You may have heard that Green Mountain Coffee Roasters stock took a big hit earlier this week when they missed earnings and put out a disappointing forcast for the remainder of the year. In fact, the stock lost almost 48% of its value in one single trading day. Ouch! Now if you have been long the stock, that is a major hit to that portion of the portfolio. Granted GMCR has been a momentum stock for some time now, so it isn’t unexpected that the gains would slow at some point. However, it can still make for some sleepness nights knowing that one day could wipe out so much value.
Sleep Better At Night–Buy Some Protective Puts
If you are investing in the stock market (and especially in individual stocks), you need to have some plan for these events when they occur. There are many ways to do this from not buying individual stocks and going only with indexes, to diversifying across several stocks and sectors, to using stop losses, to buying put options. I would like to address the concept of risk management from the perspective of put options and share what I do with my retirement account.
If you have been reading this blog for a while, you know that I invest my retirement account in some individual stocks many of which might be considered risking (ironically, GMCR only shows a beta of 0.8). Take for example, my investment in Onyx Pharmaceuticals (ONXX). This is a stock that I bought after selling Imclone which was bought out several years back. I purchased ONXX as a potential buyout candidate for which there is still potential. The most recent run up is due to buyout rumors again.
Over the past year, ONXX (with a beta of 1.2) has traded from $27.17 to $47.80 per share. With this most recent pop, I decided to buy some protective puts at a strike of $46 expiring in the month of May in two weeks. So far, that looks like a good decision since ONXX is now back down under $43 per share. Since my overall cost in the stock is $43.57 even after the purchase of the puts, I have guaranteed myself a profit.
Then, I will be able to purchase back the same stock for less and either sit on the cash or purchase even more shares of ONXX in preparation for the next pop. I will usually pay for the put options by selling some covered calls creating a collar.
I have found the technique of buying puts, selling calls or selling stock when it pops and buying back calls, exercising puts, and buying more stock to be fairly effective in mitigating losses and decreasing volatility in my retirement portfolio.
Hopefully, I won’t one day discover that the stock that I am holding has dropped by almost 50% in one day. But if it does happen, I know that I will sleep well because I would have owned some protective puts.
Oh, and by the way, a stop loss order would not have helped with GMCR this week. If you don’t know why, be sure to ask.
Readers: I am guessing that most of you use indexes for your risk management, but for those who do pick individual stocks, what do you do?
Perhaps you’re battling credit card debt or your lack of follow through on budgeting tips. Maybe you need to work on educational savings goals for your children, or your retirement savings. Whatever the case may be, you must find your method for meeting your financial goals and budgeting needs.
Choose Your Budgeting Style
One of the major elements is in respect to your budget. When you do this, you must consider some important aspects with you and your budget:
- How technological, or “un-technological,” must it be? Consider any devices that you have which could lead to an obvious choice in terms of convenience.
- What features do you need? From the basics that a notebook could take care of, to the advanced features that an advanced program on your notebook computer can demonstrate, there are many sides to this story.
- Do you need to keep multiple budgets?
- Identify any weaknesses you have with keeping a budget, or remembering to use it.
Some of these points will lead you to a certain direction. If you’re old school, you might prefer to stick with your pen and paper. A smartphone that you use every day could mean that an app is right. Take some time to consider how you currently keep a budget, as having something that works well for you is extremely important – how else will you pay off credit cards and save for your children’s education?
The Problem of Motivation
As we continue our casual look into financial methods, another incredibly important issue is brought up with motivation. In financial articles, it is perhaps not spoken of more often. After all, the best budgeting tips in the world will do no good if they are not followed, of course.
You have to take a deep, hard look at the ways needed to motivate yourself. For instance, some consumers needing to cut their expenses down or save more may find success of the following:
- Give yourself a goal. For instance, as part of your budgeting changes, you could invest a small amount into a savings account each month. With that money you could go on a small trip, thus giving you incentive. Or you could be saving for a deposit on your dream home.
- Put your budget in plain sight. You might “see no evil” if you ignore views of your budget. Let yourself see the debt you have on a regular basis; it might drive you to act upon it and remain disciplined.
- Inspiration. Do what it takes to follow through. Maybe you can have your household keep each other honest with spending money, or post reminders (i.e. notes around those high-priced restaurants’ phone numbers). Put a picture of your future trip via the first point.
Overall, there are many aspects that can impact your financial well-being that are not directly about money. The manner in which you keep your budget and motivate yourself with your budget can make a big difference. Approach these items carefully to make implementing your financial plan much easier on yourself. Sometimes you just have to do what it takes when it comes to your budget, and these examples can certainly help with execution and practice of good habits.
The preceding post is a guest post.
In my last post, I updated many of the changes that had occurred in my positions due to options expiration last Friday. Well because of those changes, it has been a busy week and I have had a lot of additional adjustments happening so I thought I would make a few comments.
SLW Trades
As you know, my position in Silver Wheaton (SLW) was sold due to the exercise of the April $30 put options. I bought back one-third of that position at $28.50 plus a few more shares at $28 snagging a significant discount. Now I went ahead and sold some May $29 calls for $1.25 per share meaning that I will have made the $1.50 discount on the repurchase, $1.25 on the premium, but lost $1 for selling at a lower strike. However, the net will be $1.75 per share profit provided that the stock gets called away.
Yesterday, I was able to buy back the next third for $29.90. I still have the stock uncommitted so I could sell some additional calls. Gold and silver are up a little this morning. I suspect the weak GDP number means that traders are thinking the Fed might have to get more active in trying to stimulate the economy and inflation expectations down the road have been heightened. Who really knows? I will keep trading my system month to month. Right now, I am working on decreasing the basis in SLW so any shares that I add will do just that.
Do to the discount that I got in the repurchase and cash from selling calls, I think I might be able to add some shares to be ready for the next upswing. As I work out my position in AKS over the next few months, I want to use those funds as well to add additional shares of SDRL and SLW.
ONXX Trades
This has been a big week in Onyx Pharmaceuticals (ONXX). Buyout rumors caused the stock to pop over 8% on Wednesday. I ended up buying back some May $40 calls that I had sold as well as some May $42 calls. I then sold some May $45 calls and plan on selling some $47 calls when I can. Unfortunately, yesterday was sideways and today is looking somewhat weak to start out. I may just buy some put options to protect some of the gains and see what happens. I would hate to not be able to take advantage of a nice little spike, but if the rumors dissipate then the stock will languish for sure.
Other Calls That Were Sold on Strength
I also managed to sell some SDRL May $38 calls, STX May $30 calls, and INTC May $28 calls on strength yesterday. I had simply placed some good-til-cancelled (GTC) limit orders earlier in the week and they happened to all hit yesterday. It was definitely a good thing with STX since it looks to drop about 8% today. Let me tell you, volatility can be crazy sometimes which is why I have many protective puts since it is impossible to know how the market will react.
