Options-Based Portfolio Screening Tool

Controlling the overall systemic risk of a portfolio is essential as the markets continue to grapple with inflation, a rising interest rate environment, supply chain challenges, and the Russian/Ukraine conflict.

Controlling volatility while generating in-line or superior returns relative to the market is the goal of an options-based portfolio. An option-based strategy is achieved via a blended approach of options, long stock positions, and cash. Options alone cannot be the sole driver of portfolio appreciation; however, they can play a critical component in the overall portfolio construction while keeping volatility in check (Figure 1).

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is the core of an options-based portfolio strategy. They can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options enable the possibility to generate consistent monthly income in a high probability manner in various market scenarios. An options-based portfolio provides durability and resiliency to drive portfolio results with substantially less risk. Over the previous 2-year period, the portfolio strategy has consistently outperformed the Dow Jones with reduced volatility (Figure 1).

Options Trading

Figure 1 – Previous 24-month period of overall returns for the options-based portfolio strategy relative to the Dow Jones. All option and stock trades executed in the options-based portfolio is available via the Trade Notification Service

Options Screening Tool

Using basic technical indicators and key dates can aid in trade type selection, such as covered calls, put spreads, call spreads, or iron condors (Figures 2 and 3). Continue reading "Options-Based Portfolio Screening Tool"

Disney - Full Business Strength Ahead

Disney is starting to fire on all cylinders now that Covid has subsided. Disney's parks are back in full swing, and movie theaters are springing back to life in this post-pandemic environment. Despite Disney's full business nearly back online, the stock sits near a 52-week low. Disney (DIS) should be in the sweet spot of capitalizing on the pent-up post-pandemic consumer wave of travel and spending at its parks while being the new and preferred content provider via Disney Plus. The former is roaring back while the latter continues to build out content and expand its membership base.

The streaming efforts (Disney Plus, ESPN, and Hulu) have transformed Disney's business model with recurring revenue streams, which will be further bolstered by its legacy businesses now that Covid is diminishing. Taken together, Disney has set itself up to benefit across the board with its streaming initiatives firing on all cylinders while its theme parks are back online and movie theaters have reopened. The company has been posting phenomenal streaming numbers that have negated the negative pandemic impact on its theme parks. However, the streaming-centric narrative is changing as the theme park revenue flows into the company's earnings. Disney presents a very compelling buy for long-term investors as the synergy of its legacy business segments combines with its wildly successful streaming initiatives, all of which have more pricing power down the road to expand margins.

“Hulk Smash” Earnings

Bank of America analyst Jessica Reif Ehrlich noted that the most recent quarterly results were "Hulk smash" and largely driven by Disney+ direct-to-consumer segment, as well as "significantly better" results from its parks, experience, and products business, which generated $2.45 billion, compared to estimates of $1.35 billion. Continue reading "Disney - Full Business Strength Ahead"

Potential Market Inflection Point Imminent?

Cautiously Optimistic

Commodity prices are soaring, the war between Russia and Ukraine is worsening, inflation is raging, and the Federal Reserve has begun increasing rates. The backdrop seems ominous; however, the market may be just one positive headline away from an inflection point to turn the tide in a positive direction.

Timing the market has been proven time and time again to be nearly impossible; however, what is possible is capitalizing during these correction periods and buying heavily discounted stocks. These correction periods are great opportunities for long-term investors via dollar cost averaging throughout these long stretches of suppressed conditions. As the best market days typically follow the worst market days, building stock positions and riding out the volatility has proven advantageous. Missing out on just a few of the best-performing days of the market in any given year can drastically alter investor returns and yield dramatically inferior results.

The Russian/Ukraine War

Conditions between Russia and Ukraine continue to worsen while the west slaps sanction after sanction on Russia for its aggression. However, per Bank of America, stock declines related to the conflict may have bottomed. Continue reading "Potential Market Inflection Point Imminent?"

Geopolitics - Sell The Rumor, Buy The News?

Relentless Selling

The old adage is buying the rumor and selling on the news; however, during this recent market correction, it's been the opposite. Selling the rumor and buying the news has prevailed when it comes to interest rate hikes and the geopolitical tensions between Russia and Ukraine. In both cases, the anticipation of rate hikes has sent the market into a downward tailspin despite the fact the Federal Reserve hasn't put forth any rate hikes. In addition, the anticipation of the Russian/Ukraine conflict boiling over into an invasion by Russia drove the markets further into correction territory.

As a result, the markets entered deep into correction territory. Over a third of the Nasdaq 100 stocks traded off at least 30% or more from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60% or more. In addition, massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.

Per Tom Lee, many factors, including the market's big reversal at the onset of Russia's invasion of Ukraine, indicate the markets are now bottoming around these levels. Lee stated that the market's stunning comeback in stocks and a reversal in the Cboe Volatility Index signal that the pain in the market could be coming to an end. The market had a "buy the invasion" moment, Lee said in a note. The S&P 500 opened down more than 2.6% on the invasion news, and oil prices surged above $100 per barrel. However, markets typically sell off into the buildup of geopolitical escalations but rally on the day of the invasion. Continue reading "Geopolitics - Sell The Rumor, Buy The News?"

Dollar-Cost Averaging Into The Correction

Relentless Selling

The bears have been circling for months and have now mauled these markets into a correction. The linchpin was inflation along with an impending rising interest rate environment. The simmering geopolitical tensions between Russia and Ukraine only exacerbated this delicate market and pushed it into a full-blown correction. Over a third of the Nasdaq 100 stocks traded off at least 30% from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60%. Massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.

However, during periods of market-wide corrections, investors can purchase heavily discounted stocks at a fraction of the prices these stocks were trading at just weeks prior. As history indicates, establishing positions during corrections can lead to outsized gains over the intermediate-term as the selling pressure abates and the macroeconomic backdrop resolves. Portfolio balance is key in all market environments and deploying cash during periods of heavily reduced valuations is essential. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies via patience and dollar-cost averaging.

Dollar-Cost Averaging

Repurposing Cash

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. Continue reading "Dollar-Cost Averaging Into The Correction"