A few weeks ago, Kim Klaiman wrote an excellent article where he called out CNBC's Fast Money crew for consistently tossing out inane options picks to the viewing audience. Though not directly tied to options, it seems they're at it again.
Right around the time of that StockTalk, I followed up with an article, Don't Follow The Crowd Into Apple Or Pandora, where I noted:
For as bullish as I am on the company, I would not advocate following traders into (short-term bullish positions on P), particularly if you are a long-term investor. There are likely better places to put your near-term speculative money.
Pandora is the type of stock that tends to gyrate wildly ...
Whether P goes up to $15 or down into the $7s, I just sit back and yawn. Near-term upside or downside. It's all noise. It matters very little, if at all, with respect to the long-term. The last thing I would do is allow forward-looking bullishness to push me into a short-term trade. And, if I did make a short-term trade on P, it would be hedged and executed with the most speculative chunk of my speculative money.
Last night on Fast Money, Joe Najarian noted the following about the stock:
It was a mover on Thursday and I think it continues.
Now, I am not one of those CNBC bashers. I actually like, by and large, what they do. I like Cramer. I like Herb Greenberg. I shed a tear when Mark Haines passed away and Erin Burnett sold out to CNN. I also tend not to dog people for making bad trades or bad investments. I have had my share. Heck, I am long P with a $10.22 cost basis.
That said, Najarian did not present Pandora the way I do - as a wildly speculative position to scale into if you believe in the merits of the company like I do. Instead, he did what Fast Money does every night. He took about six seconds to suggest one of the worst trades you could have made.
Unless you were somehow lucky enough to get in at the open and got out about 12 seconds later (note: slight exaggeration for effect), you got your butt handed to you on P on Friday. That's precisely why I suggested now is not the time to follow options traders into bullish plays on the stock.
Of the 900 million possible trades Najarian could have suggested, I have no idea how his "first move" could have been to buy a stock like P after such a nice bounce. It had nowhere to go but down on Friday. To be fair, maybe if CNBC gave the Fast Money peeps more than six seconds to spew out their trades they could provide some context or a time frame, something to provide color on relatively risky short-term bullishness.
The overarching theme of my Options Investing Newsletter is to provide education, discussion and relatively simple ways to generate income using options. It's not about making stock picks and such. That's all secondary because, really, how can a particular stock or option selection work for your entire audience, when it's diverse in everything from age to geographic location?
I like to steer people away from making options trades and ask them to consider making what we could classify as options investments. Consider what I said about Apple (AAPL) on Thursday in the same article where I urged caution on P:
When you trade into near-term Pandora calls on a bounce or buy AAPL May $700 calls on what's probably more than a pullback, you play with fire. You absolutely require perfection in both cases to come out a winner. For different reasons, the market will punish Pandora and Apple if they do not execute without a hitch ...
In summary, we do not know what the deal is. That should be enough to scare you away from AAPL right now - period ...
Investors should use options to build wealth, generate income and hedge against risk. Options get a bad name because too many people make the types of trades that can flat wipe you out. Don't be one of those people.
If you decided to be "one of those people," there's a better than zero chance that you recently went long some AAPL May $600 calls. I heard folks refer to trades like this as "easy money." Have a look at the recent chart history on that contract, courtesy of BigCharts.com:
Forgive me for being so blunt, but there's really no other way to say it, if Apple does not absolutely blow the doors off of earnings on Tuesday (as in, do as well as it did last quarter), you are screwed on that trade and the long line of similarly misguided ones you could make.
If you're an AAPL bull and you want to use options to play the stock, go long-dated and deep ITM. If you cannot afford those premiums, you should not use options to play AAPL, unless you do some sort of conservative spread. When you have to go for the "cheap" OTM call, you do not even belong in the ballpark. That's like walking into a high-end car dealer and buying the lowest-level luxury car on the floor just so you can say you own a BMW.
I remain convinced that if you want to get long a volatile stock, you should sell cash-secured puts. To do this, you (obviously) must have the cash to cover the trade if you get put shares. And, you must absolutely check yourself to ensure that you're truly bullish and alright with the possibility of owning the stock at a price somewhere below your strike price.
There's no better strategy that selling a put, slightly OTM, on a day like Friday when stocks such as P and AAPL pull back. If you do not get put shares, so be it. You have the opportunity to sell a new put or wait for the inevitable dip and buy the stock directly. You do remember when people yowled that you would not be able to buy AAPL below $600 again, don't you?
Another excellent candidate for this strategy is Chipotle Mexican Grill (CMG). It has been for months. As of Friday's close, you could sell a CMG $420 put and collect about $13.50. Not bad. You do not lose money on the trade until $406.50.
Again, an ardent and well-researched bullishness is a prerequisite to this type of strategy to get long and/or collect income.