Thursday, July 3, 2008

Learning stock options

I was having difficulty trying to learn the basics of stock options. The information was out there in the Internet but not in the format that was easy for me. So, here is one in a format that is easier for me to understand.

  • SP: strike price
  • OC: option cost or the premium. Paid by buyer , Received by seller.
  • MP: market price of the underlying share
  • CO: brokerage commission, paid by both buyer and seller

Option types
  • Call: right to buy share
  • Put: right to sell share

4 participants
  • buyer of call
  • seller of call
  • buyer of put
  • seller of put

Buyer of call (long bullis)
  • expecting upward trend (bullish)
  • profit = MP-SP-OC-CO, if SP+OC <>
  • max profit is potentially unlimited
  • max lost = OC+CO if SP+OC > MP during option validity

Seller of call (short bearish)
  • expecting downward trend (bearish)
  • max profit = OC-CO if SP+OC > MP throughout option validity
  • max lost = MP-OC+CO if SP+OC <>
  • if selling without backing share (naked call), then max lost is potentially unlimited
  • if selling with backing share (covered call), then max lost is your backing share (value=MP)

Buyer of put (long bearish)
  • expecting downward trend
  • two ways to achieve profit
  • profit way 1 = SP-MP-OC-CO if SP+OC > MP throughout option validity
  • profit way 2 = OCresale-OCoriginal. Since the MP is going down, then the OC of selling the put option the buyer bought is increasing.
  • max lost = OC+CO. lost if SP+OC <>

Seller of put (short bullish)

  • expecting upward trend
  • max profit = OC-CO if SP+OC <>
  • max lost = MP-OC+CO if SP+OC > MP during option validity

Thursday, March 6, 2008

Your house: asset or liability

According to the newest real-estate tax statement I received yesterday, the price of my house dropped by $75K to $325K. My mortgage is still $342K.

I became part of the negative-equity group. The group that many financial industry experts are trying hard to persuade not to just walk away. I am not going to walk away because I realized I bought the house not for its investment value, but for its sentimental value. I love my house and am not planning to move in the short term.

Once someone attaches sentimental value on a house, it becomes a financial liability. It needs to be maintained and the mortgage paid. Therefore, it is not right for me to keep thinking of my house as an asset. It becomes an asset only if I manage to sell it and I have on my hands a stack of money in exchange.

Under this consideration, my net worth is a depressing -$228K and not $100K anymore. But I am happier this way because I am being more honest to myself.

Thursday, January 24, 2008

Liking ING Direct

Since I opened up my savings account with ING last November, I have been drawn to its minimalistic yet functional user interface. It is so refreshing compared to my other banks.

Bank of America used to have a quick-loading interface until they changed it. Its current interface has more functionalities, but of the kinds that I don't need. It has became slower and not as agile as the previous one. Compared to ING's, the size of the main content column is smaller too. Transaction descriptions are wrapped and often end up truncated. You'd have to click twice to see the full description and the full description display replaces the transaction list display. It's cute, but not functional. I rather have a wider main content column so I don't have to be clicking around just to read the full description, just like in their older interface.

Bank of America's disappointing new interface along with their lack of any savings or CD accounts with decent rate prompted me to consider other banks as my primary bank.

At that time I already have a HSBC checking account for me to withdraw money from while traveling abroad since HSBC has branches in just about every place I have and am planning to go.

So, I setup online access to HSBC and found that its login procedure was clunky. Type in username in one screen. Move to another screen to type in your password and clicking your secret word on a virtual keyboard. Cumbersome and misguided security implementation. While the position of the virtual keyboard keeps changing, the relative distance between the keys on the virtual keyboard is constant. A key-logger simply has to record the relative coordinate of each click to figure out your secret word.

The interface is not fancy, but quite decent. One thing I find is inadequate is the lack of running balance in its transaction listing. Transactions are also not posted until the next day. So, if you make a payment for today, the money will be deducted from your account today and you'll see that the available balance goes down. But you can't see the transaction that causes that until the next day.

HSBC's online account opening is also another thing that is lagging behind other online banks I've dealt with. It took me almost two weeks to finalize opening a savings account. I did it in less than half hour with other banks offering online account opening: BofA, ING, ETrade, Countrywide, Wells Fargo, Wachovia, etc.

Yet, I am still sticking with them because of their international branches and also decent savings and CD rates.

But, nowadays, ING is my primary bank. Its interface is quick-loading and minimalistic. There is no distracting in-bank advertisement on the top, sides, or anywhere else on the screen. I don't need to have a javascript-enabled browser to access it. It does not use silly virtual keyboard for authentication. It has a wide main content column so transaction descriptions are not wrapped and truncated. It has running balance. Posted transactions show up immediately. And it has a feature that no other bank has yet: its transaction listing screen shows scheduled transactions that is going to be applied to the account. You get to see all the pending transfer and bill payments together with posted transactions so you get an overall sense of the activity.

The only thing I hate is the screen for entering payee information. Too many small fields so you can't copy-paste information from the payee website effectively. You'd have to copy-paste information in small chunks. It's so frustrating. By far, BofA's bill payment interface and functionality are still the best I've seen.

The rates in ING are not exactly spectacular but also not something to sneeze at either. Among online banks, its rate offering has lately fell somewhat below the average. That really does not matter for me because I'm using it as my primary bank and the cost of not incurring aggravation on myself due to having to use badly designed user interface more than make up its so-so rates.

Tuesday, January 22, 2008

First Lesson in 2008: Storing Emergency Fund

Already, 22 days into 2008, I am humbled by my mistake of not diversifying. In my previous article, I recognized that I have not been storing my emergency fund correctly because I didn't diversify the maturity dates of the CDs holding the fund.

I stored it in two CDs, the 40% and 60% as I called them. 40% of the fund in a 6-month CD, 60% in a 1-year CD. That had been working great during the economic high prior to late 2007. But, this will be the first economic downturn my emergency fund experiencing.

So, since I had access to the 40% in liquid form (laying around in savings account) earlier today, I put half of it in a 1-year CD, and the other half in a 6-month CD. So, that's 20% each of total fund.

The 60% CD will mature next week. I shall split it of into 3 equal parts, each is 20% of the total fund. The first part will go to a 1.5-year CD, the second to 2-year, and the third to 3-year CDs.

I am hoping to end up with a 3-year ladder with 6 rung, each 0.5 year away from each other. Putting the fund into such ladder makes sense to me. The size on each rung, 20% ($4K), is big enough for many immediate needs and small enough that I can bear the pre-withdrawal penalty.

A longer ladder brings about more rate stability. This bankrate article on CD laddering uses a 5-year ladder with 1-year rung as an example. But with stability, there is also the risk that the fund won't be coping with inflation in an extreme economy.

I think if there is a symbol for living on the edge, and if my generation, gen-X, can speak as one voice, we would have picked that symbol. Our entrance to the world is marked by extreme events. Extreme sports. Extreme weather fluctuation. Extreme economy fluctuation. Extreme job-hopping.

5-year turnaround is too long. Things change much faster nowadays. 3-year is the longest I can talk myself into. There has not been a recession lasting longer than 3 years, and by keeping the turnaround lively enough, I get to stave off the risk of losing its value due to extreme inflation.

Quick, Stash that Emergency Fund

The Fed just made a surprise cut on its short-term interest rate by 0.75%. This will likely bring about inflation as well, and I want my emergency fund to keep up with the inflation, at least.

This also means that Savings and CD interest rates will shortly fall at least by that amount too. How soon? Who knows. But when they do fall, they will certainly fall behind the inflation rate. According to, the inflation rate in Dec 2007 is 4.08%. Meanwhile, the average 6-month CD rate is 4.66% (4.75% APY) according to Fed's cut will likely bring that to under 4%.

60% of my emergency fund is already in CD. 40% was laying around in savings accounts. To keep up with inflation, I need to consolidate them to fixed-rate CD accounts immediately. I don't think there will be enough time to shop around for good deals on CDs and transferring the money there in time before the rate adjusts. I just have to settle for whatever CD rates my current banks offer.

Lucky for me, I've been preparing for this for a while. Back in November, I've setup accounts in ING and E-Trade. I've been banking exclusively with HSBC. My primary account was there. Yet, HSBC had this outdated and slow online account opening mechanism that required you to mail/fax in documents and took weeks (days if you were lucky) to open. With ING and E-Trade, the account opening and funding procedure takes 5 minutes to complete (with ING, it took only 10 seconds!).

I did that and now I have 40% of the emergency funds that was laying around in savings accounts locked away in a 6 months 4.35% APY CD. They were in savings accounts because I had a trip to Las Vegas last December, and preferred to have them in liquid form while I was away. So, when the CD that was holding them matured last November, I simply transferred it to the savings account.

Unfortunately, the other 60% is in a CD that will mature next week. I am pretty certain that by then the rates would have adjusted. I don't know yet where I'm going to put that.

I think I'm going to ladder it. Having my CDs maturing at short intervals from each other exposes me more to bad CD rates. During uncertain economy periods, like we are in now, the bad CD rate may not keep up with the inflation rate.

Thursday, January 3, 2008

Happy New Year 2008

I just got back from a 15-day vacation in Las Vegas, San Deigo and Grand Canyon.
I expect that once the dust has cleared, that vacation will make some dent on my expected net-worth. That's OK since I had a great vacation.

Happy New Year 2008. My new year resolution is to keep on achieving monetary experience. That means wising up financially.

Sunday, December 16, 2007

Comparing Your Heating Fuel Cost

In almost every place I know, using electricity from power company is the most expensive way to heat up an area.

British Thermal Unit (BTU) is the preferred unit of measurement for energy in USA. 1 BTU is "the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit". But 1 BTU is a small amount of energy. It is more convenient to use therm (THM), which is defined as 1 THM = 100,000 BTU.

When your gas furnace burns the gas, it generates heat. The amount of heat generated by burning a cubic foot (Ccf) of gas is always the same: 1031 BTU. How much dollar per THM is that? Your gas bill should include the dollar price of a THM which makes the calculation easy. My bill for December shows that the peak rate is $0.4604/THM.

With electric heaters, all heaters no matter their make and model and price and quality, always output heat at the rate of 3412 BTU/KWH (Kilo-Watt Hour). This means, if you have a 1000 Watt (1KW) heater running for an hour, it will release 3412 BTU in the form of heat.
Electricity bills usually show rates in dollar/KWH. Multiply that by 29.31 to get to dollar/THM. For example, my electricity bill is $0.06/KWH which calculates to $1.76/THM.

So, heating my house using natural gas is 3.8x cheaper than using electricity.

That said, I do use electric heater regularly. I use electric heater in my small, enclosed computer room. It does not take long to heat the room and it has pretty good insulation that the heat stays longer. When I'm planning to be in the computer room for a long time (more than an hour), I turn off the gas furnace that heats up the whole-house.

Saturday, December 15, 2007

Smoking Your Retirement Fund Away

413 days of not smoking! Wooho. Don't worry, I'm not out to sway smokers to stop smoking. Because that's just about the most impossible thing to do; I know it because no one, not even my wife, could stop me. She could only help me stop, but I did the stopping myself. It's mind over matter, baabey!

The MSN Money article 'The high cost of smoking' describes various costs associated with smoking. I didn't find anything new there that I have not read before back while I was smoking. I am sure any smoker has heard them too.

But, a snippet from the article is particularly relevant to my final goal, the end goal of these mini-goals I set out before myself.

Sloan and his colleagues found that the effects of smoking on lifetime Social Security benefits were $1,519 for 24-year-old female smokers and $6,549 for 24-year-old male smokers. This is money paid into Social Security but never collected, because the beneficiary died prematurely of a smoking-related illness.

"You could be paying into Social Security year after year, and if you die at 66 because you're a smoker, it's money down the drain," says Sloan.

What a waste of efforts. After working so hard, enduring various unpleasantness in life, experiencing so many things, one dies without the chance to reap the benefits.

If I am socking away most of my income for retirement, living frugally, not tuning in to the gotta-have-the-latest-iPod insanity, then I better stay around long enough to enjoy it. Deferred enjoyment is possible only if you are still around to do the enjoying.

So, I'm planning to stay around long enough so I don't smoke my retirement fund away.

Free Money: ESPP

If your company is offering Employee Stock Purchase Plan (ESPP), then you have a money tree. It can give you an outrageous, guaranteed return rate.

ESPP is a plan where you pledge a percentage of your after-tax salary to be deducted every paycheck period during the plan's offering period ('offering' because you are offering your salary to the great company of yours).

At the end of the offering period, the collected money is used to buy the company's stocks at a discounted price. The discount rate is set in the plan and is applied to the lower stock price at the beginning and ending of the offering period. The exact stock pricing vary among plans; some use only the stock price at the end of the period.

My company's offerring period lasts for 3 months, and the lower stock price is purchased at a 5% discount. That means, if you sell it on the same day, it becomes a guaranteed rate of at least 5%. The exact return rate is calculated as thus:

Return rate
= profit/contribution
= (sale proceed - contribution) / contribution
= (purchased share * price per share - contribution) / contribution
= ((contribution / (price per share * (1 - discount rate))) * price per share) / contribution
= 1/(1 - discount rate) - 1

For me, it's 1/(1-.05) - 1 = 5.26%. Imagine that, my money grows 5.26% within 3 months! If you were to put the contribution in a savings account, you'd need to find one with an APY of 18.97% to get the same return rate!

So, let me just restate this amazing tidbit: 5% ESPP discount has the same return rate as a 18.97% APY savings account!

Look can really be deceiving. Without running the numbers, I wouldn't have figured out that the ho-hum, just so-so discount rate is actually an amazing 18.97% APY. Furthermore, had my company stopped being the cheap-ass they were and offered a 15% discount rate like many other companies, that would equal 71.22% APY with $500/month contribution.

I have a google spreadsheet that you can copy and start playing around with if you have a google account. To use it, simply replace the bolded fields with your numbers. The comparison is between putting $500/mo to the ESPP plan or letting it compound in a savings account. Unfortunately because I am not skilled in spreadsheet programming, you'd have to figure out the Savings Acount APR manually by trial-and-error: put in various figures until the difference is close to zero.

If you do not have a google account, you still can view it but not play with it.

The return rate calculated by the spreadsheet is actually the minimum guaranteed rate. If the the stock price is rising during the offering period, your return rate will be even higher to the point of being mind-boggling! If the stock price is dropping like a lead, you will still make the minimum guaranteed rate as long as your company is still traded.

But, but, surely, something this good must have a bunch of gotchas, right? Yes:

1. Some companies prevents this activity by putting a holding period: you have to wait for several days/weeks after the end of the offering period before you are allowed to sell the stocks.

This introduces risk. If the stock price drops before the holding period is over, you have to choose whether to keep the stocks or sell them at a loss. If you want to keep the stock, be mindful not to keep too many eggs in one basket because your income is already a big and significant egg in that basket (your job is an investment too!).

2. The reason some companies prevent this is because the spirit of ESPP is to help employees become owners. For me, this present an ethical dilemma, but I believe that I am not doing the company or any other employees any significant harm. Furthermore, if the company really wants to emphasize the ownership benefit, it can enforce a holding period. In the meantime, it is really a very low-hanging fruit that I simply has to take advantage of.

Anyway, don't be shy to share your numbers.

Friday, December 14, 2007

Mortgage After-Tax APR Comparison

Just want to drop a quick note that I have a spreadsheet that may help you answering that flummoxing question: should I invest or prepay.

Mortgage After-Tax APR Comparison

Invest or Pre-Pay the Mortgage?

Now I come to the point where many others have came upon: to invest or prepay my mortage?

Factoring in interest deduction, my after-tax mortgage interest rate is 3.7%. That's 3.7% guaranteed after-tax investment rate.

I need an investment vehicle that offers a before-interest-tax 5.16% APR to beat that. An equivalent investment vehicle delivering the same kind of rate guarantee is CD. Since CDs are usually advertised in APY with monthly compounding, the equivalent APY is 5.28%. A quick check at showed only 7 banks offering CDs with higher APY.

The highest is offered by KeyDirect at 5.7% for 120 months (10 years). Unholy cow! But that is the longest CD term I've ever seen and is offered by a bank that I don't want to do business with any longer.

The next one is CountryWide's 5.45% but only for 3 months. Sounds good except that it needs a $10K initial deposit. But building up to $10K takes time and all the while the collected money will be sitting in lower-than-5.16%-APR accounts. The other CD offers do not seem good as well. So, it seems my mortgage gives me the highest guaranteed investment rate for now.

Let's go a riskier route: stock market (includes mutual funds). The tax rate for capital gain is 15%, so, the minimum APR to beat the mortgage's rate is 4.35%. If I invest in various low-expense-ratio index funds or ETFs like VFINX, VTI, SPY, my risk of not making more than 4.35% APR over the next 3-5 years (expecting a baby, see below) is very low. Investing it in stock market gives you the best bang for your time.

Yet, 36% of my income is already in stock market in the forms of 401k and IRA. For me putting extra money in the same basket just increases the risk needlessly. Furthermore, if we own the house, we will be less affected by a recession. That is the virtue of not putting all your eggs in one basket.

Readers who are still with me at this point would probably think, 'this guy is going to prepay'. I would have, but my better half, well, being better, she gives me a better argument.

'We are still young', she argued, 'what is youth without risk?'. We have no children yet. We can basically take as much risk as we want now. We can even be fools and go back to the 30K debt hole we came from without affecting any innocents.

I bought it. For better or worse, I liked the argument. Perhaps I'm just greedy instead of being young. For now, I am reducing the amount of pre-payment from $1500 to $1000/month. Over time, I'll move more and more to the stock market.

When our risk-equation changes, like when we have a baby, I will have to revisit this topic again.

UPDATE 2007-Dec-14: I have a spreadsheet that may help you answering that flummoxing question: should I invest or prepay.

Mortgage After-Tax APR Comparison Goggle spreadsheet.

Effective APR = APR * (1-TaxRate)
APR = Effective APR / (1-TaxRate)
APY = (1 + APR/q)^q - 1, where q is number of compounding per year.

Thursday, December 13, 2007

Initial 2008 Budget

$150K/year pre-tax income.
$15.5K for wife's 401k
That leaves $134.5K pre-tax or $88.7K after-tax.
$15.5K for my Roth 401k
$10K for our Roth IRAs.

That gives us a monthly income of $5200 which needs to be deducted by
$2800 for all bills, including mortgage. The leftover is $2400.

We are planning to use $1000 to pre-pay the mortgage, and put the rest (after food expenses) in either stock market (if the condition is good) or in high-interest saving accounts.

This is a very simple on-the-napkin budgeting. If we manage to follow this, our net worth will increase by $62.4K by the end of 2008.

Choosing Benefits for 2008

It is that time of the year again. The last call for changing our 2008 Q1 benefit is coming soon.
We are not planning to change anything much. We are keeping the HMOs, the dentals, the 401ks (of course!), and basic life insurances.

One thing that shocked us was the increase for HMO plan: from $35 to $50 months! My company is offering HRA which costs only $15/month. It is tempting, but despite attending the seminar twice, I still do not understand it. May be I am too dense, but I am not going with HRA despite its cheaper cost until I understand it completely. Isn't there an advice not to invest in something you don't understand? Isn't the health plan a form of investment on our health?

Starting 2008, my company is offering Roth 401k. I'm switching from traditional 401k to Roth 401k. Unfortunately, my wife's company isn't offering one yet.

Net Worth Review: November 2007

I finally finished preparing my first for-public net worth and put it over at I put a badge on the right side of the page.

So, we are worth $107K now, if's valuation of our house is accurate. We started from $0 net worth 4 years ago. Before that, at one point, we were $30K in debt. Through discipline, a lot of hard work, luck and allowing for time to help us, we are now $138K away from that point. Phewww....

Now we need to do what took us 4 years in only 1.5 years. That's the goal!

I also discovered that the money we bring home has increased unnoticed over the years because of raises. We now actually bring home $8.9K/mo. It simply means more for us to save since our private lifestyle is still college-student like.

Income Distribution

I stumbled upon a gem comment today at

# Baba Ghanoush Says:
June 1st, 2007 at 10:55 am

In our house, the discretionary savings gets allocated in this order:

1) 100% to emergency fund (until at least 3 months expenses)
2) 100% to pay off high-interest debt
3) 401K to point of company match
4) monthly contribution to a “big ticket fund”, which is savings for occasional large expenses, like semi-annual insurance, vacations, etc.
5) Roth IRA to contribution limit
6) 401K to contribution limit
7) remainder: 50% mortgage prepay and 50% taxable index fund

I have #1 and don't have #2. I am already doing #3. The line between #1 and #4 is fuzzy. I guess any liquid asset I have over 3 months expense is automatically part of #4. I'm already doing #5.

I have not been doing #6, instead I have been putting down money for mortgage prepayment. I am still forming a plan of what to do with the leftover after #5. That post at has a lot of insightful comments that I have not gone through completely yet.

While my goal is to increase my net worth by $100K in 1.5 years, I have to balance it with long-term interest too.

Wednesday, December 12, 2007

Poor Elderly Couple

While I was queuing up for casher in grocery store earlier today, I overheard the elderly couple in front of me arguing. They were arguing in Chinese about not being able to pay for the stuffs on their cart. They were talking in normal voice probably because they were confident that no one around could understand them. But, I understood Chinese well enough to snoop on them.

Basically, they were worried that they didn't have enough money to buy the stuffs in the cart. The total for their stuffs came to $23. The man slid his card (I couldn't tell if it was a credit or debit card) and the transaction was declined. He tried again and got declined again. They were forced to let go of some stuffs before the transaction was finally approved.

I didn't know where they got their money from, but seeing that they are from Asia, their children probably support them. It is customary in Asia for children to support their elderly parent.

I am from Asia likewise, and I will support my parents when they are ready to retire. I will do it without any hesitation not because I have to, but because I respect them and thankful for them slaving their prime years towards my well-being.

But, now I think I am the first generation along my family lineage to have the chance to not be a financial burden for my children, and I want to take that chance.

Tuesday, December 11, 2007

The Goal

I am a 30-ish software developer working in financial industry. I live and work in a suburb in a metropolitan.

I started to realize the importance of saving enough for retirement only since the last 6 months or so. It was a late awakening but an important one nonetheless.

My hope is to sock away $100K within 1.5 years through various (legal!) means. The $100K does not have to be in liquid form. Depending on economic conditions, I may distribute the money in house equity, stock, or other monetary mechanisms.

The difficulty of this undertaking is high, but not that high as my wife and I earn about $150K/year of gross combined income. We take home about $8K/mo. To get to $100K in 18 months, we'll have to save $5.5K/mo. Our mortgage is $2.5K/mo. 5.5+2.5 is $8K/mo, which is our monthly take home.

Fortunately, we can use some of the $5.5K/mo to live because we contribute 6% of our salary to 401k. That calculates to $9K/year or $750/month. Maintaining an expense of only $750/month for two people will be difficult. There are various expenses: car repair, house repair, emergencies, etc.

In shorts, I will need to learn and experiment with various expense-reducing and investment techniques to survive on less than $1K/month for 18 months.

One thing we have going on for us is we have no other debt beside our mortgage. And a pillow to fall on on some months, and lastly a piggy bank to break, if we really really have to.