Do-It-Yourself Debt Consolidation: Does It Ever Work?

Do-It-Yourself Debt Consolidation: Does It Ever Work?
You have a lot of debt piling up and, uninvited, you get a
letter from a credit card company suggesting that you write
one of their handy checks and pay off your high-interest
debts and put them on a brand new credit card. The kicker
to the offer is that this new credit card is going to
charge you no interest.

Should you do this?

In a way, this is a mini-version of what debt consolidation
is all about. Debt consolidation is a way of dealing with
overwhelming debt by gathering it together (consolidating
it) into one large debt. The idea is that you can likely
get better terms (less interest) on one large debt than on
several smaller debts. Besides that, one payment a month
keeps life simpler than having to make a dozen or more
smaller payments (and there is less risk of missing a
payment and getting a black mark on your credit report).

Still, caution is warranted. The first thing you need to do
is review the actual offer extended by the credit card
company. While zero interest is no doubt true, no company
is going to extend that offer to you without some strings.
Typically, the two main strings to look for is "how much?"
and "how long?"

For instance, you may only be able to consolidate a
specific amount of money to the new zero-interest offer.
Let's say it's $5,000. If you want to consolidate about
$5,000 worth of debt or less, this is a workable amount. If
you're facing $80,000 worth of debt, this isn't going to
help much.

Next, you need to realize that the company will set some
very specific time limits on the offer. You may get zero
interest for a few months or even a year or more. But there
will come a day of reckoning when you go back to a regular
(or even higher-than-regular) interest rate.

Some offers for no-interest loans require that the loan be
paid in full by the due date otherwise all of the interest
is due. Furniture stores often extend this kind of credit.
Let's say you buy $10,000 worth of furniture and the store
says you can borrow that money free for one year instead of
at the store's usual rate of 22% (yes, a lot of furniture
stores charge rates that high). If you pay off the entire
$10,000 before the year is up, you owe no interest. But
let's say you paid $9,950 before the year was up but on the
day the offer expired, you still owed $50. In this example,
the company would be within its rights to charge you
$2,250-that's $50 for what you owe and the $2,200 interest
you owe because you did not pay the loan in full by the due
date.

So find out how much money you can consolidate and how long
the zero-interest offer lasts (and what happens when it
expires). Then you need to do some number crunching and
soul searching to figure out if you can honestly expect to
pay it off on time. For instance, if you owe $5,000 on a
variety of credit cards, you can take two or three years to
pay it off. If you consolidate this to a zero-interest
offer, you may put yourself under the gun to pay it off in
one year. Can you do that? Sit down and figure it out (in
this case, it means paying in about $417 a month, minimum,
without fail).

The other issue involved in debt consolidation involves a
process I call "stopping the bleeding." Debt is like a
money hemorrhage. Just as no person can hemorrhage blood
indefinitely without suffering dire, even fatal,
consequences, nobody can hemorrhage money for too long
without financial disaster.

If you are still hemorrhaging cash, there is not much point
in consolidating your debt. That's like taking an aspirin
when you need a tourniquet. Debt consolidation works best
when the debt is a finite thing (for instance, you got in
serious debt over an accident or medical problem) or when
you have figured out how to end the cycle of spending more
than you make. In other words, debt consolidation will help
you clean up your financial mess once you have solved the
root cause of your indebtedness.

Are these low-interest or no-interest loans a good deal?
Actually, they can be, but they are better deals to highly
disciplined money managers than to the debt-laden. If you
are already struggling with too much debt, taking on a
somewhat large debt with a ticking clock can be a lot of
stress-and require more financial discipline than you have.

Another downside of the no-interest credit card offer is
that it puts another credit card into your wallet, and one
that you will be encouraged to use. If you already struggle
with credit, you really don't need to add more temptation
to your life.

That does not mean debt consolidation is not a good
solution. If you can get a handle on your debt situation,
figure out how to stop the downward spiral, and then work
out a budget and plan to get free of debt, debt
consolidation can be a great solution. In fact, it's a
financial method used by large businesses and wealthy
individuals to handle special financial situations. The
trick is that there are many ways to consolidate debt and
other ways that can be much more advantageous to those
struggling with overwhelming debt.

----------------------------------------------------
Wondering if debt consolidation might be right for you? Are
you struggling with debt and wonder what debt consolidation
is all about? Get your free financial profile at
http://www.debt-consolidation-diva.com .
Debt-Consolidation-Diva provides information only (no
financial services) and is a good, relaxing, safe place to
get information. Check it out!

Top 10 Biggest Financial Mistakes of All Time

Top 10 Biggest Financial Mistakes of All Time
1. Negative Spending
Have you created a budget and do you stick to it? If not,
you may be spending more money than you make. People who
have created a budget have a good idea of their monthly
income and expenses and can accurately diagnose their
financial condition. Other signs of negative spending
include the inability to pay off credit cards each month
and spending money on fun things before you have paid for
necessities.

2. No Rainy Day Fund
Do you have little or no money in savings accounts,
retirement plans, and investment portfolios? When
something breaks, or difficult circumstances such as
unexpected medical expenses or a job loss happens you must
draw down what little savings you have and go deeper into
debt.

3. Too Much Debt
Do you have so much debt that you are having difficulty
meeting your expenses each month? Are you 'borrowing from
Peter to pay Paul'? You may have re-financed your home or
consolidated debt to get cash to pay for other debts (maybe
more than once). Re-financing or consolidation can be a
very good tool to help you, but the ultimate goal must be
to reduce debt.

4. No Plan
Do you have a written financial plan, to help you plan for
unexpected things and future goals? A comprehensive
financial plan used to be difficult to come by unless you
had substantial assets, but with a financial plan you can
take control of planning your future.

5. Optical Rectitus
The condition in which your optical (eye) nerve gets
crossed with your rectal (anal) nerve and you see the world
through a crappy disposition. You can choose to be
negative or positive. Whichever one you choose will set
the course for your life. You can either make the best of
what you have, or be a victim of circumstances and spend
your life blaming others for your situation. Having a
positive attitude creates the state of mind for success and
overall health.

6. Self-Centeredness
You live mainly for yourself without thinking of the world
around you. You buy things that please you alone, and then
you don't share. For instance, what good is it to buy a
new gas grill then never have a cookout? You are enjoying
your holiday meal without even a thought about donating to
a soup kitchen or food pantry. Your children are enjoying
opening their holiday gifts, but you didn't think about
donating a gift for a needy child. You don't give money
and time away. You spend your time and money on yourself,
or on those in your very small circle. You will find
liberation if you think of others and 'higher things'
before thinking about yourself. Giving money away can be
the best "investment" in how you feel about yourself and
the world around you

7. You and Your Spouse Don't See Eye-to-Eye on Money
Perhaps one of you is a procrastinator and spender and the
other is a saver and has a 'get-er-done' attitude about
finances. This problem can be overcome, but it requires a
lot of work from both of you. Financial counseling may be
in order in extreme situations. Sometimes separate
checking accounts, but joint savings and investments can
help. Creating and sticking to a budget is essential so
that the 'spender' isn't always blamed for financial
difficulties. Also, remember that a lot of marriages break
up over fighting about financial matters. The small amount
of time planning and working through financial
responsibilities is well worth marital harmony.

8. Either Trust Too Much or Don't Use Advisors at all
You assume that anyone can make financial decisions and
that everything will work out in the end. You don't keep
up with the news so you were unaware of things such as
predatory lending practices on your 'interest only'
mortgage or the 400% interest you paid to the 'Get Cash
Now' store. You are certain that the odds are truly in
your favor to win this time so you are buried in magazines
that you bought to increase your chances to win. Your
basement is filled with products that you will sell
someday; you just had to get the minimum amount so that you
could be an official distributor and save more money.
Remember, if it seems too good to be true it probably is.

Have you put off seeking help from financial, insurance,
legal and tax advisors. Many people procrastinate to the
detriment of their financial condition. We all have to pay
taxes and we all need insurance and a will. Perhaps you
don't want to make the hard decisions that they may tell
you to make (like saving more money and buying insurance,
or delaying the purchase of things you want now). Tax and
legal advisors may save you money and legal entanglements.

9. Living Large
Do you spend money on homes, cars, vacations, or hobbies at
or a level above your income bracket versus a notch or two
below? Bigger homes, and cars, more sophisticated
appliances or whatever you buy, will cost more to purchase,
fuel, maintain and insure. The nicer vacation spot will
cost you more for your lodging, meals, and for everything
else while you are there. Have you ever allowed warm fuzzy
feelings to dictate the purchase of a pet without properly
budgeting for all of the expenses it would entail? Don't
buy anything if you can't afford all of the expenses that
will come with it.

10. Laziness
For some, the desire to pay bills, budget, and plan
finances falls somewhere below getting a root canal without
anesthesia. Sometimes procrastination or a desire to avoid
difficult topics (like thinking about your death for Life
Insurance or creating a Will) can keep you from achieving
your dreams.

Being successful with the money you have is not easy or
quick and there are no short cuts. Continue to educate
yourself about financial matters and obtain and follow a
financial plan. If you work hard to achieve the goals laid
out in your plan and avoid these mistakes you will be well
on your way to funding your dreams.

----------------------------------------------------
Kent E. Irwin, ChFC, CLU, CAP, co-founder and CEO of
eFinplan.com. eFinPLAN is the first and only web-based
comprehensive consumer financial planning software designed
for people who are trying to do a lot of their own
financial planning. Find out more about how do-your-self
financial planning and how to reach your goals at: =>
http://www.efinplan.com/

Emergency Steps To Deal With The Loss Of Your Job

Emergency Steps To Deal With The Loss Of Your Job
Just been shocked and awed by suddenly being handed the
pink slip or been forced to resign because of a weird
appraisal or transfer? Feeling as if the world is breaking
apart? No clue about what to do about the situation and how
to break the news to your family? Here are some tips in how
to handle the situation.

Losing your job is not the end of the world.

First of all, try to retain your calm and don't let the
logical part of your brain be hampered. Try to think
logically about the situation. The solutions would start
popping into your head one by one if you maintain a cool
head.

Think About The Positives

Though a cliched phrase, it is actually necessary for you
to have a positive outlook. It is good that your stagnant
life is being made to roar into life. The monotony of your
9 to 5 job is now being challenged by the new entrant who
is bawling for your attention. Suddenly your kind can begin
to buzz with ideas about the possibilities of life. All
that time you wanted to devote to your family and spend on
traveling is now actually available to you. If you think
about it, you have been given an opportunity to find the
completely different profession you wanted to shift to, but
were hesitant to move out of your comfortable cocoon.

Take Stock

After having calmed yourself, review your financial
situation and check whether the break you have been given
can be utilized. See whether you need to start hunting for
a job right away or if you can afford to take the month
long vacation you so desperately wanted. Also check whether
you have enough funds to manage the house comfortably for
five or six months. Otherwise, you may have to think of
taking a loan or a short-term job.

Fight The Feelings Of Shame

It is natural to feel guilty and shameful about losing your
job. The responsibilities and constraints are bound to
weigh you down. Just be patient about the situation. Even
the best employees may have to face such situations. Though
you might be cursing yourself for not making plans for such
contingencies and for being caught completely off-guard, it
is still not too late to save the situation.

Discuss Things With Your Family

Though you may not think yourself capable of facing your
family, the deed has to be done. Chuck the idea if you are
planning to hide the loss of job from your family. Remember
that your family has the right to know about the loss of
your job and trying to hide the fact from them is a stupid
idea. Having assessed your financial situation, state your
plan of action in clear and simple terms to your family.
You would be surprised to find that your family is actually
very understanding and accommodating.

Get To Work

In case you decide to look for new opportunities, contact
the unemployment office, your alumni career help service,
and the chamber of commerce.

Finally, just try and enjoy the change and do what you have
always wanted to do - exercise, write, play games, watch
the television and get going.

----------------------------------------------------
Looking for a new job? Find out how to create a winning
resume today at: http://www.HowToMakeAGreatResume.com

The Seven Benefits of Annual Business Valuations for Family Businesses

The Seven Benefits of Annual Business Valuations for Family Businesses
Most owners of privately-held businesses believe that they
know what their company is worth. As they have worked to
build the business, often from the ground up, they feel
that their intuitive value conclusions accurately reflect
the fair market value of the firm. In many cases, these
business owners are biased in their views towards the firm,
and therefore, have an inflated sense of value associated
with the business. Though a business owner has their own
opinion as to what the business is worth, their value may
differ substantially from the value that could be realized
in an arms length transaction between a willing buyer and a
willing seller. Without a formal valuation of the company,
the business owner often has nothing other than a gut
feeling to support the value that they attach to the
business.

Many business owners are reluctant to hire an independent
valuation professional to conduct an initial valuation of
the company (let alone an annual valuation) if they do not
perceive the need for one. In many cases, there is little
perceived need for the owner of a very small business to
have a valuation performed, unless of course the owner
plans to leave the business to children, needs a loan from
a bank when the company's assets alone cannot support the
loan, or seeks to sell all or part of the business. These
business owners often are individuals who have started or
acquired a "lifestyle" business-a business that provides
the owner with a job and enables the owner to maintain
their desired lifestyle. The lifestyle business could be
thought of as a hobby for the business owner-a hobby that
earns the owner money.

As compared to a lifestyle firm, some entrepreneurs seek to
establish a transgenerational enterprise-a firm that is
skillfully managed to create long-term value and wealth for
successive generations. These firms typically exhibit the
same seven characteristics of successful transgenerational
enterprises-a compelling vision, professionalized
management team, a long-term ownership plan/strategy,
effective communication, good corporate governance, a clear
succession plan, and a comprehensive strategic plan. As a
result of the need to ensure and evaluate successful
creation of transgenerational wealth, many privately-held
and family-owned businesses, particularly those that have
survived multiple generational transfers, have instituted a
policy of having an independent business
appraiser/financial analyst conduct an annual valuation of
the firm.

Many firms of various sizes and different phases of the
corporate life cycle have recognized the benefits of having
an annual valuation conducted. The most commonly cited
benefits of an annual valuation policy include the
following:

• Accountability and Performance-An annual valuation of a
privately-held firm enables the shareholders to see the
value that is being consistently created or destroyed by
the management of the firm in its execution of the
corporate strategic plan. Over time, if the executive
management of the firm consistently fails to create value
through the increase in the estimated fair market value of
the company's shares, the shareholders may seek to replace
the management team with a group more capable of executing
the strategy and creating value for the shareholders. In
addition, an annual valuation may enable the shareholders
to identify the need for substantial change to the
strategic plan if that plan consistently fails to create
the level of value anticipated. Overall, the annual
valuation promotes accountability and provides clear
performance measurement.

• Estate Planning Purposes-Many shareholders in
privately-held transgenerational enterprises have on-going
estate planning strategies aimed at protecting wealth for
heirs. As part of an estate plan, a shareholder may
periodically place shares into a family limited partnership
whose shares are then gifted to the shareholder's children.
A shareholder may also make gifts of shares to the
children each year for tax purposes. In order to
facilitate this, an annual valuation of the privately-held
enterprise provides the shareholders with part of the data
necessary for these estate planning purposes.

• Buy-sell agreements-In multi-shareholder firms, a
buy-sell agreement is an effective and practical means of
establishing how the buyout of other shareholders will be
conducted. Though many buy-sell agreements have a defined
method or process for establishing the value of the firm's
shares, an annual valuation sets a clear precedent for the
methodology used to establish the value of the shares. For
those firms that do not have buy-sell agreements in place,
annual valuations are a good way of avoiding (or at least,
tempering) disputes that may arise when a shareholder seeks
to sell his shares to the other shareholders. Whereas one
time valuations can be open to criticism of bias in favor
of one party or the other, an annual valuation tends to
limit this accusation as the methodology has been applied
consistently in previous years.

• Promotes Effective Communication-An annual valuation of a
privately-held firm is an effective means of communicating
value creation between the executive management, board of
directors, and the shareholders of the firm. The valuation
may be the catalyst for open discussion between the
management and the shareholders on issues related to the
strategic plan, succession plan, financial objectives,
return expectations, etc. In addition, an annual valuation
is a good way for the management and board of directors of
the company to provide value-added services for the
shareholders. This in turn can foster the creation of
goodwill between the management of the firm and the
shareholders, which may ultimately lower the firm's overall
cost of capital. The lower cost of capital may enable the
firm to invest in value-creating projects that create
long-term wealth for shareholders-projects that may have
been overlooked in the past as a result of a higher cost of
capital.

• Facilitate Banking-Many privately-held firms effectively
utilize leverage to invest in value-creating projects.
Often times, this leverage may exceed the credit available
based on the firm's fixed assets alone. In some cases, the
financial institution may be willing to lend against the
company's goodwill, which is identified in the process of a
formal valuation. The ability, then, of a privately-held
firm to borrow based on the value of the goodwill or the
value of the company's shares may expand the universe of
value-creating investment options available to the firm.
In addition, the annual valuation may establish a track
record of value creation which could be used to facilitate
a recapitalization of the firm, enabling management to
further seek value-creating projects, distribute funds to
the shareholders via special dividends, etc.

• Expands the Investment Options-Privately-held firms,
unlike publicly-traded counterparts, suffer from a lack of
liquidity and the inability to use the company's shares as
currency when seeking acquisitions or mergers. An annual
valuation that clearly establishes a trend in value
creation may enable the management of the company to use
the shares as acquisition currency for another
privately-held company. The annual valuation is also
beneficial in the shareholders' investment decision making
process with respect to maintaining the status of the
company or seeking liquidity through a merger or sale of
the company. The history of annual valuations may provide
the shareholders with a foundation for negotiation of more
favorable deal terms.

• Cost Benefit-Annual valuations may also provide the
company with cost benefits as compared to one-off
valuations performed every few years. Many valuation firms
charge reduced fees for the annual update to a valuation as
part of an ongoing valuation process for a privately-held
business. For example, suppose that Triumvirate
Industries, a privately-held company with $25 million in
annual revenues, chooses to have a valuation performed once
every five years. The valuation firm's fee is set at
$20,000 per valuation. However, suppose that Triumvirate
Industries has an annual valuation conducted. Whereas the
initial valuation fee may be $20,000, the subsequent annual
updates are $14,000. While the fee structure varies by
firm and by project, annual valuation updates typically
carry a lower cost than one-off valuations.

As can be seen from the previous discussion, there are a
number of benefits associated with a privately-held firm
instituting an annual valuation policy. While this is most
typical with large, transgenerational enterprises,
privately-held firms of all sizes may derive some benefit
from annual valuations-whether it relates to financing
purposes, estate planning, or the enlightenment of the
owners in how they are creating value within their firm.
Those firms that have been most successful in creating
long-term shareholder value and transgenerational wealth
have exhibited seven common characteristics, as previously
discussed. Those firms that have instituted annual
valuation policies have likely added value to the firm from
one of the previous seven benefits. In the end, the best
way of measuring the value that management has created for
the shareholders of a privately-held business, particularly
a transgenerational enterprise, is through annual
valuations conducted by an independent valuation
professional.

----------------------------------------------------
Robert M. Clinger III has strong experience in the fields
of business valuation and financial analysis, having earned
the Accredited Valuation Analyst (AVA) designation from the
NACVA and the Certified Business Appraiser (CBA) from the
Institute fo Business Appraisers. More information on
business valuations/appraisals may be obtained by visiting
Highland Global's website http://www.HighlandGlobal.com .

Top Family Budgeting Tips

Top Family Budgeting Tips
Key Reasons for Managing Your Budget
- You Have Limited Income: Virtually everyone has limited
or fixed income. Without budgeting you are being controlled
by your environment. If you have a plan, you are more in
control of your money. Without a budget, you may not really
know you are spending more money than you are earning.

- So That You Know Your Limits: Knowing what your monthly
expenses are projected to be and what they actually are
will help you keep track of how much money you have left
over for future goals and needs.

- You Have Unlimited Demands: There is an endless demand
on your finances. Our commercial capitalistic society is
constantly calling out for you to buy. If you have minor
children, the demands are greatly increased by the things
that they want, the activities they are in, and the schools
they attend.

- You Want Freedom Not Bondage: Budgeting seems to be
restrictive to some people. The reality is that we have to
make choices between what we want at the moment and our
regular bills and goals for the future. However, there is
freedom in knowing what your limits are. Many people find
this liberating, because it creates the opportunities to
grow and mature.

- You Have Future Goals: If you are sacrificing today, it
helps to know what you are saving for in the future.
Obtain a financial plan so that you will know what your
goals are and for what you are saving.

- You Want to be More Aware of Where Money is Going: If
you do not have a budget, you may have no idea where your
money is going. Knowing where you money is going will help
you identify if you are spending too much money in specific
areas.

- You Want Less Stress: Spending without a plan and a
budget increases your stress because you do not have a well
thought out plan for paying your bills and you may spend
more money for fun than you can afford. Planning and
budgeting will give you the peace of mind that you are on
the right track.

Contract with Yourself (and between Spouse)
Budgeting is very hard for many people; therefore, it helps
to have a contract with yourself. If you are married, this
agreement should include your spouse. If you work together,
you will usually accomplish more than you could on your own.

I hereby resolve to:
1. Start a budget, and pay attention to it weekly and
monthly
2. Not spend more money than I make
3. Be in financial partnership with my spouse with no
secrets between us
4. Not borrow to purchase items that depreciate in value
5. Not let my emotions make me purchase anything, including
gifts
6. Not purchase something over budget unless it was
unavoidable
7. Not purchase anything that I don't really need, no
matter how good the sale is
8. Not purchase something to keep up with the Joneses
9. Not apply for any new credit cards, unless lowering
interest rates
10. Pay off all credit cards monthly (I will work toward
paying them off)
11. Not spend money on fun things unless I have paid my
monthly bills
12. My spouse and I will both be the "fun police"
13. Include children in the budgeting exercise to teach
restraint
14. Not obtain high maintenance items like a pet or hobby
if I can't afford the expenses.
15. Not buy something that costs over $50 without
consulting each other and the budget

Cash Flow Management Checklist
In addition to having good budgetary habits, it also helps
to take advantage of money-saving measures. The following
are many of the things you can do to help you save
thousands of dollars per year.

- Employ tax advisors to you avoid overpaying taxes
- Use low cost investments that have low to no
commissions, fees and expenses
- Shop your loans to find lowest interest rates
- Shop your insurance for the lowest prices possible.
- Buy smaller homes and cars since they require less money
to maintain and insure
- Go on cheaper vacations
- Frugal travel to lower the already large consumption of
your income for gasoline
- Eat out cheap, less often and at less expensive
establishments and cafes
- Spend less on food by shopping at low price grocery
stores and pack your lunch
- Lower home energy consumption by employing easy to find
and low cost solutions
- Break smoking and excessive eating habits to save on
tobacco and fast foods
- Monitor emotions to avoid depression or stress related
purchases
- Obtain from the library resources about budgeting,
financial planning and spending
- Go to the library for entertainment books and DVDs
- Reduce or eliminate cable TV

Budgeting Tips
Use technology or spreadsheets:
Obtain software (or use spreadsheets) that will help you
pay bills and make and monitor a budget. Devote time to it
by keeping track of all expenses and enter them into your
software program or monthly spreadsheets each week.

Save all receipts, bills, household documents, and tax
documents:
Organize these items by category into an accordion file or
drawer: e.g., auto, bank, business, credit cards, dental,
medical, grocery, income, insurance, mortgage, utilities,
general receipts, school information, and taxes.

Balance your checkbook:
It is amazing how few people balance their checkbooks
monthly. Budgeting software makes reconciling simple, but
you can read the back of your statement or make an
appointment with your banker if you need to learn this
skill manually.

Tax Time:
If you use budgeting software, you can run a tax summary
report before you work on your taxes. If not, and if you
itemize your taxes (Sched.A), you must total the
appropriate columns in your spreadsheets, e.g., Medical
expenses (Your accountant may provide you with an organizer
to help you get ready for tax time.) Remember to place
quarterly and yearly expenses on the appropriate month in
your budget so that you do not overspend. For example,
annual insurance payments, quarterly tax estimated
payments, annual homeowners association dues, etc.

Summary
Good cash flow management is key to implementing any
financial plan; commit to doing this well. No one likes
self-discipline, but it is actually good for us. With
proper management of your finances, you will become more
confident and less stressed about your future. Remember,
one bad financial decision can sometimes take years to
undo. Be very careful with all decisions you make.

----------------------------------------------------
Kent E. Irwin, ChFC, CLU, CAP, co-founder and CEO of
eFinplan.com. eFinPLAN is the first and only web-based
comprehensive consumer financial planning software designed
for people who are trying to do a lot of their own
financial planning. Find out more about how do-your-self
financial planning and how to reach your goals at: =>
http://www.efinplan.com/

The 10 Keys to Successful Stock Options Trading - Key #3

The 10 Keys to Successful Stock Options Trading - Key #3
This week we will discuss the how to choose the underlying
stock to trade the options on and the right option to trade
on that stock. The first thing to do is perform some
fundamental analysis on the underlying stock to make sure
you are getting into a stock that is likely to go in the
direction you think it will. Check the following items in
particular:

(1) The company financials, especially the P/E ratio. The
P/E or Price to Earnings ratio is the stock price divided
by the earnings per share and is a good indication of the
strength of the company. The average P/E over the S&P 500
is about 15 but it varies from industry to industry so
check the average for the industry the stock is in.
Generally a high P/E indicates a company with strong
earnings and growth potential.

(2) The amount of cash the company has on hand, the amount
of debt they have and the gross profit margin (defined as
the gross profit divided by total revenue). These indicate
the company's stability and profitability. Ideally a strong
company will have a lot of cash, low debt and a high gross
profit margin.

(3) Any relevant news at the online services mentioned in
my last article. Check to see if earnings are being
announced, if there are any splits coming up or if there is
any other economic or company specific news that may affect
the stock price Look for particular signs of strength if
you are trading calls or weakness if you are trading puts.
Also check the industry the company is in to see how the
entire industry is performing. Once you have picked a stock
that you think will move either up or down then you need to
look at the options chain to see what options are available
on that stock.

The options chain displays the expiration date, the strike
(or exercise) price, the bid and ask price, the daily
volume traded and open interest (the number of options
contracts that exist). Let's look at each component in turn.

When choosing the correct option to trade, consider in
particular the time until expiration. You never want to
hold onto an option that has less than 30 days until
expiration because options get cheaper as time goes on and
during the last 30 days time decay (as it is called) speeds
up. Therefore buy an option with at least 60 to 90 days
until expiration.

Consider also how much intrinsic value the option has
(defined as the difference between the strike price of the
option and the underlying stock price). You should ideally
buy an option that has a similar strike price and
underlying stock price or one that has a slightly positive
intrinsic value.

The difference between the bid and ask price is called the
spread. If you place a market order you will pay the ask
price if buying or you will receive the bid price if
selling. If you don't want to pay the market price you can
place a limit order somewhere between the bid and the ask
price but be aware that if the price of the option moves
away from your limit, your order will not get filled.

The daily volume traded need not be a major concern but the
open interest should be at least 100 contracts so that when
it's time to sell your option you know there will be plenty
of buyers.

One last consideration when deciding what option to buy is
the delta of the option. The Delta is one of five so called
"Greeks" which refer to the components of how an option is
priced. The Delta is the most relevant of the Greeks and
indicates how much the option price will change for every
$1 movement in the underlying stock price. For instance if
you buy a call option in XYZ Company that has a Delta of
0.65 then each time the share price of XYZ moves up a
dollar your option will increase $0.65 in value. Obviously
the higher the Delta the better it is for you but options
with a higher Delta tend to cost more to purchase.

Stay tuned for Key #4 when we will look at how to decide
when to place your trade and how to identify a good entry
point.

US Government required disclaimer: Options involve risk and
are not suitable for all investors. Prior to buying or
selling an option, a person must receive a copy of the
Characteristics and Risks of Standardized Options. Copies
of this document may be obtained from your broker, from any
exchange on which options are traded or by contacting The
Options Clearing Corporation, One North Wacker Dr., Suite
500 Chicago, IL 60606 (1-800-678-4667).

----------------------------------------------------
Roger Cox was born in New Zealand and has lived in Los
Angeles for seven years. He was President of a freight
company at LAX before setting up his own consulting firm.
Roger has successfully traded stock options for over 4
years and teaches other people how to successfully trade at
http://www.prosperitywithoptions.com