Home Articles Options Writer Series — Is 2008-09 Going To Revisit Us???

Options Writer Series — Is 2008-09 Going To Revisit Us???


When-a-company-decides-to-buy-its-own-sharesBy Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2014

August 24, 2015

Think about it. A company has say 100 million shares outstanding and the value of the company is based on the stock market price that may have as little as 1 million shares trading in a single day. Is this an opportunity or a forecast of things to come? Normally, stock prices go down when there is panic in the markets and margin calls against speculators forcing them to sell. The way to overcome this is to have a long-term horizon and to watch a company’s fundamentals.  The secret of Warren Buffett’s success is that he buys stocks at what he feels is exceptional value and is willing to hold those shares for 10-20 years. It is interesting that his company pays no dividends but he will not buy any stock that does not pay his company a dividend. Can you imagine the price of GE if the company never paid a dividend? It would be enormous. If AT&T (T) never paid a dividend and kept all of that money it paid out, the stock price could be over $10,000 a share as to value. I would love to see a study done on 10 old-line stocks that have paid dividends as to what would be the price if they kept all of that cash.

My suggestion is that if you like oil stocks, as Barron’s suggested, then my idea that you should sell out of the money put options at low strike prices has come to bear fruit. Even my idea of selling puts on those companies that are benefiting by lower oil prices has happened. You really have to look at the cruise lines. The August 24th issue of Barron’s has a bullish article on Royal Caribbean Cruise Line (RCL). I agree with the analysis but not the buy point they suggest. Rather, I would suggest that you sell a put at 15% below the current price and even then, do not commit all your earmarked money. I expect the stock market to seek a bottom. When there are margin calls, people sell what they can and must sell in order to meet the call for more money. The idea is to look for what you feel are good investments and let the price sink to your buy point. In fact, it is at that strike price that you should sell a put option and take in premium money. Remember that the lower the price goes, the more money you can get for selling a put.

For the long term, I urge readers to look at SDY. The price broke the $75 p[rice on the way down and it certainly could go lower. It might go below $70 and currently the thinking is $65 is an extreme price but certainly in the realm of possibility. This is an ETF (exchange Traded Fund) that consists of stocks that have RAISED their dividend for at least the last 25 years. That means since at least 1990 or earlier, the companies in that fund have raised their dividend every year since then. I remember in 2009 when GE and PFE among others were dropped from the fund. The talk I hear is that CVX (Chevron) may be dropped this year.  My sources are confident that oil will break the $40.00 price and head to the med to low $30s. Yet, the Florida Senator, Nelson, refused to endorse the Keystone Pipeline because the USA may export oil and gas. No wonder Mr. Trump is doing well in the polls. The real estate and jobs in the North Dakota Bakken oil fields are being financially ruined. Did you know that the USA continues to import oil from the Middle East?  I expect the price of gasoline to break below the $2.00 price in many areas.

The stock market price of Carnival Cruise Line (CCL) has pulled back to $48.38. With a 12-month high of $54.05. A 15% pullback gives you a price of $45.94. From an investment point of view, writing puts with a strike price of $45.00 seems like a safe bet. And, if the price goes lower than $45.00 you can look to commit more money as long as oil prices keep declining. Remember, that the cruise lines will make more money as the fuel prices go lower. Carnival Cruise Line is the largest cruise line in the world and there is a huge demand for cruising as this is one of the highest value vacations that one can take. If you haven’t cruised, well, then, you have not lived the good life.

Another safe area of investment is AT&T (T) and Verizon (VZ). They have nothing to do with oil and are a perfect safe haven. Panic and forced selling will make the stock prices go lower but that sets up opportunity. T is an S&P Aristocrat stock having raised tis dividend every year for at least 25 years.

Will the Federal Reserve raise interest rates? I don’t know nor care. If it does, then my cash will get more interest. My closed end muni bond funds will be able to reinvest their money at a higher interest rate and that is good because then they will be able to pay out more in tax-free dividends.

Don’t let the stock market affect your health. Don’t worry. The world is not coming to an end.

aaaaaa pic 2This is a one-year chart on the SDY, courtesy of Yahoo Finance.

warrenkaplan-3Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner.  He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”

Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone.  This article was written for informational purposes only.