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  1. Home
  2. / Investing
  3. / Stocks

Lessons Learned in 1999 Could Come in Handy Right Now

Today's hot market conjures up thoughts of two decades ago, and approaches to trading then could prove invaluable in the current environment.
By TIMOTHY COLLINS
Jan 25, 2021 | 09:30 AM EST
Stocks quotes in this article: GME, AMC, BB

When the clock struck midnight on Dec. 31, 2020, the date change included the year. What I didn't realize was that we stepped into the past.

The year is 1999. Iomega is up $10 on the open because, well, it's Iomega. Copper Mountain is skyrocketing 42% because lots of apartment buildings will want higher-speed Internet. Lucent is taking telecom by storm. Cisco is fending off Cascade Networks and Ascend Communications. The Four Horsemen of tech rule not just the day but every day. Ciena is the under-the-radar fiber play that hasn't yet moved nearly as much as the others, but give it a little time. And anything with the word "gene" or "genome" in the company description is staring at a move of 100% over the past week.

I'm jamming out to Learn to Fly by the Foo Fighters, one of the few things that survived the bubble. My phone won't stop ringing with clients calling to buy more. At first, I beg them to take profits. Then, I worry about losing them to other financial advisors who are doubling down and winning big.

For many, the ending was brutal, but it provides us a clearer path on how to potentially tackle this market that sees GameStop (GME) (the subject of Jim Cramer's opener) trading up more than 40%, AMC Entertainment (AMC) higher by 34%, BlackBerry (BB) higher by 30%, and every special purpose acquisition company (SPAC) announcing a deal higher by 20% to 50%, with the exception of a SPAC merger that has Chamath Palihapitiya in the PIPE (private investment in a public entity) and that is gapping over 100% after the announcement. These numbers will change. I'm taking this look two hours before the open, so by the time the bell rings, these moves could be twice as high or cut in half.

The year 1999 taught us that shorting overnight could kill a portfolio in weeks, if not days. Shorting stocks was best left to intraday scalping. Buying dips and then selling the next morning worked great, but so did buy and hold until the bubble finally burst. There's a reason we say, "The trend is your friend." Simply put: It's true. So, we keep playing the trend, which is higher. The folks I know who survived 1999 also survived thanks to another moniker: "Pigs get fat. Hogs get slaughtered."

They took profits, but they did so by scaling. They rarely sold 100% of a holding in a single move. They sold pieces. Kept runners until it was clear the bubble burst. That also meant they rarely exited a position at the top. If they were option traders, they rolled positions out (more time) and up (higher strike) but always pocketed a few dollars. The approach was little different than being up at the poker table and putting your starting stake back in your pocket.

One thing they didn't do was short aggressively. And they didn't short shares before there was a clear end to the bubble. The challenge created by the huge moves higher was the huge implied volatility in individual stocks. Forget about the Volatility Index (VIX). It doesn't mean anything to a stock if we have a VIX at 9 but the implied volatility of the stock is 200. The puts in that stock are going to be jacked up.

If you want to start playing potential downside moves, I believe the way to do it is with diagonal spreads, shorting the lower-priced strike, closer-to-expiration puts while buying a higher-priced strike, longer-dated expiration put. This approach would be done using the same quantity of long and short puts and on the same underlying security. Until the first put expires, the upside of the downside in a stock will be limited; however, the risk is defined to your cost and the short put can help offset some time decay in the long put. Other approaches include put spreads or skip-strike put butterflies. On names I might want to buy much lower, a ratio put spread (long one put at a higher strike paired with two short puts at a lower strike price) could work. I'd aim for no net cost or even a net credit to get into a trade like this.

I'm not a believer in covered calls up here. Collars? Sure, but the covered call limits my upside while opening me to a bunch of downside should the market turn. I reserve covered calls for deep-value plays, boring plays, plays with few visible or even possible catalysts. Honestly, they are my least favorite strategy of just about anything out there.

In the end, it's next to impossible for those of us who traded at the turn of the century to deny the echoes we're hearing, but we have to remember more about the time than just the pop. There was a ton of upside to be hard and a lot of risk shorting prematurely. Have a strategy, stick to it, and don't get stubborn.

I'll leave you with one last characteristic of those who flourished before and after the crash. They stopped looking at a trade after they exited. It's too easy to get caught up in what might have been. Do that and you're driving 70 mph down a highway with your eyes glued to the rear-view mirror rather than the road in front of you.

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At the time of publication, Collins was long AMC calls.

TAGS: Investing | Options | Stocks | Real Money

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