As a long-suffering Chicago Bears fan, this year’s NFL draft was essentially my Super Bowl. For the first time in my lifetime, maybe, just maybe, the Bears finally may have a starting quarterback that will take the team to the promised land. However, drafting a quarterback has boom or bust potential and, much like investing, involves pricing risk. This is what I mean …
This year the Chicago Bears had the number one pick in the NFL draft and there was no question the team was going to draft Caleb Williams who is thought to be a generational talent at quarterback. I am soooo excited as I’ve paid virtually no attention to the team for years, as the team has not been interesting, or competitive.
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And while the Bears pick was thought to be a no-brainer, it got more interesting a couple picks later when fellow Cabot Analyst Mike Cintolo’s New England Patriots were picking at three.
Mike and I debated what the Patriots should do with that pick for months as it was a slam dunk the Bears should pick the best quarterback at one, but it got a bit cloudier at number three, as the talent pool dropped off a bit.
My thesis on this subject was that the Patriots had to take a quarterback at three as the reward in picking the next great passer was too good to pass up.
Mike vehemently disagreed and said the bust potential, and history of drafting quarterbacks that failed, could hurt the team for years. Mike wanted the team to trade back and amass several draft picks to rebuild the team.
So what does this have to do with investing?
I’m an options trader, and what I do all day every day is price risk.
For example, if the market is strong, and hedge funds and institutions are buying calls in a stock, and if I can pay $200 for a call buy and potentially turn that capital into $1,700, that is a risk/reward I like.
However, I also know that should things go wrong, in the options game, that $200 can go to zero.
That is like drafting a quarterback, it could be a wild success or a complete bust.
For example, last month I recommended to subscribers of Cabot Options Trader a buy of Freeport McMoran (FCX) calls, and shortly thereafter a buy of calls in the Gold Miners ETF (GDX). These purchases were made not because I’m a copper and gold bug, but instead because the call buying in these stocks and sectors by hedge funds was overwhelmingly bullish.
And to pay $590 for FCX calls, and $450 for GDX calls, with unlimited upside potential, was in my mind a risk/reward worth taking, as these commodity stocks can get VERY hot, VERY quickly.
However, in my trade alert to buy both sets of calls, I did warn my subscribers that commodities, and these stocks, can also get cold VERY quickly, so there was risk.
That being said, I’m a home run hitter, and much like the NFL draft when it comes to options trading I’m not here to play it super safe … and when there is an opportunity that is too good to pass, up I pounce.
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