By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2012
June 4, 2012
In terms of US dollars, the price of oil is falling and I would expect it to continue to fall. Why? Well, oil is quoted worldwide in US dollars. The Euro has been getting weak against the US dollar. Hence, if oil continued to trade at $110 a barrel, then in terms of the Euro, the price for gasoline would go through the roof. That would only make a bad situation in Europe, much worse. So much worse as to cause social unrest as we have seen in Greece. So, a solution is to lower the oil price in dollar terms so that it has a less impact on the Euro. Currently, oil is down 22.73% and the Euro is off 8.13% from its recent dollar price. Hence, oil is actually cheaper in Europe than it has been.
What to expect in the future? Well, it would not surprise me to see oil go down to $70 a barrel. The oil stocks should go down too and may exaggerate the lower oil price. If you can keep your cool and not panic, you should be putting in GTC orders on your favorite oil stocks at a price well below the current price. One-way to do this is to use put options. You can put in a put order to on Exxon (XOM) for January 2013 at $60 and seek a premium of $2.70. Currently XOM is $78.63 and the 12-month low is $67.03 and the January 2013 $60 put currently brings $1.87.
Greece has a population of approximately 11,000,000. One of the problems of that country is the fact that they have a poor tax collection system and they have an over generous pension obligation that had started at age 45 or so. Their current government is making changes and of course that is causing social unrest. You need to stay focused. You live in the United States and not Greece. Look for stocks that you like long term and use put orders to establish positions at lower levels. You can buy utilities that have nothing to do with Europe or China. These include electric utilities, telecommunication companies like Verizon and ATT and water companies like American Water Works (AWK) and American States Water (AWR). As I have seen in the past, lower stock prices brings fear and even lower stock prices until the prices get out of reason.
I cannot stress it enough that investors should resist buying on margin. Stock prices in 2008-2009 went to unbelievably low levels, well below cash positions in some cases. In the stock market, always expect the unexpected and have what I call black swan money in reserve. Do not look to buy at the bottom. Look to buy at a great value price and don’t forget to consider a sell price. That is one of the reasons I sell covered calls and never regret it.
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.”
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