The Value of Charts to A Company Explained
Charts are a forceful means of presenting vital information to corporate management. They are industry’s proof of the expression “A picture is worth a thousand words”.
Charts tell a story which pages of statistics and interpretive comment cannot match. Trends of past performance can be related to forecasts of future plans. Preliminary estimates can be plotted, revised and put in final form on a chart in a relatively short period of time. The preparation of comparable pages of statistical summary and subsidiary schedules, in a formalized style, could conceivably require many additional hours by a large number of people.
Charts should be used more extensively by executives, especially those individuals who have difficulty struggling through statistical reports or who have insufficient time to read all the interpretive comments flowing across their desks each day.
It is recommended that a company begin its charting program on a modest and realistic basis. It is usually best to begin with total sales, profits, assets, profit ratio to sales, asset turnover and return on assets. Any attempt to launch a full-scale program, which includes each division and its product lines and all the pertinent data relating to them, is likely to result in confusion, undue delays, misinterpretation and a breakdown of sensible planning.
These additional charts should be included after the total company charts have been carefully prepared, reviewed by management and selected as a basis for periodic business review meetings.
The charts should be readily accessible to the top corporate management at all times. The charts relating to individual divisions should be available to the divisional management. However, it is essential, when a discussion of charts is scheduled, that a member of the financial department be present to properly interpret the data under discussion.
Too often scales are misread, headings are overlooked, technical information is misinterpreted and conclusions are erroneously drawn. This brings up the necessity for having top management participate in the final decision regarding the basic chart style to be used. It is of no value to receive management support for a chart program and then to present all company data on charts which cannot be understood.
At the same time the management should indicate a preference for line charts versus bar charts, or a sensible blending of both. This type of direction from the top can help both the executive and those charged with the responsibility for presenting the material. At the inception of a chart program the corporate controller should have alternate charts prepared and review them with the executive management, explaining what can be expected from the charts and what information is adaptable to charts.
Any company embarking on a chart program would do well to follow a fundamental principle of chart preparation and availability. Before any charts are shown to a member of the operating or top executive management, they should be thoroughly reviewed by the top financial officer of the company, so that he is fully prepared to answer any questions. This is made easier if the charts are kept in a room especially designed for the review of charts.
It can then be agreed that no charts will be displayed prior to their receiving approval from a designated financial officer of the company. This basic procedure will do much to insure the success of a chart program. Each chart should be accompanied by interpretive comments.
The most effective charts are the simple ones. Any chart which attempts to compress too much diversified information onto one graph is doomed to failure. It is also liable to create the impression that charts cannot assist the management in easily understanding the business.
Just as charts need not be complex, neither must they be fancy or elaborate. While a chart prepared by a professional, with a background in mechanical drawing or commercial art, will look better than one drawn by an amateur, the message, if properly presented, will be just as factual and easy to understand in either instance.
For any company, the introduction of charts will make life easier.
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Options Trading Mastery: Factors that Affect Straddle Prices
Since the Straddle’s profit potential depends on its price from purchase time to expiration, the investor should be aware of the factors that affect the Straddle;s price. Several factors affect a Straddle’s price. The first is, of course, stock price. The stock’s price dictates the value of both components of the Straddle – the call and the put – affecting the Straddle price as a whole. As the stock price moves, the prices of the call and the put will fluctuate via the current Deltas of the options and thereby affect the price of the Straddle.
As the stock moves higher, the price of the call will increase while the price of the put decreases. They do not move linearly, meaning that as the stock continues higher, the call’s value increases progressively more while the put’s value decreases progressively less. This non-linear effect is because of the option’s changing Delta.
The call Delta increases as the stock goes up while the put Delta decreases. This opposing effect continues until the call gains value dollar for dollar with the stock (once its Delta reaches 100) indefinitely. At the same time, the put value-loss stops because the put now has no value (as put Delta approaches 0).
The opposite is true if the stock trades down. The call will lose value progressively slower until it reaches $0. Meanwhile, the put will gain value at an increasing rate until the Delta becomes 100. Then the put will gain dollar for dollar with the stock indefinitely. The chart below illustrates the effect of stock movement on the dollar value and Delta value of the Straddle.
Again, we will use the July 65 Straddle as an example. The Straddle will be worth $4.10 ($2.10 for the call, $2.00 for the put).
Stock/ Call/ Call Delta/ Put/ Put Delta/ Straddle
57.50 .42 15 7.81 -86 8.23
59.50 .78 24 6.16 -77 6.94
61.50 1.35 34 4.17 -67 6.06
63.50 2.11 45 3.46 -56 5.57
65.50 3.13 56 2.47 -44 5.60
67.50 4.35 66 1.69 -34 6.04
69.50 5.77 75 1.11 -25 6.88
71.50 7.37 83 .71 -17 8.08
73.00 9.09 83 .43 .12 9.52
A second factor that affects the pricing of a Straddle is implied volatility. As implied volatility increases, the value of the Straddle increases. The price of both calls and puts increase as implied volatility increases. A Straddle will feel a double effect when volatility increases because the strategy employs two options working together and not against each other.
When a strategy uses two options working against each other, the effect of implied volatility on the strategy is the difference of its effect on each option. This is different from a Straddle where the two options are working together. This combines the effect of implied volatility on each option.
Implied volatility movement affects an individual option to an exact dollar amount as indicated by the option’s volatility sensitivity component or Vega. An option with a $.05 Vega will increase five cents in value for every tick that implied volatility increases. It will decrease in value five cents for every tick that implied volatility decreases.
A call and its corresponding put will have the same Vega. That is, if the July 65 call has a .10 Vega, then the July 65 put will also have a .10 Vega. Remember, Vega is calculated by the strike price and does not differentiate put or call. Now that we have confirmed this concept, we can use it to calculate how much our Straddle price will change with a movement in implied volatility.
The Straddle combines a call and its corresponding put doubling the Vega effect. This means that the Vega of a Straddle is the addition of the Vega of the call and the Vega of the put. Since the put and call Vega are the same, we simply times the Vega of the strike by two.
Look back at our example. If the July 65 call has a .10 Vega, then the July 65 put must also have a .10 Vega and thus the July 65 Straddle will have a .20 Vega. This means that for every tick that implied volatility increases, the July 65 Straddle will increase $.20 in value. Conversely, for every tick that volatility decreases, the July 65 Straddle will decrease in value. The chart below shows how the Straddle-value changes at different implied volatility levels.
Price/ Vol.Level Call Put Straddle Vega
65.50 30 3.13 2.47 5.60 .174
65.50 40 4.05 3.39 7.44 .180
65.50 50 4.96 4.31 9.27 .182
65.50 60 5.88 5.23 11.11 .184
65.50 70 6.80 6.15 12.95 .184
When you study the chart, you can see that as implied volatility increases or decreases, the value of the Straddle increases or decreases by the amount of the Straddle’s Vega multiplied by the amount of tick change in implied volatility.
Finally, time is another major factor affecting the price of a Straddle. Time takes a toll on all options. Its effect is even more pronounced on the Straddle which that combines two options for the same period. A Straddle will see twice the rate of decay that a single option will. From previous discussions, we should be familiar with the option decay chart and its non-linear curve. As time goes by, the Straddle will decay, day after day, at an ever-increasing rate until expiration Friday at 4:00 p.m.
The implication to the buyer and seller is obvious. The passage of time decreases the value of the Straddle and thus always favors the seller. Time works against the buyer. The buyer has until expiration to get either a large stock or implied volatility movement to offset the price paid for the Straddle.
Ron Ianieri is currently Chief Options Strategist at The Options University, an educational company that teaches investors how to make consistent profits using options while limiting risk. For more information please contact The Options University at http://www.optionsuniversity.com or 866-561-8227
Why Most People Lose Money in the Stock Market
Mention the word ’stocks’, and many people have painful experiences to narrate. Stories abound of how people have had their life savings wiped out overnight. Or money they have borrowed to buy a ’sure, hot stock’ was lost when the stock suddenly took a nose dive. Ever since I was young, my parents and grandparents warned me to stay away from the stock market, and tell me that it is safer to leave my money in the bank.
So, is it true that most people lose money buying stocks? The answer is Yes! But how can this possible? We know that the stock market as a whole has been consistently increasing in value for the last fifty years at an average rate of 10% and 12.08% in the last twenty years! The main reason is that most people who purchase stocks are ignorant of the business behind the stock. It doesn’t mean they are not intelligent people. It’s just that they lack the ‘financial intelligence’ to understand, analyze and buy businesses.
Let me ask you this question? If a whole bunch of people with no advanced driving skills were given the keys to drive a Formula One racecar at 230km per hour round a circuit, how many would crash after a few rounds? Probably most of them! Well, this is exactly what is happening in the stock market today! The majority of investors are made up of the general public who enter the market looking for riches without any financial or business training and, as a result, crash and burn! To these people, investing in stocks is indeed a high risk, sure-lose venture. They treat the stock exchange like it is a casino.
So without financial and business training, how do most people make decisions on buying and selling stocks? The answer is based on fear and greed. It is the combination of ignorance, fear and greed that motivate people to buying a stock when the price is too high and selling it when the price is too low, resulting in a loss.
We have to know that when we buy a stock, we are actually buying a share,
an ownership, in an ongoing business. Instead, most people treat stocks like lottery tickets, buying and selling based on predictions of whether the price will go up or down in the short term. Because stock prices go up and down randomly and erratically based on world events, there is no way anyone can consistently beat the market by attempting to read! Which is why, in the long term, the average stock player loses money.
Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE bonus report ‘Get Out Of The Rat Race Now’ at http://www.SecretsOfSelf-MadeMillionaires.com
Stop Trading Individual Shares If You’re Not Beating The Market
Every share investor enjoys hunting out profitable companies they can invest in, and hopefully finding a potential ten-bagger that will make them rich, but there comes a time when you have to analyze your portfolio and make harsh decisions if you’re not beating the overall market.
After all what is the point in spending hours and hours researching different companies if the end result is that you are underperforming the overall market. You may as well just invest in a tracker fund that tracks the market or a top performing mutual fund and spend your time doing more worthwhile things.
I know it can be quite exciting doing your own research and investing in the companies of your choice, but professionals are paid to do the same job and will generally have access to more information than you do, and can make better informed decisions.
So take a look at your share portfolio over the years and see how it’s performed in percentage terms. Then compare this to the performance of the FTSE 100, for example (or the Dow Jones if investing in US shares) and see how you compare.
If you find that the overall index has seriously outperformed your own efforts then something is seriously wrong here, and it might be an idea to seriously rethink your investment strategy.
For instance, taking the FTSE 100 as an example, this index has increased dramatically since 2003 almost doubling in value so almost all good quality companies will have risen a lot during this time. Now look at the companies you’ve been investing in. If they haven’t risen during this time when the market as a whole has been extremely bullish, then your investment strategy is seriously flawed.
If however, you have achieved excellent gains in percentage terms then your individual share picking strategy is of course justified, although it might still be an idea to place your money in a tracker or mutual fund, depending on your performance.
This isn’t always true though, because it’s important to note that portfolio managers have more constraints placed on them in terms of the types of companies they can invest in, plus of course there’s the added fees you have to pay for their service, so ultimately it’s a matter of choice and convenience.
I personally have done extremely well investing in my own portfolio over the years and have plenty of time to do my own research. However for people who have busy lives and have maybe shown that they are not that successful in managing their own portfolio and selecting individual companies to invest in, then paying someone else to do it for you is probably the better option.
James Woolley runs a blog that discusses all aspects of money including shares, property, running your own business, and basically how to build wealth in general. Visit this site now by clicking on the following link:
http://letsdiscussmoney.com