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How do you know what to write covered calls on? He looks at a stock and what he feels is its trading range. Using the premise that the market is based on mean reversion, it is going to come back to the centre at some point. We know markets overshoot to the upside and overshoot to the downside. Nobody knows exactly where that number ends. You create something called a mean reversion, it will come back into the middle. Technicians look at moving averages to try to figure out what that is. The options market can give you some insight as well. By taking options on a particular security you can wrap a trade around what you perceive to be the mean reversion. If you believe it is worth a certain figure, you could sell a call option at the top end of the range, and if there is a reasonable price and you really get it right, you can actually reduce the cost of the stock down to the bottom end of the range. You can play that mean reversion game all day long. This strategy should always beat a “buy and hold”. If you apply this methodology across the board on indexes, it actually does work.
If you think interest rates are going to rise at some point later in the year, these things will continue to do well. This is leveraged to a certain sector in the economy, and if that drops, you can suffer. The return you are getting on this is the yield. If you Buy call options on this, that would play out and you do very well. This is a leveraged exposure to a sector that has done very well.
Energy. Feels we will find an alternative to oil, when we run out of oil. Technology will have figured it out at that point. Thinks oil is going to be a worthless asset 20 years from now. If so, then the long-term picture for oil is not good. Saudi Arabia is trying to get what they can get for oil today and build up a sovereign fund. They are putting their money where their mouth is because they are selling the main corporation, which they believe might be worth $1 trillion, which is based on the premise that at some point it will have no value. That means there will continue to be huge supplies coming out of the Middle East and around the world, and we will be sloshed in supply meaning oil prices will stay weak.
A small company worth about $700 million, and they operate about 50 low Earth orbit satellites. If you are in the transportation business, and shipping high value goods and you want to track shipments, this is who you would deal with. They just launched their last 35 satellites. There is lots of risk. However, they have a lot of new business coming on board. A very low cost operator. He is looking for bottom line growth over the next 4-5 years.
Sell: Goldcorp Oct 24 calls at $2.80.
Sell: Goldcorp Oct 24 puts at $2.80.
This had an interesting price today closing at $24. Basically in October you are going to Sell the stock or Buy more. If you buy more, your average cost is going to be around $21. If you believe the thesis that the gold market is experiencing a sector rotation into that space, then very likely it will regress to the mean. If the stock stays the same or goes up, you are going to make $5.60, which is a very good return for 5 months.
Sell: Square Sept 24 calls at $10.
Sell: Square Sept 24 puts at $10.
This just reported on Thursday and missed expectations. You are trading off volatility. He is taking a position in this, which is trading at $10 a share today. If he starts with 100 shares, he is either going to own 200 shares at an average cost of $8.10. If it stays the same or rises, he is going to make 32% of his money over the next 4 months.
(A Top Pick Aug 18/15. 0.00% Return.) He bought the stock a little higher than what it is today, but sold an option which reduced his costs down to $208.52. He also collected dividends on this, which has not been included.