Stocks and Options Magazine

Stocks & Options

Magazine Issue 1

How we trade Fundamental analysis The Capital Investment club

Black Scholes Microsoft BT Plc

Stocks & Options Magazine Contents

jeff@digitalpublishingservice.co.uk http://stocksandoptionsmagazine.com

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Stocks & Options magazine

04

How we trade stocks and options

07

Fundamental analysis

11

Capital Investment Club

14 18 22

TICN

24

The Simple Moving Average

31 34

Microsoft

Black Scholes Finding LSE Winners

British Telecom

02 Hello everyone and welcome to the first edition of our brand new title. It is now almost eighteen months since we launched Forex Trader Magazine (FTM) which was our first title. With almost 12,000 downloads from the Apple iTunes Newsstand alone it has proved very popular. You can find out more about FTM at http://forextradermagazine.co.uk It is the popularity that prompted us to produce this magazine. We hope it will become even more popular and that you will choose to take out a free subscription.

We have been trading stocks and options for more than ten years, much longer than we have traded forex; stocks and options are actually our real passion.

Despite being based in the UK, we have always traded US stocks and options. We believe that there are many very good reasons for doing so. These include factors such as the cost of trading, the greater availability of options and LEAPs, tighter spreads and the greater availability of company performance data etc. That said, we are close to the UK markets and are well positioned to serve our British readers.

Although we are majoring on US and UK stocks we hope that we will attract readers from around the globe. FTM has readers in more than 70 countries and is regularly the most downloaded business and finance title in many of them. We very much hope that this publication will do even better.

Our plan is to publish at around every six weeks and to then think about going monthly if we achieve our readership targets – so please, help us spread the word and encourage others to take up a free subscription.

This magazine is very much about informing investors and traders but also acting as a source of learning and ongoing development of stock and options trading skills. It is with that firmly in mind that we are considering forming the Capital Investment Club.

This will also serve to allow new traders to learn and earn in a very safe environment and amongst friends. Read more about this in this magazine.

Cover Image The monument, by Gateshead sculptor Joseph Hillier, features five laser-cut figures that look to be working and climbing upon the vast grid of welded steel to give the impression that the sculpture is ‘under construction’. The sculpture represents our portfolio being built step by step with many hands and growing enormity.

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> Welcome to our new title

The FREE digital magazine for home based traders Welcome to Stocks & Options Magazine for the US and UK Markets

We love currency trading but our hearts, and our pensions, are in the stocks and options markets! We have traded these for at least twice as long as we have currencies and have always had great success.

Going forward, we will reveal everything we know about trading stocks and options in this free publication. If you have not already done so, grab the opportunity right now to sign up for a FREE subscription. Only available online:

We have now decided that the time is right to let everyone in on our secret.

As with forex trading we have developed and used our own trading strategies that make trading stocks really easy, very safe and hugely profitable. Incredibly, we only ever trade one or two stocks at a time and we select them from a stable list of just 12 stocks. From these stocks we take no fewer than SIX streams of profit. In addition, we take only tiny risks and spend just a few minutes trading each month!

http://stocksandoptionsmagazine.com

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> How we trade stocks and options

Our trading system typically returns 40% per annum

The thought of trading stock, not to mention options, can be daunting.

However, there really is no reason why it should be. We all do things in our everyday life that are far more difficult than trading.

The anxiety simply arises because of an inbuilt human tendency to fear the unknown. Who would not have been rightly scared if they found themselves suddenly in sole control of a car in heavy traffic if they did not know how to drive?

trading is easy when you know how.

Learning to trade, like learning to drive, is a step by step process.

However, before anyone gets too far ahead of themselves there is some thinking and decision making to be done.

Hopefully, I have already answered the first necessary question that we must ask ourselves: can I do this? The answer to that one is almost always a resounding yes.

For some reason, that is beyond me, many people do put themselves in charge of a trading platform knowing little or nothing about trading when they would not contemplate taking control of a car without knowing how to drive. Perhaps it is because trading does not involve any physical risk or perhaps it just looks easy, who knows.

Next, you may want to ask yourself “why” you want to trade. Surprisingly, the answer is not always as simple as “to make money”. Some people trade for fun, others so that they can share an interest with someone else and some people just want a challenge. However, there is

Like driving, or any other everyday skill,

Continued

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> How we trade stocks and options probably always going to be a financial element in the reasoning that we have.

The financial question is worth exploring further. After all trading has a financial cost of entry, a trading “pot” is needed and some investment in training is essential.

In addition the actual cost of placing a trade takes the form of commission. Frequently, the commission is fixed and does not vary with the number of stocks or shares involved in the transaction. Therefore, the more stock that is involved the lower the cost of the transaction per share. A larger trading pot can therefore give better value for money on transaction costs and will reduce the amount of trading gain needed to cover the cost of the trade.

Trading is likely to give a much better return if it involves using stock options. With options in mind we tend to buy stock in multiples of 100 shares. To find a reasonable selection of optionable stocks to purchase it is best to be able to select from a range with prices up to at least $30 (£20) per share. As an absolute minimum therefore a trading pot of 100 x $30 or $3,000 (£2,000) is needed. By the time an investment in training is made and to give a little headroom the total minimum investment is going to be around $5,000 (£3,350).

Don’t worry if you have not got that kind of money or if it is more than you feel ready to invest. The cost can be reduced considerably by joining an investment club.

You will still need to pay for training but can reduce the amount being used to buy a reasonable number of shares and also the cost per share of the transactions.

For example, if ten people were to club together with say $1,000 (£650) each to form a trading pot of $10,000 (£6,650) they could buy $10,000/$30 = 300 shares.

In addition, they would learn how to trade far more quickly and would soon build up a pot that they could choose to trade for themselves.

The cost can be even further reduced by opting to put in a small regular contribution to the investment club rather than putting in a lump sum.

Before we leave the question of finance, it is also useful to have a target return from your trading activities. My own preference is to have a monthly target. A realistic return at the start could be something like 2% of your trading pot. Now, that 2% is a compounding target and it equates to an annualised rate of return of almost 27%.

Starting with $1,000 or £1,000 a 2% compound monthly gain would make the $1,000 worth:

$1,268.24 after 12 months $1,640.21 after 24 months $2,039.89 after 36 months $2,587.07 after 48 months $3,281.03 after 60 months Yes, that is correct! The value will more than triple over five years and, of course, you would be adding more capital as things progressed. Who would not trade with that rate of return?

The remaining “pre-flight checks” are also very practical matters.

One such question is, “Have you got time to trade?” I now spend only around two hours per month managing my trades

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> How we trade stocks and options and can use time that does not interfere with my other ventures. The biggest investment of time that you will require is that needed to learn how to trade and even this can be spread over a period of weeks or even months.

We then come down to minor details such as have you got an internet connected computer, tablet or even a smartphone.

After all of that you will finally be ready for step one.

Step one is to get an overview of trading that allows you to understand what trading is, how it works, what it involves actually doing and what its objectives are. This is like a driving instructor with a new pupil.

The first thing that driving instructors do is demonstrate the controls of the vehicle and explain how they work and what they do.

You will be able to use a free simulated or “demo” trading account that uses real time prices for this.

Step two is all about learning how to select the stocks to trade. This is a fairly simple,

Stock Market Factoids The first stock market was established at Antwerp in Belgium in 1460 .

London came in 1698 in a coffee house.

The first US stock Market was established in Philadelphia in 1790

almost mechanical, exercise.

Step three involves getting to know, understand and practice, in a safe environment, the trading strategies and tactics through which you will profit.

Finally, step four involves learning risk reduction and profit maximisation strategies.

Then you are ready to go! However, as with any new skill, you will want to practice and to grow your experience. This too is a lot easier in an investment club environment.

To find out more about Stocks & Options Magazine’s very own investment club complete the information tab below.

> Fundamental Investing

Graham is universally considered to be the father of value investing; an investment movement that he began while teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their book Security Analysis (1934) and Graham’s probably more famous book The Intelligent Investor (1949) – available below. Graham had many followers in his lifetime, a number of whom went on to figure amongst the most successful stock market investors ever.

The most well known of Graham’s followers

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include Warren Buffett, Peter Lynch, William J. Ruane, Irving Kahn and Walter J. Schloss, David Dodd and Jean-Marie Eveillard. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons, Howard Graham Buffett and Thomas Graham Kahn, after him.

Graham, Buffett and Lynch have something else in common; none of them has EVER used technical analysis to identify the market beating stocks that they have such brilliant records in selecting.

Their investment decisions do not involve charts, trend lines, or candlesticks; they

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> Fundamental Investing have relied entirely on fundamental analysis to earn their famously vast fortunes.

that the market has mispriced.

When a stock is under priced, they buy; when it's overpriced, they sell short.

In fact, Buffett once remarked, "I realised technical analysis didn't work when I turned the charts upside down and didn't get a different answer." Meanwhile, Lynch observed, "Charts are great for predicting the past.“ And, of course, it was Graham before them who famously said, "In the short term the market is a voting machine, but in the long run it is a weighing machine.“ Instead of focusing solely on market momentum, all three simply focused on finding long-term value with spectacular results.

What is fundamental analysis?

Simply put, fundamental analysis is the act of using empirical data to calculate a stock's intrinsic value. The value is arrived at through the analysis of data through a mixture of qualitative and quantitative methods to arrive at a stock’s fundamental value and the future prospects of its value.

As such, fundamental analysts make their investment decisions based largely on a company’s: • • • • • • •

Competitive advantage Earnings growth Sales revenue growth Market share Financial reserves Product pipeline Quality of management

Fundamental analysts focus on a company's financial statements and try to find gems

Tools for fundamental analysis But what exactly do these fundamental analysts look for as they scour through the data? The following list includes the eight metrics they use as a mainstay of their analysis.

1. Earnings: The most important factor is the “bottom line”. Everything else flows from how much money a company earns after subtracting its expenses. Earnings give an indication of a company's expected dividends, its potential for growth and its capital appreciation.

2. Earnings Per Share: Net earnings don't take into account how many shares of stock are outstanding. In order to make earnings comparisons more useful between stocks, fundamental analysts look at earnings per share (EPS). EPS is calculated by taking a company's net earnings and dividing by the number of outstanding shares of stock the company has. For example, if company XYZ reports $20 million in net earnings for the Continued

> Fundamental Investing previous year and has five million shares of stock outstanding, that company has an EPS of $4 per share. That would make the stock worth more than a similar company with an EPS of $2 per share, assuming everything else is equal.

3. P/E Ratio: P/E gives a window into how the market has priced specific securities in the past. It is calculated by taking a company's price per share (P) and dividing it by the earnings per share (E). For example, if a stock is priced at $50 per share and it has an EPS of $5 per share, it has a P/E ratio of ten. The higher the P/E, the more the market is willing to pay for each dollar of annual earnings. Of course, companies that don't have earnings have no P/E ratio at all — which is why you'll rarely find a fundamental analyst anywhere near them.

4. PEG Ratio: So, is a stock with a high P/E ratio always overvalued? Not necessarily...

That's because P/E doesn't take earnings growth into account. That's where a company's PEG ratio comes in. PEG is calculated by taking a stock's P/E ratio and dividing by its expected percentage earnings growth rate — typically for the next five years. A stock with a P/E ratio of 50 that's expected to grow its earnings by 30% would have a PEG of 1.66. In general, the lower the PEG the better the value. This is because investors would be paying less for each unit of earnings growth.

Companies with PEG ratios of one or lower are usually bargains.

5. Dividend Yield: fundamental investors love dividends. The dividend yield measures what percentage return a company pays out to its shareholders in the

09 form of dividends. It's calculated by dividing the dividends you receive over a year's time by the price you paid for the stock. For example, your dividend yield is 5% if you paid $20 per share, and you receive $1 per share in dividends ($1/$20) over the 12 months following your purchase. In short, it is a cash pay out that investors receive for simply being a shareholder — sort of like receiving a bonus based on a company's earnings.

6. Debt/Equity Ratio: In general, value investors frown upon companies with high levels of debt. Instead they prefer earnings growth thats generated by shareholder equity, as opposed to borrowed funds. It is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. The higher the ratio, the more debt that a company carries. And while this figure varies from industry to industry, a good way to measure it would be by looking for a ratio that is less than 80% of the industry average.

7. Book Value: The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This is how much the company would have left over in assets if it went out of business immediately. Value investors often look for companies trading “under book”.

8. Return on Equity (ROE): Return on equity (ROE) shows you how much profit a company generates in comparison to its book value. The ratio is calculated by taking a company's after-tax income (after

> Fundamental Investing preferred stock dividends, but before common stock dividends), and dividing by its book value. It is used as a general indication of the company's efficiency; in other words, how much profit the company is able to generate given the resources provided by its stockholders. A good ROE in this regard would be a five year average between 15%-17%.

These calculations take the fundamental analyst about 80% of the way towards making their assessments. Less tangible factors do enter into their thinking. These are factors such as brand-name recognition, patents, or proprietary technology.

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> The Capital Investment club

Stocks & Options Magazine is planning to operate a very different, global investment club

one fund or to spread their investment across both accounts. They will also be able to move funds between the accounts on a regular basis.

Reading, studying, simulation etc. They are all great but they can’t match actually “doing” with at least a little skin in the game.

That is why S&OM is intent on setting up the Capital Investment Club with its readers during 2015 to trade stocks and options.

However, the club will be very different in many ways, here are some of them: US & UK Markets – the club will have two trading accounts. A sterling account for UK trades and a US Dollar account for the US markets. Members will be able to choose

Unit Based – being unit based, like a Unit Trust or Mutual Fund, means that the club will be valued at the end of each trading month. The value will then be divided between its members depending on how many units they own.

Open to new members – because the club is unit based it can accept new members at the start of each month. The initial investment of the new member, large or small, will simply buy them a number of units of ownership based on the latest valuation of the club.

Lump sums or regular investments – Once more, being unit based means that the club will be able to accept a lump sum and

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> The Capital Investment Club or regular monthly investments. Occasional additional lump sums and variable monthly inputs from members can both be accommodated with ease. If a member wants to they will also be able to take a contribution holiday by reducing their input to a minimal monthly level.

Withdrawals – as the investment club is unit based, members will be able to make withdrawals at the end of every month. We will simply value the club and determine the value of a unit. Members will then be able to withdraw any proportion of the units that they own.

In addition to the above highly innovative features members will benefit from many other highly attractive additional, rock solid characteristics of this unique undertaking including: Democratic ethos – every aspect of trading club funds will be directly controlled by the members. Decisions such as what to trade, when to enter and to leave trades, and how much to trade will be made by the members. Members will also take decisions about factors such as minimum and maximum investment levels, trading targets, investment policies etc. These will be reflected in a democratically adopted constitution.

Fairness – every penny that goes into the trading account will belong to the members and every penny that comes out will go back to members directly and in proportion to the units that they own at the latest valuation.

International – the investment club will be based in the UK but will accept members from around the globe as long as there are

The Capital Investment Club is for everyone not local regulatory restrictions that do not allow membership for particular individuals.

Member training – because all members will have an input into trading decisions we feel that it is essential that they are properly trained to a high standard. To facilitate this all members will be required to successfully undertake an approved training programme. This will include ongoing personal development. All of the training and development will be made available online for self-study by the club.

Members only website – the club will operate a member’s only website. This will give access to training, to a member’s forum and to a live record of the current trades and financial status.

Webinar club meetings – the investment club will meet via regular webinars. These will include club business, trading decisions and training. The webinars will be recorded to provide a record of the decisions made and to be available to members who either had to miss attending or who want to revisit the webinar for any reason.

Continued

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> The Capital Investment Club Bank account – the investment club will have a separate bank account to hold members funds safely and separately from any other finances. The monthly statements will be available for all members.

However, it will have a secondary objective of helping its members to gain the knowledge, skills and confidence needed to be independent traders on an individual basis.

Trading account – we will be doing our best to make the trading account visible to all members.

The first duty of the club is therefore to make money for its members. This will be reflected in a target monthly level of return. In due course that target is expected to be a compounding 4% of the trading accounts value. We believe this is absolutely achievable. However, a starting target of 2% of the trading account per month may be recommended in the initial months of the club’s operation.

Professional support – the investment club will be supported by professionals. This will not extend to making investment decisions which will always be democratic. However, it does mean that the club will have access to a fantastic array of data and tools to support its trading and to professional administration. This will ensure that all regulatory requirements and tax return information is provided correctly, quickly and in an appropriate format.

Our Aims and Objectives The investment club is first and foremost about making money for its members.

To find out more about the Capital Investment Club just let us know how to contact you

We are big fans of the 4% target; we are also big fans of compounding returns. The compound interest formula was Albert Einstein’s favourite formula for a very good reason. Take a simple example. What would £1,000 or $1,000 be worth after 12, 24 and 36, 48 or 60 months of compounding 4% gains? Here are the figures:

What would £/$1,000 be worth after 12, 24 36, 48 and 60 months of compounding gains?

Months

Value

Gain %

12

£/$1,601

60%

24

£/$2,563

156%

36

£/$4,104

310%

48

£/$6,571

557%

60

£/$10,520

952%

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> The Investment Club Network - TICN

The Capital Investment Club is to be part of the TICN global family of investment Clubs

http://youtu.be/b6HG1CiRyzo

TICN combines the buying power of its thousands of members and users to gain access to first class, independent research at a cost which is way below what people would pay on an individual basis.

The above video, introduced by Owen O’Malley, founder of TICN explains the benefits in greater detail.

The first thing that TICN does is provide a common platform of education. The methods that they use and teach are rooted in fundamental analysis or value investing. Whether you are a lone investor or part of a club the education programme is an invaluable grounding in options trading.

The second advantage of TICN is the access it gives to individuals and club members to some of the very best research and fundamental analysis.

Owen O’Malley – TICN Founder Continued

> The Investment Club Network - TICN If you have ever wanted to take your investing to a higher level, this is the way forward. No matter what your knowledge of trading, TICN can take you from being someone who knows absolutely nothing about the Stock Market and educate you on how to navigate it. Theirs is a fully comprehensive eight module course that teaches how to: • • • •

pick quality stocks know the right price insure your capital generate a monthly income

This course includes online tutorials and a 400 page, full colour manual. The course covers: • Psychology of investing • Entering trades online • Market Order • Stop Limit • Stop Market • Limit Order • Trailing Stop • Order sends Order • Order cancels Order • Contingent Orders • Good Till Cancel (GTC) duration • Risk Management • Diversification • Asset Allocation • Creating an Investment Strategy • Creating a plan based on compounding returns • Finding a quality stock using a value line report • Industry Rank

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• Valueline Ranking of Timeliness • Valueline Ranking of Safety • Beta (volatility of a stock vs the stock market) • Earnings • Revenue • Debt • Management Finding a good price on a quality stock using a value line report • Current Price • Dividends • Value Line estimated price appreciation over three to five years • Revenues vs. Earnings • P/E Ratio • Buy/Sell Range • Buy Range • Hold Range • Sell Range • Reward / Risk Ratio • Using charting software and setting up indicators • Looking at short term (daily), mid term (weekly) and long term (monthly) charts • Using Early analysis indicators (MACD, Stochastics, and RSI) • Using current analysis indicators (moving averages and Bollinger Bands) • Finding Resistance and Support

> The Investment Club Network - TICN • Candlestick patterns • Drawing on charts to see the trends • Buy and Roll Strategy • Buy Insure and Rent Strategy • When to execute a buy and an option trade • Covered Call • Protective Put • Six Protective Strategies

TICN training is webinar based so you will have direct access to a trainer rather than to only a set of video recordings. The courses also run on a live basis in various cities if your preference is for face to face learning.

To find out more let us have your contact

• • • • •

What is a call option What is the call option symbol P/L diagrams How to set up Option display How to use calls to collect a monthly income • Selling and buying back a call • Strike prices and which to select • In the money • At the money • Out of the money • Using chart to chart the option price history

Alternatively, email me directly with any questions that you may have at: jeff@digitalpublishingservice.co.uk

• • • • •

What is a put option What is the put option symbol P/L diagrams How to set up Option display How to use puts to insure your share • Short term puts • Long term puts (LEAP Puts) • Using chart to chart the option price history • Using a trade log to track costs and income • Track call income • Track stock price • Track put cost

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Published works by Owen O’Malley

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> Announcement – Partners

Strategic Partners Required Join with us and share in our success Digital Publishing is growing exponentially, why not share that growth with us?

We are very keen to grow. Our aim is to dominate the business and finance sections of the Apple iTunes and Google Newsstands in every major industrialised country and to do it quickly!

We recognise that we are more likely to achieve our goal if we partner with like minded businesses and individuals around the globe. It is our intention to do this through strategic partnership joint ventures.

Whether you are interested in working with us to grow one of our current portfolio of titles or would like to work with us to establish your own title get in touch and talk to us.

We already have expertise in publishing and marketing online publications and would be delighted to share our knowledge. We can train you or your people and can work directly with you to produce a great, profitable publication.

To find out more just email us and provide an outline of your thoughts on how we can work together. We are happy to sign a confidentiality agreement as required.

Email me, Jeff Fitzpatrick jeff@digitalpublishingservice.co.uk

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> Black Scholes

How are option prices determined?

You can try the formula for yourself using one of the several free on-line calculators that are available, see end of this article.

Robert C. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model, and coined the term "Black–Scholes options pricing model". Merton and Scholes received the 1997 Nobel Prize in Economics for their work. Though ineligible for the prize because of his death in 1995, Black was mentioned as a contributor by the Swedish Academy.

This complex model provides a formula that is still widely used to determine the value of and price of stock options.

The Black and Scholes Option Pricing Model didn't appear overnight, in fact, Fisher Black started out working to create a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and the underlying stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation!

Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. Some credit should also go to A. James Boness of University of Chicago for his earlier work.

Continued

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> Black Scholes Black and Scholes' improvements on the Boness model came in the form of a proof that the risk-free interest rate is the correct discount factor, and with the absence of assumptions regarding investor's risk preferences.

to a change in the underlying stock price [N(d1)].

The second part of the model, Ke(rt)N(d2), gives the present value of paying the exercise price on the expiration day.

The fair market value of the call option is then calculated by taking the difference between these two parts.

To calculate the price of a call option: C = S N(d1) - X e-rT N(d2) Where: Robert C. Merton

The model predicts the variation of price over time of financial instruments such as stocks. This can, amongst other things, be used to determine the value and therefore the price of a European style call option.

The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time remaining to the option's expiration.

There are a number of variants of the original Black-Scholes model.

In order to understand the model itself, we divide it into two parts.

The first part, SN(d1), derives the expected benefit from acquiring a stock outright. This is found by multiplying stock price [S] by the change in the call premium with respect

C = Price of call option S = Price of underlying stock X = Option exercise price R = risk free interest rate T = Current time to expiration N() = Area under the normal curve d1 = {1N(S/X)+(r+Ďƒ2/2)/ĎƒT1/2 d2 = d1-ĎƒT1/2 Put-call parity requires that: P = C - S + Xe-rT Then the price of a put option is: P = Xe-rTN(-d2)-SN(-d1)

Myron Scholes & Fischer Black

1) The stock pays no dividends during the option's life Most companies pay dividends to their

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> Black Scholes share-holders, so this might seem a serious limitation to the model considering the observation that higher dividend yields elicit lower call premiums. A common way of adjusting the model for this situation is to subtract the discounted value of a future dividend from the stock price.

2) European exercise terms are used European exercise terms dictate that the option can only be exercised on the expiration date. American exercise terms allow the option to be exercised at any time during the life of the option, making American options more valuable due to their greater flexibility. This limitation is not a major concern because very few calls are ever exercised before the last few days of their life. This is true because when a call is exercised early, the remaining time value is forfeit on the call and collect the intrinsic value. Towards the end of the life of a call, the remaining time value is very small, but the intrinsic value is the same.

3) Markets are efficient This assumption suggests that people cannot consistently predict the direction of the market or an individual stock. The market operates continuously with share prices following a continuous “Itô” process.

To understand what a continuous Itô process is, you must first know that it is a type of Markov process or "one where the observation in time period “t” depends only on the preceding observation." An Itô process is simply a Markov process in continuous time. If you were to draw a continuous process you would do so without picking the pen up from the piece of paper.

4) No commissions are charged Usually market participants do have to pay a commission to buy or sell options. Even floor traders pay some kind of fee, but it is usually very small. The fees that individual investors pay is more substantial and can often distort the output of the model.

5) Interest rates remain constant and known The Black Scholes model uses the risk-free rate to represent this constant and known rate. In reality there is no such thing as the risk-free rate, but the discount rate on U.S. Government Treasury Bills with 30 days left until maturity is usually used to represent it. During periods of rapidly changing interest rates, these 30 day rates are often subject to change, thereby violating one of the assumptions of the model.

6) Returns are “lognormally” distributed This assumption suggests, returns on the underlying stock are normally distributed, which is reasonable for most assets that offer options.

Painlessly try the formula for yourself at: http://www.erieri.com/blackscholes

Forex Trading can be lucrative, easy to do and can leave you with plenty of time to enjoy yourself!

> London Stock Exchange and VectorVest

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VectorVest Does The Heavy Lifting

close to 52 week highs. In the week past I have bought into the builder Barratt as the share passed through a 52 week high.

In a detailed look at my winners, they have all got the same broad characteristics.

All my big winners really started to motor when they broke through 52 week highs.

Maybe it would be a good idea to make a list of all the shares on the LSE that are

All my winners have been trading at a price lower than the VectorVest valuation.

I favour undervalued shares. There is much less risk there. Buffett says “you don’t know who has been swimming naked until the tide goes out.” As I write in February 2015 Barratt is significantly undervalued as calculated by the VectorVest software. That’s one box ticked.

I only look at shares that have a safe history of making money. I don’t like surprises. There is lots of cash to be made Continued

> London Stock Exchange and VectorVest in companies that are growing their earnings safely and steadily. VectorVest calculates the earnings potential and earnings safety of each and every company on the LSE and AIM. These numbers are graded between 0 and 2.0 with a value of over 1.2 being good and 1.3 being excellent. Barratt has an earnings potential of 1.64 and an earnings safety of 1.22.

That’s another box ticked.

Again, I only look at shares that are aggressively growing their earnings at above 15-20%. Barratt passes this easily.

Most of all, the London market should be rising during big percentage moves from all my winners. The most important thing is to

Dr. Bart A. DiLiddo Founder of VectorVest

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know whether the market is moving up or down. Everything else follows from that.

VectorVest calculates a short term trend and an underlying trend. As I write the underlying trend of the LSE has been upwards since the first week of January 2015. That’s another and very important box ticked.

My objective is to find undervalued shares that are growing their earnings both aggressively and safely that are going up when the LSE is going up.

I am happy to report that VectorVest does all the heavy lifting of this exercise in seconds.

Written by Dr. David Paul VectorVest UK/South Africa

http://youtu.be/XVcX0J0tJg0

> Indicator Spotlight – Simple Moving Average

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It may be simple but it is also powerful

average value over a predetermined time period is made. As the price of the security changes, its average price moves up or down.

In terms of its definition a SMA is an indicator that shows the average value of a security's price over a period of time.

Actually, this definition would accommodate a whole range of moving averages such as the exponential moving average or the weighted moving average, but the definition will do for the moment.

When calculating any moving average, a mathematical analysis of the security's

The SMA is simply a progression. If, for example, we were calculating a ten day SMA we would calculate the average price for a ten day period. Then we would knock off the first day and replace it with the figure for day eleven before recalculating the average. This process would then repeat and the results would be graphed or charted.

Then things begin to get a little more complicated. Firstly, what figure should we use for the calculation: the opening or closing price, the high or the low or perhaps an average for the price across the day? More often than not it is the closing price for the period that is used in Continued

> Indicator Spotlight – Simple Moving Average the calculation. Often, it would not make too much difference which of these was used as long as it was used consistently.

A much bigger question is which time scale or time scales to use and we will return to that question shortly.

The most popular method of interpreting an SMA is to compare the relationship between it and the security's price itself.

The usual interpretation is that a buy signal occurs when the security's price rises above its moving average and a sell signal occurs when the security's price falls below its SMA. The SMA is not intended to get you in at the exact bottom nor out at the exact top for trade entry and exit. Rather, it is designed to keep you in line with the security's price trend by buying shortly after the security's price bottoms and selling shortly after it tops. I would NEVER use the SMA as a sole indicator. It should be used alongside other indicators.

The following chart shows the SMA of a stock on a one year price chart using a 200 day average in the calculation. The 200 period is commonly used; notice how much it smooths performance.

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The number of time periods used in calculating the average is considered critical to its successful use. When using hindsight, you can always find a moving average that would have been profitable (using a computer, I found that the optimum number of months in the preceding chart would have been 43). The key is to find a moving average that will be consistently profitable. The most popular moving average is the 39-week (or 200day) moving average.

The reason why the 200-Day Moving Average in particular is so popular in stock analysis is because historically it has been used with profitable results to time the market.

Trend traders can use a mix of moving averages to gauge market direction and enter trades. Momentum traders may look to 10-day or 20-day SMAs as entry points and exit on a cross of a 10-day against a 20-day SMA or a 20-day against a 50-day SMA. Long term traders may use price tests of a 50-day or 200-day SMA to add to an existing held position and exit the entire position when the 50-day crosses the 200day SMA. That said, my preference is to use the ten and twenty day SMA’s and to use them in combination. When using SMA’s in this manner it is the cross over between the two SMA’s that is significant as shown here with buy and sell signals indicated:

> Indicator Spotlight – Simple Moving Average

The number of periods used in an SMA can be made to fit the market cycle you choose to follow. For example if you determine that a security has a 40-day peak to peak cycle, the ideal moving average length would be 21 days calculated using the following formula:

Moving average periods = (Cycle length/2) +1 A daily moving average quantity can be converted into a weekly one by dividing the number of days by five (e.g., a 200-day moving average is almost identical to a 40week moving average). To convert daily moving average periods into a monthly one, divide the number of days by 21 (e.g., a 200-day moving average is very similar to a nine month moving average, because there are approximately 21 trading days in a month).

Another feature of moving averages is their use as support and resistance. Traders will use longer moving averages to gauge trade direction, but look to shorter moving averages, like a 10-day or 20-day SMA, to enter positions. The longer the moving

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average, the more important its influence is on support or resistance. A price test of a 200-day SMA will carry greater weight than a 20-day SMA test.

In events where a shorter term moving average crosses a longer moving average a price test of the next longest moving average may occur. For example, a 20-day cross of a 50-day SMA often leads to a price test of the 200-day SMA. Moving averages can also be calculated and plotted on other indicators. The interpretation of an indicator's moving average is similar to the interpretation of a security's moving average: when the indicator rises above its moving average, it signifies a continued upward movement by the indicator; when the indicator falls below its moving average, it signifies a continued downward movement by the indicator.

Indicators which are especially well-suited for use with moving average penetration systems include the MACD, Price ROC, Momentum, and Stochastics.

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> Options Income engine – Bill Poulos When it comes to learning how to trade successfully, there are a lot of variables. As a result, trading can become a way for you to successfully put a lot of extra money away or it can become a financial disaster.

The key is to learn what you are doing before you actually begin handing over any money. In order to do that, you need someone to pave the way for you that has already been there and done that. When it comes to somebody that you can count on in all types of trading, the name Bill Poulos often comes to mind, largely because of his decades of vast experience in the business and his capability of effectively showing others how to do the same and be successful.

One of the newest things from Bill Poulos is called the Options Income Engine. This takes everything that he has previously made available to help people learn how to trade successfully and turns it up several notches. It is designed to teach people about options trading, which is somewhat different than other types of trading. For instance, with options trading you always have the option to purchase a particular stock but you are not committed to do so. Some other types of trading force you to commit to purchasing the stock before you know exactly what it is going to do but in options trading, as the name implies, you have the opportunity to bow out until virtually the last second.

It might have been enough for Poulos to simply offer a training course that cantered around options trading, just as he has offered many other types of training courses in the past. However, the

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Stock Analysis Looking for value and performance

S&OM are not stock analysts and we do not give investment advice or tips. The information that follows is in the public domain being gleaned fro the financial reports of the businesses involved and from press reports.

When undertaking fundamental or technical analysis investors and traders should use up to date data. They are also strongly advised to seek appropriate professional advice.

Any reference to a stock being right to buy, hold or sell is a reporting of such a recommendation by a third party or parties.

You can undertake a huge amount of stock analysis quickly and easily using a service such as that provided by VectorVest.

VectorVest offers a very low cost five week trial during which it is possible not only to analyse as many stocks as you wish, you can also use the whole VectorVest software package. The trial costs just ÂŁ5.95 or $9.95 and can be accessed below.

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> Stock Analysis - Microsoft

Microsoft MSFT Still a stock that we trade

The Microsoft Corporation was established in April 1975 by Bill Gates (recently recorded as the world’s richest man for the 16th time) and Paul Allen. Its main business has long been developing a range of software products and services. The Company also designs and sells hardware.

These days it is also trying hard to become established as a leading player in the field of advertising.

When we looked at Microsoft early in March 2015 it was trading at $43.88. At this price most pundits consider it to be undervalued and see it as a stock to hold rather than to buy into.

Based on forecast earnings per share and a number of other factors, the stock is currently worth around $60 per share.

There is therefore considerable scope for a price rise as the price and the value converge. Most commentators seem to believe that the convergence will mainly consist of an increasing price rather than a fall in the value of the business.

VectorVest takes the comparison of price and value a stage further using a sophisticated model and then calculates what it calls a relative value on a scale of 0.00 to 2.00. At the time of writing it scored Microsoft’s attractiveness, in terms of its price to value at 1.26. Although this score is above the VectorVest threshold score of 1.00 they find other reasons to not give it a buy recommendation.

Microsoft is not seen by commentators as being a high risk stock to purchase. Taking

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> Stock Analysis - Microsoft account of factors such as the accuracy of the forecasts that the company itself gives, its low debt level, low price volatility and the degree to which the business is firmly established, it is seen as being well below the average in terms of risk.

Bill Gates – Co-founder and the worlds richest man

So, what’s the problem, why is Microsoft seen as a stock to hold rather than one to buy? It comes down to timing. At this point the analysis has moved from one of fundamental analysis to technical analysis. The stock is showing as being overbought with its stochastic of 89.71 being above the magic score of 80.

Of course things can change and no-one is recommending that Microsoft’s stock is held come hell or high water. Historical support and resistance seems to suggest that the current trend would be broken if the stock fell below a price of around $41.70 per share.

At S&OM we tend to be traders rather than investors and to therefore base our buy and sell decisions on relatively short term forecasts. However, it is worth noting that Microsoft, which tends to be very good at forecasting its own performance, is expecting an annual growth rate of only 3% over the next three years. Compared to inflation and

interest rates 3% is nothing to get excited about!

In terms of future earning, Microsoft has a forecast for the next twelve months of $2.78 per share (Earnings Per Share or EPS) giving it a Price to Earnings Ratio (P/E) of ($43.88/$2.78) = 15.78. This is well below the P/E of most stocks in the US markets which have an average P/E of around 40.00. That said, the yield of 6.34% (($2.78/$43.88) x 100) is much better than the average which is around 2.5%.

Another factor which leads to the conclusion that Microsoft is undervalued is its GPE (Growth to P/E Ratio). This compares the rate of earnings growth with the P/E ratio of a business. MSFT has a GPE rating of 0.20 leading to a conclusion that the stock is undervalued if using the normal yardstick of requiring a GPE rating below 1.00 to be classed as undervalued. However, this yardstick uses an interest rate of 10% rather than the current 2.76% in its calculation. Taking this into account and recalculating the GPE it comes out at 0.08 pointing to an even greater probability that the stock is undervalued.

MSFT pays an annual dividend of $1.24 per share. As this level of dividend is within the top 20% of the most affordable dividends being paid out by companies in the market it is deemed safe to reasonably assume that dividend level will continue into the foreseeable future.

Microsoft also has, for those of you with a preference for long term buy and hold, a Continued

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> Stock Analysis - Microsoft very good record of increasing its dividends.

The rate of growth is 15% against an average of around 1.33%.

Current call options available to sell, at 3 March 2015 for the 27 March 2015,17 April 2015 and 15 May 2015, are: $44.00 Strike Price 27/3 $0.58 = 1.32% if not called 1.60% if called.

Microsoft is, of course an optionable stock.

It has weekly, monthly and long term (LEAP) options available. In addition, it uses single cent spread steps for options close to the current stock price and for the stock itself.

Being a large CAP ($360.48Bn) stock it completes our checklist of stocks that we are happy to trade with in most respects.

The one area that we are a little less than happy with is that the price of the stock is above the $30.00 level that we prefer.

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$44.00 Strike Price 17/4 $0.88 = 2.00% if not called 2.27% if called. $44.00 Strike Price 15/5 $1.43 = 3.26% if not called 3.53% if called.

At this moment in time we would be looking at alternatives because of the stock price being higher than we like to pay and the call option prices being lower than we are happy with.

Global advertising at crazy low rates!

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> Stock Analysis – BT Plc

British Telecom Plc Good growth recently but how do the fundamentals look?

BT-A.L British Telecom Plc. Monday 9 March £454.60 BT Group Plc is a large, well established communications business which dominates the UK landline business and is a big player in internet services. It is in the sports TV business and has great ambitions to dominate the mobile communication market. As I write the business seems to be highly favoured by the finance pundits who believe the price may hit £500 despite being already up 27% since October 2014.

On paper, in terms of a tangible asset, BT Plc has a value of around £472 so the current price is a reasonable reflection of its value. This reflects forecast earnings per share, growth forecasts, profitability and other factors.

Looking into the longer term, and beyond

the hype, BT Plc is quoted as having a less than average score in terms of its long term price growth potential over the next three years.

BT Plc has a good record in respect of accurately predicting its own financial performance and therefore we are probably sensible to take cognisance of its forecasts. This makes the stock a relatively safe one to take on if we could find an opportunity to do so at a price further below its value. That comes down to timing and being alert to opportunities.

As stocks go, investing in this one is putting cash into a relatively safe pair of hands. Even if no huge growth is forecast the stock should at least do what the business managers say it will without them taking on any unreasonable risks Continued

> Stock Analysis – BT Plc

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that may upset things. If I were a pension fund manager I would be tempted to keep some of this stock in my portfolio.

negative earnings. BT Plc has an EY of 6.25 percent. This is actually significantly above average.

Looking across the buy, sell and hold recommendations of the professionals I see more saying buy than are saying anything else. I can understand this as the downside risk does not look bad and there is always the chance that this business will do something that is market moving that will push the price well up.

Growth to P/E Ratio (GPE) compares earnings growth rate to P/E ratio. BT Plc has a GPE rating of 0.07. This would suggest that BT Plc is fairly valued.

Personally, because I am not a fan of buy and hold, this stock won’t be coming into my portfolio at present but I could completely agree with many people buying who have a different strategy and a different appetite to risk than I do.

The calculated “stop price” that analysts point to is around £412.70 per share, below this and they would be suggesting an exit.

This looks reasonable to me, though I am not a fan of accepting losses and would probably have been covered with a put option long before we got to that price.

In line with my fairly safe and probably boring rating, BT Plc is suggesting that its earnings will only grow by 1% over each of the next three years. That is poor by current standards. Earnings per Share (EPS) are forecast at £0.29 per share.

Price to Earnings Ratio (P/E) is 16.00 which again is pretty low.

Earnings Yield: (EY) reflects earnings per share as a percentage of Price. EY is related to P/E via the formula, EY = 100 / (P/E), and may be used in place of P/E as a measure of valuation. EY has the advantages that it is always determinate and can reflect

BT Plc pays an annual dividend of 11.40p per share. This gives a current yield of 2.48% whereas most stocks offer below 2%. In addition, the availability of funds and profits suggests that this dividend is very affordable to the company and, in this respect, it is therefore considered to be a safe dividend. On the other hand, the rate of increase in the dividends paid looks less healthy and could, on the strength of its forecasts, be trimmed going forward.

Sales / Market Capitalisation Information Sales: BT-A.L has annual sales of £17,960,000,000 BT Plc has seen sales fall by around 3.00% over the last year which can’t be good news.

Shares: BT-A.L has 8,369,000,000 shares outstanding.

Market Capitalisation: BT Plc has a Market Capitalisation of £38,431,000,000. Market Capitalisation is calculated by multiplying price by the number of shares outstanding.

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