Don't Panic. Hunt for Deals When Market Dives

Monday was shaping up as the worst day of the year so far. All major indexes were down big. Many individual stocks were being pummeled even worse. If you own stocks you're hurting. The predominant emotion you're feeling is probably fear of even larger losses to come. That is entirely rational. Almost all traders and investors will be having similar panicky thoughts. It's absolutely OK to feel like everybody else. Smart traders, though, know that they'll get paid later for fighting their emotions and acting opposite of most other people. You need to do what's goal-achieving rather than stress relieving. When the Dow Jones industrial average is down more than 760 points, the stress relief trade is to dump shares and reduce exposure. The less stock you hold, the lower future damage is likely to be. The goal achieving move is to increase exposure by adding to your favorite positions at some of their most favorable prices since the Christmas Eve Capitulation of 2018. Many shares are even cheaper now than they were back then. Regular readers of my columns know I almost never buy options, except as closing transactions. On days like Monday, however, the circumstances warrant doing what is not typical. When should you consider buying call options? When the following are true: Share prices are well below true values Other investors are seeking to hedge their positions against loss Risk on that particular stock appears low Upside seems exciting Monday's sell-off provided exactly those circumstances. Here are two of my actual call purchases from the day's session. Both involved stocks I've written about favorably here on Real Money Pro in recent days. Norwegian Cruise Line Holdings looked great a week ago at about $49. They are due to report what should be a great quarter, on the way to a record year, this Thursday. Market action on Aug. 5, 2019, had driven the stock down to near $46. My end of 2020 target price is about $90. That's almost double where it is now offered. Why not buy a few long-term calls out to Jan. 15, 2021? Actual bid-ask prices, with NCLH at $46.12, are shown below. If I'm correct and NCLH reaches $90 by January of 2021, then potential gains on these options could be enormous. Maximum gains would be 292% on the $35 calls; 376% on the $40 calls; and 492% on the $45 calls. The greater percentage gains relate to the leverage provided by the smaller premiums laid out to start. Of course, there is no guarantee that NCLH will be $90 by then. Recouping my money, though, doesn't require that kind of move. All I need is for NCLH to reach the respective break-even points by expiration day to get back 100% of my initial investments. Even the highest break-even point of $2.60 is just $6.48 per share above Norwegian's super-depressed current quote. That's just 17.9% above my trade inception price. Plus, I have 1.45-years for that move to take place. I see risk/reward on these call options as extremely favorable. Another stock that I bought calls on Monday was Affiliated Managers Group , the subject of the column I wrote the same day. I loved it at $81.12. By Monday afternoon it had fallen to south of $80. AMG doesn't offer 2021 expiration date options. I bought in-the-money $70 calls for $14.50 per share. That set my March 20, 2020 break-even point at $84.50. Picturing AMG at that price doesn't require much imagination. In fact, it traded above $92 as recently as July 29. It was north of $115 in April and was over $156 not quite one year ago. As with NCLH, analysts see record results ahead for AMG over the coming year. If the shares merely rebound to $115 by expiration day, the calls which cost $14.50 will be worth more than triple what I paid. If AMG recovers to $150, they'll sell for at least $80. Bad markets give way to better ones. The turns occur faster than most people expect they will. So turn selling panics to your advantage by fighting fears and buying when others are scared to death to do so. Your IRA, 401(k) or standard brokerage account will be better off if you go counter to the crowd.

Don't Panic. Hunt for Deals When Market Dives

Making moves to make money as opposed to stave off a fear of losses is the smart play during market drops.

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Very good quarterly numbers from Bassett Furniture (BSET)

First Half Results - Putrid Second Half Results - Likely to Be Much Better

We Should Be in for Better Starting Soon

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