My All-or-Nothing Strategy

If you’re like me - afraid to margin, afraid to bet the market is going down, and afraid that you’re not going to be able to pay for [insert large expense here] - boy, have I got an all or nothing strategy for you. I’m pretty much putting my neck on the train track lines in anticipation that there is hope and money to be made.

Getting into this mess was surely the easiest thing I’ve ever done. I just bought undervalued growth companies. But good news - these are the types of companies that are sold most when recession and depression fears spread like wildfire throughout the global marketplace, driving oil speculators home to their mommies and daddies.

I recently had the pleasure of seeing Ben Stein visit Purdue. He cited two steps to fixing this economic mess.

1. Have a New York Court determine that Credit Default Swaps are illegal and void of any value.
2. Have the US government do what the European governments have already done --- and give 3 year guarantees on inter-bank lending.

Ben Stein was asked what he’d be doing if he was young; he’d be buying stocks. He’s never seen fear like this and he always asked his dad what would happen if something like this current credit market mess was going on and his dad advised that the government would step in. Unfortunately, it let Lehman fail. And here we are today.

What am I doing? I’ve been on a 3-step program. First, I started with a portfolio of undervalued growth companies, fairly diversified. Second, as markets started getting crushed, I slowly began pushing more money into the markets that are rocketing down the most that I felt shouldn’t be. Lastly, I’m actually selling stock --- and buying long options that expire January 2010 on the stock I’m selling. I generally am only doing this if it makes sense and the company re-affirms and/or keeps up with its expectations. Three companies have caught my radar for this switch: Kinetic Concepts (KCI), Bucyrus (BUCY) and Central European Distribution (CEDC). Only CEDC got the call though, because the calls are severely under priced.

This type of bullish strategy isn’t for everyone, and it’s always a slow transition. I expect that it is within reason for the market to go down even more from this point. As it does, I will keep leveraging up. It’s my statement that I believe there is a bottom.

Disclosure: I am long KCI, BUCY, CEDC

Comments

[Sales Guy:]

The problem with KCI is the key IP on their VAC wound therapy is about to expire and they have nothing to replace it. It accounts for much of their current revenue. Worse, they have such horrible customer service that people would love to throw them out out of their facilities and will do so as soon as their many competitors are able to move in with the "right stuff" as the IP expires. Full discosure - I work in the space but am not a direct competitor to KCI.

2008 Oct 26 09:59 AM

[Glen Bradford:]

Interesting insight. Something I'll definitely take into account and look into more.

2008 Oct 26 10:32 AM

[jbs:]

Averaging down with options is not smart. It may work -- but it is not smart in any environment, let alone in this one with the VIX at all-time highs. You are really paying for that leverage -- leverage which would be cheaper if you just bought on margin.

But the real reason it is not smart is because you are substituting a time-insensitive position for a time-sensitive position. You are converting a long term position into a short-term position.

You think you aren't buying on margin, but you are employing another form of leverage -- a more expensive and time-sensitive form.

2008 Oct 26 08:55 PM

[Diyg:]

Never rely on Ben Stein - or his Daddy!

2008 Oct 27 12:38 PM

[User 300271:]

I have not had a chance to go out to 2010 to see what you did, but I wish you hadn't sold you long for a position sometime in the future. I understand you are in college. Try keeping those positions in your portfolio and keep adding to them as you can and with this VIX when your underlying stock (whaterver it is) KCL goes up to 26 or 27 think of selling a covered Call whether in the monery around 25 or higher to say 30. If the stock drops or does not go over the strike price you just picked up a nice "dividend" so to speek for that month. Use that money for your monthly expenses. Say KCL goes down to 21 like today. Go ahead and sell a 20 Put if it doesent go below 20 in the month you picked up another "dividend" so to speek. There is no reason you should not own both positions in a month(a straddle) especially in this VIX enviornment. What is the worst that can happen. Someone could call you shares if you do not move the call options out at par or better before they expire and you just made what you sold the calls for + the strike price of the shares. Or someone may put the shares on you - again if you do not move the options out a month or 2 at par or better before they expire. In that case your on Margin, but you are selling calls and puts each month so you should be able to pay down that margin, still own the stock and have a little money left over for your college expenses. At best your stock trades between the straddle and you pull down a grand or two a month and cover those college expenses and you keep your positions in a time when YOU SHOULD NOT BE SELLING. Don't lose you nerve - A Dad.

2008 Nov 17 11:38 PM

[Glen Bradford:]

Dad,

I'm not selling calls in the future. I'm buying them. For me, there are two viable ways to leverage up. The first is to use margin, which is less expensive than calls with the VIX at all time highs, but I just can't risk trading on margin because the risk is less limited than when I buy calls. Buying a call --- which is what I mentioned --- allows me to buy shares of a company at a later date at a specified price. I pay for this privilege. The downside risk of buying calls is losing 100%. I can't lose more than I put in. If I sell stock and buy long calls that expire a year or two from now, it's the "safest" way to leverage up.


On Nov 17 11:38 PM User 300271 wrote:

> I have not had a chance to go out to 2010 to see what you did, but
> I wish you hadn't sold you long for a position sometime in the future.
> I understand you are in college. Try keeping those positions in your
> portfolio and keep adding to them as you can and with this VIX when
> your underlying stock (whaterver it is) KCL goes up to 26 or 27 think
> of selling a covered Call whether in the monery around 25 or higher
> to say 30. If the stock drops or does not go over the strike price
> you just picked up a nice "dividend" so to speek for that month.
> Use that money for your monthly expenses. Say KCL goes down to 21
> like today. Go ahead and sell a 20 Put if it doesent go below 20
> in the month you picked up another "dividend" so to speek. There
> is no reason you should not own both positions in a month(a straddle)
> especially in this VIX enviornment. What is the worst that can happen.
> Someone could call you shares if you do not move the call options
> out at par or better before they expire and you just made what you
> sold the calls for + the strike price of the shares. Or someone may
> put the shares on you - again if you do not move the options out
> a month or 2 at par or better before they expire. In that case your
> on Margin, but you are selling calls and puts each month so you should
> be able to pay down that margin, still own the stock and have a little
> money left over for your college expenses. At best your stock trades
> between the straddle and you pull down a grand or two a month and
> cover those college expenses and you keep your positions in a time
> when YOU SHOULD NOT BE SELLING. Don't lose you nerve - A Dad.

2008 Nov 24 08:58 PM