by Helmi Hakim | May 1, 2013 | Investment
When the investor is bullish about the stock’s performance and expect stock’s price to go up, he buys (long) a ___________ option.
When the investor is bearish about the stock’s performance, and expect stock’s price to go down, he buys (long) a ____________ option.
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If you cannot answer this question, do go back to my first blog post where I share more on buying call and put options.
http://helmihakim.com/investment/m9a-insurance-regulatory-exam-blog-post-no-1/
It is important that you understand the very basic first, because with very strong fundamentals, you can easily grasp the advanced ones later. Moreover, MCQ exams like M9A test more on your understanding, rather than just pure memory work. If you can answer the above correctly, do continue reading this blog post. 🙂
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There are another group of people who wants to make money. They are the option sellers. They make money by SELLING (writing) a call or a put option. They make money by collecting the option’s premium that the option buyer pays.
Call Option Seller
If these group of people, expect the stock’s price to go down, they sell (write) a call option. They hope, that the price of the stock goes down, and those who buys call option (the investors, i mentioned in my previous blog post) never exercise their right to buy at strike price, since market price is already cheaper. The call option seller makes money, by collecting option premium.
Put Option Seller
Vice versa, if these group of people expect the stock’s price to go up, they sell (write) a put option. They hope, that the price of the stock goes up, and those who buys a put option, never exercise their right to sell at strike price, since the market price is already higher than the strike price. The put option seller makes money, by collecting option premium too! 🙂
Grasp and understand above, before you proceed to the last part of my blog’s post.
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Warning. There are dangers, of being a call or put option’s seller, if you don’t own the stocks.
You have UNLIMITED RISK. If you sell a call or put option without owning the stocks. We call it, that you are selling “naked”.
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Let me give you an example. You sell (write) a call option. The current price of the stock is $30. The strike price is $35.
The call option buyer expects the stock’s price to go up, so that he can buy at strike price and sell it for a profit on the open market. You as the call option seller, hopes the stock’s price to go down, praying that the call option buyer won’t exercise his right to buy at strike price of $35, and you can enjoy the option premium which he pays you.
5 days later, stock’s price jumps to $90. Call option buyer wants to exercise his right to buy the stock at $35. You don’t own the stocks. What, you have to do, is buy the stock from the open market at $90, and sell it back to the call option buyer at strike price of $35. Your risk is unlimited, because the stock price can go up, to $90, $100 or $200. You have no choice but to buy from the open market, and sell it to the call option buyer if you don’t own the stocks.
That is the danger of being an option seller, without owning the stocks in the first place. Your gain is just the option’s premium if option buyer never exercise his right, but your loss is unlimited if option’s buyer exercise his right.
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I hope this sharing is beneficial for you and wait for my next post, which I will share more on option strategies.
Sharing is caring. Share this post around and may all benefit from it! Insya’Allah… 🙂
by Helmi Hakim | Apr 29, 2013 | Investment
I understand that some of my colleagues, in the finance industry find it challenging to pass the regulatory exam, M9A.
Thus, I will like to make a small contribution here. I will be writing a few blog posts, to help explain in a simple, easy to understand manner, concepts that you need to know, when you undertake the M9A exams. If you find it helpful, do share my blog post around! 🙂
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In this blog post, I’m going to share more about buying a derivative instrument called options. 🙂
Most of us are familiar, that when we first get married, and want to buy a BTO house, we paid $2000 to “reserve” the house. This is an example of buying a “call option”.
When you buy (long) a call option, you attain the right but not the obligation to BUY the underlying assets (house) at specified price (strike price), within a specific period of time.
That $2000 that you paid, gives you the right but not obligation to buy the house. That $2000 is also known as the option’s “premium”.. Nobody else can buy your house, only YOU can buy the house, until the option expires.
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In the real world, people buy a call option for stocks, if they are bullish, and expect the price of the stock to go up.
Example, the price of XYZ company shares now is $30/ share. You expect the price to go up to $60/share. The strike price is $35. You buy a call option by paying a fee, called premium.
When XYZ share price goes up to $60 before the option expires, you have the right to “buy” the stock at $35, and sell it at the open market for $60. Bingo!!! You make money!!! 🙂
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Those who are pessimistic of the stock’s future performance, instead of buying a call option, they will buy (long) a put option.
Put option gives them the right, but not the obligation to SELL the underlying assets at specified price (strike price), within a specific period of time.
You know, people buy stocks at low price so that they can profit when they sell the stocks when the price goes up. But if stock’s price goes down, they cannot make money.
Buying a put option, allows them to make money even if the stock’s price goes down.
Example, XYZ company’s share price is now $60/share. You are bearish, and you expect XYZ company’s share price to go down to $30/share. The strike price is $55. When XYZ share price goes down to $30 before the option expires, you have the right to “sell” the shares at $55. You make money again! 🙂
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Now you understand, that when the investor is bullish about the stock’s performance and expect stock’s price to go up, he buys (long) a call option.
When the investor is bearish about the stock’s performance, and expect stock’s price to go down, he buys (long) a put option.
There are another group of people who wants to make money, by SELLING (writing) a call or a put option. I will share with more on the benefits and danger, of being a call or put seller in my next blog post, but before that, just make sure you understand the concept of buying call and put option. Stay tuned! 🙂
by Helmi Hakim | Apr 25, 2013 | Investment
Today, I am going to share with you what most finance courses out there, dont teach you.
The Mechanics Behind The Formula Of Compound Interest! 🙂
In one of my previous blog post, I have shared on how to calculate compound interest, without using a financial calculator.
This is the formula again.
Principal (1+interest)number of years
In this blog post, I am going to share with you the mechanics behind the formula of compound interest for a single cashflow. Before that, let me give you an example, on how compound interest works.
Example, you have $10,000 today, and you earn 9% compounded interest, annually.
For the first year, you earn 9% X $10,000 = $900 interest
On the second year, you will earn an additional 9% X ($10,000 +$900) = $981 interest
You earn interest, not just on the principal…but you earn interest on the (principal + interest)
So total in 2 years, you make, $10,000 X (1.09) X (1.09) = $11,881
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The above explanation is pretty straight forward and it is pretty easy to calculate if we compound it for 2 or 3 years.
If we compound for 2 years, we take 10,000 X (1.09) X (1.09).
If we compound for 3 years, we take 10,000 X (1.09) X (1.09) X (1.09).
If we compound for 4 years, we take 10,000 X (1.09) X (1.09) X (1.09) X (1.09).
BUT what if we compound for 60 years? What are we going to do, if we dont have a financial calculator? Take….
10,000 X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) ???
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The mathematician who developed this formula makes it easy for us.. Just use this formula…
Principal (1+interest)number of years
Example if you have $10,000 and compounding it for 2 years at 9%/annum.
The formula goes 10,000 (1+0.09)2
which is also 10,000 X (1.09) X (1.09).
For the first year, you make (10,000 X 1.09) = $10,900 inclusive of interest, and the second year, you make (10,900 X 1.09) = $11,881
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But if the $10,000 is compounded for 60 years, instead of inputting, 10,000 X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09),
just use this simple but powerful formula.
10,000 (1+0.09)60
Hope this explanation is beneficial for you…. 🙂
by Helmi Hakim | Apr 24, 2013 | Insurance, Investment, Miscellaneous, Motivation
Alhamdulillah Wa Shukrillah…. I have finally graduated with Bachelor Of Science (Hons) in Banking and Wealth Management, University Of Wales, UK, with first class honours. 🙂
It has been an uphill task thus far, juggling appointments with clients and school, but a rewarding and satisfying one.
I have made great friends along the way and learnt what it takes to be an empathic, professional and competent financial planner. Now, I have the time and resources to share what I learnt, and apply it fully onto my 600+ clients. Till then, I shall wait patiently, for our convocation in November 2013. Insya’Allah… 🙂
by Helmi Hakim | Oct 8, 2012 | Insurance, Investment, Miscellaneous
My friend always tell me, “You all Malay, very lucky one….. We, Chinese ar, our wedding can cost $50,000 – $60,000…… Our life savings all gone….”
I used to agree with them, until I plan for my own one…. but now, I have a come back line, ” Ya lah….But you all can cover back your costs wat….”
lolz….. I have been procrastinating to post my rough calculation on the cost of Malay wedding in Singapore. But for the benefit of all, below is the extract from my own financial plan, just for my side of the wedding held under my HDB blk, not inclusive my future wife’s side……. 🙂
If you are planning to get married in a few years time, going to get married, just gotten married, already few years in marriage, do call me for a FREE financial planning advice. I will be very happy to assist you! 🙂
****UPDATES on 8th August 2013****: The post that I created was a year ago, on 8th October 2012. Alhamdulillah, most of the costs, remained intact, as I have made my downpayment, reservation fees at that point of time. However, certain expenses can only be confirmed closer to my wedding date, thus I update them in the costs allocation table above using the red fonts.
As most of you are aware, there is this thing called inflation. Which means, costs of wedding rise year by year. I will advice you to go down to the wedding expo, and confirm with the pertinent vendors, on the specific prices involved. The wedding costs, that I computed above is the exact costs, that I incurred for my wedding. You have the autonomy and flexibility to adjust accordingly. Enjoy the process, like the way, I do. 🙂
by Helmi Hakim | Jul 1, 2012 | Investment
These past few months, I received smses, and msges asking me, if I have purchased my Danga Bay property in Malaysia.
My answer is NO. Here are the reasons.
1) Instable political landscape in Malaysia
Strong governance is very important in a country that you will like to invest in. The recent Bersih rally, worries me a lot. Roads are blocked and businesses suffered. Police officers were beaten up and their patrol car overturned.
I believe, the opposition parties have a stake on this rally, and they will continue to push for such rallies in the future. They will make Malaysians angry with the current government. When people are angry, they will venge it on the streets. When people venge it on the streets, it will get ugly. I am expecting more demonstrations in the future.
This type of democracy is unhealthy. Foreign investors like me, will not want to invest in countries with disastrous political turmoil.
2) Crime rates
Everytime, I flipped the papers, watch the tv for news, it is always about crimes in Malaysia.
You can take a look here. http://www.facebook.com/#!/photo.php?v=379757725412953
When such things occur, I don’t feel safe. I don’t feel secure. It will not stop me from visiting Malaysia, as a tourist, but as an investor, I will think 2,3 or 4 times, before making an investment decision.
Hope, my explanation clarifies.
