By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2018
February 9, 2018
As we all know, the Friday stock market DOW Jones dipped nearly 700 points. The main reason according to CNBC contributors, it was due to a lack of buyers. Whatever it was, it was good to see a market decline. I have been sitting on a wad of cash, which I have been adding to because I could not find very cheap stocks that I did not already own. At best, I could or would only add to what I knew. I had placed open buy orders on certain ETFs that were well below the market price. At Etrade and Schwab, you can buy certain ETFs and pay no commission. Since my open buy orders are below the market price, my first buys would be for just 5-10 shares. If those orders get filled, I then would look at the situation and put in an order to buy many more shares at a lower level and of course much larger serious volume. The 5-10 share orders are like canaries in a mine. Filling those orders alerts me that stock prices are falling. Just be mentally sure that you want to buy shares at a price you specified because if there is another 700-point drop, you just might get hit and be buying at super low prices.
The current reason stock prices are falling is because interest rates are now trending up. OK, I will buy that thought. Because I felt that the rates would rise, I had sold many of my Closed End Bond Funds and sat on the cash. Sitting on cash is very challenging as I believe that there is always opportunities.
What if stock values decline? My attitude is, so what? As long as my investments are paying dividends and in fact increasing dividends, the stock price means nothing to me. Really? Well, paper wealth is nice and makes me feel smart and good. But the truth is, you can’t spend paper wealth unless you sell the paper, convert to cash and then spend it. Older people worry that they may run out of paper wealth so they don’t turn stocks into cash. They sit on stock. They fret whether the paper wealth is more or less. They tend to buy stocks with no clear objective in mind. To succeed in investing, you need goals for your stocks. Nearly everyone buys a stock and does not say, well, if the stock gets to price X within Y period of time, I would sell the stock and treat myself to something like a vacation, a cruise or buy a new TV or computer. If you are buying a stock for its dividend yield, then just monitor that. The price of the stock is truly secondary. Your yield return is primary as is safety. I really feel for sorry for investors in GE. This great company cut its dividend in 2009 and was removed as an S&P Aristocrat stock. Then over the next few years, it began to again raise its dividend. Then in 2017, there was a huge shakeup in management and President Imelt was out (he should return the money he got because he did not do his job) and the dividend was again reduced. With that happening, paper wealth of shareholders was slaughtered with a drop exceeding 50% in value. As usual, with all of the excitement, I believe that the stock is over sold based on the value of the company itself. I am using the current price as an opportunity to make some money. I would not be surprised to see a $20 market price and I would then exit it in my trading accounts. I had sold out of GE in my investment accounts when the stock went past $30 and because I had sold covered calls and the stock was called away from me. In the stock market, there are similar situations of good companies being mismanaged in stock market history and there will always be more. Since I world travel more extensively, lately on ocean and river cruises, I have less time for stock picking and monitoring. So, my family continues to shift money into certain ETFs. There are ETFs that tend to raise their dividends every year. The best monitor of dividend raising stocks that I have found is issued by firstname.lastname@example.org. It is a newsletter worth its weight in gold. If you want to learn about options, there is no better book the Michael Sincere’s Understanding Options. I have been writing options against positions and cash for 60 years, long before there was an Exchange for option contracts. Writing options and getting premiums is another source for income. If you write covered calls, you must be mentally prepared to sell the stock at the price you agreed to. If you wrote cash covered puts, you must be prepared to buy the stock at the agreed upon price.
By the way, I do not know about Bit Coin or any of the other electric currencies. Also, I don’t want to learn. I have enough work doing what I do know. I do know that there was and is a bubble but I do not get involved in going long or short.
For those of you who are well advanced in option trading, you should try Eric O’Rourke’s site. https://medium.com/@OptionAssassin.
The key to success in writing options is that you must keep yourself protected against the famous “Black Swan” event.
Warren 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.