If you use Yahoo! Finance to get up-to-date investing information, perhaps you've clicked on that "Options" link when viewing a stock quote.
On that page you might see some familiar terms, but some might be mysterious. Let's see what I can do to demystify that content.
I learn best with help from examples, so I'll walk you through one. I randomly chose FCX - Freeport-McMoRan Copper & Gold. See below for a screen snapshot from June 25, 2008 with numbered labels; sorry if they're a little confusing!
1. Company name: Freeport-McMoRan Copper & Gold Inc.
2. Stock ticker: FCX
3. Recent trade information: time of trade, price per share, dollar change for the day, percent change
4. Expiration of options: Options "expire" or are only good until a certain date, since options provide the right (but not the obligation) to buy/sell at a certain price by a certain date. That "certain date" is called the "expiration." Only the month and year pairs appear in these links because, magically, options always expire on the third Friday of any given month. If you want to see data on options that expire in Nov 08, for example, you would click the Nov 08 link.
5. Option type: There are two standard types of options: "call" and "put." One call option contract provides the contract holder the right, but not the obligation, to purchase 100 shares of the corresponding stock at a certain price by the expiration date. The top section shows data on call options; more on put options in (8).
6. Expiration date: This header area shows the exact date when the displayed options expire.
7. Advertisements: Horizontally across the top you'll find (typically broker) ads, and you'll find more ads on the right-hand side.
8. Option type: One put option contract provides the contract holder the right, but not the obligation, to sell 100 shares of the corresponding stock at a certain price by the expiration date. This bottom section shows data on put options.
9. Strike: The strike price is the dollar amount at which the contract holder can buy or sell the underlying shares.
10. Symbol: Since options contracts can apply to different stocks (FCX in this case), have different types (call/put), strike prices (85, 90, ...) and expirations (Jul 08, Aug 08, ...), it's helpful to identify all that in one little symbol. When you buy or sell an option, you'll need this symbol to identify what you're buying or selling. For help decoding these symbols, check out this Investopedia page.
11. Last: Just like stocks, options contracts can have some monetary value. The last represents the price* at which that particular options contract changed hands. *I say price, but remember that options contracts are good for 100 shares. I like to think of the last as a per share price. That being the case, to figure out the dollar value of an options contract you should multiply the last by 100 (or simply move the decimal point two places over). So, for example, symbol FCXGQ.X last changed hands for $3,225 (32.25 * 100).
12. Chg: Options contract prices can move up and down, so the Change represents how much the last has changed since the trading day started.
13. Bid: The bid represents the highest price someone is willing to pay for at least one options contract at that moment.
14. Ask: The ask represents the lowest price at which someone is willing to sell at least one options contract at that moment.
15. Vol[ume]: The volume represents how many of that options contract have changed hands that trading day.
16. Open Int[erest]: The open interest represents how many outstanding contracts there are of a particular option. Let me clarify what I mean by "outstanding contracts." Go to the PUT OPTIONS section and look at the 85 Strike. Now look at the Open Int column: 612. That 612 means there are 612 put option contracts out there with strike price 85 and expiration in Jul 08. If I were to write 10 new put contracts at the Bid price of 0.20, at that moment the Open Int number would rise to 622 (612 + 10 = 622). If I were to buy 10 of those put options contracts and exercise them, the number would fall to 602 (612 - 10 = 602). In a later entry I'll describe what it means to write options contracts.
There is plenty more to learn about even just Yahoo!'s options pages, but I hope that breakdown is helpful! Options can be very confusing, complicated, and risky, so PLEASE do your own careful research before trading options.
Disclosure: I have no position, long or short, in FCX.
I have a hard time selling shares shares at a loss. Being (an especially self-competitive) human, I hate accepting defeat. I was mad at myself for not selling higher earlier, back when my gut told me to take some off the table.
Ever been in that spot?
I recently sold off half my position in FedEx (FDX). I've been a shareholder for several years now, and I watched the shares make a healthy climb from sub-$100 to $120. Then they fell back down, and then they fell even farther down. I followed my own rules and bought some on the way down as I periodically re-evaluated the business, so where did I go wrong?
Initially I had bought into FDX as a relatively stable beneficiary of increased Internet commerce. When people buy "stuff" over the web, they expect to receive it. More and more people are buying more "stuff" online, so more and more "stuff" gets shipped. I liked FDX's valuation at the time, and figured I could watch the shares rise steadily without worrying about the sometimes emotionally challenging and sharp fluctuations of the e-retailers (like Amazon).
Was my thesis wrong? I'm not sure. I don't think it was wrong, but I didn't foresee $130+ oil. My macro-picture was off. Like many folks, I have a diversified portfolio. While I increased my weighting of energy holdings within the last year, I also bought more FDX as it descended. Those energy holdings have seen some nice gains (and I've taken some profits in that sector), but FDX?
FDX can operate like a perfectly-oiled machine, but they can't do anything to make one of their significant input costs -- oil -- go down. Honestly, I hope that the oil bubble will pop soon. I don't know that it will, and so I decided to trade some FDX for cash. Until oil gets cheaper, I don't see any catalysts to drive FDX's shares higher.
Am I accepting defeat? I don't know, for sure, that I'm being defeated. I hate selling for a loss -- even a small one. I shouldn't feel too bad, because a lot of people didn't predict that oil prices would rise this high as quickly as they have.
Whatever you want to call it, I've reduced my exposure to FDX. If the bubble pops, maybe we'll see a bounce and I can catch some upside. In the meantime, I'm happy to have some cash on the sidelines.
Disclosure: I am long on FDX at the time of writing, but I recently cut my position in half. I do not own any position, long or short, in AMZN.
In case you hadn't noticed, Bear Stearns (BSC) is trading much higher since opening on Monday around $3/share. The reports say that JP Morgan Chase (JPM) is buying BSC for the price of approximately $2/share... so what gives? Why is BSC trading so much higher?
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
Greeeaaat, how entertaining can this PE discussion be. I mean, we're talking about Price to Earnings (PE) ratios, man. Gnarly! Let's get to the point.
The PE ratio magically incorporates the following three things in one number:
These three pieces of information can be important to consider because investors want to make money (??):
Two simple ways to to calculate a PE ratio are:
Note that (Stock price) * (Total # of outstanding shares) is also called a company's Market Capitalization or Market Cap.
You end up with the same number in both (1) and (2), which you could prove by doing some simple algebra. But what does it all mean?
On Wall Street, people often look at the PE ratio to determine whether a stock is "cheap" or "expensive." Surprisingly, a $5 stock is not necessarily cheap and a $500 stock is not necessarily expensive. In general, lower PE ratios point to cheaper stocks and higher PE ratios point to more expensive stocks. Note that I prefer to use the terms cheaper and more expensive; reason being, I like to keep things relative where possible/appropriate.
There is no one perfect PE threshold that indicates stock cheapness. It's not so simple that we can say "Hey, this stock has a PE of 5 (or 10 or 15)... it must be a steal!!"
When evaluating if a stock is cheap, sometimes people just look at the PE number itself; sometimes they compare PEs among stocks within an industry or sector; sometimes people compare a stock's PE to the average PE of all stocks in the S&P 500 index. Also, some people say that high PE stocks are too risky for them; others say that low PE stocks do not offer enough upside potential to be worth their time and money.
People use the PE ratio in all sorts of ways, and the list goes on and on, but the bottom line is that it relates the company's stock price, # of outstanding shares, and annual earnings all in one "simple" number.
I hope I've got you hooked, because there's more to come in the next installment later this week!
The PE ratio magically incorporates the following three things in one number:
- how much profit the company makes in a year
- the stock price
- the number of outstanding shares
These three pieces of information can be important to consider because investors want to make money (??):
- Profit is important: the more profit, the better for the shareholder.
- Stock price is important: the lower I can buy the stock and the higher I can sell it, the better.
- The number of outstanding shares is important: when the company makes a profit, how big of a slice do my shares represent in the profit pie?
Two simple ways to to calculate a PE ratio are:
- PE = (Stock price) * (Total # of outstanding shares) / (Annual net income)
- PE = (Stock price) / Annual Earnings per share (EPS)
Note that (Stock price) * (Total # of outstanding shares) is also called a company's Market Capitalization or Market Cap.
You end up with the same number in both (1) and (2), which you could prove by doing some simple algebra. But what does it all mean?
On Wall Street, people often look at the PE ratio to determine whether a stock is "cheap" or "expensive." Surprisingly, a $5 stock is not necessarily cheap and a $500 stock is not necessarily expensive. In general, lower PE ratios point to cheaper stocks and higher PE ratios point to more expensive stocks. Note that I prefer to use the terms cheaper and more expensive; reason being, I like to keep things relative where possible/appropriate.
There is no one perfect PE threshold that indicates stock cheapness. It's not so simple that we can say "Hey, this stock has a PE of 5 (or 10 or 15)... it must be a steal!!"
When evaluating if a stock is cheap, sometimes people just look at the PE number itself; sometimes they compare PEs among stocks within an industry or sector; sometimes people compare a stock's PE to the average PE of all stocks in the S&P 500 index. Also, some people say that high PE stocks are too risky for them; others say that low PE stocks do not offer enough upside potential to be worth their time and money.
People use the PE ratio in all sorts of ways, and the list goes on and on, but the bottom line is that it relates the company's stock price, # of outstanding shares, and annual earnings all in one "simple" number.
I hope I've got you hooked, because there's more to come in the next installment later this week!
So what is raised guidance anyway?
Let's start with guidance. Google tells me that guidance means "something that provides direction or advice as to a decision or course of action."
When people buy and sell stocks, they're doing it to make money. If you predict the direction of a stock's trading price and your prediction turns out to be right, chances are you can make some money. Wall Street analysts make a living predicting what's going to happen to a stock's trading price, and they make their predictions based on a number of factors. What a company's management -- for example their CEO, CFO, etc. -- indicates about future business is one factor they may consider when making a prediction or issuing a rating (buy, sell, hold, etc.).
If you ever have listened to a company's quarterly conference call (if you haven't then I suggest you find one and check it out -- very interesting stuff!) you may have heard the company's CEO or CFO provide earnings guidance.
For example, on a year-end analyst conference call the CEO may indicate that management expects the company to earn between $1.00 and $1.05 / share in the coming fiscal year. Analysts then may take that earnings expectation or guidance range and incorporate it into their stock price prediction model/algorithms. Chances are that the models crunch the numbers differently depending on how predictable management's estimates have been in the past.
Predictability and credibility are important concepts on Wall Street!
Long story short: although the analysts consider many factors when predicting a stock price, they now have made a prediction keeping in mind the company's guidance.
Suppose Q2 rolls around and Q1 was a better-than-expected, phenomenal quarter (maybe the company unexpectedly started selling Hannah Montana Krispy O's cereal?). Keeping in mind that new information, the company's CEO and management team have re-evaluated the earnings guidance figure. During the Q1 conference call, the CEO provides raised guidance of $1.15 to $1.20 / share (EPS) for the coming year. With this updated, raised guidance (higher compared to the original EPS of $1.00 to $1.05) the analysts may go back to their drawing boards to come up with a new stock price prediction.
Commonly when a company raises guidance, the stock price goes up because the company is doing better than people had expected. Raised guidance usually is a good thing for people who are "long" on a stock!
There you have it. I hope the stocks in your portfolio provide some raised guidance soon!
Let's start with guidance. Google tells me that guidance means "something that provides direction or advice as to a decision or course of action."
When people buy and sell stocks, they're doing it to make money. If you predict the direction of a stock's trading price and your prediction turns out to be right, chances are you can make some money. Wall Street analysts make a living predicting what's going to happen to a stock's trading price, and they make their predictions based on a number of factors. What a company's management -- for example their CEO, CFO, etc. -- indicates about future business is one factor they may consider when making a prediction or issuing a rating (buy, sell, hold, etc.).
If you ever have listened to a company's quarterly conference call (if you haven't then I suggest you find one and check it out -- very interesting stuff!) you may have heard the company's CEO or CFO provide earnings guidance.
For example, on a year-end analyst conference call the CEO may indicate that management expects the company to earn between $1.00 and $1.05 / share in the coming fiscal year. Analysts then may take that earnings expectation or guidance range and incorporate it into their stock price prediction model/algorithms. Chances are that the models crunch the numbers differently depending on how predictable management's estimates have been in the past.
Predictability and credibility are important concepts on Wall Street!
Long story short: although the analysts consider many factors when predicting a stock price, they now have made a prediction keeping in mind the company's guidance.
Suppose Q2 rolls around and Q1 was a better-than-expected, phenomenal quarter (maybe the company unexpectedly started selling Hannah Montana Krispy O's cereal?). Keeping in mind that new information, the company's CEO and management team have re-evaluated the earnings guidance figure. During the Q1 conference call, the CEO provides raised guidance of $1.15 to $1.20 / share (EPS) for the coming year. With this updated, raised guidance (higher compared to the original EPS of $1.00 to $1.05) the analysts may go back to their drawing boards to come up with a new stock price prediction.
Commonly when a company raises guidance, the stock price goes up because the company is doing better than people had expected. Raised guidance usually is a good thing for people who are "long" on a stock!
There you have it. I hope the stocks in your portfolio provide some raised guidance soon!
