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What does covariance mean?
Covariance is a measure of what degree the returns on two assets move in tandem. A positive covariance implies that returns on two assets move together in the same direction, while the opposite is true with negative covariance. In a diversified portfolio, an investor ideally owns securities with negative covariance, so that returns may be smoothed out over time. Continue reading...
What does 'short covering' mean?
When a security is sold “short,” it means that the investor did not own the security, to begin with, and the broker can require that the investor return the shares in what’s known as ‘short covering.’ Covering a short position means to acquire the securities which were sold short, and returning them to the custodian/broker that facilitated the short sale. Imagine a shopkeeper who allows a customer to lock-in a certain price for a widget, even though the shopkeeper does not have the widget in inventory. Continue reading...
What is a short position?
A short position is a sale made by an investor for a security which he or she will deliver to the buyer in the near future, but which he or she is hoping will go down in price in the near future so that a profit can be retained from the price collected in the short sale. A short position is a bearish play on a security which an investor believes will decrease in price in the near future. The investor offers shares for sale, and collects the current market price for the shares from the buyer. Continue reading...
What is a short squeeze?
A short squeeze occurs when many short-sellers attempt to cover their positions at the same time, and it drives prices up rapidly. A short squeeze is a bottleneck situation where many investors who have sold a security short, suddenly become very interested in covering their positions - usually, because the stock starts on a strong uptrend. The squeeze will actually cause the price of the security to rapidly increase, more than it would otherwise, because so much demand has hit the security at once. Continue reading...
What is a short sale?
A short sale is the sale of a security not owned by an investor, which the investor has borrowed from the broker in order to sell. An investor can use his broker to give him the ability to sell shares that he does not have in his inventory. The investor believes that the stock price will be lower in the near future, and will replace the borrowed shares by purchasing them at the (possibly) lower price in the future. Continue reading...
What is a Bear Squeeze?
Investors who were bearish on a stock may have chosen to short-sell shares in the hopes that they could cover at a lower price. Short selling is when a broker facilitates the actions of an investor who wishes to take on the risk of replacing sold shares of a particular stock because he or she believes the price will be lower when he or she replaces the inventory. The broker passes the proceeds of the sale (minus a fee) along to the investor who is taking the risk of replacing the shares, and charges the investor interest or fees as long as the shares are outstanding. Investors need to cover the short before prices go up and it results in a loss for them. Continue reading...
What is short interest?
Short interest is a term used to describe how many short positions are open for a given security or market at a given time. It is often expressed as a percentage of the total securities outstanding and is used for the short interest ratio. This serves as a gauge of bearish market sentiment, since short-sellers are expecting price action to trend downward. The short interest ratio (SIR) provides a context for the quantity of short interest outstanding by stating this amount in relation to the average daily trading volume. Continue reading...
What does “Buy to Close” Mean?
When an investor takes a short position on an option contract by selling (“writing”) a call or put option, he or she is opening a position, which creates more open interest in an underlying security which will be handled by the brokerage house, and this is called “selling to open.” If the price changes in the underlying security in an unfavorable way, the investor will seek to get out of the short position he holds on the options contract before the option’s expiration date. To do so, the investor must buy back the option (or, really, cancel out the position by buying the same kind of contract that he or she previously sold short). Continue reading...
What is a naked call?
A naked call is a type of option contract where the seller of a call does not own the underlying security, thereby exposing them to unlimited risk. Investors have the ability to “write” or sell options contracts as well as to buy them. The seller of a call option has opened a position in which the buyer is given the right to buy 100 shares of a stock at the strike price named in the contract. The seller – along with all other sellers of calls for that security – are the ones who must cover and close the open positions if the call owners exercise their options. Continue reading...
What is a naked put?
A naked put is when a put option contract writer or short-seller does not have the resources (shares of the security) on hand to cover the position if the option is exercised. Put options are contracts between two people who have been put together with the help of an options exchange or clearinghouse.One of them will be the “writer” who sells the put on a certain underlying stock with a certain strike price and expiration date. Continue reading...
What is Stop-Loss Order?
A stop-loss order is appended to a securities position being held long or short, and stipulates that the security is to be sold or bought if the price moves beyond the stop price, at which point the investor seeks to "cut his losses," or limit his potential exposure to losses. A stop-loss order will name a price below the market price on a long position and above the market price on a short position, at which point a sell order will be triggered for the long position and a buy order will be triggered to cover the short position, with the goal being to limit the potential losses to which an investor is exposed. Continue reading...
What is the Dead Cat Bounce (Bearish) Pattern?
The Dead Cat Bounce pattern appears when a security's price falls quickly but has a temporary “v-shaped” recovery before resuming its downward trend. The temporary bounce (from point 2 to point 3) may be explained by shorters covering their positions or buying by investors who think the price has already reached a low point. It is important to wait for the confirmation move, which is when the price breaks below the low where the dead cat bounce occurred (point 2). Continue reading...
What is an Accelerated Share Repurchase?
An Accelerated Share Repurchase (ASR) is a method by which companies can buy back a significant amount of their outstanding shares with the help of an investment bank. By enlisting the help of an investment bank to accelerate a buy-back, a company can cleanly retire a large bulk of shares at once. These agreements have come into use in the last 10 years, and there is of course some variation in their composition. They fall under a category of buybacks known as structured buybacks. Continue reading...
What are Debt Ratios?
Debt ratios give a relative picture of a company’s ability to repay debts, make interest payments, and meet other financial obligations. They generally compare the level of debt in a company to the level of assets. Debt ratios are key for investors and particularly creditors, to determine the overall level of financial risk faced by a company. Debt ratios that increasingly turn unattractive can serve as “canaries in a coal mine” that a company is in danger of bankruptcy or default. There are several types of debt ratios, such as debt-to-equity, debt-to-capital, cash flow to debt, and so on. Continue reading...
What is intraday trading?
Intraday trading means opening and closing a position, or buying and selling (or short-selling and covering) a security within the same trading day. Intraday traders are active during market hours, buying, selling, shorting, and so forth, to capitalize on the movements of the markets during the day, and they primarily trade positions which are opened and closed during the same day. Intraday traders use technical indicators to find inefficiencies or price fluctuations that they believe will correct. Continue reading...
What is a covered call?
A covered call is when the writer or seller of a call option either owns the underlying security, or has a guaranteed way to obtain it. Investors are able to open a position for another investor to take. An example of this would be selling a call option. The seller, or “writer,” of the contract is obligated to fulfill the contractual obligation outlined in the call, namely to deliver 100 shares of the underlying stock to the owner of the call option in exchange for the strike price listed in the call contract. Continue reading...
What is a covered straddle?
A covered straddle is a bullish options strategy, where the investors write the same number of puts and calls with the same expiration and strike price on a security owned by the investor. If an investor owns a stock and is bullish about where it’s price is headed, they may use a covered straddle strategy to provide them the ability to buy more shares at a set price (the call option portion of the straddle) while also giving them the option to sell the security at the same price (the put portion of the straddle). Continue reading...
What Does Medicaid Cover?
Medicaid will cover many things, but it is reserved for those without enough assets to get such care on their own or to pay for other coverage. Some examples of covered services include checkups and childbirth for low income pregnant women, and nursing home care for low-income elderly people with long term care needs. Medicaid covers a very wide range of medical costs, including hospital expenses, visits to the doctor, nursing home expenses, and so on. Continue reading...
What is a Federally Covered Advisor?
The Investment Advisers Supervision Coordination Act of 1996 sought to delegate the responsibility of monitoring investment advisors between the states and the federal government. It amended the Investment Advisors Act of 1940, which required all advisors to register with the SEC. The Dodd-Frank Act further amended the IAA, such that only advisors with assets under management exceeding $100 million had to register with the SEC. The IASC was part of the NSMIA legislation passed in 1996. Up until that point, all advisors were regulated and monitored by the SEC. Continue reading...
What Are Covered Calls and Their Risks?
When it comes to investing, especially in the world of options, understanding risk is paramount. Covered calls are an options strategy that has gained popularity among both new and experienced traders, primarily because they offer a limited risk approach to generating income. In this article, we'll delve into what covered calls are, their benefits, and the risks associated with this strategy. Continue reading...