For investors, here is what was morning was spent on.
Morning Notes: Understand Risk – Diversify and Use Credit Put Spreads
My morning was spent with investors who continue to follow stocks like Tilray (TLRY) – down 40% this morning, Canopy Growth Corp Stock (CGC) – down 18% this morning. It is fine if you understand the risks of these types of stocks and use credit put spreads when selling put options or credit call spreads when selling call options (not covered calls).
Repairs Are Difficult In Certain Cases
The reason I do not use these stocks for Put Selling is because repairs are difficult in stocks such as Tilray (TLRY) that fall 40% in a day, but cannot be trusted to work well for a repair. For example, when McDonalds Stock (MCD) fell 16% in the pandemic panic from Mar 16 to Mar 18 and was already down 35% from Mar 3, I had no concerns about rolling positions forward and indeed setting up more positions as well as buying stock.
With Tilray, CGC and other marijuana type stocks, these are meant purely to trade on spikes and buy puts against for expected dips. In other words they are poor choices for a strategy of earning income through selling put options. While I understand put option premiums are huge in stocks like Tilray, they are this high because of the high risk of the stock making large swings.
Some Stocks With Survive Every Calamity
McDonalds Stock (MCD) will be around 25 years from now and their dividend will be higher as will their stock price. I have no idea where marijuana stocks will be 25 years from now but losses being taken on days like today make it hard for investors to stomach especially when positions are taken that are too large for a single stock.
Some stocks will survive every calamity and indeed a calamity is when you want to jump into them and buy shares or selling put options for income. Investors can actually look forward to calamities in specific stocks in order to profit from collapses. But not all stocks are created equal. Many stocks can destroy a portfolio and leave an investor feeling disgusted and literally sick. Just last week I worked with investors in GameStop Stock (GME), who many lost entire portfolios and even large portions of retirement accounts.
Not For Selling Put Options For Income
I urge investors to avoid stocks such as these for selling put options for income, especially without credit put spreads. The long put in these type of stocks would save from losses. Instead my morning was spent working with investors, some members and some not, who sold put options due to the high put premiums without setting up long puts for protection.
Taking Huge Losses Is Gut Wrenching
Without get into too many specifics, many investors sold the Feb 19 expiry $55 put strike yesterday for $10.40 and did not buy long puts because having earned $10.40 selling the put strike, they felt they were well protected against a collapse over the next week and a half. Instead those puts this morning are around $20 to buy to close. Losses can mount quickly whereas if an investor had even bought the $45 put strike yesterday for $5.00, while it would have cut their profit in half from selling the $55 put strike, today the $45 put strike is trading for roughly $11.50 today. Basically these investors would be looking at far less losses and probably at some point a gain. As well a credit put spread in stocks like these is definitely repairable whereas the naked put just keeps adding in more losses as it falls.
Never Wanting To Invest Again
Repairs take patience and time to be setup and to work. If too much capital is tied to a single stock or a single sector and it collapses, investors tend to panic and cover trades taking large losses. This sours the investor into ever investing again. This morning was an example. Of the 37 investors who I worked with this morning 15 told me they would never invest in stocks again. They though had 35% to 100% of all their capital tied to these stocks, which are obviously all in the same sector. So when the sector collapsed, all stocks were taken down.
Spread Out Risk and Use Credit Put Spreads
I realize that my trades often seem small but that is because I spread risk out over a wide number of stocks in various sectors and larger trades of 10 or more short puts are always turned into credit put spreads, even for big cap blue chip stocks like McDonalds Stock (MCD), Walt Disney Stock (DIS), Microsoft Stock (MSFT), Apple Stock (AAPL), Walmart Stock (WMT), Costco Stock (COST), Home Depot Stock (HD), Lowes Stock (LOW), Target Stock (TGT), JP Morgan Chase Stock (JPM) and dozens more. No one can judge with certainty when a stock or stocks will have a “bad day”. Credit put spreads work to protect positions.
Day In The Rain
All stocks have their day in the sun and day in the rain. When a stock collapses it can be swift and painful for some investors. Remember, diversify among a variety of stocks and sectors and never commit too much capital to one single stock. Understand the risk of the trade being made and then determine whether to commit capital. If every investor this morning who emailed me and even those who did not, had 1 or 2 percent of their portfolio tied to Tilray, they could withstand the losses being taken and waited for a better day to effect repairs, but when a quarter or more of your portfolio is in decline it is indeed hard to stay calm and work through a repair.