By: Steve Smith
Retail, and other sectors such as financial, transport, have seen gains that accompany technology’s pain. Shares of prior market leaders, especially semi-conductor chip stocks such as Nvidia (NVDA) have sold off sharply.
For the most part, these “rolling corrections” have been healthy, allowing the major indices to march higher in an almost uninterrupted fashion thanks to a broadening of market breadth.
Also, as Michael Batnick pointed at in his article This is Not Normal, the gains enjoyed by the FAAMNG gang were unsustainable.
From the article: Netflix, Facebook and Amazon are each up 60% in the first 11 months of the year. Apple, is up 50%. Google, the laggard, is up just 34%. These five stocks have added over $900 billion in market capitalization in the first eleven months of the year.
This sort of run would have been completely unthinkable coming out of the GFC. At the bottom in 2009, none of these FAANG stocks were in the top ten in market cap for the S&P 500, Netflix wasn’t in the index, and Facebook was private. This is a totally ridiculous comparison but it’s my blog and I’ll do what I want, the 201-500 biggest stocks in the S&P 500 at the time had a market cap equal to what these five companies added in the first 11 months of this year.
The chart below shows that the total market cap of the S&P 500 in March 2009 was $6 trillion, and the cumulative market cap for the 300 smallest companies in the S&P 500 were less than what five companies added in eleven months this year.
Finding 4 Buys Through Put Sales
While I agree what was occurring above was neither normal nor sustainable, the recent, and as I type still ongoing, sell-off in many tech names represents a healthy creation and potentially a great buying opportunity.
Here are 4 stocks that have sold off sharply, and are now approaching important support levels.
The options trading approach I’m taking is to sell puts as a means of establishing bullish positions. This way, I can take advantage of the increase in implied volatility and creating a cost basis that’s even below current prices at which I’d be willing to be assigned and take ownership of the underlying shares.
1. Micron (MU), the chip maker, had been among the best performing stocks, gaining over 200% over the past 52 weeks. But recently it has dropped over 20 percent, essentially giving back 3 months of gains in just 5 trading sessions.
The stock is now at the first key support at $40 per share. Major support comes near the $33 level. Now, let’s get into the options trading.
I’m selling the January 2018 puts at the 37 strike for $2.00 per contract. This would give me a $35 cost basis should I be assigned shares.
2.Alibaba (BABA) The huge Chinese internet commerce company has rolled over some $25 from the recent high and is approaching support at the $165 level.
I’m selling the January 2018 puts with a 165 strike for $6 per contract, to give me a cost basis of $159 should I get assigned.
3.iRobot (IRBT) may be best known for the Roomba vacuum cleaner, but it also manufactures remote devices for the military and other automatic products, such as pool cleaners.
The shares have dropped a whopping 45% from the summer time high, and are now at key support at the $62-$63 level.
I’m selling January 2018 puts with 62.5 strike for $2.50 a contract giving me a $60 cost basis
4. Square (SQ) The mobile payment company that had focused on small businesses. More recently, it’s been moving up the value chain in terms of both dealing in larger companies, and offering more services.
The stock went parabolic in early November, when it announced it would look both to exchange and accept bitcoin. I think that mania has now abated, and the stock is back at a good support level at the $36 level.
I’m selling the January 2018 put with the 35 strike for $1.80 a contract, giving me a $33.20 cost basis if shares were to be assigned.
The selling in these and other tech names has been swift and steep. They could go further down. But for the above, I think current levels offer a good place to sell put as a means of establishing a bullish position and setting a price at which I’d be willing to own shares. Through options trading, I can make the most of the current dip while also minimizing overall risk.
Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.
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