By Don Fanstone, Member, Kitchener/Waterloo User Group
Option Blog August 9, 2015:
VectorVest advises buying undervalued High VST stocks in a Rising market.
USA: Col. Guard Bearish: MTI .74 Dn/Dn, C/Dn, Do Not Buy
CAN: Col. Guard Bearish: MTI .69 Dn/Dn, C/Dn Do Not Buy
The 50-DMA of the TSX fell below the 200-DMA on July 23rd.
The 50-DMA of the DJI is about to cross below the 200-DMA.
The primary “Up” wave posted last week was a false hope for those of us looking for a change in market direction. Had I followed my own advice and purchased a PUT option on Great West Life through their earnings release, I would have been in a better position than now exists! Even Top Rated Stocks get punished when earnings do not exceed the analysts’ expectations. Everything in life is a lesson and we are doomed to repeat the lesson until we learn the lesson!
Great West Life was severely punished dropping almost 10%, from $37.50 to $34.10.
What would have been the outcome for the four classes of investors this past week?
The Conservative Investor would learn to wait until after the earnings release!
A Conservative Dividend Investor would Buy the stock and collect the dividend.
The Prudent Investor would validate the selling of PUTS to cover this outcome.
A Prudent Investor wanting to own the stock, would sell “At the Money” Puts now, collect the income, and if “Put To” buy the stock, sell covered calls, and collect the dividend.
The Aggressive Investor would be unhappy, sell the stock, grieve his loss, and learn nothing.
An Aggressive Investor would sell “At the Money” Puts now and use the income to buy at the “At the Money” Call Options now. If “Put to”, then likely sell the stock.
The Speculator would be out his Option Costs and move onto another opportunity.
A Speculator would buy relatively inexpensive slightly “In the Money” Call options on Tuesday Aug. 4th, with a one month expiry hoping that a positive EPS report and/or a dividend increase would provide a quick gain.
As reported previously, Linamar (LNR) had fallen from a high of $88.73 to $76.66 and was a potential buy. Earnings will be reported approximately Aug. 7th. Linamar was oversold and popped up $6.00 a share on July 25th. Sometimes caution can cause one to miss an opportunity and sometimes to save you from disaster. On July 6th, Linamar dropped from $82.50 to $73.24, a drop of $9.26. Extreme Volatility.
If you have a yen to be in the market, Buy an At-the-Money Weekly Call and an At-the-Money Weekly Put on the S & P 500 (SPY)
Sells for the Week of August 3rd:
Starbucks (SBUX) 12 January 50 Calls. Held onto a portion of a healthy profit.
While I believe SBUX is a great company with the earnings and the stock price rising steadily; with the market heading down, it’s time to stand aside. There will be another opportunity!
Buys for the Week of Aug. 3rd:
Dollarama (DOL) 8 January 70’s @ $11.40.
This was not a prudent time to make this purchase on the Green Light in the price column. I am comfortable with a January Expiry.
Will Be Revised on a DEW Up Signal.
Valeant (VRX) $335.32 January 280
Dollarama (DOL) $77.85 January 70
Metro (MRU) $35.59 December 32
Loblaw (L) $71.32 January 64
Ritchie Bros (RBA) 35.38 January 30
Can. Tire (CTC.A) $130.39 December 120
Grt. West Life (GWO) $37.04 January 30 (Lowered Strike Price)
Linamar (LNR) $$79.81 January 70
Agrium (AGU) $133.80 January 115
Emera (EMA) $43.62 January 38
Celestica (CLS) $17.52 January 15
DISCLAIMER: Options trading involves risk and is not suitable for everyone. The information contained in this Blog is for education and information purposes only. Example trades should not be considered as recommendations. Options training is strongly recommended before placing any trades. VectorVest offers a basic options course online and occasional intermediate options workshops in Canada each year.
Excellent info as always. Thx for sharing your wisdom and expertise. I really look forward to your posts each week
I’m a bit confused by the final section. With strike prices well below the current share price, does that mean those are Put options to consider selling for income?
Hi Rob:
The strike prices shown for the stocks listed are the option strike prices that have a delta of .80. This indicates that for every dollar the stock goes up in price, the option will rise by approximately $.80. With Call Options being used as an alternate to buying the stock, you need to look for a 6 month time frame to expiry as the option is a depreciating asset as it nears expiry as well as a delta of .80 or better.
Don
yes, I know what you mean….had to cover some BIIB naked puts when it got taken to the woodshed after poor earnings, and options expiration was the same day…..lesson…too risky to have expiration and earnings on the same day.