By Rocco Pendola
In Parts One and Two of this series, I built a portfolio of mostly dividend-paying stocks using nearly $150,000.
For a review of the five holdings to this point see:
With the excess cash - $15,355 - I'll get aggressive with options to make aggressive speculative trades.
Generally, I limit my option trading and investing to covered calls, cash-secured puts and in- or at-the-money long calls or puts. Aside from a spread here or there, I tend to stay away from anything more complex or riskier.
To be clear, what I am doing in this portfolio with options goes against everything I discuss in my Options Strategies For Beginners eBook. I do not necessarily consider these trades ones to conduct with money you do not want to lose. High risk. High reward. But the action takes place in the highly speculative part of this portfolio with under 10% of its cash balance.
Plus, each of the stocks mentioned here has realistic potential for considerable upside.
*All prices, as of Friday's close
Facebook (FB). The FB momentum train is about to take off. I own the stock in real life as well as some out-of-the-money March 2013 call options. Here in the $150,000 portfolio, I use LEAPS options to speculate on sustained movement over the next year.
BUY 25 FB January 2014 $42 calls @ $1.00 each. Cost: $2,500.
Because the IPO left a sour taste in people's mouths, the media and, as a result, the public turned on the company. The backlash was not only overdone, it was absurd.
The story on Facebook is pretty straightforward. eMarketer predicts the company will trail only Google (GOOG) in mobile ad revenue in 2013. By 2014, we're looking at $629.4 million in mobile dollars at Facebook.
Once these numbers start coming into view - and Mark Zuckerberg's excellent performance at the recent Tech Crunch Disrupt conference leads me to believe they will - the stock will break $40 with ease.
LULU is the Apple (AAPL) of apparel. It makes relatively expensive, downright excellent products. But that's only part of the draw. It forges a seemingly unbreakable connection with its target customer; expands its line dynamically, but with caution; and provides a unique and innovative brick-and-mortar retail model.
It can survive in a dying space (brick-and-mortar retail) because it has an exclusive lifestyle brand. Plus its customers tend not to look at price tags, which helps it weather relatively lean economic times.
There might not be a better run company in the world. As LULU approaches its 52-week high, it's set to break out further. As such, I will ...
BUY 10 LULU December 2012 $80 calls @ $5.90 each. Cost $5,900.
JPMorgan Chase (JPM). The rally in the financials is real. I could kick myself for not getting long JPM when the London Whale controversy hit. For all of the criticism Jamie Dimon received, I thought he handled it incredibly.
I recognize that the banks could take a hit on fiscal cliff concerns between now and the end of the year. If politicians allow us to fall over the cliff, we might be in for some turbulence. If JPM (or most other stocks I like for that matter) falls, I will double down.
First, I think the fiscal cliff is a bit like Y2K. We'll likely avert disaster whether Congress and the President let us dive off of the cliff or not. Whichever way we go, fiscal cliff hysteria provides nothing other than alarmist fodder for the media.
If things actually do get bad, we'll recover. That's a buying opportunity. Lawrence McDonald, who wrote an excellent book about the collapse of Lehman Brothers, said it best in a Tweet over the weekend:
As such, going with ...
BUY 20 JPM January 2014 $45 calls @ $3.25 each. Cost: $6,500.
That leaves the portfolio with just $455 in cash. I'll hang on to that. Once my covered call money from the aforementioned stock trades clears, I will add it to the cash balance and consider more speculative trades.