Down and down we go.
The Futures are off another 5% this morning and that is their limit (like Monday) so it's very likely we're facing another trading halt at the open with a 7% drop in the indexes to start our day. The S&P 500 is already testing the 2,600 line 10% lower than it was at Tuesday's close (2,882)! This is already the bottom of the range I predicted for the S&P last night on Money Talk (part 2 is here). It's also 10% of the 15% that Goldman Sachs said we would fall yesterday – we just didn't think they meant "tomorrow"…
I decided to post part 2 of the interview because, rather than rehash all the doom and gloom you can hear from anyone this morining (I was all alone in my warnings last month) I want to be constructive and talk about all the great things we can buy. I am NOT ready to call a bottom yet – the markets could still drop substantially lower if this virus spreads out of control (as I said above) but, as I also said above – you have to be prepared for a move up as well as a move down though Trump's misadventures in crisis management last night do seem to make down the more likely case.
Still, we added three trade ideas to our Money Talk Portfolio and there are PLENTY of blue chip stocks that are going on sale AND the Volatility Index (VIX) is going to be in the 60s this morning and that makes it a fantastic time to SELL options – especially put contracts on stocks we REALLY want to own if they get cheaper.
We will stay away from banks, insurance and travel stocks as we don't know how bad things will ultimately get and we will keep our entries small on the expectation we very likely may have to roll them or double down on them (or both) if the market drops another 20% but here's the kind of bargains we can engineer for ourselves in this kind of market. Do be aware that margin requirements can jump up as the stock goes lower so you should have the cash available to actually buy these stocks. ThinkOrSwim ordinary margin is noted for each item:
- Boeing (BA) – It's hard to call a bottom on BA but they will be close to $160 this morning and that means we can sell 5 of the 2022 $110 puts for $27.50 ($13,750) in the LTP for just $3,707 in margin. This one could be a rough ride.
- Cisco (CSCO) – Rarely goes on sale and this is a doozy back at $35 this morning. We can sell 10 of the 2022 $25 puts for $3.20 ($3,200) in the LTP to net in for $21.80. $785 margin.
- Hanesbrands (HBI) – HBI is one of our "safety" retailers. They make ordinary underwear, which even people with the flu have been known to wear. Down at $9.50 is impossible to resist as that's $3.5Bn for a company making $600M a year so 7x earnings AND they pay an 0.60 dividend, which is 6% on this price. We don't have to buy them for $9 to collect 0.60 though as we can sell 20 2022 $8 puts for $2.20 ($4,400) in the LTP to net us in for $5.80. $519 margin.
- IBM (IBM) – Our 2019 Stock of the Year is back where we came in in 2018 at around $110 and we can sell 5 2022 $80 puts for $10 ($5,000) in the LTP to net in for $75. $1,206 margin.
- Intel (INTC) – Hasn't been this cheap in a while and $50 is $220Bn in market cap for a company that made $20+Bn in each of the past two years. We can sell 10 of the 2022 $30 puts for $3 ($3,000) in the LTP and net in for $27 – almost half that price. $748 margin.
- 3x Biotech ETF (LABU) – This index is completely falling apart, just caught up in the general selling that's going on in the market. It fell 20% yesterday and another 20% this morning so VERY RISKY to catch this knife at $25 but we can sell 10 2022 $15 puts for $7.50 ($7,500) in the LTP to net us in for $7,500 on 1,000 shares so the risk/reward is pretty good. Margin on that is $607 but we're also going to buy 20 of the 2022 $20 ($15)/$35 ($10) bull call spreads at $5 ($10,000) as that will be net $2,500 on the $30,000 spread with $27,500 (1,100%) upside potential if LABU can get back over $35.
- Plug Power (PLUG) – This was on our "Stocks of the Future" list but it got away from us before we could buy it at $3 and now it's back to $3.15 this morning and we can sell 50 of the 2022 $2.50 puts for $1.10 ($5,500) in the "Stocks of the Future" Portfolio to net us in for just $1.40. $1,369 margin.
- TD Bank (TD) – This is a very solid bank that is not as exposed to the energy sector as other Canadian banks. Testing $40 this morning is under $75Bn for a bank that made $8.5Bn last year and pays a 5% dividend ($2.37) but we're not paying that, we're just going to promise to buy 500 shares by selling 10 2022 $25 puts for $3 ($3,000) in the LTP to net in for $32 if asssigned. $1,834 margin.
- Tenet Healthcare (THC) – One of our biggest winners from last year is back on sale at $19 and it's tempting to back up the truck but we'll just sell 10 of the 2022 $15 puts for $3.50 ($3,500) in the LTP so we can remember to keep an eye on them. $2,090 margin.
- ViacomCBC (VIAC) – They have done nothing but go down and we already have them so not for our portfolio but $18.50 is INSANE as it's $12Bn in market cap for a company that made $3.3Bn last year. If anything, you would think more people will be watching TV as they stay home every night. You can sell 10 2022 $15 puts for $4.50 ($4,500) to net in for $10.50. $743 margin.
That's a good starting set in what will hopefully be a rolling bottom call. Remember, there may be A LOT more pain ahead so these are relatively small entries for our $500,000 Long-Term Portfolio and we're collecting $43,350 in CASH!!! plus we have $27,500 of potential upside in LABU all against just $9,901 in margin and THAT is how we play a crisis!
Keep in mind, however, that margin requirements can go up SUBSTANTIALLY if these stocks drop 20% so you have to REALLY be prepared to own them or else – keep tight stops on your losses. If S&P 500 can't hold 2,500 – we are in DEEP TROUBLE!
Let's hope not…
