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Part of everybody's set of investment beliefs, either consciuos or unconscious, is the idea that the market always comes back - after a bottom, there will be new heights to scale, higher than anything which preceded it.
Few hold such beliefs for individual stocks, having noticed over the years that large and profitable companies can disappear in a flood of red ink, litigation, and disappointment.
But for the market as a whole, most of us believe in our hearts that it always come back: first it goes down, then it goes up, but it always goes higher in the long run. If that does not play out as projected over the next 20 years, there are going to be a lot of disappointed retirees, myself among them.
Mr. Market has an opinion, I think. He studies the words and actions of those who are supposed to protect us from a meltdown, a global economic catastrophe, and takes a guess at whether the nostrums, remedies and panaceas actual or proposed will have the intended effect of getting everything back on track again. If the actions work, the market will go back up, same as it ever did. If they don't, it will just keep getting worse, forever.
Right now, Mr. Market is not sure...
I am mildly hopeful, based primarily on the Federal Reserves suggesting that they have more arrows in their quiver, above and beyond simple rate cuts.
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Comments (2)
Tom- I liked your article on SA about BJS. I'm right there with you on the sector, but instead of buying calls, what do you think about writing puts. For example, you can get $5 for a MAY09 RIG 35 Put. I gotta think that if I got put Rig at an adjusted cost of 30, I really wouldn't be too upset. Just wanted to get your thoughts on the execution of the strategy.
Posted by mike | December 6, 2008 10:14 AM
Mike,
My experience with selling puts has been mixed. For years I sold small amount of puts at times when the market was low and volatility high, earning decent returns with what I regarded as very little risk. This past year I have had some good size losses selling puts on a few financials which I thought were at the bottom of their range. You have the old saying, selling puts is like picking up nickels in front of a bulldozer or is it steamroller.
That having been said, selling the puts you list looks OK to me, because you are perfectly happy to own the shares at 30. That is the acid test, if you like the stock and are happy to own it at the net price resulting from an assignment then puts is a good way to handle it, especially with volatility as high as it is right now.
RIG is trading at a very low P/E and as I recall a lot of their work is under contract and so it could take a while for the oil slump to make it through to their bottom line. A lot of writers are suggesting that if oil exploration and productions slows while the economy slows, there will not be adequate supply when the economy recovers, resulting in a spike in oil prices. That would carry your RIG back up to where it was 6 months ago, so I don't see to much risk that selling the puts could do your finances any lasting harm.
Tom
Posted by Thomas Armistead | December 7, 2008 3:42 PM