Another week… another rollercoaster ride for stocks…
And all those ups and downs have investors and traders alike worrying about volatility for the first time since January.
So, for our first Q&A of the day, we give the floor to a feisty reader, who has a strange challenge for our unrepentant market bull – Jason Bodner (Palm Beach Trader)…
Reader question: Hey, Legacy team. Quick question and point of feedback: Is Jason Bodner still bullish on stocks?
Personally, I would be very cautious of going long on anything right now. My remaining stock speculations are very well thought out and 85% composed of commodity and mining stocks. I am prepared to hold them through the crash, due to the inverse relationship of commodities to equities.
I am with Jeff Clark on this one – this baby’s going to crash and burn. I’m already setting up puts going into December and September. Hope we get a little pop up to trap the bulls and get me better prices. I also went long on VIX today, with a call.
Even if there was more life left in this tired bull (and it’s standing on a house of cards) we have black swans circling like sharks on all fronts.
If Jason Bodner is right and we see another six-plus months of sustained upwards stock prices, I will cook one of my socks and eat a bite.
– Brendan V. (Legacy Research member)
Jason’s answer: I totally understand where you’re coming from. Things are quite strange in this current environment, not to mention volatile.
That said, I am still bullish over the long term. To list my reasons why would sound like a broken record, but let’s do it anyway:
More than three-quarters of companies reported a positive earnings surprise in Q1
More than half of companies reported a positive revenue surprise in Q1
Stock buybacks are running at a record pace ($253 billion) through March 15
Global bond yields are still too low to lure income investors away from stocks
What we are experiencing now in terms of uncertainty can be unsettling, but the thing is this… I’ve been around long enough to know that markets get sick from time to time. It’s expected and just how it works. It’s all supply and demand… the news media just fits a narrative around that activity.
The weakness we are seeing right now, to me, is merely a natural pullback after the V-shaped recovery that followed the Q4 downturn.
Will the sell-off persist for some time? It certainly could. But what I’ve found is that markets bob and weave. They tend to head higher over the long run. Which makes sense to me because great businesses grow.
I could probably sit here and list a dozen or more headlines that were unsettling the past three-plus years. It seems there is always something to be afraid of. My feeling on the subject is to look for opportunity through the lens of “markets tend to go up over time.” And think of these temporary market sell-offs as buying opportunities.
I, for one, don’t believe that bull markets die of old age. We are in unprecedented times, for sure. Fear gets swirled around from here to there, but betting against this market has been a bad move from my perspective. Do I always get it right? No. Does the mainstream media always get it right? Definitely not.
What I do know is that when the trade war nonsense gets resolved, we should see a big jump in the market.
Until that time comes, there will likely be some more uncertainty. But if we are talking six-plus months out… my bet is bullish. I don’t foresee a crash.
So you might want to watch this video on how to eat a cooked sock. It should come in handy when the market proves me right.
For our next Q&A… another reader with volatility on the brain. He wants answers from master trader Jeff Clark (Delta Report, Delta Direct, Jeff Clark Trader, and Market Minute). And we know why…
Jeff watches and understands short-term market movements better than anyone else we know…
Reader question: Dear Jeff, making money on the option trades you suggest has been a wonderful benefit of reading your newsletters. Applying your technical analysis to the rest of my investing has been even more profitable.
Your material is the first thing I read every day the market is open. I can’t thank you enough for the insights you provide. But there’s one thing I’m unclear on.
I have often read that the price of puts goes up as the VIX rises. I have never read what happens to the price of calls as the VIX rises. Do the prices for calls rise or fall with the VIX?
– Ray D. (Legacy Research member)
Jeff’s answer: Hi, Ray. Thank you for the nice comments.
As the CBOE Volatility Index (VIX) rises, the cost of both puts and call options increases. As the VIX declines, the prices of puts and calls decline, as well.
Traders should remember this as they implement option strategies when the VIX is at extreme levels.
In general, you want to be a buyer of options when the VIX is low and option premiums are relatively cheap. And, you want to be a seller of options when the VIX is high and premiums are expensive.
For example, last Monday, as the S&P 500 was tumbling all the way down to the 2800 level, the Volatility Index was spiking above 22. I was looking for a way to profit on a rebound in the market.
The choice was between buying call options on SPY – the S&P 500 ETF – or selling uncovered put options. Since the VIX was elevated, option premiums were relatively expensive. So, the better, higher-probability trade was to sell uncovered puts. The puts would lose value as the broad stock market bounced higher AND they’d lose value as the VIX dropped back down to a more normal level.
And, that’s exactly what happened. As a result, the SPY put options lost value faster than the equivalent SPY call options gained value. Traders would have earned a larger profit by selling the uncovered puts.
Before we move on to the next Q&A, I have to agree with reader Ray above… Jeff’s Market Minute is the first thing I read in the mornings.
And, if I’m being completely honest… every time my phone alerts me to one of Jeff’s Delta Direct updates, I stop whatever I’m doing to read it. I’ve even pulled off the road and parked my car so I could read Jeff’s latest.
Switching over to another Jeff…
A question about the Long-Term Stock Exchange for Silicon Valley insider Jeff Brown (Exponential Tech Investor, The Near Future Report, and The Bleeding Edge)…
If you missed The Bleeding Edge issue where Jeff told readers all about this new stock exchange… you can catch up here.
Reader question: How would this new exchange affect our investments in the Exponential Tech Investor newsletter if it should come to fruition? How would it affect our Nasdaq holdings?
– Mark A. (Legacy Research member)
Jeff’s answer: There is no impact at all to our current portfolio holdings.
Even if one of the current portfolio companies decided to switch from the Nasdaq to the Long-Term Stock Exchange (LTSE), no action would be required by investors. Online brokerages manage the access to all major equity exchanges, so investors would still see the stock in their brokerage account.
In theory, the effect of the LTSE on company stock prices should be less volatility. The desire of the LTSE is to have investors with a long-term investment strategy, not “fast money” looking to trade in and out of positions. In practice, we’ll have to see how the exchange develops.
Moving on…
Buying and selling stock warrants is one of the newest investing strategies at Legacy Research. And E.B. Tucker (Strategic Trader, Strategic Investor) is on the case to walk a confused reader through the process…
Reader question: I recently became a Casey Platinum member and have one question. You tell us how to buy warrants, but how do I exercise them when the time comes? Am I able to do it on Fidelity by myself, or do I need to get a physical being to do it for me? Just want to be prepared for when the time comes. Thank you.
– Dylan R. (Legacy Research member)
E.B.’s answer: Thanks for the question, Dylan.
One of the most powerful features of warrants is their long time to expiration. If a warrant expires in 2023, that gives the holder four years of exposure to big gains without forking over a pile of cash to own the actual stock. You are correct that when 2023 comes, you have to exercise the warrant or it expires. That’s where we come in.
There are two ways to capture the value of an expiring warrant. One is to exercise the warrant. The other is to sell it back into the open market.
Exercising means your broker would wire money from your account directly to the company to purchase the shares you’re entitled to as a warrant holder. Say you have 100 warrants with a strike price of $20 on a stock that’s trading for $40. Your broker would wire the issuing company $2,000. The company would issue you 100 shares of stock. You’d see the stock show up in your account shortly after. That stock would be worth $4,000. You could keep it or sell it as soon as it hits your account.
The other option for capturing the value of an expiring warrant is to sell it back into the market. This is almost always the easiest option. Take the previous case, for example. Instead of having your broker wire the $2,000 to the issuing company, you may be able to sell the soon-to-expire warrants for just under $2,000. If the difference is negligible, this is the way to go. Large investment funds tend to stand by ready to purchase warrants for pennies less than fair value. By gathering millions of pennies, they exercise with the underlying company and collect the difference. This usually isn’t worth the effort for small investors.
Keep in mind, we monitor every open warrant position in our Strategic Trader portfolio. We track what it’s worth and how that compares to the current market value. As a warrant approaches the end of its trading life, we will most certainly alert you when it’s time to sell or exercise it to capture a profit.
Well, that’s it for our biggest mailbag edition to date. Hope you enjoyed it.
Have a nice weekend.
Regards,
 |
James Wells
Director
P.S. There are only a few days left to secure your spot at the 2019 Legacy Investment Summit for hundreds of dollars off the standard ticket price.
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