 calls on Intel, which lets say is trading at $30. This is a bet on a BIG move in
either direction. The drawback is you are buying TWO options, and that means a lot
of money out of pocket. But if you are right, the big move more than makes up for the
cost of buying both options.
The numbers look like this:
If each of the put and call options on Intel cost $5 each, for a total of $10, you need the Intel
stock to move at least $10 in either direction to cover the costs of the option, or to
break even.
