When Markets Are High... Make Money on Stocks That Don't Need to Go Up

Last week ended with the insider sell/buy ratio hitting a new yearly peak. Corporate officers and other insiders sold 70 shares in their own companies for each one bought. Anything above a 20-to-one sell/buy ratio is considered short-term bearish, so last week's reading was quite extreme. The same indicator was solidly in bullish territory as recently as Feb. 5, just two weeks earlier. Use of this tool can be very short-term in nature. It often fluctuates between bullish and bearish within weeks, not months or years. That said, in a negative environment it is noteworthy to check out stocks that showed counter-trend insider buying. Three of my previous picks, Coty , Affiliated Managers Group and DXC Tech , showed up on Barron's list of significant insider purchases this week. When the people who know the company best are putting their personal cash at risk that's a very positive sign. Coty and DXC Technology in particular offer incredible opportunities for those well versed in the use of buy/write combinations. Buy/writes involve purchase of round lots of shares (any multiple of 100) along with the sales of covered calls and naked puts on the same underlying stock, typically utilizing identical expiration dates. Actual pricing for COTY's Jan. 20, 2023 $7 strike price options, with COTY at $7.63, is shown below. Here are the cash flow details on a 1000-share, 10-call and 10-put combination out to Jan. 20, 2023. If held through expiration these will see just two possible outcomes. Coty will close at $7 or higher, or below $7. If the former situation prevails the following best-case scenario will unfold. Potential returns are astounding considering the stock does need to advance, and could even fall slightly, in order to cash in on it. Where else could you hope to capture over 600% gains on a position that didn't even go up? The potential annualized gain of 348.9% is not too shabby either. What if COTY declines to below $7 on expiration day? Barring a major collapse, even that event is unlikely to cause harm. You'd end up with a double-sized long position in COTY, but at a net average cost of just $3.96 per share. Any decline of less than 48% from the trade inception price would still allow for immediate liquidation for at least a small profit, and perhaps a sizable one. How cool is that? DXC Technology recently turned down a buyout offer from a French company at $39 per share. They felt it was way below their true worth. I agree. Here were the prices on DXC shares and its Jan. 2023 $25 strike price options as of 4 p.m. on Friday. The table below details the cash flow on a 100-share, one call and one put combination. As with COTY, there are just two possible outcomes if held to maturity. Also similar is that DXC was already above the strike price needed to achieve the best-case results shown next. DXC is a higher quality, less speculative company than Coty. As such, it does not offer quite the same upside potential on its buy/write combo. I doubt, though, that any of you would be dissatisfied with gains of 82.6% in under two years. There is no guarantee that DXC will hold $25 though. If not the worst-case scenario detailed below would apply. Any drop of less than 25.5% would still allow for immediate liquidation for at least a small gain. Lesser declines could deliver quite respectable profits. Getting the chance at over 82% upside while still receiving greater than 25% downside protection is a fine risk/reward proposition. Remember, too, that company insiders appear bullish on their firms' prospects from recent price points. Earning the maximum gains on COTY or DXC using the described buy/write combinations appears very attainable. Seeing those stocks drop below the respective break-even points looks quite remote.

When Markets Are High... Make Money on Stocks That Don't Need to Go Up

Let's look at opportunities in Coty and DXC.

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