Market Timing: A Futile Endeavor
In 2013 the market barely went down. Under-invested traders prayed for a sell-off in order to put cash to work. 2014 has been mostly negative so far. Now that many stocks have fallen from lofty levels those same investors are hesitant to buy fearing things could get even worse.
They were paralyzed by the unrelenting move up last year fearing getting in at the top. Now they are frozen like ‘deer in the headlights’ worrying about getting in just as the trend turns ugly.
That is the problem with trying to time the market. No matter what you do it can be wrong.
Selling long-term (often called LEAP) puts on stocks you’d like to own is a great technique to establish positions, or simply make profits, without the need to have prescient timing.
High-quality stocks are not immune to market declines. They are less likely to crater, though, than speculative issues. You can identify good names by checking their financial strengths and long term stock price growth ratings. Two that look superior in these regards are Franklin Resources (BEN) and Berkshire Hathaway Cl. B (BRK.B).
Both BEN and BRK.B appear to be reasonably priced already based on comparisons with their own historical valuation metrics. Selling January 2016, puts allows for a nice margin of safety even if they have not yet finished going down.
Our Put Writing Portfolio booked a $1,941 profit one week ago on Franklin Resources as our three previously shorted contracts of the BEN Jan. 18, 2014, $50 puts expired worthless.
BEN touched almost $59 quite recently. Friday morning saw the shares back down to $54.72. Market Shadows sold two contracts of the Jan. 15, 2016 $55 puts @ $8.00 per share.
Our best case scenario will see us pocket the $1,600 proceeds without having to buy any shares. We must stand ready to purchase 200 BEN shares at a net cost of $47 per share ($55 strike price – $8 put premium).
BRK.B peaked not long ago at $119.38. With baby Berkshire down @ $112.79 again, we sold one contract of the Jan. 15, 2016, $110 put @ $9.00 per share.
If the stock cooperates and the put expires worthless we will keep the $900. If not, we need to be willing to own 100 shares at a net cost of $101 ($110 strike – $9 put premium).
I expect both these companies will be worth more two years from now than they are today. Either we will buy cheaply or we’ll get paid for insuring somebody else against declines that may, or may not, actually take place between now and early 2016.
We are prepared to live with either result.
Check out the details of all Market Shadows’ closed-out and current option positions by clicking here.
