Rambling about Bull Call Spread on ROK

NYSE:ROK current price: $61.70

APR 12 BUY TO OPEN 1 CALL @ $35 for US$28.2 = $2,800
    Break Even = $35 + 28.2 = $63.2
        vs
    Current Price of $61.7. Difference = US$1.50

SEP 11 SELL TO OPEN 1 CALL @ 65 for US$1.2 = $1,200
    Break Even = $63.2 - $1.2 = $62
        vs
    Current Price of $61.7. Difference = US$0.3


At expiry,    
        if price is above $65, SEP 11 is called.
            I have to exercise my APR 12 call, need to pay US$35.
            Total paid so far = Break Even = $62
            I will be called SEP 11. Credit $65. Earn $3 * 100 = $300

        if price is below $65, SEP 11 expired worthless.

            If say the price is $57, I will have paper loss of $5.
            By then, the price of next-month's $60 will be around $1. If I sell next month CALL @ $60 for $1, I run into the RISK of $62 (break even) - $60 (called assignment price) - $1 (call premium) = $1 at risk if the price jumps above $60 and I get my call assigned.

            If each month for the next 7 mths (from Oct '11 - Apr '12), I get to sell for $1 credit, Final Break Even Price = $62 - $7 = $55

Disclaimer: I am not promoting an analysis on any stocks. The example on ROK is purely for illustration purpose. I could have used any stocks for this exercise and achieve somewhat similar probability outcome. If you want to use this for real life trade, do so at your own risk.

Vehicles of Investment.

Dear Readers,

How many forms of investment vehicles are you exposed to? How many of these are you employing in your financial plan?

I have gotten a fair bit of exposure to different kinds:

1. Savings
• I bet almost all my readers do have a savings account. This is by right the best capital protected form of investment available. Capital protection does not mean safe, though. Main reason because the interest paid is normally meager compared to the rate of inflation. Thus, your money decays away as the cost of goods increases.
• These days, there are more and more financial banks offering competitive enhanced savings account with higher interest rates. To name a few are POSB My Savings, OCBC Monthly Savers, Standard Chartered XtraSavers, Citibank Step Up Account and a few others.
• However, this form of investment is mainly for my daily uses substitute of cash. Not for interest sake
2. Fixed Deposit
• This vehicle is normally offered by banks. The interest rate is slightly higher than Savings but your money is locked in for a couple of months or years. 
• Again, Return on Investment is not significant.
3. Mutual Funds/Unit Trust
• I started on this in the year 2007 via Fundsupermart. Financial crisis year? Tough luck...
• Lesson learned from this mode of investment is that if you do not want to actively manage your money, you let others' do it. But, there is a price to pay. Those fund managers can be pretty costly.
• Why do I say so? In the financial downturn, your funds goes downwards, you suffer paper loss and at the same time still have to pay those "hardworking" fund managers who cannot do much to bring the fund to give you some gains.
• So, early 2011, I moved on... cutting loss and leaving the Unit Trust world.
4. Stocks
• Large population of Singapore residents are into this baby. I ventured into this mode of investment because Unit Trust costs money. Why let fund managers manage the funds if you can get your hands dirty with stocks investment itself?
• I started my trade with penny stocks which I have regretted to this date. It is a lesson learned not to own stocks you do not want to hold for long. Because, you will end up holding onto them with losses.
• I have ventured into US Stocks as well. There are generally more volatility in US market as compared to SG market. More gains and/or more losses.
5. Warrants
• Similar to stocks, this instruments are time-bound and are leveraged. With small amount of money, you can win big or lose big.
• However, since it is time-bound, there is time decay. As time goes by, your warrants loses time value, thus it loses money.
• With warrants, you can buy either call (similar to having a long/buy position of the underlying stock) or put (similar to having a short/sell position of the underlying stock)
6. Options
• This mode of investment is very similar to warrants. While warrants allow you to be on the buyer side for call and put, options allow you to be on the side of either the buyer or the seller side of both call and/or put.
• Options are time-bound and are leveraged, too
• However, I learned many strategies with options which can put you into gambler hat or conservative Scrooge McDuck (Donald Duck's uncle)
• Let's talk a little on the conservative side:
• Capital secured Put: With this, you place money into the brokerage house in view to buy a stocks at a certain strike price with a certain expiry date. You Sell To Open a put option and get paid some premium (^$-$^) . If the stocks goes higher than your strike price at expiry date, you get to keep the premium and nothing happened. If the stocks goes lower than the strike price, you get assigned the stocks. Note: Do NOT place this bet on stocks you do not wish to own.
• Covered Call: If you own some stocks which has options chain (or assigned a stock because of the Capital Secured Put strategy), you can "rent out" these stocks using covered call. Here, you Sell To Open a call option on the stocks you own with a certain strike price (choose strike price higher than your cost basis/average price, or you will end up losing money on the trade). With this trade, you will also get paid some premium (^$-$^)
• I shall update some other strategy which can be done with options.
7. There are many more investment vehicles which I have yet to get my hands into (not in order of importance)
• Forex
• Treasury Bill and Govt Bonds
• Land Investment
• Wine Investment
• Antiques
• Property investment

Let's hope that as time goes by, these vehicles can provide me with smoother rides into the RICHER destination

~ Erwin Liong ~

Comeback

Finally, after almost a year of not writing an entry, I think it is time for a comeback and being more disciplined in writing on my financial adventure.

So that, perhaps, the future me or anyone in the virtual world can learn from my story.