How low can we go?
If 2,850 is our Must Hold Level (below which we are bearish – and for good reason apparently!), then 20% below that is the bottom of our range and that's 2,280 and the S&P 500 bottomed out at 2,350 yesterday so we're not quite there though we certainly attacked it with a running start as the index fell 325 points (12%) on heavy volume.
As I noted yesterday, while this is now close to 40% from the top, we had no business being at 3,400 in the first place so stop thinking we're going to bounce back to there – that would be silly. It's a lot more likely that 2,850 becomes the top of the new trading range and 2,280 should be the bottom but we're in panic mode now and the selling volume is still overwhelming the buying interest so we could go quite a bit lower – but it's going to be a great buying opportunity… at some point.
It's an incredible buying opportunity for people who still have cash to spend but a 40% drop in the market tends to make people very cautious. As I noted last Thursday, as we dipped to 2,480, our prefered way of bottom-fishing is to sell puts, because it puts CASH!!! in our pockets by simply promising to buy stocks for an additional discount – far below where they are trading today.
Since we're back near the bottom of our range (and, keep in mind, things can get worse), why don't we look at some more stocks we'd like to own if the World doesn't end?
?We are staying 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:
- Intel (INTC) – $44.60 is $190Bn in market cap for a company that has made over $20Bn for the past two years. Yes there will be a slowdown this year but this is not a Zombie Apokalypse, this is a virus and, even if it kills millions, that still leaves Billions of people who will still want computers, phones and tablets. Again, we're not looking to buy them for $44.60 but we can sell the 2022 $30 put for $4, which is promising to buy them for net $26 and requires just $463 in margin selling 10 of them for $4,000 in our Long-Term Portfolio (LTP).
See how easy that is – that's a trade. We COLLECT $4,000 for promising to buy INTC for $30 between now and 2022. If it goes below $30, we are obligated to buy but, no matter what, we keep the $4,000 so our net cost on 1,000 shares would be now worse than $26,000, which is 40% below the current price!
- Apple (AAPL) – Is nowhere near cheap enough at $240 as I hear FoxConn, who make IStuff, are testing all 200,000 workers every day but, when one of them tests positive, they have to shut the line down and clean everything and they are doing it over and over and over again because it's way too soon to push all those people back to work. Still, any chance to buy AAPL on sale is something we don't like to pass up and we can sell 5 of the June 2022 $150 puts in the LTP for $14.50 ($7,250) and that net's us in for $135.50, a nice 44% discount off the current price. Margin $1,667.
- Automatic Data Processing (ADP) – You would think people are never going back to work the way ADP is selling off. I doubt revenues will take the hit that is being baked in at the moment but what I find really attractive is that you can sell the 2022 $80 puts for $12 and that nets you infor $68, 43% below the current price so let's sell 10 of those in the LTP for $12,000. Margin $3,163.
- Amazon (AMZN) – Is HIRING 100,000 people because they are being overwhelmed by demand. Very obviously, if people are not leaving their home, they will buy more things on-line and that should be great for Amazon. I would never pay $1,700 for the stock as that's still over 50 times what they earn but I don't mind promising to buy them for $900 by selling the 2022 $900 puts for $47.50. That nets us in for $852.50, 50% off the current price and we can sell 5 of those in the LTP for $23,750. Margin $13,078.
- Caterpillar (CAT) – Is one of our all-time favorites that we always buy when it's on sale and, while $95 is nice, wouldn't $45 be nicer? We can sell 10 of the 2022 $50 puts for $5 ($5,000) in the LTP and those are so far out of the money that the margin is just $1,863.
- Clorox (CLX) – Bleach is one simple way to kill the coronavirus (but don't drink it!) and CLX has gone up, not down during this crisis so not on sale and not cheap but it's a stock we know will be doing well and, because we know how to use options to our advantage, we don't have to pay $175 or even $125. We can promise to buy CLX for $110 and get paid $7.50 for selling 10 of the 2022 $110 puts for $7,500 against $4,944 in margin in our LTP.
- Lockheed Martin (LMT) – Is our Stock of the Century and miles above where we picked it when it was well below $100 but we're happy with any chance to own the company most likely to develop a working fusion reactor and, of course, virus or no, the Military still wants their planes. We can sell the 2022 $160 puts for $16 to net in for $144, 50% off the current price so 5 of those in the LTP nets us $8,000 but, frankly, I'd be happier if this one were assigned to me than expire worthless. Margin $2,483.
- Medtronic (MDT) – Is an old favorite that hasn't been cheap in a long time. They will have a bad quarter or two as all non-emergency surgery is being pushed back to keep beds open for virus victims. Still, it's a fantastic long-term play and we can sell 5 2022 $60 puts for $9 ($4,500) in the LTP to remind us to keep an eye on them as I'd love to add a bull call spread when we find a bottom. Margin $2,028.
- Square (SQ) – Is those little white payment terminals you see in so many retailers these days. It's been a very hot stock and we felt like we missed the rally but now is a great time to jump in as it's more than 50% off it's highs – as if no one will ever shop again. These are the kind of stocks we like – there's no competitor taking them down – just the irrational fear that life will never go back to normal and SQ has over $2Bn in cash and made $375M last year – they can weather a bad quarter or two. We can sell the 2022 $30 puts for $6 and that nets us in for $24, which would be 40% below the current price. Let's sell 5 for $3,000 in our Future is Now Portfolio as this is truly a Stock of the Future. Margin $471.
- Exxon (XOM) – Is a diversified company that refines and sells oil as well as drills it so they still make good money selling gasoline when oil is cheap (it's an ingrediant in gasoline) and $34.50 is about the same as the low they hit after 9/11 and far lower than the $60 they held in 2008 and, both of those times, oil was below $20 a barrel for a while. We can promise to buy 1,000 shares of XOM at net $21.50 by selling 10 2022 $27.50 puts for $6 ($6,000) in the LTP. Margin $753.
That's $81,000 we will be collecting against our promises to buy 10 blue chip stocks for about 40% off their current prices. We have plenty of cash in our Long-Term Portfolio but we're also well-hedged with $200,000 worth of shorts in the Short-Term Portfolio to help cover potential assignments or rising margin requirements (which will happen if the market sinks further). You should never sell puts against stocks that you don't REALLY want to own if they fall to your strike price – a 20% drop in the market can easily cause 100% or more losses in the contracts!
I said last week, if the S&P 500 can't hold 2,500 we are in DEEP TROUBLE yet here we are this morning – not holding 2,400 so far. If we're below 2,400 tomorrow, we're going to have a lesson on hedging!
Be careful out there.
