Home Articles Options Writer Series — Does This Stock Market Seem Top Heavy To You?

Options Writer Series — Does This Stock Market Seem Top Heavy To You?


market finBy Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2014

June 15, 2016

It seems top heavy to me.  Barron’s Ben Levisohn seems to think so in his latest article, The Trouble With Quality. He rings out the fact that even the stocks in PowerShares S&P 500 Quality ETF (SPHQ) no longer appear cheap. Mr. Levisohn brings out the fact. The ETF is currently selling at 26.1 times trailing 12-month earnings, which is 27% above its five year median of 20.6.

A similar but not the exact same ETF is SDY.  The SDY requires a company to have raised its dividend every year for at least the last 20 years.  A tougher ETF is the NOBL. To be included in that fund, a company needs to have raised its dividend for at least the last 25 years in a row.

The SDY and NOBL have options available. So, lets say you want to buy SDY but not at the current price ($82.89). You have to ask yourself, at what price do you want to buy it?  How about 10% less? That would mean a price of roughly $74.  What you do is write put options at that strike price. The current quote on the Oct  $74 is $.45 bid and $1.35 offered. You will post $7,400 for 100 shares and take in $35 now or you can offer to sell a put at $74 for a price in between $.45 and $1.35. If SDY backs off its current price, you will be able to get a premium in between those 2 values such as $.65. You will end up either owning SDY at $74 or not. In any case, the premium is immediately yours. A 10% drop in the stock market is a reality that has happened many times. You have to ask yourself “{Do I really want to buy SDY at $74.00 because you will only be doing so IF the stock price on Oct 21, 2016 is below $74.00.  In order for the stock price to get that low, there has to be a lot of doubt in the stock market so I expect the TV personalities to be very bearish and if you listen to them, you will be scared. There has to be something happening to spook the market down in order for this to happen. However, the secret of success is to keep your objective in mind. You wanted to buy SDY at $74.00 and it could happen.

The same scenario is true for NOBL. The stock closed on Friday at  $53.68. Say you feel that the stock is too high. I know I do.  A 10% decline would mean the stock has declined to roughly $48.00 This, in my opinion, is a very comfortable price to buy the stock. Oct 21, 2016 puts at $48.00 do exist. They last traded at $2.05. Currently, the quote is $-0- bid and offered at $10.00.

One of the ways to succeed in the stock market is to hone in on a stock of a company you like. You need to understand why you like it. Then you decide at what price you want to own it and why. As readers of this column know, I honed in at T and VZ. I liked both of those companies and I am a customer of T. The stock price was dull and not moving in the $30 –$32 area. I wrote a lot of puts, as the dividend yield was 5+%. Then I sold very short-term calls at $34-$35 for a little premium but it allowed me to garner a 10+% income. T is an S&P Aristocrat stock and has raised its dividend every year for at least 25 years.  When I found it more difficult to write $30 puts, I stopped selling $34 calls and started to sell $36-$37 calls. I really did not want to lose (sell) the stock so I then decided to sell call options at $38 -$40. The stock eventually broke out of the $32 point this year as buyers found religion in dividend and value stocks. The $38 stock has been called away from me and I expect to sell the T shares at $39 due to the stock price being $40+.  I did not fret over the sale as I bought a bundle of PSEC as well as selling puts at $7 and some calls at $8. Most of those options expire this Friday June 17th.

Currently, I am selling puts on CCL ($45-$50) and I have a number of calls sold ($55-$65) that expire this Friday and July 15th.  In the last 12-months, the company has raised its dividend twice: from 25¢ quarterly to 30¢ and recently to 35¢. The raise to 35¢ surprised me as I would have liked the company to reduce debt and then next year raise the dividend to 35¢ quarterly. I just read that the stock is down because of concern that European and Asian cruises attendance is down. I had presumed that but Alaskan cruises are way up and more people are cruising than ever before. For those of us who cruise, we know that once you are on board a ship, they have ways of sucking your money out of your pocket. Hence, I will continue to sell puts for large premiums and calls for tiny premiums.

The real objective is not to accumulate money for money itself. It is to be sure that you have enough money to live free and not worry about expenses. Why do I work? I just enjoy it. I travel around the world and I can afford the best accommodations so that is what I do. My children and grandchildren are saving money with my guidance. I even have my grandkids putting money into a Roth IRA with reinvesting dividends.

Have I ever lost money on a stock? You betcha. All loses are always unexpected. I never bought a stock or wrote an option expecting to lose money. In my next article, I will tell you how I handle those types of situations.

warrenkaplanWarren 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.