I have made many pop culture references in my Real Money columns, but Wednesday's crashing equity markets brought one to mind that I have never shared: Uncle Rico. Yes, Jon Gries' legendary "Napoleon Dynamite" character.
Rico delights in passing a football in front of a camcorder with the knowledge that "if coach had put me in we would have taken state." Of course, the viewer and Napoleon both assume that Rico was terrible and would never have led his high school football team to a state championship. It's not about past glory; it's about glory that never was.
So, looking at the prices of individual stocks in Wednesday's stock sell-off made me think of Uncle Rico. Maybe these companies were never valuable to begin with.
First on my list is Teva Pharmaceutical Industries (TEVA) . Basically, I am using a long position in Teva common stock as ballast to opportunistically write calls against TEVA. This is how to play a stock you believe will fall while keeping leverage within prescribed limits.
I have written three contracts against TEVA and each of them has produced profits very quickly. It's a strategy I call "harvesting." Buying a put option or shorting the stock would also have worked well with TEVA, obviously, but it is the repeated nature of harvesting that makes it lucrative. It's almost as if one could just keep betting against Teva and winning. But for how long?
Well, according to Investing.com, Wednesday's plummet in TEVA shares, driven by both a downgrade from bond rating agency Moody's and the terrible overall market. has plunged TEVA shares to a level not seen since November 1999.
So, 20 years later, just like Uncle Rico's right arm, TEVA has produced no value. That's not to say you could have harvested calls on Teva for each of those 20 years; Teva closed at an all-time high of $66.92 on Aug. 21, 2015, compared with a price of $6.30 at Wednesday's close.
Clearly, though, the roughly 90% decline in Teva's stock in four years shows something has fundamentally changed.
Opioid lawsuits are the obvious culprit in Teva's case, and the full extent of those liabilities is very difficult to calculate. I think the company has the balance sheet strength to survive -- don't try to harvest options on companies that are bankruptcy risks -- but TEVA's downward spiral will echo the one that we have seen from names such as General Electric Co. (GE) , Fluor Corp. (FLR) , Deutsche Bank (DB) , Macy's Inc. (M) and even Ford Motor Co. (F) . Steady downward moves make harvesting quite profitable in multiple periods.
I am finding other Uncle Rico-style opportunities in the energy sector. Excelsior now has long positions in Chesapeake Energy Corp. (CHK) and Denbury Resources Inc. (DNR) . I have written many columns for Real Money on the exploration-and-production sector. With my new venture, though, I can actually profit though the extraordinary volatility in these names.
Again, I am harvesting premiums through buy-writes on DNR and CHK. I can talk until I am blue in the face about the value created through advanced hydrocarbon extraction techniques and corporate risk profiles that are grossly over-exaggerated by the market -- especially in the case of Denbury and its CO2 recovery process -- but right now I am beating 'em and joining 'em. Again, I believe Denbury and Chesapeake have the balance sheet strength to survive this rout, but if Mr. Market wants to keep hating energy stocks, I am happy to reap the profits.
Friday is the expiration date for all the options contracts I am currently short. I would be most happy if those options expire worthless, a prospect that seems very real if Thursday and Friday's trading is anything like Wednesday's.
That's the beauty of harvesting; it is repeatable. On Friday at 3:50 p.m. I will either buy back my short options at pennies on the dollar or, if CHK, DNR and TEVA are below the respective strike prices for those contracts, I will simply let the options expire worthless. Then I will start the options writing process anew on Monday with contracts expiring on Sept. 20.
I have watched "Napoleon Dynamite" many, many times and the movie never gets old for me. Napoleon is quite put-upon by many of the people in his life -- including Uncle Rico -- and likes to exclaim "Lucky!" when others experience good fortune. Harvesting value through writing call options is anything but lucky. The global equity markets are in danger of collapsing. You may not see that yet, but the bond markets do. Make a profit on it if you can.
