All options are on the table! WOOOT!!!! But what do I mean by that? As those of you who’ve been following my adventures in the stock market know, I’m currently very cautious when it comes to the market overall. To be clear, I actually think it will make new highs from here, so I’m not calling ‘the top’ or anything. I don’t claim to be that good.
Within the last several weeks I’ve sold most of my stock (for some very good profit), and I’m about 75% in cash. But here’s the thing, there are companies out there that I like, that are close to levels where I’d like to start a position. But what if it turns out that I’m right, and the market has a large correction sometime in the next 12 months? Well then, I’ll just buy MORE as they go down. It’s been working for me so far. But what about an additional strategy?
Via put options on stocks that I believe are overvalued, I can profit from their decline. (Here’s an Investopedia article about the basics of options.) I can buy significantly out of the money put options that are good for ‘long’ periods, even over 12 months. If I’m right, I can make a significant amount of money by only investing a small amount upfront.
If the market tanks, these options could potentially act as a hedge against going long in the stocks I’m considering buying. If the market moves sideways, it’ll just be good old-fashion stockpicking: what am I ‘long’ versus what am I ‘short’? If the market keeps going up… well, I don’t plan on spending a ton on options, but I’ll likely lose most, if not all, of the option investments.
The GOOD: Options are relatively cheap versus the number of shares they can ‘control’. Some big money is possible using only a small investment. Shorting stocks directly is dangerous and I don’t ever plan to try it, while options only risk the amount of money invested.
The BAD: You have to be right with your timing to make money in options, even long term ones. Options lose money over time, all else being equal. Why invest in something like that? Am I THAT good?
The UGLY: What if I’m just getting cocky because of my market trouncing performance so far? What if I’m getting too fancy, too big for my britches? Options, hedges… etc. I’m just an amateur, what am I doing playing with options? I could lose my shirt. Shouldn’t I simply stick with what I’ve been good at so far? I could blow 10% of my portfolio on options that expire worthless, and still be beating the heck out of the market… but should I take the risk?
I’ll admit that when I use terms like ‘hedging’, I start to think I’ve read too many investment books. (It’s a favorite pastime of mine) So I’m aware of the vast potential for hubris here. I plan on fighting these propensities by remaining small in the options game, and not be in a hurry. I don’t think the market is going to crash tomorrow, so I can take my time. I am fully aware that options are high risk, and most people who buy out of the money options tend to regret it. I could very well end up being one of those people, but I’m planning on giving it a try with a small amount of money.
What companies do I feel have the potential to become overvalued if the market pulls them significantly higher? I’m thinking about some of the companies I’ve made money on in the past.
Energy Transfer Equity (NYSE: ETE) was good to me on the long side, with a 222% gain over 7 months. I sold it last month, and am happy I did. If it shot up to the mid $20’s I might buy some puts. It’s had a GREAT run, but the dividend is far from assured.
Ambarella Inc. (NASDAQ: AMBA) was a good investment as well, up 70% over about the same time period as ETE. I still like the company long term, but if it shot way up from here I’d consider some puts. But then, if it tanked from here I’d be a buyer.
I haven’t talked about Mattel Inc. (NASDAQ: MAT) in awhile. It was good for a 43% gain when I sold it in February after holding it about 6 months. It hasn’t done much since, but the valuation seems high, in my opinion. The dividend is far from assured, and any stumble in the turnaround story could send the stock down. A rally on little news might be a good opportunity to take the other side.
Simply because I’ve sold these companies doesn’t mean that I’ve stopped following them. At some point I hope to buy them again at lower levels, but now I’m considering expanding the tools at my disposal. At this point these are just some ideas I’m kicking around, not hard plans, but you can see my thinking. As I stated above, I believe the market is headed higher in the very near term, despite the negativity of the past several trading days. If I’m right, that might be the perfect time to try my hand at puts.
As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.
Michael, the Stock Picking Bartender,