Keeping Sane, the Profitable Way: How I'm Playing This Market

The market continues to be a daily roller coaster ride. We saw some real intense fear on Wednesday when the averages sported double-digit losses intraday. However, stocks rebounded nicely from new lows and the S&P 500 was off 5% on Wednesday when all was said and done. The Nasdaq was only off a tad more than 3%. Equities continued to rally some Thursday and are up in early in trading Friday. I am hopeful the intraday lows Wednesday of around 2300 on the S&P and $20 a barrel on oil turn out to be the bottom when Covid-19 fears ebb and sanity returns to the market and the world. While the media continues to mainly be focused around reporting on how Italy, Spain and Iran have been overwhelmed by the virus, I am focusing on Germany. First, because it has done extensive testing. Second, because you can trust Germany's figures, unlike China's, and third, because it has kept its healthcare system from getting overwhelmed. So far, Germany has seen 44 deaths on 16,626 confirmed cases as of Friday morning. This would imply a mortality rate of two and a half to three times that of the common flu. This would be much lower than what is being articulated by much of the media at the moment. Statistics out of Japan and South Korea are also encouraging. Thursday, the Trump administration articulated some hope for existing anti-malarial drugs to treat Covid-19. And Gilead Sciences antiviral originally developed to treat Ebola has shown great promise in limited testing and appears like it will be rushed, lightning-like, to approval sometime this spring. Once the population becomes confident the worse cases of the outbreak can be treated effectively, hopefully the bubble around this panic bursts and life can start to return to normal. In the meantime, I continue to shuttle new money into the market on declines using buy-write option strategies, which are also known as covered calls. I cannot recall ever seeing option premiums higher, making the strategy potentially very lucrative while providing a good measure of downside protection. Using the January call strikes one can fashion covered calls on the iShares Russell 2000 ETF , which represents the small-cap benchmark. This provides great diversification. At-the-money January calls are offering potential 20% returns even if the index is at the same trading level as now by the beginning of 2021. Usually one would only get a potential 8% to 10% return in normal times. The IWM is off some 40% from recent highs, so a lot of downside already appears priced into this index. Willing to take on a bit more risk for a much higher return? Lots of the cash-rich small biotech names with great balance sheets I have profiled lately, such Exelixis and Alexion Pharmaceuticals , make great covered call candidates. Wednesday, I added covered calls on Amarin , another name I have highlighted here. Near-the-money January call strikes were offering nearly 70% potential returns with large downside protection. Really want to take a walk on the wild side and bet the federal government is not going to let the airline, cruise line and hotel industries go bankrupt? Thursday, I did some covered calls on Carnival Corporation , the huge cruise ship operator. Using the January $10 call strikes, I fashioned some covered calls with a net debit (stock price - option premium) of just $4.38 a share. So, if Carnival doesn't end of up in bankruptcy by year end, I should be banking a profit in excess of 125% on my small investment. So, while so much of the country seems paralyzed by fear, I will continue to look to profit wildly from the madness of crowds.

Keeping Sane, the Profitable Way: How I'm Playing This Market

I continue to shuttle new money into the market on declines using buy-write option strategies.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 10/23/2020

Let's Talk About Why Cash Is King

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.