“Sell the rip” is now the predominant theme on Wall Street. For years, investors profited from buying all dips but now investor confidence is on the rocks and sellers are in control.
The macroeconomic conditions are still strong. There are some signs of cooling off, especially now that central banks are in cool-down mode. The U.S. Federal Reserve is in the throws of raising rates. The ECB just ended its bond buying program.
In addition, the U.S. is in the middle of a tariff war, especially with China. Just this week, the U.S. allies joined in with the fight, so this fight should become easier to resolve. Another wall of worry is from the U.S. Fed actions.
This week, Fed Chair Jerome Powell reminded investors that he is poised to continue raising rates in spite of not having signs of economic overheating. Shorter term, we have a looming government shutdown that is likely to start this weekend.
So there are reasons to worry, but they are transient. Since we invest for the long term, we should ignore the short-term potholes. The company-specific outlooks don’t turn on a dime. The thesis for holding stock in Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Tesla (NASDA:TSLA) doesn’t change because of short-term challenges.
The company fundamentals are still healthy, so most equity holders trust that this too shall pass. So they don’t want to sell their stocks now just because of the predominant headlines are inflammatory and part of negotiating tactics.
This is easier said than done. Portfolios are under pressure and we struggle to watch assets values fall while we wait for the storm to pass. Until then, there are things stock holders can do to mitigate the risks of holding their assets through this tumultuous period.
The options markets allow stock owners to put their assets to work. Owners of AMZN stock can create income out without needing the stock to rally. Selling covered call options against stocks they own brings cash into the account, even if the stocks fall. This is also true for GOOGL and TSLA stock. If the stock rallies past the call sold, I commit to selling it at that price.
This is a viable strategy, especially when the volatility is this high. The CBOE Volatility Index (INDEXCBOE:VIX) spike means that options are expensive so it is a great time to sell them.
Amazon stock is the mother of all momentum stocks. The team is extremely competent and a proven winner. The company dominates the cloud and is miles ahead of its competition. Microsoft (NASDAQ:MSFT) and others are scrambling to catch up. That is why AMZN stock is still up 20% year-to-date.
Looking forward, AMZN will have an expansion in profits as the Alexa royalties will come pour in from licensing. Just today, RBS wrote about a $19 billion forecast in Alexa revenues.
So this is clearly a stock to hold for the long term and history proves it. I could sell the Jan. 25 $1,650 call option and collect $25 per contract. If the price stays below this strike through expiration, then I keep my premium as profit. This is the equivalent of a 1.7% dividend in one month. I chose that expiration, so I don’t have to worry about the earnings pop if it comes. A more conservative call option to sell is $1,700 for a $15 premium.
Google is the behemoth in advertising. Many challengers have tried, but it still dominates, especially in mobile. They have forays in many other ventures, especially autonomous driving, so management is excellent at executing on plans. They are starting to monetize YouTube, which has billions of users. I personally will be cutting my cable cord from AT&T (NYSE:T) to become a Google client in January.
If I’m going to own GOOGL stock, I will hold it for the long term. In the meantime, I can make it pay me while I wait. I can sell covered calls in GOOG at $1,140 and collect $10 today. If the stock stays below it, then I retain the whole premium as profit. Again, here I chose the longest date contract that doesn’t not include the earnings. This way if it pops on earnings, I won’t have to sell my stock.
CEO Elon Musk made owning TSLA stock “interesting” for lack of a better word. It has been a wild ride, but the stock has its die hard fans. I personally profited from it by selling puts on dips. Today, I am sharing how to profit from it, even if the stock does nothing into January. The long-term thesis in TSLA is ambiguous, but the potential is undeniable. So it is a speculative stock that belongs in a diversified portfolio. So to wait out the short-term market-wide risks, I can also create income out of thin air by putting the stock I own to work.
I can sell the TSLA covered call using Feb. 2 $392.50 call. For this trade, I collect $5 per contract, which is the equivalent of a 1.9% dividend. This is a strategy I can repeat over and over again. The longer out in time I go, the higher in price I can sell calls. This way I don’t have to manage the risk for the short term. For example, I can sell the Aug 2019 $590 TSLA call and collect about the same yield as the Feb trade.
In all three cases, I chose call levels to sell that are likely to have resistance at or below them. This increases the odds of winning. The goal is to have them die for maximum gains. In other words, I would have sold lotto tickets that lost money for the buyers. The house, which in this case is me, would have won.
The risk of selling covered calls is the possibility that I need to sell my stock at that price if it rises above it. But I am not required to hold the call open through expiration. I can close it at any time for partial gains or losses.
I can even roll it higher to manage it if markets rise too fast.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. 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.