GIVE ME SOME MORE GLOBAL WARMING.

I'm Tired of Cold Weather. I know my Colorado friends will be tired of hearing me complain about days where it never exceeds 50 degrees but I am anxious to spend more time outdoors and 50 degrees is a bit too cold for that. The funny thing is that the azalea bushes don't quite know its not spring yet. We occasionally see a lonely bright fuchsia blossom among the evergreen bushes. I guess they don't know they're 45 days early.

What About Our Option Trade? Here is another exciting report on our option trade. If you recall, we sold 1000 qualcom put options for 80 cents per contract. As of this point, it has increased in value to $1.00 per contract. Since we are short these contracts, this means we would lose $200 if we bought those contracts back today. If the stock doesn't change in price before expiration date, we will have to buy 1000 shares of qualcom stock at $37.5 per share. Our acquisition price would be $37.5 per share minus the 80 cent premium we received or $36.8 per share. Since the current price is $37.26, that would not be a disaster.

Where Do We Go From Here? There are several things we can do. 1. We can buy our contracts back and lose $200. 2. We can stay where we are and risk that the stock will continue dropping and we will lose considerably more but we will have a chance to make up to $800 if the stock rises above $37.50. Again, there are other possibilities which we can discuss when they become more viable.

How Do We Decide? The first decision point is whether or not we want to own qualcom stock at $36.8. If the answer is absolutely not, we should buy back the contracts and look for the next deal. If we don't think that would be a bad acquisition price, we can consider holding the contract for the 16 days between now and the expiration date. To carry things a bit further, we should consider the intrinsic and extrinsic value of the contracts. As we said last week, the intrinsic value of an option is the strike price minus the market price or 37.5 -37.26 or .24. The extrinsic value of the contracts is the current price of the option minus the intrinsic value. In this case it is 1.00-.26 or .74. In a perfect trade, both the intrinsic value and the extrinsic value will be zero and the option will expire worthless, our ultimate objective. Since the extrinsic value is .74 and we know it will be zero at the expiration date, there is still considerable opportunity for profit. But what if the stock drops to $35 on the expiration date? At that point the intrinsic value would be $2.5 which would be 1.70 more than we received for our contracts and we would own a $35 stock for $36.70, a bad outcome.

Here's Another Definition. One thing we should look at is a term known as delta. The delta of an option is an approximation of the probability that the option will finish in the money. It has other uses but we don't need to go into that for now. As of this writing, the delta of our option is .51 which means that we have 49% probability that our option will expire worthless and we will get to keep the $800 we received. That is our ultimate goal.

So What Is the Bottom Line? My decision is to hold on for at least a few more days before I do anything. I still like Qualcom despite some negative comments by analysts and I believe the long term trend is up. Stay tuned.

Do You Have To Take Money From Your IRA This Year? I have several clients who had to take money from their IRA this year. Many are not all that happy about it. I guess you need to ask yourself why you put the money away in the first place. Was it to provide funds for your retirement? If so, take the money out and enjoy it. If it was to keep until you die so you could leave a legacy for your children, an IRA was the wrong vehicle. Your children will have to pay tax on that money at their tax rate. You could have left a life insurance or a multitude of other assets that they wouldn't have to pay tax on. If you have a large IRA and your income needs have been pretty well met by other means, you might want to consider a withdrawal even if you are less than the age at which you have to take it out. Saving for a rainy day is fine but as we approach the final quarter of our lives, the rainy day may be much be much closer than we think.

GLOBAL WARMING?

Political or Scientific? We've made a political issue out of the global warming phenomenon. It isn't. Its a scientific issue. When I started this blog I resolved to stay away from politics but such an important issue will have long lasting effects on our investment policies and I felt I had to devote at least some space to the myths and realities what's going on.

Is It Real? The scientific community is certainly not unanimous as to whether the temperature increase we're observing is just part of random cycles or whether its a real phenomenon that can be expected to continue if we don't do something about it. Although much of the discussion has occurred within the past 10-15 years, this certainly isn't new. I remember when I was working in the research department of a major oil company in 1964, we had a seminar in which a respected scientist told us of his research that indicated this was happening and that it was at least partially due to "the greenhouse effect". He defined the greenhouse effect as the accumulation of carbon dioxide in the atmosphere which was keeping heat from escaping the environment. Although not all scientists agree, for the purpose of this discussion, we will assume that the temperature changes we are observing are real and not just random fluctuations.

What is Causing Global Warming? If you ask the "man on the street" what is causing global warming, the answer will be pollution. The accuracy of this answer will depend on how you define pollution. The so-called pollution consists almost exclusively of carbon dioxide. Carbon dioxide is a naturally occurring substance in our atmosphere. Without it there would be no life on this planet. The first thing to go would be plant life which breathes in carbon dioxide to produce oxygen. This means no trees, no crops, no animals that eat plants, and no animals that eat the animals that eat plants. There is no carbon containing substance that can be converted to energy without generating carbon dioxide. Not ethanol, not biodiesel, not wood, and not coal. The cleanest burning engine known will produce carbon dioxide exclusively. Carbon dioxide is produced from other sources. We exhale carbon dioxide as do all animals; plant decay produces carbon dioxide; the leaves that fall from your trees produce carbon dioxide. Undoubtedly, without carbon dioxide there are other phenomena that can cause the earth's temperature to rise, not the least of which is is small increases in the temperature of the sun. In fact, some research indicates that this is the main culprit. All this leads me to believe that global warming, if it does exist, is certainly not caused by pollution since I could n ever consider a naturally occurring substance, without which life could not exist, as a pollutant.

Can We Improve the Situation by Reducing The Amount of Carbon Dioxide We Emit? Most people think we can. I have my doubts. We certainly can't stop exhaling, we can't stop the decay of plant materials, we can't control the temperature of the sun. We can burn less gasoline, diesel, and coal. If we assume this will make a substantial improvement, how will we replace that energy without ruining our economy and drastically reducing our standard of living? Perhaps a promising approach is the use of nuclear energy to generate electricity. Before you accuse me of being crazy, consider the fact that nuclear energy produces no emissions and there are already 10 countries that derive at least 40% of their electricity from nuclear power. This includes France which generates 79% of it's electricity from nuclear power. Of course, nuclear energy is not without its environmental hazards; however, even the most staunch environmentalists are becoming of the opinion that this is preferable to burning carbon containing materials. Hydrogen is touted as the fuel of the future since the combustion product is water vapor. Two huge barriers exist: 1. We haven't found an economical way to produce hydrogen for fuel. 2. We don't know the consequences of introducing huge amounts of water vapor into the atmosphere. It could increase global warming as much or more than carbon dioxide. Finally, we can use solar energy, which has been the utopian solution to the problem for decades. Despite the attractiveness of solar and the research that been devoted to developing it, it has yet to become a significant source of energy. Apparently, the technology necessary to develop solar into a significant resource is somewhat elusive.

What Can We Conclude From All This? A quick summary of my opinion is as follows.
1. Global warming most likely exists.
2. Part, but not all, of global warming may be from carbon dioxide.
3. Carbon dioxide is not pollution by my definition.
4. Carbon dioxide is not exclusively man-made.
5. We can reduce carbon dioxide emissions but this may not be enough to have a significant effect.
6. The economic and environmental consequences of reducing carbon dioxide emissions have not yet been
determined.

Hopefully This Post Has Not Been Offensive. I have tried to make it objective and not political. I felt it necessary to address this subject because of the large amount of misconceptions that are prevalent in discussions by politicians, all of whom think they know the answers. The fact is that the answers aren't simple. Those who think they are fully aware of what we need to do are misinformed. That is the trouble with politics. Everyone thinks a simple solution is available and it usually never is.

MONITORING OUR OPTION TRADE.

Days Remaining: 22. If you haven't read my January 20 post, this post will mean little to you. I would suggest you read the January 20 post before proceeding with this one. We are 5 days into the trade I described in my last post. As you recall, I sold a contract that allows the purchaser of that contract to sell me 1,000 shares of Qualcom stock for $37.50 per share. For that privilege, the contract purchaser paid me $800 which was credited to my account right away. Since my maximum loss is far greater than my maximum profit, it is necessary that I monitor this position closely to manage my risk.

As of January 25, Qualcom stock is $38.66. This is a slight drop from the $38.87 price when I purchased the stock. While this is not highly significant, you have to remember that it only requires a drop of $1.20 or so until the option is in the money and I will be forced to buy the stock. Even though the stock has dropped in price, the put option which usually moves in the opposite direction of the stock has dropped to $.60. This means I could buy that contract back to day for $600 and pocket the $200 differential. If I think Qualcom prices are going to continue drop, I should do that. If I think the stock is going to stay even or increase, I can make another $600 over the next 22 days by holding on to the contract. There are other strategies but we will hold off on that discussion until these become more viable. Is this as exciting as watching paint dry? Some of you might think so but it is exciting to me as I monitor several positions at once. To stop the suspense right now, I will say that I am still bullish on Qualcom stock and I plan to hold for now. At this point, it may valuable to introduce two simple components which make up the value of an option.

Intrinsic Value This component is a measure of how much the option is "in the money". It is the strike price (the price at which I have to buy the stock or $37.5) minus the current price of the stock, in this case, $38.66. Since the number is negative, we can assume that the contract has no intrinsic value. If the stock were selling at $36, the intrinsic value would be 37.5-.36 or $1.50.

Extrinsic Value This component is the amount that the price of the option exceeds the intrinsic value. It is the option price minus the intrinsic value. In this case, since the intrinsic value is zero, the option $.60 option value is all extrinsic. While this may not seem like a very important point, it is when you consider one of the few sure things in the financial markets is as follows: On the day following the expiration date, the extrinsic value of any option is zero. This is why I like option strategies so much. Over the next 22 days, I know that the extrinsic value of my Qualcom contract will be zero. If the stock price doesn't fall below the strike price, the value of this contract will be zero and I will be able to keep the entire $800 I got for selling the contract. I guess I'm simple minded because I like sure things.

These are Simple Concepts Which May Not Mean Much at This Point. They will become more significant as we discuss other trading strategies in the future.

You Meet Interesting People in the Strangest Places. Interesting people add much in the way of meaning to your life. A few days ago, I saw a short TV spot about the only sky cap at the Beaumont Airport. He has had the job for 50 years. That may not sound too amazing until you find out that he has had the job since he was 52. Do the math. He is 102. Still drives (has a new pick up). still cuts his own yard, and he doesn't even wear glasses. He says the secret to his success is, "Treat everybody right and do it from your heart." I don't know about you but he sure makes me feel guilty about complaining over the trauma of the aging process.

CONSERVATIVE OPTIONS STRATEGIES.

My Most Successful Investment Strategy Involves the Use of Options. I have avoided talking about options strategies on this blog because I wasn't sure I could explain it adequately. Still, I would be negligent if I didn't share with you something that has worked so well for me. I started this strategy at the end of 2003 and, for the three years ending in 2006, I have earned just under 20% per year. Granted, I spent a fair amount of time monitoring this portfolio but the time spent contributed to my knowledge of the market place. I could probably have done this in less time but I very much enjoyed exploring this strategy. The thing I like the most about my strategy is that I believe that, contrary to popular opinion, it is less risky than buy and hold strategies. So what's not to like? Above market returns and below market risk. Rather than give you a bunch of definitions, I will try to explain the terminology as I go along.

Selling Put Options Is Probably the Most Simple Strategy I Use. When I sell a put option, I give the purchaser of this option the right (but not the obligation) to sell me a certain number of shares of a particular stock at a certain price for a certain time period. Here's an actual example: On Friday, January 19, I sold an option that allows the buyer to sell me 1000 shares of Qual Comm stock for $37.50. As of that date the stock was selling for $38.87. Since the current stock price is above the price at which I have to buy the stock (strike price), this option is an out-the-money (OTM) option. If I had sold a put option with a strike price of $40, that would have been an in-the-money (ITM) option. The purchaser paid me $800 for the privilege of being able to sell me this stock between now and February 16 (27 days from now). If the stock rises or stays the same, I get to keep the $800. If the stock drops to $37.49 or lower, I will have to buy the stock for $37.50. Since I got 80 cents a share in premium, my break even point is $36.70. The buyer is betting that the stock drops below that level and I am betting that it doesn't. The reason that most investors will not make this trade is that I am risking $36,700 for a maximum gain of $800. While this is true, it is an extreme case assuming the stock goes to zero. If I buy the stock at today's price of $38.87, I stand to lose $2,170 more than with the option trade. In addition, I have to have $38.870 in cash to buy the stock. With the option trade, I get $800 in my account right away. Granted, I better have a plan as to how I'm going to get the cash to buy that stock if I have to. In fact, the brokerage house will demand that I have enough cash or borrowing power in my account to perform if necessary.

I AM Bullish On Qual Comm Stock. If I weren't, I wouldn't be making that trade. I view it as putting in an order to buy the stock at $36.70. I am willing to own it at that price. I don't want to pay the going market rate of #38.87. If I don't end up owning the stock, I get to keep the $800 premium I received. This is what happens about 80% of the time. Once you establish a position like this, you don't just walk away and forget it. Managing the position is probably more important than establishing it. There are several things you can do to maximize your gains or minimize your losses in this instance. During the next 27 days, I will make several posts letting you know where I stand on this trade, what my options are and how things turn out. Hopefully, this will be educational and interesting to you.

Do Not Try This At Home. Like the commercials that show the crazy driver doing car stunts, I would caution you not to try this strategy based on what you read here. I have made bad trades that cost me a considerable amount of money. If you implement a similar strategy, I guarantee that you will too. Hopefully my Qual Comm trade won't be one of them causing me considerable embarrassment among my loyal readers.

NEW REGULATIONS FOR MORTGAGE LENDERS

Help is On the Way. Your Colorado State government wants to protect you. In a surprising demonstration of bipartisanship, a democratic state senator and a republican state representative are sponsoring a bill aimed at protecting consumers from fraudulent appraisals. This proposed legislation is the result of Colorado's un-enviable position as a leader in foreclosure rates. The theory is that the main reason for this situation is fraudulent appraisals. The new legislation would make it illegal for anyone involved in a transaction to coerce an appraiser to render a value other than the "true value" of a property. Mortgage brokers and Realtors can face numerous penalties to include loss of license and felony conviction. I am certainly relieved. This new legislation combined with a new law requiring mortgage brokers to undergo criminal background checks and become licensed should go a long way towards reducing the foreclosure rate in Colorado and protect home buyers from experiencing the nightmare of foreclosure.............NOT... Many of the so-called fraudulent appraisals are the result of the inexactness of the appraisal process. In some cases, it is necessary for lenders and real estate brokers to argue with appraisers in order to arrive at a value that is more consistent with a projected sale price than the value the appraiser obtained using the accepted techniques. There can be no exact estimate of what a reasonably informed buyer should be willing to pay for a property. For example, I was willing to pay more for the house I own here in Texas because it was located next to a lot that I already owned. Buying this house gave me a wooded acre with 160 feet of lake frontage. Had I not already owned the lot next door, I wouldn't have bought this house. This brings us to one of the most important rules of real estate. The value of any property will always be relative to the needs of a buyer and the perceived benefits offered by the property. Appraisal will always be an inexact process and the opinion of value of buyers, sellers, mortgage brokers and Realtors is often as reliable, and sometimes more reliable, than that of an appraiser educated in theories of valuation.

Is Regulation of Mortgage Brokers a Good Thing? I seriously doubt it. There are a number of laws on the book that should limit what I consider to be the biggest abuse in mortgage lending: deceptive advertising. Regulation Z of the federal Truth in Lending act would stop virtually all deceptive advertising if it were enforced. It is already illegal to not be truthful in loan applications. They could stop 90% of foreclosures by tightening underwriting guidelines and doing away with limited or zero documentation loans.

Even More Dangerous Than a Crook....is an honest man who doesn't know what he is doing. I think the mortgage industry is full of those. If you want straight answers on your mortgage, send me an e-mail or give me a call.

HAPPY NEW YEAR.

The New year is Well on its Way. And this is my first post of the year. I don't have much of an excuse for not writing more often. Although the weather has been wet here it has been relatively warm and I have spent a fair amount of time walking in the woods.

How is Your Comfort Zone. One thing I have noticed as I age, is that it is easy to settle into a comfort zone. While this isn't necessarily bad, taken to the extreme, it can lead to your isolation. It may be nice to venture out and visit friends or travel but it can gradually become more trouble than it is worth. I see this often in my friends and I occasionally observe these tendencies in myself. The only way to change your life in positive ways is to venture outside your comfort zone. I might also mention that there is a risk that you can change your life in negative ways as well. A good exercise for the new year is to spend time looking at the way you are living your life. Are there things you would like to change? Whether you are 25 or 75, you can change your life. It takes stepping outside your comfort zone and trying something new. It takes resiliency to bounce back if your venture turns negative. It takes courage to stay with the new venture rather than bounce back into your comfort zone before you find if your new venture works. One of my new year's resolutions is to step outside my comfort zone and try new things.

This Applies to Personal Finance As Well. Three years ago I developed a conservative option investment strategy that has provided me with exceptional returns. As part of that strategy, I never purchase options. I write them on stocks that I own or would like to own. At the end of 2005, I stepped outside my comfort zone and made a sizeable option purchase. I don't know if this strategy will work or not but I believe it was worth a try. Even if it doesn't work, it adds an element of adventure to my investment activity and makes my life more interesting.

Think About It. Is your life exactly the way you want it? Are you afraid to step outside your comfort zone to make changes? Can you take small steps and work your way to where you want to be without taking too much risk? I am fortunate to have worked my way to where I want to be by stepping outside my comfort zone many times. I have also been fortunate to work with many clients who have done the same thing. Which do you want? Comfort or adventure. It is a choice that only you can make. Give me a call if you want to discuss how you can create the lifestyle you want.