For the next few days I am offering my "Twelve Posts of Christmas", sung to the classic English holiday song introduced back in 1780. I am using the holiday season as inspiration to try out new ideas or reassess old ones. We covered the first three days on Wednesday, so here is installment two.
In this Fourth Post of Christmas, my true love sent to me: Four Call (Option) Birds
My favorite call option strategy does not offer as many opportunities now as it did in the 1990s, when volatile tech stocks dominated the scene -- but you can still make money now and then using it. What I look for is companies with generally good long-term stories that blow up suddenly for some likely transient reason, then buy far out-of-the-money, long-dated LEAP (Long-Term Equity AnticiPation Security) call options. This is a low risk/high return bet on the recovery in the stock. The reason you need a blow-up is simple: that is the only way to get strike prices sufficiently far from the current stock price to make the LEAP extremely cheap.
Here is an example of a trade that worked out, so you can see the mechanism. In mid-2012 Apple (AAPL) stock collapsed by over 40%, leaving a trail of LEAP options with strike prices over $100 (all prices adjusted for a subsequent split), even with the stock trading in the $60s. You could buy January 2015 calls with 100+ strikes for literally pennies. As you know, the stock has recovered since then. As it moved in the money, those calls are now worth dollars, creating returns of hundreds of percent. (Obviously, if the stock did not recover, you only lose your premium paid.)
So where is opportunity now? You will hate me for not quite offering specifics yet, but I am digging around the energy complex, and will post some good ideas in the near future for this trade strategy. Some energy-related stocks have been crushed, especially those with shale exposure or in oilfield services, creating the way-out-of-the-money strikes that make the strategy effective. For example, Continental Resources (CLR) is down over 50% in the past six months. Will oil prices be in the $50s three years hence? My guess is probably not, and many of the leaders will rebound. Stay tuned for more ideas in this category soon....
In this Fifth Post of Christmas, my true love sent to me: Five Gold Rings
Gold. The barbarous relic, or the only "real" money on planet Earth (until Bitcoin replaces it?) I have been a gold fan for some time, as I expected substantial inflation in the wake of aggressive central bank money printing. Well, when the facts change, I change my mind. What do you do, sir? My call now is a stronger dollar as central bank policies diverge. A dollar of higher value means gold is going nowhere. I have peeled off some of my SPDR Gold Shares (GLD) holdings, and will work out of more over time. I never held it as an investment, rather as a currency substitute, but for now I think the good old greenback will be OK. I am not a gold hater, just lost interest for the moment.
In this Sixth Post of Christmas, my true love sent to me: Six Geese-a-Laying
When we talk about "a-laying", we are talking about eggs. In the stock market, one name that has not "laid an egg" is Cal-Maine Foods (CALM). This $2 billion market cap company is a pure play on egg distribution. The stock has been on a tear, as the food and agriculture sector shows steady demand and robust pricing. The stock is reasonably valued at 13x the May 2015 fiscal year estimate, and definitely underfollowed, with the only major broker covering it being Stephens (and the analyst that covered it just left!). The company will report earnings next Tuesday, so check out the report and, if strength continues, CALM may be a calm port in a market storm going into 2015.
Now that we have that out of the way, enjoy this last shopping weekend before Christmas. My on-the-ground research suggests that the season is coming in soft: I was in Chicago all week and was shocked by the lack of crowds everywhere -- stores, popular restaurants, etc. Many workers were telling us things were pretty slow ... except the folks at the Best Buy (BBY) on North Michigan Avenue, who said they had a huge Black Friday and were ahead of plan so far (for that location only). The wildcard is how much commerce is being lost to online shopping, versus simply being lost. The next few days will tell. Get out there and shop!
At the time of publication, Gary Dvorchak was long BBY, GLD.