Re: I have just started taking a course in how to effectively trade options so I can more easily go both short and long in what I perceive could be a lengthy bear market.
Ken,
I'm really scared of this market also. It just doesn't make any sense to me how some of these stocks can have such high PE's. Should Ebay be worth more than Boeing? At this point, I think the only thing holding the markets up is that the baby boomers didn't save enough for retirement and are now dropping gobs of money into the market. This will continue for some time I think, but I'm not sure if it's enough to continue to support some of these high PE's.
Here's an interesting options strategy to look at. Take a stock like INKT or EXDS. Both are great companies that should benefit over the next few years, but both have a valuation like it was 2005. I think both companies will continue to do great, but I'm not sure about the stocks (especially should we enter a bear market). To reduce risk, you can use options. Say you buy 1000 shares of either company, look at selling at the money january 2003 calls. For EXDS, your purchase price would be about $50,000 but you can sell 10 at the money calls for about $27,000 making you net investment $23,000. If EXDS can stays where it's at, you more than double your money in 2 1/2 years. What's nice about this is that your stock doesn't have to go up, it just has to hold it's value for you to get a double. Also, your shares would be called away in jan 2003 and you would be taking all long term gains at the beginning of the tax year (can't stress how much I love LT gains over ST gains). In the mean time, you've more than doubled your equity position, so you can use this extra equity to sell puts or make a short term trade here or there. The only downside I see is that if you wanted to close your position, you would have the options to deal with. Also, this would be a long commitment. If the stock went up 1000% in the next 2 1/2 years you would miss out. At this point, I'm happy to settle with a play like this. I wouldn't recommend tying up all your money in a strategy like this, but with a small portion of a portfolio it may make sense.
chic |
