Mega-cap technology securities have been on rails this year. The largest tech stocks are up 25%, and others have surpassed 50%. The rally has been fueled by Trump-era “hopium” and global central bank money. For the first time in a long time, we have synchronized global growth. This makes a bad time to be a bear. So small dips offer buying opportunities and the bulls have been taking full advantage.
The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is up 25% for the year. But today it’s down 0.7%, which in today’s terms feels like a massive correction. Last night we had bearish headlines from China that noted elevated equity levels. Today, Wall Street blinked and good stocks are on sale going into their earnings. Therein lies the opportunity.
I don’t chase upside targets, and in this case, I will sell downside risk against proven support levels. If time passes and my levels hold, then I would have created income out of thin air.
It is important to note that I am willing to buy these shares at a discount, so this a calculated risk. I build myself a sizable buffer from current price so I don’t have to be perfect with my timing.
Tech Stocks to Buy: Apple (AAPL)
Apple Inc. (NASDAQ:AAPL) is down 2%, which is more than the market is today on the usual whispers of iPhone disruptions. I pay no attention to those since they always turn out to be immaterial to how many phones they will sell. They usually sell out of all that they make. Long term, this company is on rails and will continue to generate massive amounts of cash.
Furthermore, it only sells at a price-earnings ratio of 18, which is cheap by any standard. Owning it at a discount is not a mistake. Warren Buffet is a buyer on every dip. So he and the company buybacks will play defense for my trade.
Sell AAPL Feb 2018 $130 puts and collect $1.40 to open. Here I have a 90% theoretical chance to retain my maximum gains. But if the AAPL stock price falls below my strike, I own the shares and accrue losses under $128.60.
Tech Stocks to Buy: Alphabet (GOOGL)
Alphabet Inc (NASDAQ:GOOGL) is the “G” in “FANG.” This is a monster cash machine with several platforms that have more than a billion users each. What’s impressive is that they are only really monetizing only one.
The potential here is giant. Sure there are critics of cost per click and other advertising metrics trends, but management has so much other potential from the auto industry to TV that I am not worried one bit. I am willing to own it here with a clear mind. Yet, I will still structure my trade to leave plenty of room for error.
Sell GOOGL Jan $850 put and collect $5 to open. There is only a 10% chance that I wouldn’t win on this setup. GOOGL can fall 15% and I would still be okay. If margin requirement is an issue, I would sell the $860/$850 spread for a 10% yield on risk instead.
Tech Stocks to Buy: Facebook (FB)
Facebook Inc (NASDAQ:FB) is the “F” in FANG. Of the three ideas today, FB is the most expensive from a P/E perspective. Technically it is also the most perched. By that, I mean that its rising wedge could bring about a retest of $167 per share area. But like GOOGL and AAPL, this is a company that is a rolling boulder and nothing on the horizon looks like it could trip it up.
Management has been phenomenal with their acquisitions. We saw an example of it this week. So for the long term, I am willing to own FB stock. At these elevated market levels, however, I am more certain of the support zone than the upside potential. So here, too, I will generate income, but with a huge buffer zone just in case equities struggle in the next six months.
Sell FB Feb 2018 $140 put naked for $1.50. This bullish trade has a 90% theoretical odds of winning. But if the FB stock price falls below my level then I would lose money below $138.50.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.