New Beginning January 2012
Profiting From Volatility
In today's volatile market a buy and hold investor is more accurately described as a buy and hope investor. Volatility can be a bad thing for some option traders but it can also present some spectacular opportunities. Volatility can knock you out of carefully crafted positions and produce expensive losses. However, buying certain stocks after a volatility event sometimes produces an outstanding trade.
Volatility can come from an earnings miss, a guidance warning, broker downgrade, etc or it can come from a sector event where some other stock in the sector falls off the cliff and drags the sector down with it.
Buyouts in the sector, rumors of buyouts or even failed buyouts all produce volatility events that can be used to our advantage. Some recent buyouts in the energy sector included Global Industries (GLBL) and Brigham Exploration (BEXP). Global was an active play in the OilSlick newsletter at the time and we did nicely on the position. There are rumors of buyouts all the time but not every rumor is a trade. Investors have to read between the lines and determine if there is a possibility to profit.
A recent volatility event was the firing of the Yahoo CEO, Carol Bartz. The sharks began swarming as the company was put up for sale. We capitalized on this in the Option Writer newsletter by selling a cash secured $14 put six months out and purchasing a call position six months out using the proceeds received from the put. We actually did it as a net credit transaction where we kept some of the premium in the trade. If somebody does buy Yahoo for the $19-$31 valuation quoted by the analysts we will have a very nice profit. Because we entered the position after the volatility event we insulated ourselves from future volatility.
Another volatility event was the firing of Hewlett Packard's CEO and the hiring of Meg Whitman to rejuvenate the company. In the Option Writer newsletter we sold a $25 put on HPQ four months into the future when Meg Whitman was rumored to be the CEO candidate. We did not trade on the initial dip but waited for a reason to enter the trade and that reason was Meg Whitman. When the stock rallied to $28 six weeks later we closed the position for a very nice gain.
Another recent example was the crushing loss on Green Mountain Coffee (GMCR) when their earnings guidance was disappointing to investors. I felt the sell off was overdone but we waited for an uptick to begin and sold a short put well out of the money for a relatively safe play. Let somebody else suffer from the volatility and we will step in and profit from it.
One last example on how we can maximize gains in the Ultimate Investor. I recommended to readers that we get long Pulte Homes (PHM) back in September in the Option Writer newsletter. It would have been easy enough to just buy the stock at $4 at the time but to enhance the returns I recommended selling a 2013 $7.50 LEAP put and using the proceeds of $3.80 to buy three 2013 $5 LEAP calls and we had nearly a dollar in premium left over. Now we have a free leveraged trade on Pulte with a year left to run and the housing sector should be much improved by then.
All Investing Strategies
Because the plays to be profiled in Ultimate Investor can be from weeks to months in duration the option strategies used will cover all the available investing options. We can do simple long calls and puts, covered calls, simple spreads, cash secured puts, stocks or even futures if the right setup appears. There is no strict focus like we have in some of our other newsletters. This newsletter will focus on making money any way possible with a minimum of risk.
No two plays are alike so we should not be locked into a simple long option strategy. Subscribers don't have to have a big account to utilize these strategies. Some may require the ability to sell a put to maximize the returns but I will attempt to profile the trades in such a way to offer alternatives to a specific recommendation for those without option writing capability.
Frequency of Trades
Because there is no calendar for when a volatility event will occur there will not be a daily newsletter. Recommendations will be made when a low risk investment opportunity appears. There will be a regular update newsletter on the weekend to snapshot the open plays. I expect to profile from 3-5 trades a month. If more appear then we will have more trades. If the market goes dormant then we could go a couple weeks without a new position.
Investing is NOT about trading every day. It is about finding a low risk opportunity and having the capital available to apply to that opportunity. The key is patience and vigilance. We need to be vigilant in watching for opportunities and that takes patience. When days go by without a trade many traders will grow impatient and trade just to be trading. This is not a good strategy. Patience creates profits.
Profiles and Portfolios
Each trade will be tracked in an active portfolio and we will keep score. At any time you will be able to see all the current plays and the portfolio history for the entire year.
Play profiles will be lengthy when needed to explain the play in its entirety and not based purely on a chart. I believe fundamentals matter and they will eventually overcome headlines. We have seen many times lately where headlines trump technicals. Those headlines will give us the volatility events to profit from the fundamentals and the technicals.
You Can't Profit if You Don't Play
My goal for 2013 is to generate $10,000 in gains in the Ultimate Investor portfolio. Actually I would hope for more than that but we don't know how the investing climate for 2013 will play out. We are at the mercy of Europe and that is going to be a long term problem. This makes it even more important for investors to be careful about the entries they make because being over extended in a volatile market can shrink your trading capital.
Subscribe today and we will prosper in 2013 regardless of what the market gives us.