Amazon and others have a lock on the market for large-scale e-commerce, but this stock leads a different niche, as it’s the go-to place for buyers (46 million of them at year-end, up 16% from a year ago) and sellers (2.7 million, up 20%) of homemade, handcrafted goods.
Cabot Profit Booster 114
Before we dive into this week’s new idea, I wanted to talk a bit about the market and our positions. Clearly, it’s been a harrowing three weeks as the S&P 500 is down 19% in 13 days. In comparison, the quickest declines from all-time highs to bear market (down 20%) were 30 trading days in 1929, and 38 days in 1987 (two of the ugliest times for the market in history).
So what does this mean for our positions? Clearly there has been some pain—though, because we sold calls and collected a premium, our breakeven on these stock purchases is much lower than if we bought the stock outright. That obviously doesn’t fully insulate us from a meltdown like we’ve seen, but does highlight how selling covered calls reduces risk/breakevens.
So how are we going to manage our positions? The decline of 7% overnight Sunday caused a deep sell-off before the market open that pushed several of our stocks through their stops. That is an unfortunate risk of investing.
My plan, subject to change as the market swings, is to adjust a position or two, and sell one or two others that aren’t performing. Though as I noted, this will all depend on the market and stock action going forward.
The “upside” to this volatile market is call premiums are now very elevated, which makes the potential yields/profits on covered calls very enticing. Now to the idea …
The Stock – Etsy (ETSY)
Amazon and others have a lock on the market for large-scale e-commerce, but Etsy leads a different niche, as it’s the go-to place for buyers (46 million of them at year-end, up 16% from a year ago) and sellers (2.7 million, up 20%) of homemade, handcrafted goods.
The top brass expects GMS (gross merchandise value) to rise 27%, revenues to rise nearly 30% and EBITDA to advance in the low 20% range, with margin expansion as time goes on. Big picture, Etsy thinks it has just 5% of its target market, and given its leadership position, there’s no reason the firm can’t get much larger over time if management continues to pull the right levers.
Technical Analysis
ETSY had a huge run in 2017 and early 2018, but it stalled out early last year and began a 45% decline, living below its long-term 40-week line for months. Shares did perk up with the market late last year, but it wasn’t until February that the stock changed character—it held up well on the market’s initial dive, gapped up on earnings, and has remained in solid shape despite the environment. There’s old overhead to chew through, but if you’re game, ETSY could be nibbled at on dips. Stop - 48.5
The Covered Call Trade
Buy Etsy (ETSY) Stock at 59.5, Sell to Open June 60 Calls (exp. 6/19/2020) for $6.50, or a Net Price of 53 or less
Static Return: $650 per covered call (12.26%)
Breakeven: 53
Covered Call Return (if assigned): $700 per covered call (13.2%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 53 or less. (In this case 59.5 minus 6.50 = 53. Or another example is you could pay 60 for the stock and sell the call for 7, which also equals 53)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
