In my previous post, How To Make Money Going Naked, I described selling put options. Selling put options is a very safe and conservative way to make money and potentially own a stock or fund at a specific price versus the market price.

The price of the particular exchanged traded fund I wanted to own was around $28 per share last month. However, I was willing to purchase the fund at $25 per share, so I sold a put option set to expire in January 2011 and received a premium. (As a reminder, one option contract controls 100 shares.) Therefore, the net premium I received was the dollar amount of the option x 100, for each share. The net premium was $1.38, or $138 per contract. Three contracts mean I would receive $414 cash.

For every contract (option), I had $2,500 set aside in my money market funds to purchase the appropriate number of shares in the event the option exercises in the future. If I had one contract exercised, I would pay $2,500 and receive 100 shares of XYZ. If I had three contracts, I would pay $7,500 and receive 300 shares, and so on.

Rather than wait to see if I would purchase the shares six months from now or if the contracts would expire worthless in January, meaning I would keep the premium and not own the fund, I decided to close my position. By closing my position, I simply bought the option back.

Buying the option cost a net amount of $65, but I sold the option originally for $138, which resulted in a $73 net profit per contract. Taking $73 and dividing the amount by the money set aside ($2,500), I earned 2.92% on my money in one month. Further calculating the return, 2.92% x 12 (months), my return on investment, or money sitting in a money market fund, was 35.04% annualized!

Although the return is annualized and by stopping after only one month and potentially sitting on the money for a while, the investment beats many long term CD rates.

One last note on the option strategy; selling naked puts can be done in an IRA.

I was going over the financial feasibility study with a client today. When the conversation turned toward financial ratios, I brought up return on equity as I usually do.

However, something eye opening hit me during the conversation.

Before I talk about my discovery, let me mention topics we hit on first. You’ll want to pay attention this today if you are interested at all in making money on your investments, etc. If not, both  you and future generations to come will miss out too.

When determining if the business was worth doing, we looked at cash flow. Cash flow statements are very easy to understand and it’s this simple…money coming in versus money going out. You can look at a personal checking account just as a business looks at their statements.

Next we discussed income statements. Income statements show business the items such as depreciation of assets on and other tax write-offs which reduce the taxable amount of income. The income statement, however, does not affect cash flow – money spent does. The income statement gives an idea about the net profits which are taxable.

From there, we reviewed return on equity. A difference between return on equity and return on investment is different, but in short, the return shows how hard the money is working. In just a minute, I’ll demonstrate some simple math; but first, let’s look at the Rule of 72 as it relates to how hard your money is working.

The Rule of 72 will tell you how fast the money will double in value.

To figure the time, you will only need the calculator between your ears. If you know the rate of return, which is mentioned on the feasibility study ratios page – or a CD at the bank, simply divide 72 by that number. The answer will be the number of years for your money to double.

For example, if you earn 6%, take 72 and divide it by 6. The answer is 12. Your money will double every 12 years.

Now comes the eye opening part.

I was looking at a money market account paying .01%. That’s right, 1/100th of a percent. At this rate, money will double every 7,200 years!

Without reinvesting the interest earned and simply setting it aside, in order to double the money, 11,920 years will pass.

Looking at interest rates on CD’s at .25%, which are not uncommon rates, money will double in 288 years. Can you and your family wait this long? Mine can’t.

Don’t blame banks for offering low rates, there is more to the story and you can read about it in “Barking With The Big Dogs” which is soon to be released.

Last year saw huge changes in the U.S. beginning just as Obama promised in his campaign.  For example, GM’s CEO is out.  Obama said new leadership.  Therefore, government Motors is in.  GM filed bankruptcy and was out of it in one month.  So much for the shareholders.  Dealerships had contracts canceled.

Quoting CNN from last year, “A senior GM official official told CNN that the White House and its auto task force had “sent very clear signals” that the key to more help was “new leadership” and something that would help the administration see real change.”

Real change, you bet.

Today, GM is 60% owned by the federal government and received $52 billion in federal aid.  Even though the advertising says GM has paid the money back, it’s still a government controlled company.  Did you know today’s GM CEO Whitaker receives $9 million in compensation?  Where’s the outrage for CEO compensation from the White House on this one?

Will Government Motors be better run than when GM was in the private sector?  When wast the last time the government acted fiscally responsible?  Turned a profit?  Had better products because it was competitive?  If you need help, consider the Postal Service…going broke, reduction in service, etc.

In order to get more help, the government apparently tells businesses what to do and how to do it.

Small business doesn’t have that luxury.  That’s good.

Small businesses and entrepreneurs generally have to keep sharper to turn a profit and compete.  And that is good for the consumer.  Better products, better prices, better service.

However, with any business – large or small – you can only have two of the three.  Quality, service or price. Someone will beat you on one.

Small businesses generally do not get tax incentives, bailouts, reduced costs due to economies of scale – but somehow seem to make it work.

If customers don’t buy their products, it’s generally because the businesses are not competitive, innovated, or creative enough.

Speaking of good products, I remember people referring to GM products having a Fischer Price interior.  Some of the pickup trucks looked like Lego’s.  That sounds creative – if you are selling to my kids.  However, there are some better autos, and ones I will buy in the future – Volvo,  BMW, etc.

However, I bought a Ford this weekend.

I have a Suburban, only for a few more days,  Also, living in Texas, Chevy’s air conditioners are horrible.  I considered a Traverse, but decided against it for a few reasons.  (Reread the above paragraphs.)

My Ford is nice and will serve its purpose, but I would really prefer a Volvo XC90 or a BMW, these cars “fit” and the performance and handling are superior.  I’ll probably get one next.

I like my Volkswagon.  When my mom asked what my VW wanted to be when it grew up, I said “a BMW and they are ‘Made in the USA’ “.

Talk has surfaced again about nationalizing retirement accounts.

With the government’s out of control spending and promises for entitlements which it can’t pay, one way to borrow money is through retirement accounts.

Obama and company want government retirement accounts, formally known as IRA’s and 401k’s, to fund the pensions, etc. We already have Social Security, but that isn’t good enough and is broke too.

The way to fund their obligations is by nationalizing private citizen’s accounts and paying paltry returns on our money. One way the government borrows money is by issuing Treasuries. Would our retirement accounts, containing stocks, mutual funds, exchange traded funds, etc., be reduced to containing low yielding Treasuries?

Take a look at my previous article, “How to double your money – slowly“. Only this time substitute the word bank with government. Or better yet, you can read Chapter 44 “Failure By Design”; it’s online HERE.

While driving to work today and enjoying the nice spring morning, I was channel surfing the radio and landed on NPR. The topic on the radio had commentaries about health care reform.

One of the key comments made had to do with limiting excess profits. The idea is for companies to make enough profits to pay claims, doctors, etc., but eliminate excess profits.

What a sinking feeling.

No, I’m not talking about reducing my health care cost, which would be nice (but not likely even after reform). In reality, we will pay in some shape, form or fashion for this reform – both monetarily and our in our freedoms – of choice and time for example. Instead, what I’m referring to are things like mutual funds, exchange traded funds, retirement accounts, insurance policies, etc.

That’s right, these excess profits go to shareholders, such as you and me, not just the demonized Wall Street suits we only hear about. Why invest our money if we won’t get a return on our money?

How do insurance companies pay for life insurance for example? The companies use money to make profits to pay the policies. Have you ever looked at a prospectus to see where the money goes and which companies are invested in?

Yes, Obama has made it clear he does not like profits (for everyone else in my opinion). However, he made $5.5 million last year. Obama has mentioned, there is a time for profit, but it is not now. That’s just plain wrong – there is always a time to profit. As well, he has labeled bankers as fat cats, yet has not reduced earmarks for pork projects.

Barney Frank made comments about eliminating profits going to shareholders as well.

The ironic thing about socialism and capitalism is that the Socialist are Capitalist themselves.

The elites, who put their pants on one leg at a time just like the average Joe are really capitalizing by taking from everyone else. Therefore, capitalism works, socialism doesn’t. And why should one man or a small group of people determine what everyone else makes or limits individual potential?

To finish, I saw a bumper sticker that read “I’ll keep my guns, money and freedom…You keep the change”. The change we are getting from Obama is really in the speed in which things are happening – like hitting the throttle during a trainwreck.