Writing Options on Stock Trades Growth, Value, Emerging Markets Trades
Dividend and Small-Cap Trades
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In all likelihood, my five-year-old daughter and three-year-old son could have picked stocks in 2013 and returned double digit results. 2014, on the other hand, has been significantly more challenging for investors and traders.
What worked last year is not working this year. Take growth stocks, for example. Nearly every time this group of stocks starts to gain some upside momentum, the bottom falls out. Oil stocks, which had performed great in the first half of the year, were absolutely crushed in the month of September, and many have given back all their gains for the year.
So what is the average investor to do in such a challenging environment?
My recommendation ... take advantage of the amazing resources and talent that Cabot offers and build a portfolio of stocks and execute options strategies on them.
So today, I’d like to write about each analyst and highlight a recent stock pick of theirs and offer an options strategy on the stock.
A Growth Trade
In the two years I’ve known Timothy Lutts the one thing I’ve really been impressed with is his ability to see the big picture before others. When I first met Tim he couldn’t stop talking about this new company called Tesla Motors (TSLA). While I was trying to figure out what I wanted to order for lunch, Tim was still talking with great excitement about Tesla’s amazing growth opportunities. He recommended TSLA nearly three years ago and it’s up an amazing 810%.
For those that attended the Cabot Investors Conference in Salem, Massachusetts, this past year all the analysts were asked for their top pick for the next year. Well Tim once again has picked a big winner when he recommended GoPro (GPRO). Since the conference in August, GPRO is up an amazing 127% in less than two months.
While that return is truly amazing, many traders and hedge funds are starting to get concerned about the company’s lofty valuation. I too, don’t love buying stocks that are up over 100% in just a few months. But if I wanted to put on a bullish position in GPRO, instead of buying the stock, I would buy one of the GPRO January 100 Calls for $8.00. If GPRO were to close at $100 or above on this call’s expiration on January 17, I could exercise my right to buy the stock at 100. If the stock did not go above 100, the most I could possibly lose is the premium I paid for the call, or $800.
Another Growth Trade
A growth stock and market timing expert, Michael Cintolo is chief analyst of Cabot Market Letter and Cabot Top Ten Trader. Mike spends all day everyday studying charts looking for the next great breakout stocks. Mike doesn’t look to hit singles, he looks for doubles, triples and home runs.
As I mentioned above, growth stocks have been giving traders headaches all year. We have seen rapid rises and even greater falls in 2014. For this reason, I would again recommend using a call purchase on Mike’s recent recommendation, Avago Technologies (AVGO). Worst-case scenario, if growth stocks again sell off, the most you can lose with the purchase of a call is the premium paid. With that in mind, you could buy the AVGO January 85 Call for $4.00.
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A Value Trade
Roy Ward, chief analyst of Cabot Benjamin Graham Value Investor, has been crushing the S&P 500 for years now. Using his methodology, Roy is up 241% for the past 11 years. In the same timeframe, the S&P 500 is up 76%.
The Cabot Benjamin Graham Value Investor is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham. Graham taught or influenced later investment gurus Warren Buffett, Mario Gabelli, John Neff, Michael Price, John Bogle-and Cabot Benjamin Graham Value Investor’s chief analyst, J. Royden Ward.
Roy created a spreadsheet for his readers that values companies based on price to current EPS and five-year estimated EPS growth, among many variables. Then Roy digs deeper into these companies to find those that are undervalued.
Because Roy is a value investor who is not looking for quick stock appreciation, investors could use long-term options to trade off his stock picks. For example, Roy recently recommended United Technologies (UTX) and believes the stock will trade at 127.68 within one year. Because Roy believes the stock will trade at his price within one year we could buy the UTX January 105 Call that expires January of 2016 for $7.00.
A Chinese Trade
If you’re looking for emerging markets exposure for your portfolio then Paul Goodwin, the chief analyst of Cabot China and Emerging Markets Report, is a terrific resource. Paul has a real knack for finding the hottest trends in countries thousands of miles away before they became household names.
One of the stocks in Paul’s current portfolio of stocks is Baidu (BIDU). While many investors find stocks in China to be too risky for their portfolio, buying calls in a stock like BIDU limit your downside exposure to the premium paid. Therefore, an investor could buy the January 230 Call for $12.00. Thus the most you can lose is $1,200 and the upside is unlimited.
A High-Yield Trade
For investors who are looking for yield, Chloe Lutt’s Cabot Dividend Investor is an ideal resource. In this current choppy environment, and in a near-zero interest rate world, Chloe’s system has been soundly beating the S&P 500 all year.
One way to create even greater yield is to buy a stock that pays a large dividend and then sell a call against that stock. Chloe currently recommends Church & Dwight (CHD) which pays a dividend of $0.31 per quarter. If you buy 100 shares of CHD, you could then sell one CHD November 70 Call against your stock position for $1.00. This strategy is called a covered call. So not only will you collect the dividend of $0.31, you will also collect $1.00 by selling a call. If the stock is unchanged in two months, you will receive a yield of 1.89%.
A Small-Cap Trade
I’m fairly confident that Tom Garrity, chief analyst of Cabot Small-Cap Confidential does as much research on small cap stocks as any top hedge fund or research team.
Tom’s analysis results in a portfolio of stocks of companies that are pioneers in their areas of business. In most cases, these companies are creating whole new micro-industries, providing essential tools for an entire industry’s growth. Because these stocks have little or no institutional or research coverage, Cabot Small-Cap Confidential subscribers can acquire significant positions in these companies more cheaply than if their stocks were widely followed.
However, there’s risk in these young companies, so many of Tom’s stocks are great candidates for call buying.
As you can see, the Cabot team of analysts have the vision, the chart-reading ability and the systems to make this confusing investing environment much more manageable.
If you like these professionals’ stocks ideas, I recommend that you consider using options strategies to enter into investments. I use a wide variety of calls and puts to guide investors to quick profits in any market while always controlling risk.
To find out more about the strategies I recommend in my Cabot Options Trader advisory, click here now.
Your guide to successful options trading,
Jacob Mintz
Chief Analyst, Cabot Options Trader/Cabot Options Trader Pro
