The technology sector stocks have been on fire for months. The high-profile FANG gang are up 40% in 12 months. Most beloved of late is Nvdia Corporation (NASDAQ:NVDA) and it’s up over an amazing 125% in 12 months.
These are by products of the Donald Trump era, which brought about an animal spirit on Wall Street. Global traders feel safe with central banks dedicated to re-inflate economies and it’s a centralized effort.
Shorting is difficult so dips are fleeting and they don’t last long. However, such success makes it difficult to chase upside when we are already so high. So it is more prudent to place bullish trades with caution.
This is not the same as saying that markets are overpriced. They are not. Leading this mega rally are mega quality stocks which have real earnings not pure hopium. Sure the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) is up 29% for the year, But unlike the dot com bubble, now we have traders betting on actual profitable business models, not eyeballs.
Today I want generate income from the value in three of these leading companies. I will sell downside risk against scenarios that other fear. So if I choose levels carefully, I collect premium now and if my support holds then I keep the premiums as maximum gains. Else I would own share but at a discount.
Mega-Cap Stock to Buy: Tesla (TSLA)
Tesla Inc (NASDAQ:TSLA) is my speculative trade today. This is a company that needs several miracles to happen for it to grow into the expectations on Wall Street. Investors do not treat this as a car company because if they did, the stock price would be much lower. TSLA’s bullish thesis is a muddled collection of headlines from cars, to semi trucks, solar, batteries and more.
The single thread through these is the company leader Elon Musk. Investors have a crush on him and that is the secret behind the power of its stock.
Fundamentally and in the absence of tangible value from a price-to-earnings basis, I chose my level based on recent price action instead. This is a perfect example of a calculated risk.
Sell TSLA Jan 2018 $210 puts and collect $1.50 to open. Here I have a 90% theoretical chance of success, but if the TSLA stock price falls below my strike, I temporarily own the shares and amass losses under $208.50.
Mega-Cap Stock to Buy: Amazon (AMZN)
Amazon.com Inc (NASDAQ:AMZN) is the “A” in “FANG.” This is the mother of all start-up companies. Under Jeff Bezos, they never stopped being an ultra-growth company. They have been running lean margins with one goal in mind: Growth. It is impressive that they have been able to maintain this for over a decade.
Critics cite this fact as a detriment. They keep looking for improved margins. I disagree for as long as they are delivering the growth. Besides, they are not bleeding cash. They generate most of it internally. And even when they issue debt, they use it for major acquisitions. I favor this over what Apple Inc. (NASDAQ:AAPL) does which is borrow money for financial engineering.
For as long as the execution is this impressive I will bet long but with caution. This is a four-digit stock that is up 50% year-to-date, so the risk of dips is elevated.
Sell AMZN Feb $900 put and collect $5.50 to open. There is only a 15% chance that my setup fails. But even then, I would be okay owning shares at a 20% discount from here. If margin requirement is an issue, I would sell the $910/$900 spread for an 8% yield on risk instead.
Mega-Cap Stock to Buy: Facebook (FB)
Facebook Inc (NASDAQ:FB) is the “F” in FANG. Of the three ideas today, FB is the cheapest from a P/E perspective. It’s also the least aggressive investment. It is very profitable now yet it also has great growth potential. Technically it is still vulnerable to a dip if the rising wedge breaks down. But that is the byproduct of a 50% rise in 12 months. A retest of $170 per share area would serve the bulls well. Should it happen, they could use solidify it as a platform for another leg higher.
Management has been successful with their acquisitions, so long term, they are well set to continue executing on their growth plans. Because of that, I am willing to own FB stock for the long term but at a discount. So I will sell risk against support zones to generate income and leave plenty of room for error.
Sell the FB Jun 2018 $140 put naked for $3. This bullish trade has an 85% theoretical odds of success. But if the FB stock price corrects then I would accrue losses below $137.
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
Get my newsletter for free 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.