Time to Grow Up!
What to Do about those “Safe” Retail Stocks?
Protecting Your Stock Investment
Last weekend, my wife told me it was time to grow up. This was a shocking statement to a 38-year old man. I’m a successful trader, I own my own home and cars, and provide a very comfortable life for my wife and kids.
That said, I knew where she was going with that comment. When I’m sitting in front of my trading screens, I’m typically in shorts, a t-shirt and sandals. On the rare occasion that we go out on the town, many of my shirts and pants are at least three to five years old. And when we go to a wedding or a charity event, my one suit is every bit of 10 years old.
In preparation for an upcoming family wedding, my wife clearly was done with my old suit. While I agree that my suit has seen better days and perhaps my waistline has grown since I originally bought it, nevertheless, I was dragged against my will to Nordstrom to buy a new formal wardrobe.
We pulled up to the mall, which is essentially my idea of what hell must look like, and the parking lot was beyond packed. We got the best parking spot we could find—what appeared to be the last available spot, as far from the door as possible. The dread of the upcoming shopping experience continued to build.
Once inside the mall, it was amazingly crowded, with little room to move between clothing aisles. That said, after about an hour or two of trying on suits, ties, belts and shoes, my wife and I left the mall with a new formal wardrobe—and still married.
So why am I sharing this story with you?
Even though the mall I shopped at was overwhelmingly packed with shoppers, the retail sector has been decimated in the last month.
Here are some of the retail stocks that have been hit this month:
Nordstroms (JWN): Down 13.50%
Macy’s (M): Down 22.50%
Dillards (DDS): Down 14%
Fossil (FOSL): Down 28%
2015 has been a challenging year for all investors. Whether you’re a top hedge fund or an average individual investor, it’s been impossible to avoid all the blows-ups.
Perhaps most difficult for the average investor this year is that even the sectors and stocks considered to be safe have been decimated.
When steady stocks such as Wal-Mart (down 30% year-to-date), ConocoPhillips (down 22% year-to-date) and Alcoa (down 40% year-to-date) are getting destroyed, it can be alarming.
Traders and investors who play momentum or biotech stocks generally understand the risks they’re taking. But investors who buy Wal-Mart for its yield and slow share price appreciation have very different risk profiles.
When the selling of “safe” stocks will end is anyone’s guess. Perhaps Amazon has changed the way we will shop forever, and Nordstrom is in long-term trouble.
Can an investor who wants to own Nordstrom stock protect himself from the downside?
Yes—by buying puts.
A put option gives its holder the right to sell 100 shares of the stock at the strike price at any time prior to the option’s expiration date. For example, if I own 100 shares of JWN and the stock is trading at 56.50, I might buy 1 December 55 Put for $1.00.
Let’s break down the scenarios of owning these puts.
If JWN does not move and is unchanged on December expiration, my puts—which are basically insurance against further declines in the stock—would expire worthless. I would be out $100. (The cost of any option—purchased or sold—multiplied by 100).
So the puts purchased for $1.00 actually cost $100.
If JWN were to fall below 55, I would have the right, but not the obligation, to exercise my puts, which would allow me to sell my stock at 55.
If JWN were to go higher—which is the ideal situation—my stock position would still gain $100 for every $1 the stock went up, minus the cost of the put.
If we’ve learned anything in 2015—in which few stocks have been safe from the rotation and selling pressures of the market, it’s that sometimes the right trade is to play it safe.
And while I dislike paying for insurance (puts), especially in a stock like JWN, as much as I dislike shopping at a mall for a suit I’ll wear once a year, sometimes we need to grow up and play it safe.
Your guide to successful options trading,
P.S. At Cabot Options Trader, I offer a complete options education, and only recommend trades in which the odds are clearly in our favor. When I buy options, I risk pennies to make dollars. When I sell options, I never expose my subscribers to any catastrophic risks. My options trading strategies are varied enough to cater to all investors depending on their investment objectives, risk tolerance and available assets.
With a little education, options trading can be simple, low-risk, fun and most importantly, profitable.