Sometimes a trade works faster than one anticipates. This occurrence is a pleasant surprise, but we should remind ourselves that we might buy the bottom and sell the top a time or two. We should not count on that being a regular event.
More likely, a trade move against the trader in the first day or two. Day traders would typically close such trade, look for another entry point, or walk away from the idea altogether.
We are not a day trading service. Our goal is to educate our subscribers and put them in the way of good ideas. Some subscribers are long lonely stock investors, and they review our ideas and build them into their portfolios from time to time. Other subscribers prefer to limit their risk by using options. We provide examples of matching an options trading strategy to an investment thesis for these folks.
To develop these ideas, we try to find fundamentally sound investment ideas. One of the challenging parts of trading is that fundamentals help with direction but provide limited guidance with timing. We have all made investments in fundamentally cheap stocks, only to see the share price get cheaper and cheaper. This reality is by we turn to the charts and use technical analysis.
BHP is a natural resource mining company poised to do well in these times of shortages and inflation. A few weeks ago, we suggested traders buy a significant dip that took place during the first two weeks of March. Our strategy we to sell a put spread as we felt that a bounce, if nothing else, was in the cards. It turns out our timing was pretty good, and the share price ran up $11 or 17%. In retrospect, one would have been better off simply buying a call and going for a ride. But single-leg options trades have a low probability of success, and they require constant monitoring as one should exit a long options position quickly if the trade does not work right away. Time decay is a killer that works against holders of options. Since most of us have day jobs and do not sit in front of a screen and trade for a living, we suggest trade structures that have a high probability of success if held until expiration.
Now that the stock has had a good run, we think another dip is around the corner, and we suggest investors close out the put spread sold on March 15. There is little value left in this spread, and one should be able to close it out for $0.05 to $0.10.
Our primary uncertainty is how deep the dip might be. Will it fall to the high 60s or the low 60s? We will keep an eye on this one as we think there will be another opportunity to get long in about a month.
We are still bulling the name, and if you are a long-only stock investor looking for opportunities for long-term capital gains, we think it is safe to hold on to the stock. Given our market outlook, particularly regarding inflation, we suspect natural resources companies will be one of the few groups who see higher prices over the next year or two.
As an aside, here is another thought about fundamentals and investment timing. Russia began its invasion of Ukraine on February 24. Shortly after that, the US and many Western European counties put sanctions on the country, some of its politicians, and wealthy individuals. Furthermore, they cut off the country’s access to the SWIFT messaging system
These actions have essentially brought trade to a halt. They will soon cause shortages in oil, gas, and minerals like nickel used in electric batteries and is an allowing element in stainless steel. We have seen the price of nickel increase by 3x, and the global price of oil has jumped. One might think these economic disruptions would cause investors to sell stocks, driving down their prices. However, in this case, stock prices have been on the rise ever since the war started. A closer look at the chart, it seems investors sold stock in anticipation of the invasion, and maybe they bought back with the carnage was not as bad as anticipated. Or perhaps people think the war will be contained and over soon.
Our position was that the selloff was due to the repricing of risk assets as interest rise in earnest. Since we think interest rates will continue to rise, we expect share prices to return to their bearish price action at any time. We would think the market disruption of energy, food, and minerals caused by the war will contribute to the selloff. But so far, investors might be talking about the war, but they are not investing like it matters.
A third scenario may explain the price action of US stocks. We have read that money is flowing out of emerging markets and Europe to the United States. This money has to go somewhere, and some is surely finding its way into stocks. This phenomenon could be the source of buying and why stock prices increased in the past couple of weeks.
