With all the terror in the markets it’s hard to find a safe haven.
I am putting out these trade ideas with one overriding concern – if the whole world goes to hell in a handbasket and banks start collapsing and all you have is some puts on some computer system somewhere – will you even end up getting paid? With that in mind, here are some ideas that allow you to put money into some stocks with fairly high degrees of safety:
GLD – We like GLD but we don’t trust gold not to collapse with everything else. In a total economic meltdown, gold can go well over $1,000 but, in a depression, it can also go back to $250. The nice thing about the ETF is you don’t have to carry all that heavy gold around. You can buy the ETF for $82.33 and also buy the 2010 $145 puts for $64. This costs you net $146.33 but you know that you can force someone to buy your stock from you for $145 anytime before Jan 15th 2010. That means that, over the next 15 months, you need to sell $1.33 worth of options to break even on this trade. If you want to make 10% on your money, then you want to sell about $1 worth of premium per month. You can get started this month by selling the Oct $73 puts for $0.80 (gold would have to dip $100, below $730 for the caller to go in the money) and you can sell the $93 calls for 0.90 (gold would have to gain $100 by the 17th). Each of these sold contracts should have a 50% stop loss on them – since you won’t lose both sides at the same time, it’s reasonable to expect you won’t get too burned and if you have to take out one end, you can take out the other as well and wait for things to stabilize before selling again. At $1.70 in net sales, if you get away clean in 10 of the 15 months you have ahead of you, that’s $17 returned on your $146 investment or 11.6% over 15 months, better than a CD and, if gold goes to $2,000, the fact that you have a put wouldn’t stop you from having the upside of owning the stock. That’s why I like this one, it’s the ultimate inflation hedge.
By the way, these are safer ways to play, you can be more aggressive and target closer strikes for much more money but that sacrifices protection and, in this market, the protection is king! I suppose on GLD I would sell the $88s for $1.80 and the $78 puts for $1.90 as I’m a little bullish but think it will be hard to retake $900 and, of course if we get close I could do a roll like the roll from the $80s, now $5 to the Nov $84s at $5.15. If I have a reasonable expectaion of being able to roll my caller up $4 per month and I have 15 months to sell, it means I can probably withstand a $60 rise in GLD as long as it doesn’t hit me $10 in one month. It’s very much the same logic as the butterflies – We don’t care which way it goes, we just want the premium!
So gold is the world going to hell in a handbasket play but these plays are better with dividend paying stocks. Of course the caveat there is the dividends might die with the economy but then we are back to playing the premium game and we’re good at that so not a bad worst case.
GE is now officially crazy cheap at $22.15 with a 5% dividend. Sometimes you get a good deal as sentiment is GE is not that likely to go lower and the March $22 puts are only $3.25 while you can sell the March $22 calls for $3.15. That puts you in the stock for for net $22.25 with a .31 dividend expected in Dec and Feb, which is a 2.7% return plus whatever residual value your put has left in February (assuming you are comfortable that you will be called away at $22). Alternatively, you can buy the stock and the 2010 $35 puts for $13.97, putting you in for $36.12 with a guaranteed sale at $35. You’ll get your 5% dividend, which already pays for the put premium so now your job is to sell puts and calls for a proft. If we want to make 10% then we need to sell about .35 a month in options, that won’t be hard…. Nov $17.50 puts are .79 and Nov $27 calls are .54, that’s $1.33 right there. If we don’t get stopped out of those sales, that’s 3.7% in just 7 weeks.
Don’t forget things are super-volatile right now so it may be best to sell your puts while things are racing down and sell your calls while things are racing up. Always keep in mind that, if you enter this play at $36.12, you can lose no more than $1.12 no matter what happens so there is no pressure for you to sell anything until you feel secure in your target ranges.
KMP is an old favorite Sage and I wrote about close to 2 years ago regarding this strategy. After 20 months, I’m proud to say the stock is within 63 cents of our target price on that play. KMP currently pays a 7.6% dividend with the stock at $50.63 and March $60 puts are $11.50, a $2 premium to make up. This is easy with KMP because the Nov $57.50 calls can be sold for .50 and, if those calls go in the money, you are very likely to have a positive total value to the play as even the March $47.50 puts are $3.45. That means if you get called away at $57.50 and you have $3.45 left on the puts and the .50 you got from the caller, that’s net $61.45 back on the $62.13 initial investment. There is a $1 dividend expected in October and January and, if all goes well you simply roll the puts back to 2010 in March and line yourself up for more collections.
