A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Rules for writing options and cash-covered puts. He doesn't do put-writing. Clients understand covered calls: buy the stock, sell the option, get the premium in the next day. Most clients don't understand puts, and he'd rather his clients understand what he's doing. As a do-it-yourselfer, go ahead. Beware that the great failure of do-it-yourself put-writers is that they leverage everything. You're supposed to have the same risk with put writing as you do with covered calls, but most people don't do that. The risk is that you'll have several stocks put to you that you didn't really want to hold. Several different methodologies for where to write the calls. For example, one or two standard deviations above the strike price. His preference is to go out a few (4-6) months and try to get as close to the strike price that you can to maximize the amount of option premium you receive. He doesn't do them much anymore, as they're awkward to deal with. BMO and Harvest provide very good covered calls, and he's happy to use their products. Though expensive, these products add value.
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COMMENT
Navigating turbulent markets. His business model and methodology are built for these times. He does well in bull markets, but also in bear markets that have some volatility. He has stock portfolios, but also hedges which are made up of short equity indices. It involves a lot more active management. When the market starts to roll over, he throttles up the short equity indices overlay. When there's a breather with a rally, he throttles it down. He feels for those investors who participate from the long side only. You need those tools to protect your investment and profit from the volatility and bear markets.
COMMENT
Advice during volatility? Active management. Usually this means you need some professionals to help pick stocks and protect what you have. It's a fact that 85% of the time, markets go up. But when you enter a market where indices are down 20% despite intermittent rallies, you need to be able to go long but also short the market. He does this using equity indices, and they become a barometer of the market. For example, only 10 days ago, he had his hedge up to about 90%. Yesterday, it was down to 30%, but today it's back up to about 80%.
COMMENT
Factors for put options besides unprofitability and high PE ratios. You have to be very vigilant. If you trade options against stock positions you currently own or want to own, you have to pay attention. If they're calls or puts, roll them up and don't let it go through the strike because it can become ineffective and expensive. Requires active management when it comes to single stock options. He does it regularly when it comes to the total portfolio, using equity futures on his hedge. Once the short equity indices position exceeds 50% of the notional value of the portfolio, that's when he starts to use options. You never know how long a trend will play out in the market. So options allow you to define the cost that you're going to use for risk management. He'd recommend using the technical side, such as moving averages and RSI, to manage the market. The last 10 years has been an investing market. Last year, everything changed. Interest rates, Ukraine, lockdowns. Now it's a trading market, and you have to respect that.
COMMENT
Tech on the verge of a rebound? Not yet. It's a bear market, but you can still make money. He has a solid tech portfolio of 28 names that he loves, with 45-75% upside. But you have to defend that with the hedge. He wouldn't short these individual stocks. It doesn't mean you can't have a bear market rally. In March, the market rose 16% in 2 weeks. We won't have a bear market rally until there's certainty on whether central banks can control inflation back to neutral territory.
COMMENT
Outlook for cybersecurity. The sector will continue to grow. But it's still a trading market right now, not an investing market. Revenue growth rates extending for 3-5 years from at least 25% and a lot of them into 35%, tremendous margins. But as a result, it becomes a crowded trade. Scale in, scale out. Write covered calls to generate income.
COMMENT
I know what you're thinking: Why not sell everything and come back when this meltdown ends? Answer: We don't know when the selling ends and the opportunity begins? He's seen dozens of these sellings like today. Experience says it's very hard to time the bottom. He kept accumulating wealth by never stopping his investing--he reinvested dividends and bought when markets were down....The Fed has a daunting job to crush inflation with interest rate hikes, but Powell needs to get more aggressive. Consumer spending needs to decline.
COMMENT
Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. The biggest market rallies occur during bear markets. It could be bargain-hunters, asset allocation shifts, or short covering. Some stocks will double once this market truly pivots. Would like to see a rally that lasts more than one day, and a market where there are not 3% swings, daily. Unlock Premium - Try 5i Free
COMMENT
It's difficult to call the market short-term, though many S&P companies have reported well with earnings up 4-5% YOY. There's sometimes a disconnect between a company report to the market reaction, like Home Depot's positive report this morning with a strong backlog; HD shares opened sharply but have fallen. Investors are thinking/worried of the macro. She owns income and growth stocks. Utilities and pipelines pay dividends and she likes companies making profits, can access capital (to acquire) and therefore offer real growth.
COMMENT
There are many issues with the market but the one getting the most attention is inflation. It is the most in 40 years creating the fear of a deep recession since the Fed. will raise rates aggressively. Fears are slightly overblown especially on the inflation front. Half of the CPI is composed of three major parts: shelter, energy and food. House prices, 1/3 of the CPI, have peaked and are turning down. Energy is up by 40%. It tends to shoot up right away with Geo-political situations and then not go much higher. Food prices are related to energy prices so if energy prices go down so do food prices.. The worst of the price increases are probably behind us. Also prices don't have to go down for inflation to go down. If they stay where they are, inflation will come down but it takes time. Growth stocks are way down but in many cases the fundamentals are the same or better so there are opportunities. However stay away from non-profitable tech companies that were high flyers and peaked last year.
COMMENT
Billy Kawasaki’s Insights - Billy’s most-liked answers from 5i Research. Most bubbles have already popped; cryptos, EVs, SPACs. Other than some of the biggest companies, we have seen small cap and mid cap growth stocks simply devastated. Yet, earnings estimates are moving up (contradicting some of the article comments) and corporate balance sheets are in very good shape vs other cycles. There are 11M jobs available in the US. Everyone is negative, yet the things that count: earnings, jobs and interest rates, are not necessarily that bad. Rates are rising, and inflation is a concern. But at some point, inflation peaks. It may peak faster with a China slowdown and a possible recession. Unlock Premium - Try 5i Free
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