Podcast – Episode 70 – This is a Stock Pickers Market

Podcast Transcript

My fellow passive traders, I hope you are doing well. This coronavirus really has everyone on edge, and it’s been about a couple months since this thing really took hold in the U.S., and we’ve been sitting at home for a while now. The arguments, the protests and the discussions are getting very heated about whether we should stay at home or whether we should start opening up the economy again. Either way, it’s not up to me, so let me just talk about the stock market, something that I know a little bit about.

This market is not like your typical market, of course you know that. Volatility’s through the roof, but we don’t even know if we’re in a recession, if this is going to lead to a depression, this has never happened before. We keep hearing that, over and over again, from the financial media, from the government, “Something like this has never happened before, never happened before.” Yeah, but we still have to trade it. We still have to survive through it, right? We can’t just sit on our hands the whole time. I have been getting back into the market for a little bit, I wasn’t doing anything, I was just watching and waiting and learning and seeing what was happening. But eventually, you got to get back in.

But right now, I’m seeing other folks try to get in the wrong way, and that’s what I want to do this episode, specifically. I do not believe that this is a market to be trading options on indexes. Normally, that’s what we prefer, we want to trade the S&P 500, we want to trade the Dow Jones and NASDAQ because those are safer. There’s less risk when you have an average, when you have multiple companies, so in case some companies do well, other ones will do bad, so you don’t get blindsided by one. But in this situation, the average is down. Most companies are not doing well, most companies, business is down, revenue is down, a lot of companies are on the verge of bankruptcy, but not all.

There are companies that are doing well, there are companies that their stocks are making all-time highs, and there’s a lot more that are making 52-week highs, meaning new yearly highs. So those are the ones that we should be looking at, those are the ones that should be trading, not companies … I mean, you can buy stocks in a company that might be going out of business. I have done that in the past, and I might talk about that in a future episode, but I have taken, well, let me just say it here: I’ve taken about $20,000, and I picked 20 companies that really got hit by the virus really, really badly, and I put $1,000 in each one, buying their stock.

Now, do I expect all of them to survive and make money. No, I think a bunch of them are going to go out of business. But some of them should recover, most of them. I hope they’ll recover and do well. So I’m not looking on this particular instance to make 100%, I’m looking to make four, five, 6,000%, because these are very risks stocks. What I mean by that are companies that might go out of business tomorrow, but there are other companies that might not go out of business, but they’re going to need a bailout. And who knows what that’s going to look like? We’re talking about the cruise lines, we’re talking about the travel agents or the airlines themselves. These companies are hurting right now because they’re all shut down, the hotels.

But then there are still other companies that are doing really well, and those are the ones I’m trading options on. I’m not buying options on the loser companies, I’m buying their stocks, because I don’t know how long it’s going to take for them to turn around, if they turn around. I don’t want to have an expiration date. I put $1,000 in each of these companies, I could easily have bought options for $1,000. But then those options would have, and they would have an expiration. I don’t want that, because I don’t know how long these companies are going to need to turn around. Some of them are financials, they’re banks. It might be three, four, five years. That’s why I would rather own the stocks.

But I’m not trading options on these suckers, and I’m not trading options on the indexes right now, because the indexes are made up mostly of companies that are not doing well. So we have these crazy news days where the market’s down 2%, then the next day the market’s up 3%. Then it’s down 5%. Then it’s up 3%. You can easily get whip-sawed in this market, in such a high volatility market that our normal non-directional trades, like Iron Condors and Butterflies are not working either. So what do you do?

Well, this is not the time for diversification, it’s the time for focus. So what I would like you to do is to check your watch list, find the companies that are doing well, find the companies that are making new highs, and stick to those only. Really tone down your list and say, you know what, I can’t do all of them, I can’t trade all of these. Even if it was great in the past, I can’t trade it right now. One of my favorites is Starbucks: I don’t think they’re going out of business, it’s a good company, but they’re not making new highs, they’re not doing, who knows how long it’s going to take for them to ramp back up and get back to normal? So I’m not doing spreads on Starbucks.

If you don’t have enough names on your watch list, companies that are doing well on your watch list, if you can’t find any, the place to find them right now are on the 52-week high charts. Basically, these are a listing that comes out every day of the companies that are making new yearly highs, 52-week highs. So if you’re on thinkorswim, you can go over to the marketplace, market watch tab, and then search for new yearly highs. If you’re on Yahoo! Finance or Barchart, you can do the same thing. FINVIZ, they have it. All these free sites, they have the list every day, and you go through them. Most of them are going to be garbage, you’re not going to be able to trade them. Some of them might not even have options. Some of them may be so small, you don’t want to.

But you might find some gems in there that you didn’t know about. Like Papa John’s pizza, Wingstop, Amazon, Shopify, Domino’s Pizza, and even Johnson & Johnson. Clorox has been doing amazingly well. Johnson & Johnson is on my buy list, I’ve been wanting to buy the stock, it didn’t go down, otherwise I couldn’t buy it, but Johnson & Johnson is one that I’ve been selling puts on because I want to buy it. I’m hoping it goes down so I can buy some shares. But I’ve been selling naked puts on this stock and it’s doing great. So I want you to stay with strength. Right now, the big takeaway from this episode is, let’s stay away from the indexes for now, let’s focus on the stocks that are doing well and trade those.

This is not the time to be diversified, because all stocks are not doing well. Find the ones that are, and then when things return to normal, then yeah, you can go back to the indexes. For right now, let’s stay away from the indexes and focus on the stocks that are doing well that are strong, that have good balance sheets, that have good cash, have decent revenues, and that are not going out of business, okay?

One final thing is that, stay away from companies that have exorbitantly high premium, meaning that you’re doing a covered call on a stock, and it’s paying you 8% or 12% for a month. There’s something wrong with that picture, there’s something wrong with that stock. There’s a good chance it’s going to tank, there’s a good chance it could go out of business. So if you’re doing trades and the premium is way, way high … now normally, if you’re doing, let’s say, covered calls, and you make 2%, now you can make more. You can make 3%, 4%. But if you’re making 8%, 12%, three or four times what you should normally be making, you’re taking too much risk. So don’t get greedy, and stay away from those type of stocks. Stay away from that type of risk, because yeah, you might make it on some of them, but you get one loser and it’s going to wipe out everything. And you’re going to cry.

So keep yourself from crying, keep yourself from taking that big loss, right? Stay away from the options that are overly priced in premium, because these companies could collapse tomorrow. One of the traders in our passive trading group mentioned that he’s selling options on Macy’s. That scared the heck out of me, because they’re not doing well. They might go out of business tomorrow if they can’t raise enough money, if they can’t borrow enough money to survive. And that would be sad, it’s a great company, it’s been around for a while, I love shopping there. But if they go out of business, he’s going to cry. And luckily, I was able to tell him, like, “Hey, man, you need to get out of this one.”

But there are others out there, too, that people are trading, like Bed Bath & Beyond. Recently, there were so many people, with oil dropping, who were trading the USO. And they learned the hard way that the USO is not the same thing as oil, it’s just a different, the USO is not something you want to own as an individual investor over the long term, anyway. But selling options on it, people got crushed. So things that are going to zero, stay away from, things that are giving you too much premium, stay away from. Indexes, stay away from right now, focus on strength, focus on what’s working, focus on what’s staying in business. All right, folks? Take care, talk to you next time.

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