R2I Finances - FD Laddering Strategy for INR Liquidity


Interest rates on fixed deposits (FD) in India bottomed in 2003. Over the last 40 years, the rates have fluctuated from a low of ~5% to a high of ~13% as shown in the graph below:  



Currently, the interest rates on FD are hovering at just under 10%. For R2I-ers, these rates sound excellent as the best rates for Certificate of Deposits (CD) in the US are well under 4%, not to mention the practically non-existent interest rates for savings deposits and checking accounts. Even the interest rates for regular checking accounts in India are between 4 and 6%.

Many R2I-ers opt to maintain the bulk of their assets denominated in dollars. Reasons for such a strategy include:

  1. Dollar’s status as the world’s reserve currency allows for ready acceptance/convertibility of the dollar all over the world. Many R2I-ers regard themselves as global citizens with plans to travel to and live in different countries. The ready availability of dollar makes this easy. INR on the other hand is yet to be fully convertible and one has to jump through several hoops to convert rupees to other currencies, especially larger amounts.
  2. As US stock markets are the most transparent and the best bet when it comes to stock investments, many R2I-ers maintain their stock investments through US market brokerages which deal primarily in dollars.
  3. Retirement schemes in the US (IRA/401K) form a sizable portion of assets held by R2I-ers. Withdrawing from such accounts prematurely involves paying a 10% penalty in addition to realizing taxable income and the associated withholding. These factors act as deterrents for R2I-ers.

Also, a good portion of the reportable income of R2I-ers may be in dollars (interest, dividends, capital gains, social security/medicare payments, and earned income). In other words earnings are in USD and spending in INR. Combined, these factors leave the majority of R2I-ers vulnerable to risks associated with USD/INR conversion ratio. If INR appreciates, R2I-ers stand to lose and vice-versa. Direction of the INR against the dollar is an unknown – most currency regimes have an unwritten policy of keeping their currencies weak to aid exports. Meanwhile USD is no longer a strong currency because of the fiscal degradation in the US over the last two decades.

Many R2I-ers yearn for a strategy that ensures liquidity in INR over the long-term – one that would allow access to INR for ongoing expenses while the bulk of the liquid assets stays invested in USD through their US brokerage and retirement accounts. One tactic is to take advantage of the currently favorable interest rate and exchange rate levels in India and build a liquid INR asset-base: use savings accounts that earn 4-6% for short-term and a set of FDs that earn in the 9-10% range which mature periodically (laddering) for long-term.

Below is an FD laddering strategy to ensure rupee liquidity over the short and long-terms while earning decent overall returns. The example uses Rs 25L as the portion set aside for INR investments in savings and fixed deposits:

  1. Decide on setting aside a percentage of the liquid assets in INR. This number will vary depending on one’s outlook – it can be quite high for those planning to spend most of their lifetime in India and vice-versa. Bear in mind when eligible for Social Security, those payments will be coming in USD.
  2. A portion of the INR assets should be set aside for short-term needs (say 6-12 months). This money should be invested in regular savings accounts that earn 4-6%.  In this example, we set aside 20% for short-term needs for a total of Rs 5L.
  3. Construct an FD ladder with the rest of the money to ensure rupee liquidity over the long-term (say 10 years). On the average, these deposits should earn between 9-10%. In the example, an FD ladder covering 10 years can be constructed by starting fixed deposits worth Rs 2L each with maturities spanning 1, 2, 3, ..., 10 years.
  4.  As the FDs mature, the ladder can be continued perpetually by investing in another FD with the proceeds of the matured FD. The maturity of the new FD should be for the highest term (10 years). 

FD laddering allows the flexibility to determine what to do with portions of one’s money periodically. As long as the FD ladder is intact, there is the flexibility to reallocate the proceeds of the matured FD as you please every year. For example, if interest rate is very low or if the dollar exchange rate is very low, one can do away with the ladder and use the proceeds for current needs. The ladder also allows for assets to be invested in longer-term (10 year) FDs while allowing rupee liquidity without penalties on a periodic (yearly) basis. In an emergency, it is also possible to get access to all the funds invested in FDs: the FDs can be closed and proceeds credited at any time, although there is a penalty that reduces the interest paid. The penalty can vary with banks although the most common penalty is the following: if the interest due for the period was 9%, they will only credit 8% in case of early withdrawal. 

Basics of Options and Futures for Value Investors


Introduction:


Options and Futures are both zero-sum in the sense that for every winner there is a corresponding looser. They are both contracts between buyers and sellers.

Options are contracts between buyers and sellers whereby the buyer (long) gets the right to buy (call) or sell (put) a particular security at the strike price from the seller (short). The buyer pays the seller a premium for this privilege upfront which is the price of the contract. 100 shares of a security is equivalent to one contract.

Futures are contracts between buyers and sellers whereby the buyer (long) is obligated to buy a particular commodity at the pre-determined price from the seller (short) on a particular date. To enter a contract, you need to deposit an initial amount into the margin account (usually 5% to 10% of the contract value), called the initial margin – the contract does not have a premium as such. The account is credited or debited from/to every day based on contract price changes. In addition to the initial margin, there is also a maintenance margin requirement, which is the lowest amount an account can reach before needing to be replenished. One contract stands for an amount of commodity that is different for each commodity. For example, for the E-Mini S&P futures contract is valued at 50-times the value of the S&P 500 stock index. So, based on the current S&P 500 index value of 1370, one E-Mini S&P futures contract has a value of 1370*50=$68,500.

What do the terms “long put”, “short put”, “long call”, and “short call” mean w.r.t. Options?


The put buyer is short on the underlying asset of the put, but long on the put option itself. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price. The writer (seller) of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. Similarly, a call option that is purchased is referred to as a long call and a call option that is sold is referred to as a short call.

Who can be assigned and when?


Assignation is a trade that happens between the buyer and the seller of an option at the request of the option buyer to exercise his option position. As such, only the option seller can be assigned – ie, the seller is made to either buy (call option) or sell (put option) the security at the strike price as a result of the buyer exercising the option any time before expiration date. The logic is straight-forward: The option seller sold the right to buy (call option) or sell (put option) the security at the strike price to the option buyer. As such the right to assign is with the option buyer.

How to close an option and what happens between the buyer and seller?


Closing an option position is a transaction that happens between the closer and the exchange, not the counter-party when you opened the position. Basically, when doing a “Buy to Close” or “Sell to Close” against an open option position in your brokerage account, what happens is you are doing an offsetting transaction to exit the trade.

Intrinsic Value and Extrinsic Value (“Time Value”) of Options:


Intrinsic value is the money that can be realized, if exercised. Example: Assume stock ABC is trading at $30 and a call option with a strike price of $25 is trading at $7. Then, if the option is exercised, the amount realized is $500 per contract – so, $5 is the intrinsic value.

Extrinsic value or “Time Value” is the difference between the option price and the intrinsic value, when it is trading more than the intrinsic value. In the above example, $2 is the time value. 

Out-the-money options have 0 intrinsic value and a positive time value. So, if ABC stock is trading at $25 and call option with a strike price of $30 is trading at $1, the intrinsic value is 0 and the time value is 1.

One strategy for short-term traders involves capturing the time value. Time Value decays faster as the expiry date approaches. For this reason, such traders prefer at-the-money near-term (1-week to a max of 60 days or so) options. At-the-money is preferred because time premium is highest with at-the-money options. On the other hand, that strategy has minimal down-side protection. Some protection can be achieved while sacrificing some time premium by choosing deep in-the-money options with “decent” time premium.

Implied Volatility (IV), Statistical Volatility (SV), and Theoretical Value (TV) (“fair value”) of Options


SV is a measure of how rapid price changes have been. IV is a measure of what the market expects the price to do. They are both numbers between 0 and 100, higher numbers imply higher volatility.

The derived value of the option price when plugging in the SV into an option pricing model is the theoretical or fair value of an option. The difference between the theoretical value and the actual value of an option is known as option mispricing.

Practical Use

  1. It is good to sell options when IV > SV (market price is higher than theoretical price) and buy options when SV > IV (theoretical price is higher than market price),
  2. Options are cheaper to buy when volatility is lower,
  3. Options bring more premium when volatility is higher,
  4. Implied volatility increases when the macro sentiment is bearish and vice-versa – this is because of the belief that bearish markets are more risky than bullish markets.

Delta, Gamma, Vega, and Theta – “The Greeks”


These are measurements of risk for an option position.

How do Options and Futures differ?


Margins in Futures vs Premiums in Options:


Margins are specific to Futures while premiums are specific to Options –

  1. Margin – these are financial guarantees (5% to 10% of contract value) required of both buyers and sellers of futures. Since, the guaranty is only a small percentage of the total contract value, there is very large leverage allowing large gains or losses.
  2. Initial Margin – paid by both the buyer and the seller of a futures contract into the margin account.
  3. Maintenance Margin – the lowest amount an account can reach before needing replenishment.

Premiums are the payment that the buyer makes to the seller when entering an Options contract.

Risk in Futures vs Options:


Options - the maximum risk for the buyer of an option is the premium amount while the maximum risk for the seller is unlimited (call – there is no limit to how much a stock can go up) or limited (put – the risk is limited as the stock cannot go below zero).

Futures – the maximum risk for the buyer of a futures contract is limited to the total contract value while there is unlimited risk for the seller. Because of the leverage, the risk for both the buyer and the seller is very large. 

Obligation in Futures vs Right in Options:


Upon expiration, buyers of futures contracts are obligated to buy the underlying commodity from the seller of the contract, independent of the price of the commodity. For most contracts, settlement is in cash and so there is no physical delivery of commodity. Also, price differences are settled daily, which means margin calls can occur any day.

Upon expiration, buyers of options contracts have the right to exercise their option contract, but they are not obligated to do so.

Versatility in Options vs Futures


Options are much more versatile as you can construct option positions that profit in all directions while futures are uni-directional – you can profit only in one direction.


Basic Futures Strategies for Value Investors



Futures allow for directional bets on a commodity with huge leverage usually between 10:1 and 20:1 which implies either winning big or losing big. Trading in the futures markets are controlled by hedgers and speculators. Rather than speculating with futures, value investors use them as a hedging tool and in the context of their overall portfolio, there are numerous ways to use futures as a hedging tool:

Buying stock index futures: Purchasing stock index futures on a representative index (S&P 500) allows placing a large long bet on the overall market. The approach can be beneficial for a value investor, whose research indicates oversold market conditions. While purchasing stock index futures is similar to buying a call on the index concerned the significant differences are:
  1. With a long call option, the maximum loss is when the option expires worthless as the index stayed below the strike price plus call premium. The actual loss will then be the premium paid or simply put; the downside is capped at the call premium. The upside has no limit. 
  2. With a long futures contract, the maximum loss is the total contract value, which can vary between 10 and 20 times the initial margin. Even though the maximum loss scenario is unlikely (i.e.the index goes to zero), the downside is relatively huge. The upside is not bounded. Given the large leverage involved, it is best to consider long futures contracts as though one has established a long position on the index for the total contract value. For e.g., if one E-mini S&P futures contract (one such contract stands for 50-times the value of the S&P 500 stock index. So, based on the current S&P 500 index value of 1370, one E-mini S&P futures contract has a value of 1370*50=$68,500) is purchased at a quoted price of $1370 using the initial margin requirement of $5000, then it is best to regard the stake as though one is long the S&P 500 index at $1370 for $68,500 (1370*50) – the size of the position also happens to be the size of the maximum loss. 
Long futures contracts are preferred over long call options when analysis points to the significant likelihood of the index staying just below the strike price plus call premium. Should that scenario pan out, the investor might be able to exit with small gains as opposed to a total loss of the call premium with options.

Selling stock index futures: Selling stock index futures on a representative index such as the S&P 500 allows placing a large short bet on the overall market. For a value investor, the approach is beneficial when applied after recognizing overbought market conditions. The approach is akin to buying a put on the index concerned, although there are significant differences –
  1. With a long put option, the maximum loss is when the option expires worthless as the index stayed above the strike price plus call premium. The actual loss will then be the put premium or in other words, the downside is capped at the put premium. The upside is limited to the value of the underlying shares at the strike price minus the put premium.
  2. With a short futures contract, the potential loss is unlimited. Losses rise proportionally to the increase of the index above the price at which it was sold. The upside is limited to the total contract value as the index cannot fall below zero. Because of the leverage involved, it is best to view short futures contracts as though one has established a short position on the index for the total contract value. For e.g., if one Mini S&P 500 Futures Contract is sold at a quoted price of 1250 using the initial margin requirement of $5000, then it is best to regard the stake as though one is short S&P 500 index at 1250 for $62500 (1250 * 50) – the size of the position.
Short futures contracts are preferred over long put options when analysis points to the significant likelihood of the index staying just above the strike price plus call premium. Under such a scenario, the investor might be able to exit with small gains instead of a total loss of the put premium with options.

It is also possible to buy or sell commodity index futures on individual commodities in a similar fashion. But, value investors should base their hedging strategies on a bottom-up analysis on the commodity involved and should also come up with a valuation at specific dates. The macro environment needs careful analysis before committing capital. 


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Last Updated: 04/2012.

British Central Africa - Travel/Philately/Numismatics/Memorabilia Profile


The area of British Central Africa protectorate covered the lands west of Lake Nyasa and the Shire Highlands south of Lake Nyasa. Following a crisis over control over the area in 1889 between the British and the Portuguese, Great Britain took over the area and named it the British Central Africa Protectorate in 1893. The area changed its name to Nyasaland Protectorate on July 6, 1907.

Philatelic Profile:

The first stamps of British Central Africa were “B.C.A.”overprints on Rhodesian stamps of the British South Africa Company. The stamps were released as a large set of seventeen (Scott #1 to #17) during the period from 1891 to 1895. The set is sought after and catalogs in the $8.2K range for Mint and a lot more for Used – the two pound and five pound varieties are not known to exist in Used condition. Denominations vary from a penny to ten pounds. Fiscal cancellations are fairly common from most issues of British Central Africa and catalog well below these values – the most common among the fiscal cancels is the undated double-circle with a town name in the center in Black. The first set was followed by a set of two stamps with three shilling and four shilling surcharge overprints on the original issues (Scott #18 and #19 on Scott #11 and #12). That set is also sought after and catalogs in the $475 range for Mint and around the same for Used. Certain double surcharge varieties exist and genuine copies of those fetch a huge premium into the 1000s.

The first original issues of British Central Africa were a couple of designs on the Coat of Arms theme issued in 1895. The set of twelve stamps with denominations that range between a penny and twenty five pounds (Scott #21 to #31) is highly valued. The first eight stamps forming the denominations till 5 shillings catalog in the $850 range for Mint and around hundred less for Used. The poundage denominations fetch well into the 1000s. The Coat of Arms theme along with certain surcharges formed the primary stamp issues of British Central Africa during the period till the turn of the century. A couple of sets that were King Edward VII (KEVII) keytypes were issued during the period from 1903 to 1907 and those form the complete stamp issues of British Central Africa. The most valuable stamps of British Central Africa are the 2p and 4p varieties of the KEVII issues of 1907 (Scott #71 and #72) and those catalog in the $12.5K range.

Collectible Memorabilia:

Prints of Sir Harry H. Johnston artwork are a good collectible item from the period. Original maps of the area is also a collectible item.


Last Updated: 12/2015. 

R2I Housing – Landscaping, Balconies, Shower Doors, and Painting



The better half of the year after our R2I was spent on installing necessary items we did not avail of from the builder, items the builder failed to complete before handover, and replacements to certain builder items due to shoddy workmanship. We also made several ‘optional home improvements’ in and around the house such as landscaping our yard space, closing balcony areas, and painting. From our perspective, the builder should have definitely provided/offered solutions for some of these items as an upgrade.

A minimal front-yard landscaping (lawn) was standard fare for all houses and the remaining yard is left bare. By the time we moved in, the yard had taken on a mini-forest appeal with full-grown weeds and several acacia trees. Parts of the front lawn were visible but the weeds outdid them easily. As the water situation was dire, we decided at the very onset to eliminate the lawn and laid an interlocked-tiles walkway for 4.5’ along the perimeter of the house. Barring a small vegetable patch, we spread river-stones over a very thick layer of crushed rocks (metal) to discourage weeds for the remainder area. A few spots were boxed to plant fruit trees as well. This met our purposes well – minimal maintenance while providing gratification for our well-concealed green-thumb. The interlocking work came to Rs 32K (~$650 – around a dollar per square feet in a total area of 640 sq ft) and the rest 700 sq ft was around Rs 25K (~$500) which included river-pebbles (Rs 14K - 70 sacks at Rs 200), metal, bricks, and labor. On hindsight, the wiser option would have been weather-proofed tiles in place of the standard ones as weather-proofing the tiles set us back an additional Rs 7K ($150) later on.

Open balconies are what came standard with the house. For certain floor plans, the builders did offer concrete roofs although that meant the balcony area would be added to the total square footage quoted. We had around 250 square feet of balcony space in the front and two separate balconies in the back covering around 75 square feet each. Keeping those balconies open in the long monsoon season was out of question. As the purpose we wished to derive from each of these balconies was dissimilar we did different things to each of them and the process was a real learning experience:

a)      Front balcony: The roofing of this area was done using brick tiles and the remaining area was covered with aluminum fabricated glass sliding windows. The area was mosquito-proofed using false-roofing and mosquito-frames. Numerous options abound on fabrication frames as well as for the glass. Looks wise, brick tiles are the best but then they are very expensive and require maintenance during the monsoons – roofing came to ~Rs 75K ($1500). Quoted rate for the mid-range aluminum fabrication work with coffee brown glass windows came to Rs 150 per sq ft for a total of ~Rs 45K ($900). False roofing came to Rs 15K ($300) and mosquito proofing to ~Rs 25K ($500). All told, the front balcony was brought in with an outlay of ~Rs 160K ($3200).
b)      Back balcony (adjacent to the main private road within the community): This was finished with aluminum fabricated privacy glass windows along with aluminum sheeting for the roof. False roofing and a minimal amount of mosquito proofing brought the grand total to Rs 42K (~$850).
c)      Back balcony (with nary a view on the east): This area ended up as our laundry area. As electricity is dear, we opted for the air-dry option over a dryer. To serve the purpose the area, got cast-iron fabricated grills instead of glass-windows. Aluminum sheeting was still used for the roof and an opening was designed for roof access. Including plumbing the total for this area came to ~Rs 30K (~$600).

Shower doors were another item the builder did not offer. With no separation for the shower area it was impossible to keep the flooring of the bathroom dry. Shower doors come in different materials and the popular options are acrylic fabrication and toughened glass panels – toughened glass panels are more than twice as expensive. Our choice was acrylic fabrication for the two upstairs bathrooms and toughened glass for one of the downstairs one. One bathroom was left the way it was for disability access. The entire installation was done in 2 days and is less intrusive than some of the other works done inside the house. The total for the three panels came to ~Rs 37K (~$750) including installation.

A single coat of distemper (whitewash) was what came as standard from the builder. For the uninitiated, distemper is among the most economical paints available in India – the ingredients of this paint include lime, chalk, water, and color. Weathercoating the tiles was not part of the deal and at handover, the roof tiles were already showing signs of mould. We reused the color panels the color-consultant had suggested to paint the insides of our previous house. As for brand selection, we went with Berger and Asian paints. Berger Easy Clean was our choice for the inside – based on the feedback that Berger’s premium paints are wonderful although it attains less coverage compared to the competition. The living rooms used emulsion but we had to compromise and use exterior weathercoat for the kitchen and bathrooms. The distemper job in the bathrooms and kitchen are a disservice by the builder as one cannot go for enamel paint in those areas, once distemper is applied – the enamel coat will just peel off. For the wooden windows and grill-work, we used glossy enamel instead of satin and semi-gloss as the glossy one is supposed to resist dust and mold better. For the exterior walls, we went with Berger All Guard and for the roof tiles Asian Apex Ultima. Given our experience in having done a paint job in a couple of different houses, we highly recommend paying the extra premium for better quality paints. The total paint job came to just under Rs 140K ($2800).

With painting over, our primary wishlist was met – we postponed the secondary items for the time being. Those include plumbing upgrades, floor tiling upgrades in several areas, etc. While these things would all be quality-of-life enhancements, our desire for peace-and-quiet won hands down – any work inside the house essentially involves throwing one’s schedule off.


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Basic Options Strategies for Value Investors



Options are an excellent tool for value investors. Value investors who rely on Fair Value Estimates (FVE) to arrive at Buy/Sell decisions tend to use a two-pronged approach:

  • Bottom-up fundamental analysis, and
  • Macro considerations
Rather than using a fixed FVE, value investors rely on a range of FVE’s based on the assumptions and methods used. With a range of FVE’s in place, the Buy decision can be based on a margin-of-safety around the low-point of the FVE’s and the Sell decision when the market value approaches the FVE.

Macro environment can cause the overall market to stay significantly undervalued or overvalued for extended periods of time. In times of market undervaluation, it is easier for value investors to stay fully invested while the reverse is true during periods of significant market overvaluation. Hanging on to cash under such circumstances can result in value investors missing out by a long chalk as cash holdings rarely provide significant returns. This, in essence, is the bane of long-only value investors.

Value investors would be better off with a long-short portfolio instead of one laden with longs only. Then, value investors can opt to stretch their short-portfolio when the macro picture indicates the overall market overextended and shrink the same when the macro points to the contrary. The approach is not without downsides: 

a)      Open-Ended Risk: The losses can be limitless while the returns are capped as the stock cannot dip beyond zero. For e.g., the maximum profit from shorting 100 shares of a $50 stock of ABC is 100% of the proceeds received when shorting ($5,000) – realized if the stock goes to zero. On the other hand, if the stock goes to $150 and the decision is to close the position, the loss is 200% of the proceeds received when shorting ($10,000) – theoretically, the losses have no limit as there is no ceiling for the stock price of a company.
b)      Costs: Several expenses are associated with shorting stock - the fees the broker charges for borrowing the shares, dividend payment on short position, and margin costs. A part of the cost may be offset if interest is earned on the short proceeds. The cost increases as the position is held for extended periods of time.

Options based strategies are a valuable tool for value investors. Below lists some of the most basic option strategies that can be employed:

a)      Short Puts: Short puts involve selling put options on a stock at a particular strike price. The expectation is that the stock will stay above the strike price during the option period allowing one to pocket the premium realized as pure profit. But, one is obligated to buy the stock, if and when assigned. Hence, it is best to write cash-covered puts – meaning one has the liquidity to buy the stock at the strike price. Short puts are a way for value investors to potentially enter a stock at a price they wish to enter. For e.g., say the FVE indicates stock ABC is a good value at $30 or below and the stock is currently trading at $35. An option in this scenario would be to sell put options on ABC at $30. If the stock stays over $30, the investor gets to keep the premium received. But, if it went below $30, most probably the stock would be assigned and the investor would own the shares at $30. The downside is the value of the position at the strike price, if the option was assigned. For this reason, it is best to view short put positions as though one is long on the stock at the option strike price in an amount equal to the contract size – if the sale were for 5 contracts, assume one is long 500 shares.
b)      Long Puts: Long puts involve buying put options on a stock at a particular strike price. Though the put premium needs to be paid out, it provides protection, if the investor owns the underlying shares. For e.g., say one has ownership of a stable stock XYZ at a cost-basis of $25. The stock is currently trading at $50 and the investor still thinks there is a good margin-of-safety at the current price. But, since the stock has gone up, there is an urge to protect the gains. In such a situation, long puts are value investors ally. It provides a way to protect the gains against a stock decline for the price of the premium, while keeping the upside intact.
c)      Short Calls: Short calls involve selling call options on a stock at a particular strike price. The expectation is that the stock will stay below the strike price during the option period, thereby allowing the investor to pocket the premium realized as pure profit. But, the investor is obligated to give away the stock at the strike price, if assigned. Hence, it is best to write covered calls – meaning one is long the underlying stock in an amount equal to the contract size – if selling 5 contracts ensure one is also long 500 shares. For value investors, short calls allow a way to realize periodic income on a stock. The strategy can be used against one’s long positions when the overall market and the stocks involved are fairly valued or over-extended. One is spared from selling the stock as it is unclear how long the macro situation will prevail. In this scenario, using covered calls help realize periodic income, embellishing one’s returns.
d)     Long Calls: Long calls involve buying call options on a stock at a particular strike price. The expectation is that the stock will go well above the strike price during the option period, allowing one to realize potentially huge profits in a short period of time (option period). Should the stock stay below the strike price, the call premium is lost. Value investors can apply this strategy with stocks that have a chance to go up significantly over a short period of time, should an anticipated event occur. For e.g., say the stock of a company, known to have a history of blowing past earnings expectation once every few quarters, is trading at $100. Research has narrowed down on the fact that the coming quarter is one of those quarters. In this situation, value investors can opt for long calls covering the quarterly report at a strike price of $100 for say $10. If the stock moves as expected to $130 immediately after the earnings release, the money invested have tripled. On the other hand, if the investor were to go long the same amount of shares at $100, the returns would have been just 30% following the quarter report and stock move.

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