My wife says it’s genetic: I prefer to complain about what’s gone wrong rather than talk about what’s gone right. That’s why I named my latest book “Hard Knocks: Great Cases I Lost.” Available at Amazon for $9.95.
So for months I’ve been complaining about my losses in Apple options, which added up to about a $44,000 loss. But suddenly Apple shot up well over 100 points, and if it stays between 490 and 525 for the next few months, I will have a profit instead of a loss. Things are looking up.
Do I recommend buying Apple stock, or writing options on it? Absolutely not. It’s become way too volatile. And they make all their money from about 10 products while companies like Amazon have tens of thousands of good products. Instead, if you are bullish on the computer and hi-tech sector, consider an investment in IGV, and ETF (fund) that owns companies in the software industry.
That’s not all that’s happened for the good in the past few weeks. Whirlpool continued its meteoric rise from $55 to over $130. It’s hard to believe that it will go over $140, so it might be time to write a call spread on it now. More on that below.
National Testing, which I’ve owned for years at purchase prices of anywhere from $4 to $16, announced a sale and the stock went up to $22. I sold.
The Japan ETF continues to go up, and I’m holding on for the long term. But I got tired of holding the Brazil ETF. When they discovered a big oil and gas field there I thought it would boost the economy. But the corruption factor is greater than I anticipated, and I’m tired of waiting, so I sold it and took a small loss.
Most of my holdings have gone up, and are still up in spite of the recent slight decline in the market. The two major exceptions are gold and copper. They remain in loss territory, but I remain confident of an eventual cycle bringing them back. According to the experts, that will not be soon. One major European bank predicts gold to hover between $1,475 and $1,525 from now throughout 2015 because experts are not now in fear of inflation. But my thinking is that while that might be the averages, some catastrophe will happen that will cause gold prices to skyrocket for a short period of time, at which time I’ll sell. Meanwhile I am writing calls against my holding in GDX so I am getting a return on my investment.
So what do I think one should buy right now? Probably nothing. I think the market is pretty high at the moment, and while it might go up a bit, it is more likely to take a small hit before it starts back up. When I feel that way what I do is write call spreads on the stocks I own, and also on the S&P 500 index.
What is a call spread? The best way for you to learn about it is to read up on it, on sites such as the one I run called DoubleYourYield.com. It’s not easy to explain in the paltry little space my editor gives me every two weeks. But the essence of it is to sell a contract at a price above the current market price, higher than you think the index price is likely to go during, say, a 60-day period. When you sell that contract you agree to deliver the stock at that outrageously high price if it goes above the agreed price. If that happens, you have to buy the stock at that high price to deliver it at the contract price, which might be lower than the current market price. In other words, you might have to buy high, sell low.
To limit your risk of losing too much money, when you sell the call at the price beyond what you think the index will go to, you buy a call at an even higher price. Then you cannot lose more than the difference between the two prices, less the premium received.
Yes it’s a bit complicated the first time, but it’s like riding a bicycle; after you do it a couple of times it begins to come naturally. And it’s what the big funds do when they think the market is oversold.
I don’t necessarily think the market is oversold today, but I don’t see a lot of room on the upside for the moment. And remember, October is coming up soon and that’s a month that often has great volatility.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.