May 01, 2008
Volatility Isn't the Enemy
Kim likes to tease me on the radio show each week for my former role in "financial pornography." That's the term she uses to describe the mainstream financial press, which includes my former employer, The Dallas Morning News Business section.
While I don't consider my former colleagues purveyors of pecuniary smut, I do see Kim's point. In an effort to explain financial news to the largest audience possible, the mainstream press dumbs things down a bit. You have only a couple of sentences - and sometimes only a headline - to convey information. Context is often cut out.
This isn't as much a problem in newspapers and magazines as it is on television, where if you can't tell a story in 20 seconds, you might as well not tell it at all. No wonder you see the friendly faces on CNBC and Fox Business reduce each story to its lowest common denominator, complete with flashy graphics and ominous music. The anchor may try to tell you what the market did today, but all you can focus on are the giant letters at the bottom of the screen: RECESSION?. (The question mark is very important, since they don't want to imply we're actually in a recession; they're merely asking. Right.)
One of the more misused terms right now, and often in big, bold letters at the bottom of the TV screen, is "volatility." News reporters tell us that investors are scared of the market's volatility. What the reporters mean is that investors are scared that the market may go down quickly. But that isn't the definition of volatility. As Nick Murray points out in the April edition of Financial Advisor Magazine, " 'Volatility' (like 'leverage') denotes a phenomenon which cuts both ways. That is, it means, in the context of markets, sudden, sharp, price movements in either direction."
The average investor hears "volatility" and thinks only of something negative. But "volatility" can be positive, too - especially for the investor who uses options to generate income.
Volatility is one of several factors that affect option premiums. According to the Options Industry Council:
Volatility is simply a measure of risk (uncertainty), or variability of price of an option's underlying security. Higher volatility estimates reflect greater expected fluctuations (in either direction) in underlying price levels. This expectation generally results in higher option premiums for puts and calls alike, and is most noticeable with at-the-money options.
Because the Snider Method® investor sells options, higher option premiums mean more income. In other words, volatility can be your friend.
But back to the fear-mongering coming from the media. Lots of outlets are treating the recent volatility as something unusual. The truth is quite different. Ed Easterling, author of Unexpected Returns and a past guest on Kim's radio show, explains:
For most of the past four years, volatility has been unusually low-and, in late 2006 and early 2007, volatility fell into the lowest three percent of all periods since 1950. No wonder that investors and market spectators became complacent to market volatility…or maybe complacency about risk led to the low volatility. Nonetheless, the waters of the market were unusually calm. So almost any increase in volatility is now startling and anxiety-producing. This longer-term measure (which is a little slow to react since it requires twelve months of information) has recently increased to near 12%. That's a lot higher than its low of 5.5% in January 2007, yet still below average.
…
The current level of volatility is approaching the levels experienced during and around 2002. An historical perspective of volatility reflects that higher volatility periods are normal and can extend for quarters or years.
The moral of this story is don't be surprised by the recent volatility. In the grand scheme, it's normal. And volatility by itself is nothing to fear, regardless of what the newspapers or television pundits tell us.
--James Pecht
SOURCES:
1. Easterling, Ed. "Volatility in Perspective," Crestmont Research, March 31, 2008 (updated). http://www.crestmontresearch.com/pdfs/Stock%20Volatility%20Perspective.pdf (Accessed April 29, 2008).
2. Murray, Nick. "The 'V' Word," Master Advisor, Financial Advisor Magazine, April 2008.
3. Options Industry Council, "Options Pricing," http://www.optionseducation.org/basics/options_pricing.jsp (Accessed April 30, 2008).
Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal.
Options involve risk and are not suitable for all investors. Before opening an option position, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available by calling 866-952-0100. Please read it carefully before investing.
July 02, 2007
Alison's Book Review
We've been focusing on the idea of Cash Flow investing lately. So I gave our radio listeners some resources to reference for more information on the topic. I thought it would be useful to list them here too. First, let me say that I'm a pragmatist. I know I can suggest that folks read all of these great books but people are busy. So, if you can't spend time reading, then try listening to books on your iPod or a similar device.
I also mentioned the well known fact that most people are taught next to nothing about money. What's worse is that many of us find out what not to do (the hard way) before we finally get around to handling money well (assuming that ever happens). I can tell you that my family's money advice was rather vague: "Don't spend too much!" or "Geez, you just got that money and it's already burning a hole in your pocket?!" (this one, I'm afraid was often true).
So here are three excellent websites for audio books. I think they're a great start to learning more about money issues: Audible.com, Simplyaudiobooks.com and Recordedbooks.com. When I typed in the keyword "money" at Audible.com it gave me 15 pages of results with a wide range of choices. You can get more academic choices like Milton Friedman's "Money Mischief" or the more practical "Money Wisdom" by Suze Orman and just about everything in between.
The books I mentioned on the radio show were: "Cashflow Quadrant: Rich Dad's Guide to Financial Freedom" and "Rich Dad's Who Took My Money?: Why Slow Investors Lose and Fast Money Wins!" These two relate to Cash Flow investing specifically. When I performed a search at Audible.com I found both books available for download as well as several others by Kiyoaski. Finally, I highly recommend that you check out Kim's reading list under the resources tab at www.kimsnider.com. I've read several of her suggested books and I got a lot out of each of them.
Happy Reading!
Kim Snider, Kim Snider Financial Communications and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
April 20, 2007
Lattco™ Has More Meaning Now
Lattco is the software which generates new positions for the Snider Investment Method™. It is brand, spanking new. Although Chronim has been using it for almost a year now, and it has been in beta for months and months, this month is the first time it will be used by paying customers.
On our Bora Bora Society trip, we ran a contest to see who could come up with a clever acronym for Lattco, since truth be told, it is just a made up name. The winning entry came from Henry and Paulette Levine:
Leaving Aggravation To The Chronim Organization
We thought you might enjoy some of the other entries as well:
Learning Another Technical Type of Company Options
Leverage And Trading Technique Collator
Learn About Total Trading Co.
Look At Top Trade Customized Opportunities
Look At The Top Call Only
Lattco Arranges The Top Call Options
Leave Alone Tweaks To Change Outcomes
And my personal favorite …
Leave All That Tweaking Crap Out
OK. I admit it. Jim came up with that one!
Obviously, we are having too much fun on this trip. If you are a Snider Method graduate, we hope you will join us next year. If you're not, go to kimsnider.com to find out how to join the club. And if you aren't familiar with Lattco yet, get the full scoop and sign-up at chronim.com.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
February 08, 2007
An idea for optionsXpress
Snider Investment Method™ alumni Paul Crider sent the following idea to optionsXpress:
This is an idea for you to consider. Probably there is a significant percentage of your customers who have more than one account. I have on a few occasions made a trade in one account which I intended to make in another account. For some reason the account switched from the IRA account to the margin account or vice versa. This switch is easy to miss because the account designation button is small in comparison to the rest of the page and much of the time has scrolled off of the monitor screen.
Why can't different accounts have a different background color, i.e., the current white background for margin accounts, light pink for IRA accounts, and other colors for whatever other types of categories OX offers. Alternately, and probably even better, program the software so that each customer can choose a color for each account.
This would be helpful for the adult child who is handling his/her own account and also the same type of account for the elderly mother or father. It could very well reduce the frequency of trades made on the wrong account and the need for OX employees to "bust" trades from one account to another. I mentioned this idea to Kim Snider this weekend, and she thought you folks at OX may like the idea.
Here is the reply from Lou Friedman at optionsXpress:
Great idea Mr. Crider.
Happy to report this is now in the works, and will be available to you and ALL of Kim's students sometime before the end of March!
When it goes live, you'll have the ability to change the color of the web site in your profile settings. You will be able to choose a different color for each account.
Our best ideas come from customers like you.
Thank you for your business. Keep in touch.
Lou Friedmann, EVP
I think this is a great idea - it's simple and should be useful to a lot of our students. Does anyone else have any ideas that we should pass along to optionsXpress? If so, leave them in the comments below. Thanks Paul for your follow-through.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
