Playing Your Options - Aaron Skloff, AIF, CFA, MBA - CEO Skloff Financial Group
July 7, 2012 – WEEKEND INVESTOR – By Ben Levisohn Playing Your OptionsCompanies continue to dole out stock-based pay—even as the volatility of the past few yearshas shown how quickly that paper wealth can vanish.For employees on the receiving end of stock and options packages, this combination is bringingbig headaches and a greater chance that they will mismanage their money. Theres little relief insight, either, given the troubles in Europe and the likelihood of market-roiling political clashesin the U.S. later this year.The good news: There are simple ways to diversify stock holdings, squeeze more value out ofoptions, reduce the odds that a portfolio will implode—and still capitalize on a rise in anemployers share price.Too much stock exposure can be downright dangerous. You already are heavily exposed toyour employer through your salary. By loading up on company shares, you are putting more ofyour chips on one bet.Comments July 7, 2012Do you get the feeling that greedy Wall Street is taking advantage of you? Turn the tables onWall Street and profit from its greed and reduce the risk of your company stock with a strategycalled covered call writing.
With this strategy, you sell (or write) the option for Wall Street to buy your stock at a higherprice (called a strike price) in the future. Covered call writing is considered to be even moreconservative than simply owning a stock outright, as your risk is actually reduced by theamount you receive (called a premium) when you sell a call. Wall Street’s greedy nature canlead to unrealistic expectations of price increases, driving up the premiums you receive.The premium you receive is your profit, no matter what happens to the stock. If the stock goesdown, stays flat or goes up you keep the premium. In addition, you continue to collect all thedividends the stock pays - even though you have sold Wall Street the right to by your stock.Let’s look at an example where your stock is flat for one year. If you sell options equal to 5% ofthe value of your stock and you collect dividends equal to 3% of the value of your stock, youmake an 8% profit over the course of one year. There is nothing wrong with an 8% profit on aflat stock.Aaron Skloff, AIF, CFA, MBACEO - Skloff Financial GroupAaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA),Master of Business Administration (MBA), is the Chief Executive Officer of Skloff FinancialGroup, a NJ based Registered Investment Advisory firm. The firm specializes in financialplanning and investment management services for high net worth individuals and benefits forsmall to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.