COVID-19 - An Agile Options Strategy

COVID-19 has become the black swan event that has materialized into a worldwide economic halt. The spread of the virus globally has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs. COVID-19 was the linchpin for the major indices to drop over 30% over the course of 22 days. This COVID-19 induced sell-off has been the worst since the Great Depression in terms of breadth and velocity of the sell-off while inducing extreme market volatility that hasn’t been since the Financial Crisis.

Although options trading provides a margin of downside protection and a statistical edge, when hit with a black swan event, no portfolio is immune from the wreckage. Thus, proper portfolio construction is essential when engaging in options trading to drive portfolio results. One of the main pillars when building an options-based portfolio is maintaining ample liquidity via holding ~50% of one’s portfolio in cash. This liquidity position provides the ability to adjust when faced with extreme market conditions such as COVID-19 rapidly. An agile options based portfolio is essential, and the COVID-19 pandemic is a prime example of why maintaining liquidity is one of the many keys to an effective long term options strategy.

An Agile Options Strategy

Risk management is paramount when engaging in options trading. A slew of protective measures should be deployed if options are used as a means to drive portfolio results. When selling options and running an options-based portfolio, the following guidelines are essential: Continue reading "COVID-19 - An Agile Options Strategy"

COVID-19 - Adding Speculative Positions

Now is as good time as any to put on some speculation plays because this COVID-19 black swan event may be a once in a lifetime opportunity. This COVID-19 induced sell-off has been the worst since the Great Depression in terms of breadth and velocity of the sell-off. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs.

The broader indices have shed approximately a third of their market capitalization into April. Some individual stocks directly related to the COVID-19 pandemic have lost ~50% to well over 80% of their market capitalization. Investors have been presented with a unique opportunity to start speculating on some of these names as sharp rebound candidates. Throughout this market sell-off, I have begun to speculate on a variety of names with small amounts of capital. Let's not confuse speculation for investment; thus, these trades are purely speculative for a sharp potential recovery. These names have been battered to levels not seen since the Financial Crisis. Names such as Expedia (EXPE), Wynn Resorts (WYNN), Capri Holdings (CPRI), MGM Resorts (MGM), American Insurance Group (AIG), The Gap (GPS), Square (SQ), Lowes (LOW), HP Inc. (HPQ), Walgreens (WBA), Yelp (YELP), Yum Brands (YUM), General Electric (GE), Ulta Beauty (ULTA), Royal Caribbean (RCL), Boeing (BA), Hasbro (HAS) and Twitter (TWTR) are some speculative names that have sold off ~50%-85%.

Evaporated Market Capitalization

The COVID-19 pandemic has destroyed entire industries and many individual stocks. Anything related to travel, leisure, retail, industrials, and discretionary spending has been cut by 50% or more. Companies are being tested like no other time in history where the entire economy is at a standstill under the COVID-19 coast is clear. Amid this economic wreckage, speculation can potentially Continue reading "COVID-19 - Adding Speculative Positions"

COVID-19 Opportunity - Laying The Foundation

An opportunity to begin or reinforce a portfolio foundation amid the COVID-19 pandemic has been presented. COVID-19 was the back swan event that only comes along on the scale of decades. This COVID-19 induced sell-off has been the worst since the Great Depression in terms of breadth and velocity of the sell-off. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs. The S&P 500, Nasdaq, and Dow Jones have shed approximately a third of their market capitalization, with the sell-offs coming in at 33%, 29%, and 36%, respectively, through March 20, 2020. Since then, stocks have attempted rallies. However, these have fallen short, and the lows are being retested. Some individual stocks have lost over 80% of their market capitalization. Investors have been presented with a unique opportunity to start buying broad market indices to lay the foundation of a portfolio or to reinforce long positions without single stock risks. Throughout this market sell-off, I have begun to take long positions in the broad market ETFs that mirror the S&P 500 ETF (SPY), Nasdaq (QQQ), and Dow Jones (DIA). It's important to put this black swan into perspective and see through this on a long term basis while viewing this as an opportunity that only comes along in decades.

Most Extreme and Rare Sell-Off Ever

Out of the 12 recessions that have occurred since May of 1937, the average sell-off for the S&P 500 was -31.6% with a range of -57% (2008 Financial Crisis) to -14% (1960-1961). The COVID-19 pandemic has crushed stocks beyond the average recession sell-off of -31.6%. The markets haven't reached the most severe sell-off levels by historical standards, so there's always a possibility for more downside potential. Regardless, at these levels putting cash to work would be prudent for any long-term minded investor. Continue reading "COVID-19 Opportunity - Laying The Foundation"

Seeing Beyond The Black Swan Event

Just before the COVID-19 pandemic struck the S&P 500, Nasdaq, and Dow, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect but they were ill-advised in what was an already frothy market with stretched valuations. I'm sure Ray Dalio quickly realized that his "cash is trash" mentality, and public statements were imprudent. The COVID-19 pandemic has been a truly back swan event that no one saw coming. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs.

The S&P 500, Nasdaq, and Dow Jones have shed approximately a third of their market capitalization, with the sell-offs coming in at 33%, 29%, and 36%, respectively, through March 20, 2020. Some individual stocks have lost over 70% of their market capitalization. Other stocks have been hit due to the market-wide meltdown, and many opportunities have been presented as a result.

Investors have been presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I have begun to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It's important to put this black swan into perspective and see through this on a long term basis while viewing this as an opportunity that only comes along in decades.

Most Extreme and Rare Sell-Off Ever

The abrupt and drastic economic shutdown and velocity of the U.S. market's ~30% drop within a month bring parallels to the 1930s. This sell-off has been extreme and rare in its breadth, nearly evaporating entire market capitalizations of specific companies. The pace at which stocks have dropped from their peak just last month from all-time highs is the fastest in history. The major averages just posted their worst week since the financial crisis (Figures 1 and 2). The Dow is tracking for its worst month since 1931, the S&P since 1940. As of March 20, the S&P 500, Nasdaq and Dow Jones have sold off 33%, 29%, and 36%, respectively. Continue reading "Seeing Beyond The Black Swan Event"

Don't Be Remiss - Start Buying Stocks

The coronavirus (COVID-19) epidemic has pummeled stocks and has caused a complete collapse of the entire market. Broader indices such as the S&P 500, Nasdaq, and Dow Jones have lost over 20% of their value, while most individual stocks have lost 20%-70% of their market capitalization. Airlines, cruise lines, and casinos have been hit particularly hard. Other stocks have been hit due to the market-wide meltdown, and many opportunities have been presented as a result. I'd be remiss if I didn't use this unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I have begun to take long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones.

The Financial Crisis and 1987 Black Monday Comparators

The broader market sold off in a historic downward move as the coronavirus has spread outside of China throughout the rest of the world, effectively shutting down economic activity on a grand scale. During the last week of February, the Dow Jones and S&P 500 sank by 12% and 11% for the week, respectively. This marked the worst weekly performance since the financial crisis for the markets. The Dow posted its biggest one-day loss ever during the week and tumbled into correction territory, down more than 10% along with the S&P 500 and Nasdaq.

As the markets moved into March, the S&P 500 officially closed in a bear market on March 12th, down more than 26% from its record high set just last month. This ended the historic 11-year bull market run. The Cboe Volatility Index (VIX) jumped to more than 76 and hit its highest level since 2008 (Figure 1). On March 12th, The Dow Jones and S&P 500 had its worst drop since the 1987 "Black Monday" market crash, when it collapsed by more than 22% (Figure 2).

This market-wide meltdown is in response to the negative impact that COVID-19 will likely have on the global economy and corporate earnings. A wide array of companies have already issued warnings about their upcoming quarterly earnings. This placed a damper on the outlook for the markets, especially with rising concerns Continue reading "Don't Be Remiss - Start Buying Stocks"