by Preston James | November 3, 2011 9:18 am
This week’s column is a slight departure from my normal heavy breathing and table-pounding when it comes to the subject of weekly options, and all the new ways to create weekly cash windfalls that never existed before about 18 months ago.
But it’s just as compelling. And just as timely.
I’m talking about using options on a very compelling investment as a way to hedge your portfolio … heck, to even grow it, right in the face of all the wild volatility and unpredictable-ness that the market is serving up these days.
This “hedge-edge” is a vehicle that swells your account as a select number of high-flying companies fade and start falling from the sky.
If you’ve got your head in the market these days, there are a dizzying amount of stocks doing just that.
Witness the likes of Netflix (NASDAQ:NFLX), Green Mountain Coffee Roasters (NASDAQ:GMCR) and First Solar (NASDAQ:FSLR), just to name three very recent examples.
So what’s the means of profiting from all this? And do you have to be a master stock-picker? And what kind of extra work does it involve?
Use HDGE to Sharpen Your Trading Edge
Well, here’s the good news. It doesn’t take any work or know-how on your part!
The way to put a grip of Ben Franklins in your pocket is simply by owning shares of a newer Exchange-Traded Fund (ETF) called the AdvisorShares Active Bear (NYSE:HDGE).
Now, this isn’t the first “short” ETF to be created — not by a long shot. There are plenty of ETFs that short market indices and industries; some even short with an added leverage (i.e., 2X, 3X) kicker.
But that’s where most ETFs stop.
Those fund managers just pick out a basket of stocks trading in the same sector, and the fund just reacts to wherever the stocks trade. Typically there’s very little, if any, active management.
What makes HDGE different is it’s a pseudo-hedge fund. (Hence the ticker symbol.) There are two managers who select stocks to short based on their own unique criteria.
Currently they are short 42 stocks. A lot of names on their “short” list are stocks we’ve seen falling out of the sky and burning up as they get closer to earth.
What’s their main criterion? The big doozy is discovering companies that have been overstating their revenue. According to the fund, this sets off a chain reaction of other bad news (like growing inventories), and ultimately institutional selling, which drives the stock price lower and lower … and lower still.
Get Paid to Give Yourself a ‘Hedge Edge’
HDGE has already crossed the line of $50 million in assets, which seems to be the magic area where ETFs start to trade with decent daily volumes. At last count, HDGE has grown to be $160 million in size, and it’s only been around since January.
The trading volume and investor interest in HDGE are pretty impressive. But what makes me even happier with this name is that it also has options available to trade.
Right now, though, it only offers the standard monthly options — there probably won’t be weekly options for a long time. But with a fund like this one, having just regular ‘ol monthly options is still very compelling!
So what’s the trade? Well, just owning shares of HDGE would serve as a hedge in your portfolio. But there’s a better way to enter that trade than just buying this ETF at market prices.
To enter a position in HDGE at a discount, which is, you can sell put options on HDGE. This would credit your account with premium (i.e., income). And if HDGE moves up (because the stocks in the portfolio move down!), you keep the premium.
If HDGE moves lower (because the stocks they are short move up temporarily), you would become the owner of HDGE shares at a discount, as you would get to keep the premium when the puts were sold.
Keep the Income Stream Flowing from HDGE
Also, if you find yourself owning shares of HDGE at a discount, you can turn right around and sell monthly call options to collect premium as well.
You can give yourself a little room for upside by selling out-of-the-money calls (i.e., those with strike prices above the market price of the shares) — creating income plus giving yourself some room for capital gains.
While there’s not much option volume in HDGE these days, this will likely improve over time as more traders and investors become aware of it and start adding this “hedge edge” to their portfolios.
Try explaining all these possibilities to someone who was in the market in the ‘60s, ‘70s or ‘80s (even up ’til about 5 years ago), and they’d get green with envy from all the strategies you have available to you today!
– Preston James
P.S. Remember, I will share with you for free — with no strings attached and no credit card required — a little-known, almost magic piece of news that makes a stock go up 86% of the time, 3 to 6 months down the road after it’s announced … and it’s NOT an earnings announcement!
Adding this one thing to what you’re doing can dramatically improve your results over time, I’m convinced. And I’ll tell you what this little-known piece of news is if you click right here…
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