Mean reversion/Winston - That's the crux of the strategy. Pick long-term value stocks, wait for them to go on sale and then ride out the storm. Worst case is we end up "stuck with them" at low prices for the long term. Just be careful with big-ticket stocks as it's harder to "worst case draw an income" if they fall too far below the target range.
If AMGN ($244) falls 40% to $150ish, I don't really want to sell $150 calls or even $150 puts as it's hard to DD at those prices - especially as you move to a 4x position.
HBI, on the other hand, is $14.65 and if they dropped 40% to $9ish, even if I only got $1.30 (the price of the 2022 $20s) for the $15 calls, that's still 15% back on my stock while I wait and 10% back on my original investment on just the call side - I can afford to be patient with that.
That's why I tend to favor lower-priced stocks - unless the high-priced stock is rock-solid like AAPL. Even 400 shares of a $350 stock run you up to $140,000 very fast and, realistically, we have no fun at all starting with 1 contract on anything - so I try not to tie the portfolios up with too many of those.
Homebuilders/1020 - Well I was pounding the table on HOV all year but now they've blasted off and I'm not really sure who's cheap. Not too many people I really like in the sector. I suppose TOL would be my 2nd choice as $39.81 is still just $5.6Bn and they are good for at least $500M to the bottom line
Financial Summary
| Year End 31st Oct | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020E | 2021E | CAGR / Avg |
|---|---|---|---|---|---|---|---|---|---|
|
$m
|
3,912 | 4,171 | 5,170 | 5,815 | 7,143 | 7,224 | 7,271 | 7,612 | 13.1% |
|
$m
|
397 | 447 | 492 | 647 | 786 | 681 | 11.4% | ||
|
$m
|
340 | 363 | 382 | 535 | 748 | 590 | 553 | 605 | 11.7% |
|
$
|
1.84 | 1.97 | 2.18 | 3.17 | 4.62 | 4.03 | 17.0% | ||
|
$
|
1.75 | 1.93 | 2.13 | 3.13 | 4.54 | 4.24 | 3.93 | 4.36 | 19.4% |
|
%
|
+93.2 | +10.2 | +10.6 | +47.1 | +44.9 | -6.56 | -7.47 | +11.1 | |
|
x
|
9.36 | 10.1 | 9.11 | ||||||
|
|
0.911 | ||||||||
As a new play on TOL, for the STP let's:
- Sell 10 TOL 2022 $35 puts for $4 ($4,000)
- Buy 15 TOL 2022 $33 calls for $10.50 ($15,750)
- Sell 15 TOL 2022 $40 calls for $6.50 ($9,750)
That's net $2,000 on the $10,500 spread that's 99% in the money to start!
