Tuesday, July 13, 2010

A Practical Solution for an Awful Market

I live this stuff… literally. I eat global economics, drink blue chip stats and breath trading tricks! I can't think of anything more interesting…" – An analyst whose name would no doubt be familiar, overhead at the bar after a conference

"I've been following your comments for a while, especially the prediction of market decline beginning on June 4th, but I'm not sure what you want us small investors to do?

You certainly make us nervous with all the negative assessments. I would appreciate if you could give a bit more advice as to how to position ourselves without having to buy a farm and grow our own food." – A regular reader, pondering what the heck he is supposed to do with all our advice

Our Favorite Obsession

It's just possible that we here at Taipan are overly obsessed with high finance. We really do eat, drink and breathe it each and every day – and sometimes well into the night.

My wife caught me up at our computer quite late on a recent Saturday evening – or perhaps early Sunday morning. When asked what I was doing at such an ungodly hour, I replied that I was perusing the South China Morning Post's coverage of the possible un-pegging of the yuan from the dollar. "Go to bed, fool! The world will still be there when you get up."

Heck, my compadre Justice bragged with some pride at the last quarterly meeting that he has famous trader playing cards, and reads economic reports at the poker table in Las Vegas! Even worse – we all thought that was kind of cool!

When Survival Matters Most

But what if you are not a lifelong devotee of tectonic economic forces? What if you aren't thrilled silly about the "iron condor" we just pulled off? What if you don't really give a fig about Ben Bernanke's 2002 monogram on deflation, or rising London office rates?

What if you are just looking for a way to survive a market that has made a habit of chewing up and spitting out "buy and hold" investors? What the heck are you supposed to do when we tell you (with all too much relish and glee) that "Mr. Market" is sharpening his fork and knife and tucking a napkin under his chin?

There are all sorts of good answers to those questions, and while "growing your own food" is not the worst of them, for some it is hardly practical. I guess it behooves me to take a moment to translate all this elaborate talk into some straight-up usable advice.

What should you do as the stock market rolls over into its next trough?

What Doesn't Work on Wall Street

Once upon a time, you might diversify into a market on the other side of the planet. But now that a million geeks like me are reading the South China Morning Post each day, it's become almost impossible to find a market that is truly "decoupled" from our own troubled little freight train.

I am not a big fan of "going to cash," because I am pretty damn sure that the Wall Street/Washington Axis wants a weaker dollar in the worst way. And since the dollar is pretty much a fiction invented by Washington, I suspect the Axis will have its way. (Heck, I just read a New York Times editorial by Professor Paul Krugman that actually stooped to name calling because Fed Chairman Bernanke wasn't destroying the dollar fast enough for his satisfaction.)

So just burying dollars in a shoebox is off the table. Maybe burying gold might work a tad better, but I have reservations there as well, as the speculators are now involved in that game, and much as happened with top tech stocks for 2011, houses and oil at each of their various speculative tops, we have seen gold take a drubbing lately.

A Practical Proposal for Forcing Triple-Digit Gains Out of an Awful Market

You cannot avoid the troubles coming down the track. But you can, and I believe you should use those troubles to your best advantage via stock and index options.

Since I have been picking on the retail sector a good bit lately, let's start there. I have called for such companies as Kohl's (KSS:NYSE) and Home Depot (HD:NYSE) to get creamed now that consumers have run out of stimulus cash.

I usually don't do this, but just this once, I will tip my hand as to exactly what I have advised my paid readers to buy. Against the former, I suggested KSS October 55 Puts (KSS1016V55). At the time, they could be got for $3.50. As I sit to write, they are trading for $8.30 for a gain of some 137%.

This contract is currently posting a delta of 0.8552. That means that for every buck KSS shares peel off, you can expect to add 85 cents or roughly 10% to this contract. When I glance at KSS' chart, I see no reason why shares won't lose $5, over the next few weeks, which ought to raise these calls to $12.60 or better, for gains of another 48%.

We've had these particular puts on our books for some time now, and they have gotten really rather pricey. In my next column, I will name a retail put option contract that you can pick up less than half that which might double your money over the same stretch.

No comments:

Post a Comment