By: slickdealer dittyesq

Image by Flickr user Mike Lee

A few months back, I received a phone call from the friendly folks at Morgan Keegan, inviting me to drop by my local Regions Bank (Regions owns the MK brokerage) and chat about “stock options.” Not the kind of stock option that corporate CEOs get bundled with their paychecks, mind you — the brokers had another “option” in mind.

What they wanted to talk about was the kind of option that gives a person the right to buy or sell (i.e., the “option” of buying or selling) a stock at a specified price on a specified date in the future. It’s a bit of a complicated subject, but Morgan Keegan was offering to tell me all about it, for free.

Now, as a do-it-yourself investor, I admit to being leery when a banker calls me up and offers to do me a favor. Still, out of morbid curiosity, I agreed, figuring at worst I would lose a half-hour of my time (90 minutes turned out to be more accurate.) At best, I might learn something. And here begins our tale…

Consider your options
At this point, a couple definitions are probably in order. Broadly speaking, options fall into one of two categories. A “put” option gives the owner the right to force someone else to buy shares at a certain price. Conversely, a “call” option allows its owner to compel someone to sell them stock at a certain price. The reason both options exist is that, sometimes, you might want to sell shares for more than they’re worth. Other times, you want to buy shares for less than they would otherwise cost. Either way, the point is the same: You want to make a profit, and options are one way to do it.

Morgan Keegan’s favored strategy on this particular day was something called a “buy-write,” which consists of two parts. First, you buy a stock. Then, you “write” (i.e. “sell”) someone else a call option on the stock. (Remember, when you sell a “call,” you are agreeing to let someone else demand that you sell it later on, at a specified price.)

What’s in it for me?
Now, why would you do this? Three reasons: First, when you sell a call option, you get paid for it. Second, when you buy a stock, up until the time the call option is invoked, you get to collect any dividends the stock pays. (So now you’ve been paid twice.) Third and finally, it’s entirely possible that by the time the call option expires, the person who bought your call option will decide not to exercise it. In that case, you get to keep the money you were paid for the option, you get to keep the dividends, and you get to keep the stock. Win-win-win.

Sound too good to be true? It did to me. I figured there had to be “a catch.” And so, as soon as I escaped the bankers, I ran right home and began crunching numbers. Here’s how it works, using GE as an example:

• GE sells for $$20 today.
• It pays $0.14 per share in quarterly dividends.
• You can sell someone the right to “call” the stock (make you sell it to them) for $20 per share, any time between now and June 18, 2011, for about $1.

So assume you buy a share of GE, and simultaneously sell a covered call (i.e. a call option on something you own) today. You pay $20, collected $1 for your call, and then collect a $0.14 dividend at the end of this quarter (April 24, to be precise.)

$20 – $1 – $0.14 = $18.86. So you are effectively buying a $20 share of GE for a 5.7% discount from today’s share price.

Now let’s look at three scenarios. On June 18, 2011, GE is either:

• …still selling for $20. The call option expires worthless. You have earned almost 6% in less than three months (not bad when you consider it could take a full year to earn just 1% in a bank account.) You still own the GE stock.
• …up 20%, selling for $24. The call option is exercised (because it is cheaper to force you to sell the stock for $20 than to buy it for $24 on the open market). Again, you have earned nearly 6% in three months — but you no longer own the stock.
• …down 20%, selling for $16. The call option expires worthless. (No one wants to force you to sell them a stock for $20 when they can buy it on the open market for $16. You have lost 15%. You still own the GE stock.

So in scenario 1 you made a good profit on a “dead money” stock. In scenario 2, you made good money, too — albeit not as good as someone who just bought GE stock without the bells and whistles. That guy made 21% in three months ($24 when he sold the stock, plus $0.14 in dividends received), or an 84% annualized return! In scenario 3, you lost money, but didn’t take as bad a hit as the guy who just bought GE stock did. He has a $4 loss, mitigated somewhat by $0.14 in dividends, which works out to a 19% loss.

Putting it all together
So in essence, the Buy-Write idea seems to be this: Two times out of three, you make good money. That third time, you at least “lose less than the other guy.”

To me, this seems a plan aimed at reducing volatility, maximizing your chance at earning good-not-great returns (when your stock zooms, you miss out on most of the profits), and reducing the pain of a drop in stock price. It’s probably best suited for someone with a relatively low “pain” threshold. It also gives you a way to produce extra income from owning a stock (every time you sell an option, that’s money in your pocket.)

Personally, I doubt I’ll be taking Morgan Keegan up on their offer. To me, “buy-write” seems like too much work to be worth the modest returns it promises. I’ll stick with my usual strategy of just buying cheap stocks, and not buying expensive ones. But hey — it never hurts to know there are other options out there.

International lawyer by day and Slickdealer by night, Rich Smith is always on the lookout for a good bargain. Helping corporations pillage Third World economies is great for paying the mortgage, but Rich’s real loves are writing about stock investing for The Motley Fool, buying cheap stocks for his own portfolio, and strolling the aisles at Slickdeals in search of the ultimate blue-light special. A veteran of Moscow, Kiev, and Washington, D.C., Rich has traded-in city life, and now takes his ease in the fields of rural Indiana.

Over the past year or so, we’ve started to notice a large number of lurkers out there. Over 5 million of you come to Slickdeals to take advantage of the deals every month, but most never really get involved with the community. In an effort to remedy that, we’ve made a number of changes. The first change (that you might have already noticed), is that everyone’s rep has been reset to zero. We feel like potential new users are intimidated by the gigantic rep counts of some of our veterans.

We have also recently introduced a number of new membership features. Rest assured, although these features do have some nominal fees associated with them, standard “basic” memberships will remain free for the foreseeable future.

Additionally, we’re introducing a new Platinum Level of membership.

Platinum members will have unlimited nerps, extra-roomy 150×150 pixel avatars, unlimited access to the Secret Platinum Forum, three free username changes (either self-or-other) per year, and username protection for themselves and up to one additional user. Additional features are still available at the posted prices.

Platinum Membership will list for $99.99, but if you purchase before 4/2/2011, it can be had for $89.99.

Unilever United States, Inc. today announced a limited recall of Skippy® Reduced Fat Creamy Peanut Butter Spread and Skippy® Reduced Fat Super Chunk Peanut Butter Spread, because it may be contaminated with Salmonella, an organism that can cause serious and sometimes fatal infections in young children, frail or elderly people, and others with weakened immune systems.
http://www.peanutbutter.com/Recall.html

Since we have featured that product on our Front Page we wanted to make sure you were all aware of the recall so that you could check your items to see if they are included.

By: slickdealer dittyesq

Image by Flickr user Mike Lee

For the past few weeks we’ve been discussing the subject of how to invest — safely — in the stock market. Today we’re going to veer off that path by just a few meters, and briefly address the subject of investing against stocks: Selling stocks short.

The concept of “shorting” works like this, in five easy steps:

1. First, borrow shares from someone who already owns them.
2. Next, sell those shares at $X, and pocket the cash.
3. Now, wait for the price of the shares to decline, and buy them back at a lower price.
4. Replace the shares you borrowed at $X with shares purchased at $less-than-X.
5. Last but not least, “keep the change.” The difference between the price you sold the stocks for, and the price paid to buy them back, is your profit.

Sounds simple, right? Automatic profits. So maybe we should all just give up on this whole “investing” idea and instead take up shorting?

In a word: No. You should not short stocks, and now I’ll tell you why.

“The market can remain irrational longer than you can remain solvent.”
Despite its obvious attractions, people have been writing about the dangers of shorting stocks for nearly a century. This quote, for example, is attributed to the English economist John Maynard Keynes, who warned that even when an asset is obviously overvalued, there’s still a risk to betting its price will fall. Simply put: It costs money to short stocks. It takes time for the strategy to pay off. If you run out of either money or patience before your bet pays off, you can go broke betting that a stock will fall.

Congratulations! You get to pay interest! And dividends!
Here’s how it works. Whenever you short a stock, your broker will charge you “margin interest” on the value of the stock sold short — interest that could cost you as much as 9% annually. Conceivably, you could need a stock to drop 10% (or more) before you see any profit at all from shorting — and it gets worse.

When you sell a stock, cash is deposited in your account. Problem is, your broker will not ordinarily pay you interest on that cash (and even if it did, good luck finding a broker that pays 10% interest on deposits.) Plus, if you happen to have picked as a short target a stock that pays dividends to its owner, guess who gets to pay those dividends to the stock’s original owner?

That’s right — you do. Remember that you borrowed the original owner’s stock, and sold it. The company’s no longer paying dividends to him, because he no longer owns the stock — but he still wants his dividend check every quarter, and you’re on the hook to make sure he gets it, up until the time you close out your short position.

Buyouts
Of course, maybe you’ve got the cash to cover margin interest and pay dividends. Maybe you’ve courage in your convictions, and all the patience in the world, to wait as long as you need to be proven right. Surely money and patience will guarantee you profits … except that they won’t. You can still lose money shorting if just one corporate CEO out there is not as smart as you, doesn’t realize the company you shorted is lousy, and decides to acquire it.

For example, I know a very smart hedge fund manager who once explained to me in very convincing terms why the smartphone company Palm was “going to zero.” The company had little cash on hand, was burning more cash, owed huge obligations to preferred shareholders, and was losing market share. Unfortunately for him, and for many other investors, Hewlett-Packard disagreed about Palm’s prospects, and decided to buy the company for far more than it was “worth.” Result: Instead of going to zero, Palm stock gained more than 20% in a single day. So much for that (short) idea.

Margin calls
Nor are dumb CEOs the only people you need to worry about. You see, smart as you may be, not all investors are geniuses. Eventually, some investor (not you — the other guy) will short a stock only to see it double, triple, then quadruple in price. He’ll be wiped out, as the money he “earned” by selling a stock short gets dwarfed by the amount he must eventually pay to close out his losing bet.

To protect itself against this, brokers require that investors keep a certain amount of cash or securities on hand to cover their losses. 30%, 50% — the amount varies. But the upshot is that if a stock you sell short rises 50% before falling, your broker can require you to put up more cash to protect it against a loss. If you don’t produce, or don’t do so fast enough, your broker can close your short position on its own — cashing you out at a loss.

And that’s the good news
The bad news is that although the above list includes a few of the most dangerous aspects of shorting, it’s far from a comprehensive list. I hope, however, that it’s at least enough to alert you to the fact that shorting does have risks.

But just in case you need one more example, I’ll provide one: On December 5, 2006, then-Fed Chairman Greenspan warned investors that the U.S. stock market was showing signs of “irrational exuberance” and would eventually fall. At the time he wrote those words, the Dow Jones Industrial Average was priced at 6500 and change.

The crash Greenspan predicted did eventually arrive, of course. (In fact, we’ve had multiple crashes since then.) But even the first one took more than four years to arrive.

International lawyer by day and Slickdealer by night, Rich Smith is always on the lookout for a good bargain. Helping corporations pillage Third World economies is great for paying the mortgage, but Rich’s real loves are writing about stock investing for The Motley Fool, buying cheap stocks for his own portfolio, and strolling the aisles at Slickdeals in search of the ultimate blue-light special. A veteran of Moscow, Kiev, and Washington, D.C., Rich has traded-in city life, and now takes his ease in the fields of rural Indiana.

By: slickdealer dittyesq

Image by Flickr user Katrina.Tuliao

Greetings, Slickdealers! Are you ready for some football?

Oh, right. Superbowl’s over. Well, then let’s move right on to investing instead. Over the past few months, we’ve discussed how to set up a brokerage account, and covered the mechanics of using that account, by placing a “trade.” We used the stock of Disney as our first guinea pig, but I promised you that I would return shortly to address stocks-not-named-Disney as well.

That’s what we’ll be doing today: Discussing how to choose a stock for your portfolio — hopefully, a stock you’ll really want to own. (more…)

If you live in Chicago, Denver, Phoenix, Salt Lake City, San Francisco, or San Jose, you might have noticed a different type of deal being featured on the front page recently – a deal that’s available only in your area, easily identifiable by a little pin. Before you get all up in arms about us “selling out”, let us explain what we’re trying to accomplish by featuring these deals: we see local deals as an upcoming step in our evolution as a deal site. Eventually, we hope for a frontpage that includes accurate listings of what’s on clearance at your local Walmart sandwiched in between a TV from Amazon and a nationwide Groupon.

Unfortunately, we’re just not there yet. We’ve been pushing local deals (both on the front page and, more recently, with that tab you see at the top of the page) for the past 5 or 6 months. We’ve seen a lot of clicks (which is encouraging), but unfortunately very little feedback. At the same time, we’ve seen some great deals come up that a lot of you have probably missed out on. For example, a recent Groupon in San Francisco offered 50% off at Lowe’s for San Francisco residents, but we couldn’t put it on the front page because it (a) didn’t have any thumbs, and (b) was only applicable to a small percentage of you guys. Rather than continue missing out on sharing these deals while we wait for our usual feedback, we’ve decided to roll out a geographically-targeted test.

As of right now, our system is fairly simple. We take a look at how the different deals are selling. If something is really moving, we look a little more closely (Yelp or other independent reviews)- if it seems to be a slick deal, then we write it up and put it on the front page.

Some of you newbies might not know this, but this is how Slickdeals originally started. Before he had an audience, Mr. SD hand-picked deals that he thought people would like. It wasn’t until he built an audience that he was able to take user feedback into account. Once we have an audience that’s actively involved in Local Deals, we’ll again take a step back and let you guys choose what’s worth looking at and what’s crap.

We know that there will be hiccups-for one, we need to figure out an ideal radius to use for the deals, that will probably change from city to city. Traveling 7 miles in San Francisco or New York City is not the same thing as traveling 7 miles in Las Vegas. Also, the formula we use to decide what we even look at will need to be fine-tuned. A thousand sales in New York isn’t nearly as impressive as a thousand sales in Stockton, CA. And, eventually, we plan to make this feature optional. If you don’t want to see local deals listed on the front page, we plan to have a way for you to filter them.

Finally, we want to be very clear- these aren’t paid placements. Believe us, paying our deal editors to take the time to vet a bunch of deals that will only even display for like 1% of you guys isn’t some money-grab. We never have and we never will sell space in that frontpage deal section to advertisers.

So anyway, that’s where we are right now. We’re excited- we think it adds variety and improves the site.

By Gabe Goldberg (SD user GabeGold)

Image by Flickr user Bramus!

The Internet has many rich, powerful, and secret languages that must be understood for full Netizenship. Among them are HTML (HyperText Markup Language, used to construct Web pages), Lolspeak (captions for funny cat pictures), and shopping coupon codes used for bargaining and playing “Let’s Make a Deal” with Web sites.

Slickdeals readers are surely accustomed to finding nifty codes here — a frequently mentioned favorite site for using codes is Restaurant.com offering easily used never-expiring heavily discounted certificates — but many other code resources exist.

Entertainment discount coupon books, available for most US cities, provide hundreds of paper coupons for offline use as well as many valuable codes for online and telephone shopping. Offers include free shipping, additional merchandise, and purchase percentage savings. If you buy books for dining and local savings, don’t neglect back-of-book slick deals, such as hotels’ Entertainment rates; such discounts may beat AAA/AARP/etc. and have saved me hundreds of dollars on individual hotel stays.

(more…)

By Gabe Goldberg (SD user GabeGold)

Image by Flickr user scriptingnews

Though Slickdeals overflows with rebate offerings, they’re always a mixed opportunity. Rebates are great if they’re simple and reliable (and large!) but they’re a major frustration if they involve complex instructions and delayed or denied payment.

As rebates became widely used, strong opinions have arisen. Some people seek them aggressively, jump through hoops, fill out paperwork for apparent bargains. Others mistrust and avoid them, just try to buy at best prices available, whether discount, sale, or list. And still other folks ignore them.

Theories circulate about why companies use rebates and how they can deceive and defraud consumers. While some consumers believe that rebates simply let companies gather personal information, others haven’t seen their data abused. Nevertheless, when claiming rebates, it’s safer specifying that you don’t want to receive vendor news and special offers. (more…)