The Market Went on a Roller Coaster, and I Went to Work

Thursday of last week to Wednesday of this one took traders on a wild ride. Last Friday we saw new all-time highs. Monday morning sent the Dow Jones industrial average briefly higher, establishing a new intraday record. Since then, however, all three major indexes sold off sharply. The Invesco QQQ exchange-traded fund went from up 2.4% around midday last Friday to down 3.2% at its Wednesday close. Ouch. Many of the stocks in that QQQ ETF were trading at crazy high valuations. Seeing it come down should not surprise anyone, other than for the shockingly short time frame involved. The reported reason for the big selloff was the reaction to higher than expected inflation numbers. Higher prices had been rolling out for a very long time. It was denied by the official government figures, as the Federal Reserve Board has a vested interest in understating the consumer price index-U. Social security payments get raised when inflation rears up its ugly head. So do civil service salaries, pensions and interest on our, now enormous, national debt. Paying the old normalized rates of 5% to 7% on $30 trillion or so would totally bust the federal budget. For that reason, I don't expect to see much, if any, rise in interest rates as long as the Fed is determined to keep them artificially low. Significant inflation is real, though, and is going to get worse. What happens to various asset classes when that happens? Bonds go down in value. Holding low coupon-fixed interest paper is a losing bet after inflation and taxes. Cash, currently earning next to nothing, loses buying power. Real estate could theoretically could go up, but ever increasing property taxes, illiquidity, and high transaction costs make it less desirable for short-term periods. Gold could be helped as a non-printable alternative but it offers no income, and often costs money to hold in secure facilities. Additionally, it cannot be used to pay bills or taxes without being reconverted to cash first. Equities (stocks) provide the best chance to increase in value on an inflation-adjusted basis. Companies can mark-up inventory and raise prices to offset higher costs. Many firms make more when prices rise as they get paid a percentage of gross sales. Obvious examples of these type companies include Visa , Mastercard and retailers like Costco . Crypto currencies might prove to be even worse than fiat-based money over the long term. Nobody really knows who issues Bitcoin and thus nobody is there to complain to, or make good on losses, if and when bad things happen. I wouldn't even think about putting money into any of them. Considering all those factors, stocks are far and away the best bet to hold value or increase wealth in a now highly inflationary world. Investors with cash reserves should be putting some of that money to work on the recent pullback. One way to do that, without needing to call a bottom, is to sell puts on stocks you'd like to own, or own more of, at even lower prices. That's what I was doing over the past week. The trades shown below are really money transactions. On May 10, with the market still high, I sold one out-of-the-money covered call on Ingevity out to Oct. 15 using a $100 strike price, collecting $370. On Wednesday, NGVT closed at $85.39. I'd be willing to sell it for $103.70, if called away later. In the meantime I pocketed a synthetic dividend of 4.33% on the current quote for just over five months. All the other trades shown were naked put sales on stocks I favor. I'm eagerly awaiting the Q1 report from EBIX , due for release not later than May 17. It should be a good one. I'm expecting a nice pop once it comes out. I already own a large long position, so I merely nibbled at the edges by shorting some $22.50 and $25.00 puts out to Dec. 17, 2021. Break-evens on the two sets of puts dropped to just $19.65 and $21.13 respectively. Likewise, I'm long a big slug of United Natural Foods shares already. I couldn't resist adding a few more naked puts at $45, while collecting $18.40 per share for committing through Jan. 20, 2023. Worst-case, forced purchase would come at just $26.60 per share. UNFI closed at $34.75 on Wednesday after an almost 700-point drop in the DJIA. I've written favorably about Griffin and already own it. Still, selling puts at $22.50 out to Oct. 15 for $1.20 per share looked great to me. In a worst case I'll buy more GFF for just $21.30. GFF closed at $25.76 after Wednesday's big market decline. Sally Beauty Holdings was the subject of my article on Wednesday. I liked it at $23.71. How could I not love it at much lower prices? Knowing that, I shorted some Dec. 17 expiration date puts at $17.50, $20.00 and $22.50 strikes. One batch of those ultra conservative $17.50 puts dropped my if put price to just $16.20. The $20 puts made for a break-even price of just north of $18. Closer to the money $22.50 puts brought in $3 premiums, providing a $19.50 worst-case purchase price. The last trade I made on Wednesday afternoon was shorting four contracts of trucking firm Heartland Express' Dec. 17, 2021 expiration date $17.50 puts at $1.05 per share. My if put price dropped to just $16.45. That's below HTLD's entire 52-week range of from $17.85 to $22.75. Between the one covered call and the assorted put sales, I collected $14,778 of other people's money. In my world that can pay a lot of bills. There are just two ways that these trades can unfold between now and the option expiration dates. If I get called away on HTLD I'll have made a very nice gain. If not, I'll have at least collected decent option income plus some normal dividends. If all the underlying shares on the puts stay, or simply reach, the strike prices employed I'll end up keeping my maximum put sale gains of greater than $14,000. That's how I played the three-day decline using options. (COST is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stock? Learn more now.)

The Market Went on a Roller Coaster, and I Went to Work

Here are the trades I made as the markets plunged.

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