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 asked if I understood beta when dealing with stocks. My answer was pretty simple.

To begin, I really do not care about the complex calculations in determining the beta value, I’m more interested in what beta means. Understanding beta is easy and important.

What makes beta something worth noting is beta has to do with profits and losses. When looking stocks, beta gives an idea about how the particular equity moves in relation to the overall market.

If beta is greater than 1.0, the stock will move either positive or negative at a larger rate. If beta is 1.0, the stock will move proportionally. And, if beta is less than 1.0, the stock will move at slower rate.

To put beta in perspective, if beta on a stock is 1.16 and the stock market moves 3%, the stock should move 3.48% (3 x 1.16), or 16% more. If beta is 2.0 on a stock is 2.0 and the market moves 3%, the stock should move 6%, and so on.

Beta gives a bit of information about the volatility, or risk, of a stock and can be used with other factors in determining whether or not to purchase the equity.

One last note on beta; the previous examples have to do with stocks. Beta on options is different. (More on that later.)

The following video, by Robert Kiyosaki and his colleagues at RichDad, is very good and I thought it worth sharing.  I’m finishing a book on banking, markets, real estate, etc. that is not commonly taught.  Just like my book, I’ll show this video to my kids.

Obama announced a tax on banks to recover bailout money.

However, many banks have paid back the bailout money from raising capital and profits. Profits, wasn’t that the idea? Banks were losing money and needed help. Taxpayers bailed out banks. When banks returned to profitability, which was the idea, now Obama wants to tax them for being successful – but not everyone who has received bailout money will pay the tax. Not Freddie Mac or Fannie Mae. Not Chrysler or GM, and GM is into lending not just cars. GMAC has received three bailout packages. Does GMAC pay the tax or are they tax exempt?

When the banks pay back the government, the idea is to get government out of the companies as I mentioned in “Do They Get It?” However, that’s not what the socialists in Washington want. They want government run activities, not private run businesses and individual dependence on the govenment.

The banks were paying money back, but Nancy Pelosi and company wanted to use the money for job creation (which in my opinion is for funding money for union jobs such as government agencies, teachers, police, fire, etc.).  By law, using the repaid funds are supposed to go to paying off the balance, which should mean going back to the taxpayers.

So why does Obama say we want all of our money back? We should want our money back, but will we get it?  It’s doubtful taxpayers will receive a check.  I’ve mentioned in my post, “The Recession Is Over“, my personal taxes are going up.  In reality, I see this noble speech to the public is a dog and pony show designed to target banks, the private sector, success and increase taxes, not to pay back the taxpayers. The banks are paying back the loans as I’ve mentioned, increasing reserves as directed by regulators and prepaying FDIC amounts to add protection against future financial problems. In addition, the bank tax -Financial Crisis Responsibility Fee – applies to all banks, not just those that received bailout money.

What the tax does is add more taxes to all private citizens because all taxes are paid by the end consumer. Taxes are passed through in higher fees, such as ATM fees to 401(k) to insurance and can reduced jobs too. Jobs are cut when profits go out.   The financial industry has had huge layoffs, and these are not just the CEO’s earning bonuses.

Also, introduced in February 2009, H.R. 1068 is designed to tax trades on stocks, options and futures. The “traders tax” affects the fees on small investors and small businesses, not just the high rollers.  Small investors have a hard enough time earning significant dollar amounts to begin with, and adding more taxes on top of smaller gains hurts the little guy even more.

I’m not a big trader and am not here to defend the banks, but I am opposed and appalled at the idea and actions of Big Brother and Obama escalating class warfare and penalizing success. 

Check out the following site with a petition and urge our elected officials to vote NO on H.R.1068 – the traders tax - and don’t buy the hype of the Financial Crisis Responsibility Fee either.

Who are they?  Business and government.

Businesses such as Capital One and Bank of America seem to be getting the idea.  The idea is that having government run your business is not a good idea.

This week Bank of America issued stock to raise cash to repay the bailout money, which was apparently a shock.  My first thought was who is shocked?  Then it dawned on me that the people shocked may be the people pushing for nationalizing everything and are in favor of socialism and hate the ones who profit.

Today, Capital One paid the Treasury $146.5 million dollars to buy back the warrants the government controlled.  Warrants are very similar to options.  These warrants give the holder, which is the U.S. government, the ability to convert the contracts to ownership in companies.

Capital One, as did others, received money from the bailout, but issued warrants as well to the government.  Now, they are buying them back.

JP Morgan Chase and Goldman Sachs have also gotten away from the government as a potential owner and a hinder to business by repaying loans.  Is this just due to salary restrictions?  To some degree, but not entirely I’m sure.  Obama painted a target on CEO’s, but at the same time his actions reduces incentives for people and businesses to excel as well as created class warfare.

Government help is just the tip of the iceberg.  What’s below the water contains all of the restrictions and conditions placed on business and people that take away freedoms.  These are the “strings attached”.

Businesses, as well as many people, do not want government running their activities and lives.  Sure, assistance is necessary and helpful, but at the same time the government attaches too many strings.  I know of a company that when they saw the warrants attached to the grant money, the owners said “no way”.

When these banks, or any business for that matter, use the cash they have plus dividends to pay off loans, these businesses must be doing something right.

However, who doesn’t seem to get it is the people running the government.

Many banks for example, are not needing the financial help from the government now.  However, Nancy Pelosi wants to continue the old “tax & spend” way of doing things.

Within the TARP money program, funds exist that have not been used.  Great.  There is no reason to continually put a burden on the taxpayers to spend money not needed.  In the provision, repaid money has to go towards the balance and Congress can’t simply spend the money.  However, Nancy Pelosi and others apparently do not like the idea of paying off loans.  (These would be loans to the taxpayers and other countries).

As far as creating jobs, the spenders of other people’s money party wants to use the TARP money for job creation and included labor groups in the job creation forums.

Where these people in Washington do not get it, is labor and employment is a result of profitable business (except for government agencies that do not have to create a profit).  They should start with the owners, entrepreneurs, investors, etc. who create jobs – first, and cut taxes.  Obama doesn’t get it or he would have had the plan explained during his campaign instead of trying to figure things out now.  Remember when unemployment wasn’t to go above 8%?  Now it’s over 10%!

It seems like it is a constant game of cat and mouse.  Who gets it?  We will see in 2010′s elections as well as how the economy turns out down the road.

But in reality, government should be there to help, not control.  Everyone could be better off when Big Brother gets out of the way.  That I get.