Is This A Bounce...Or Something More?
The current environment is for traders only.
We are starting to see indications things might be picking up.
Sometimes, the "short term" bounce turns into the "long term"
move. Sometimes it doesn't. So stay tuned. And check the hotline
for updates, as it's updated every few days. It's a toll free
call and available 24-7.
Remember that the market is currently on defense, so the name of
the game right now is...
Principal Preservation!
What's on my list of "things to do" right now is to have a
shopping list ready to go. When we go back on offense, it's no
time for dawdling. I'm finalizing this shopping list right now.
In a retirement account, like a 401k, a deferred comp plan or
403b account, the current order is safety-safety-safety. That
will change as soon as the light changes to green.
Outside of a retirement account, there is an easy way to "dip a
toe in the pool," which is about all we SHOULD do now. Buying
the deep in-the-money calls is a way to get the big toe wet.
What's a deep in-the-money call? As an example XYZ stock is
trading at $63. A deep in-the-money call would be calls with a
strike price of $50, or say $55. The $55 calls should be priced
around $8, plus a premium for the amount of time left until
expiration.
By getting in with $8 instead of $63, we keep more money on the
sidelines, which is exactly what we want to do in defensive
times. And you can get a lot of mileage by only investing small
amounts in this approach and keeping the bulk of your assets in
cash, out of harms way.
But it HAS to be deep in-the-money calls. Speculators will buy
calls at (or sometimes, even above!) where the stock is trading.
For example, if XYZ stock is trading at $65, they'd buy the 65
calls. This is because they're usually the cheapest priced
options.
This is NOT what we want!
Deep "in-the-money" calls can often move in tandem with the
underlying stock. Sometimes they will match, point for point,
the move in the stock. Let me explain why this really matters.
Subconsciously, when many folks buy a stock, they think they'll
own that stock for a long time. But we're on defense. So we may
need to exit an idea quickly. If this happens, and we are
holding a stock, we might hesitate about selling. Our
subconscious may be telling us to "hang in there."
Bad!
In bull markets, you can "hang in there." In a bear market
(like now), there is no TIME for us to "hang in there." It's
either working, or it's not.
Now, if we own a call option (and not a stock) we may be less
inclined to "hang in there" like we could with a stock. Because
if the stock drops to (or below) the strike price of the calls,
the calls will be worthless. This is essentially the same result
we'd get if we were stopped out on a stock.
We need to take this kind of protective approach today because
we don't know when the market will be going back on offense.
Yes, "calls" are options. Options can destroy accounts when they
are used improperly. 100 shares buyers should buy only 1 call.
200 shares, 2 calls. Problems come along when someone who
normally buys 100 shares decides to buy 35 calls (which is the
equivalent of buying 3500 shares of stock). So they're not for
everyone. And, like driving a car (or most other things in
life), if you don't know what you are doing...
You Can Get REALLY Hurt!
But using deep in-the-money calls can create a scenario where
you can invest in several different ideas, all at the same time,
with far less dollars than buying the actual stocks.
Regards, PS Now you know why I'm busy preparing my shopping
list! That's my job. Now, your job is to keep coming up with
these great questions I continue to get. So continue to email
and call. And check the hotline. Back in a few days with another
update.