WE ALL SHARE THE CHAIR. HERE’S THE TALE. THE MOOD’S BLURRED. IT FEEL’S JUMPY. HOLDING ON MAKES OUR MINDS WANDER. ARE WE THE NEXT TARGET? BUT EARNINGS SEASON’S OVER. IS THAT TRAFFIC?
ANTS IN THE PANTS MARKETS MAKE PLAYERS CHURLISH. MARKETS ONCE SPEWED CASH. NOW IT’S ALL HAND-WRINGING. WHAT TO DO? INVESTORS PAUSE TO ASK THE QUESTION–PLOW ON OR SEEK “PROTECTION?” WHATEVER THE ANSWER, OPTIONS ARE EAGER TO HELP. WB STILL CALLS EM “WEAPONS OF MASS DESTRUCTION.”
July 2 the 2018 Tour de France rockets out of Noirmoutier near the western seashore. 200 professionals will flow like liquid toward Paris. That’s heavy traffic. It’s a lot like the opening bell. For 23 days and 3 mountain ranges the 2018 tour will snake the French countryside. The tour spins a swell of mania and joy as it streams. The land undulates as the peloton rolls through scads of pin-prick hill villages snugged in along the winding route.
Everywhere the tour rolls riders will be dealing with what’s known as “road furniture.” Road furniture includes concrete medians, traffic circles, crosswalk appliques, sewer lids, crash barrels, detours, construction disruption, signage, poles, etc. Tour organizers attempt to deal with such by what? More signs.
Any one of these obstacles is capable of creating mass damage to the peloton, or main body of riders. Is our market any different? Isn’t that every investors’ chair in the center of traffic? Yes, remember the volatility spike that exploded the private equity bet against volatility?
Private equity’s Bozoic bets against volatility cost everyone. So you’re parked in your chair on Equity Street, when private equity swerves down the lane drunk, sideways, and brainless. That’s like Road furniture for rational investors. The fact is that everything in the market is moving, including our chair.
OPTIONS ARE NOT CREATED EQUAL.
THE “GOOD” CAPTAIN KIRK OF THE OPTIONS WORLD
Most stock options “expire” worthless, except to the broker. Yet it can be a great thing to buy the right stock at the right time at the right price. Arranging the confluence of the three is no simple trick. Calls can help. Buying a call option allows you to “call away” a stock that’s moving your way.
Option Contract Elements
The terms of the deal, set at 100 shares per contract.
The per-share price to be paid if the option is “exercised.”
The price per share multiplied by 100 paid by buyer for option right, but not obligation.
“Days to expiration”–
The time within which a contract may be “exercised,” set in days.
The action taken by option buyer to “call away” activate the deal.
“Stock Replacement Strategy”
WHEN YOU’D RATHER RENT THAN OWN
LIKE “BLOOD DOPING” ONLY LEGAL
Stock replacement strategy can cut risk and improve returns. That’s not reckless. That’s risk management and return on investment. Owning stock involves risk. That’s referred to as “single issue risk.” When you own stock, your risk is equal to your “exposure” or the total number of shares you own.
Not owning shares reduces that risk to zero, as well as your shot at capital appreciation. That’s where options come in.
Buying “in-the-money” calls, instead of stock, reduces risk. Call options cost a small fraction–less money on the line means you risk less. But you still get to buy the stock. What you pay for is control and time, and value if shares rise. But if you’re wrong you lose premium.
SRS is great if you have a strong upward moving stock you want to own for a while. Think Betas over 1.5. Buy time–45 days or more. Buy “in-the-money.” That means buy a call with a strike below the current stock share price.
Savoir details of our experience and mistake with a real world example, Huntsman International.
“SJ Brain-Pill. Stock Replacement Strategy.”
MANY VIEW PUTS AS “INSURANCE” AGAINST DOWNSIDE RISK
Buying puts as downside protection requires luck and timing to be successful. Otherwise the premium is wasted. Trimming the position seems more sound. Selling puts makes no sense. If used as part of a larger 2 or 3 leg option strategy it may make sense.
Yet, complex option strategies are complex, thus complicated by nature. Crafty plays such as these explode in the faces of extremely skilled players on a regular basis. Bets against volatility? Wow. That’s like betting against gravity.