With the Dow dropping, as predicted, about 250 points, it’s time to think about buying. Certainly this should be true of Apple stock, which dropped from over $700 to under $600 for a brief moment. A hundred-point drop is worth a look.
As a covered call writer, of course, some of this made money for me. Some of the stocks I’ve mentioned recently are down slightly, but some are up. For example, I’ve been following a test strategy on Bank of America for the past five months, based on holding a long term put at $5, and selling short term puts against that hedge each month. This strategy has been very successful, but I don’t think I can attribute the success completely to the option strategy. BAC has moved up steadily from about $5 to over $9, and that’s what has made the positions profitable. Had I bought the stock at $5 I would have made twice as much money, but that’s option writing.
Another example of a stock that’s remained really hot during the decline is Whirlpool. You might remember my mentioning that I bought some at $55. That position was called away on a call option at $85, at a really nice profit. But the stock has continued to move up toward $95. Yes I thought it was a good stock, but not that good, and I have no idea why it is moving up so strongly.
The housing market ETFs have continued to be good. The Freeport-McMahon gold and copper play has remained pretty flat, but with FCX at $38 during this dip I feel it’s a good purchase. The experts say that the demand for copper is stable, and while China is buying less of it right now, the supply has dwindled considerably so another shortage looms in the future.
Exxon, another of my favorites, has gone up so much I sold off the positions and took the profit. Green Mountain Coffee, where I wrote puts at $20, has shown good strength and, while it might not go back up to $100 a share where it once was, it seems like a solid company and I’ve made a nice profit on the put premiums.
So what’s gone down? Nothing else can compare to Apple’s drop. When the stock was at $690 I sold a put spread that would have made $4,000 for the month if the stock did not decline below $625. But it did, and for a while I had an unrealized loss of $25,000 (after gains of $17,000 earlier in the year). Now the stock has shown some strength and I’m optimistic that it might go back up over $625 before the expiration date on Nov. 16.
Meanwhile, however, when the stock was about $600 I sold five naked puts at $580 and took in a premium of $12,500. I think that Apple is still one of the best companies in the world, and still has a lot of innovative products to come. I’m impressed with their potential for TV and remote speakers controlled by the iPad, and I love the look of the new mini iPad. So if I have to buy the stock at $580 a share I’m OK with that. And if the stock goes up and I just keep the $12,500 premium I’m OK with that as well, and that will also mitigate my loss on the November put spread.
So much for what has happened so far this month. What’s going to happen in the future?
Some are unhappy with the projected increase of 2 percent per year growth. I don’t see why. As long as we are continuing to grow, especially after such a bad period, I think it’s a good sign. And the experts are saying there are lots of good signs.
For one, there is usually a growth spurt right after an election. For another, corporate earnings continue to do well. Third, Europe seems to be coming out of their slump. And forth, China, while not growing as it once did, continues to show signs of activity. So it is very likely that 2013 will be a good year. If the past is any predictor of the future, the market will go up later this year.
And finally we come to the same stock I’ve complained about for the several years that I’ve held it and it hasn’t moved up — Walgreen. It seems like such a good company, with good stores, and new stores opening up all the time. The experts said that I should have bought CVS instead, and based on price for a time, they were right. But, in looking at the data, I’m holding on to my Walgreen. The price-earnings ratio is much lower than CVS, and the dividend is much greater.
On the other hand, I might have to sell it to pay for my Apple stock if that goes below $580 next January.
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.