Is This A Bounce...Or Something More?

Thomas Mullooly
 


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The current environment is for traders only.

We are starting to see indications things might be picking up. Sometimes, the “short term" bounce turns into the “long term" move. Sometimes it doesn’t. So stay tuned. And check the hotline for updates, as it’s updated every few days. It’s a toll free call and available 24-7.

Remember that the market is currently on defense, so the name of the game right now is. . .

Principal Preservation!

What’s on my list of “things to do" right now is to have a shopping list ready to go. When we go back on offense, it’s no time for dawdling. I’m finalizing this shopping list right now.

In a retirement account, like a 401k, a deferred comp plan or 403b account, the current order is safety-safety-safety. That will change as soon as the light changes to green.

Outside of a retirement account, there is an easy way to “dip a toe in the pool, " which is about all we SHOULD do now. Buying the deep in-the-money calls is a way to get the big toe wet.

What’s a deep in-the-money call? As an example XYZ stock is trading at $63. A deep in-the-money call would be calls with a strike price of $50, or say $55. The $55 calls should be priced around $8, plus a premium for the amount of time left until expiration.

By getting in with $8 instead of $63, we keep more money on the sidelines, which is exactly what we want to do in defensive times. And you can get a lot of mileage by only investing small amounts in this approach and keeping the bulk of your assets in cash, out of harms way.

But it HAS to be deep in-the-money calls. Speculators will buy calls at (or sometimes, even above!) where the stock is trading. For example, if XYZ stock is trading at $65, they’d buy the 65 calls. This is because they’re usually the cheapest priced options.

This is NOT what we want!

Deep “in-the-money" calls can often move in tandem with the underlying stock. Sometimes they will match, point for point, the move in the stock. Let me explain why this really matters.

Subconsciously, when many folks buy a stock, they think they’ll own that stock for a long time. But we’re on defense. So we may need to exit an idea quickly. If this happens, and we are holding a stock, we might hesitate about selling. Our subconscious may be telling us to “hang in there. "

Bad!

In bull markets, you can “hang in there. " In a bear market (like now), there is no TIME for us to “hang in there. " It’s either working, or it’s not.

Now, if we own a call option (and not a stock) we may be less inclined to “hang in there" like we could with a stock. Because if the stock drops to (or below) the strike price of the calls, the calls will be worthless. This is essentially the same result we’d get if we were stopped out on a stock.

We need to take this kind of protective approach today because we don’t know when the market will be going back on offense.

Yes, “calls" are options. Options can destroy accounts when they are used improperly. 100 shares buyers should buy only 1 call. 200 shares, 2 calls. Problems come along when someone who normally buys 100 shares decides to buy 35 calls (which is the equivalent of buying 3500 shares of stock). So they’re not for everyone. And, like driving a car (or most other things in life), if you don’t know what you are doing. . .

You Can Get REALLY Hurt!

But using deep in-the-money calls can create a scenario where you can invest in several different ideas, all at the same time, with far less dollars than buying the actual stocks.

Regards,

PS Now you know why I’m busy preparing my shopping list! That’s my job. Now, your job is to keep coming up with these great questions I continue to get. So continue to email and call. And check the hotline. Back in a few days with another update.

Thomas P. Mullooly, President of Mullooly Asset Management, LLC (http://www.mullooly.net ) has spent over twenty years in the investment industry, as a broker and as an investment advisor.

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