In a world of ever-changing financial markets and investment options, one timeless principle continues to hold true: stocks have historically outperformed bonds over the long run. Now, more than ever, Jeremy J. Siegel's classic book, "Stocks for the Long Run," serves as a beacon of wisdom for investors navigating the complexities of today's investment landscape.

In the third edition of his seminal work, Siegel presents a compelling case for the superiority of stocks as a long-term investment vehicle. He draws upon decades if not centuries of historical data to demonstrate the consistent outperformance of stocks compared to bonds, cash, and other asset classes. While bonds may offer stability and income, the returns they provide pale in comparison to the wealth-building potential of stocks.

Siegel's insights into the factors driving stock market returns, such as dividends, earnings growth, and inflation, remain as relevant as ever in today's market environment. He emphasizes the importance of maintaining a long-term perspective and staying invested through market fluctuations, rather than attempting to time the market or chase short-term gains

His excellent quantitative work was way ahead of his time and he can be considered a quant by excellence, before the quants as we know them today, took over the Wall Street.

In 2023, his conclusions were vividly proven as the S&P 500 delivered a remarkable return of over 20%, while Treasurys and bond investors saw a mere 5% return on average. This stark contrast highlights the enduring appeal of stocks as an investment option, even in an environment of high interest rates like nowadays, and elevated bond yields.

Moreover, "Stocks for the Long Run" provides practical guidance on constructing a well-diversified portfolio, managing risk, and adapting to changing market conditions. Siegel's accessible writing style, high-quality charts, and clear explanations make the book invaluable for both novice and experienced investors seeking to build wealth over time.

In a world where investors are bombarded with a multitude of investment options, from cryptocurrencies to exotic derivatives, "Stocks for the Long Run" serves as a timeless reminder of the enduring value of stocks as the cornerstone of a successful investment strategy. While the allure of high-yield options may tempt investors, the historical evidence overwhelmingly favors the patient, disciplined approach advocated by Siegel.

In conclusion, "Stocks for the Long Run" remains as relevant and indispensable as ever in today's investment landscape, and I can hardly recommend it strongly enough. By adhering to its timeless principles and insights, investors can navigate the uncertainties of the market with confidence and build a solid foundation for long-term financial success.

Gabe Feurdean

CEO, founder

Stardust Capital

Selling call and put options are two popular trading strategies for generating income or hedging stock positions in the options market.

Call options give the holder the right, but not the obligation, to buy an underlying asset at a predetermined price, known as the strike price, on or before a certain date, known as the expiration date. Put options give the holder the right, but not the obligation, to sell an underlying asset at a predetermined price on or before a certain date.

Options are priced using the Black-Scholes formula which is a widely used mathematical model for valuing options. It takes into account several factors that can affect the price of an option, including the underlying security's price, the option's strike price, the time to expiration, the risk-free interest rate, and the underlying security's volatility.

Market conditions change constantly, and accordingly options prices as well.

Of all the inputs that go into the options pricing model, the interest rate was traditionally the least important and had a minimal impact on an option price for obvious reasons. We had low or zero interest rates for long periods of time and when rates changed, they changed at a slow rate.

Evidently, we are in a new regime now.

Higher interest rates will have an impact on the prices of options. This is because the value of an option is affected by the time value of money, which is influenced by the prevailing interest rates. Higher interest rates increase the time value of money, which can lead to higher option prices. This is because the opportunity cost of trading an option increases when interest rates are higher.

Let's see how this is going to reflect in the prices of puts or calls.

Suppose you are an investor that decides to go long on a company. Instead of buying the stock, you're thinking of buying a call option for a fraction of the money that it would cost you to buy the stock and hold on to the bulk of the cash. That cash could pay 4% interest risk-free which has to be reflected in the price of the call. That way the call seller is compensated for his opportunity loss to invest at 4% risk-free while he's holding the stock for cover or the cash for margin. So, everything else being equal, the call prices will rise when interest rates rise.

Conversely, if you're a put buyer your position is equivalent to shorting the stock, basically making money when the stock goes down. Shorting stock generates cash into your account which could generate interest. If you choose to buy the put as an alternative to shorting the stock, you have forgone the opportunity of making more interest on the proceeds from shorting. Logically you'll want to pay less for that put in that case, and put prices will have to reflect that opportunity cost and adjust accordingly. Hence, put prices will be lower when the interest rates are higher, everything else being equal.

Let's take a look at an example using a handy calculator from the Options Industry Council. Options Calculator

Will use JPM as a stock and calculate leaps for Jan 2024, factoring in an interest rate of 1% and then 5%.

With the stock just shy of 138 will use at-the-money options, strike at 138, and a volatility of 36 %.

For the 1% rate entry we have the following results: call =$18.8/contract put = $21.07/contract

For the 5% rate entry we have: call= $21.91/contract put=$ 18.38/contract

As we can see, for a 4% difference in the interest rate input we have a 16.5% increase in the call price and a 12.76% decrease in the put price.

The longer the duration the higher the price change will be.

To summarize, in times of high-interest rates you want to be a call seller, and/or a put buyer. Or utilize strategies that take advantage of these facts.

One of the most popular strategies for hedging is the "risk reversal" more commonly known as the "collar", where to hedge a long stock position one sells a call against it and buys a put for downside protection. Another good approach would be ratio spreads, buy one call and sell 2 or 3, or for puts sell 1 buy2,3, etc.

Happy trading, and good luck to all

Gabe,

stardustcapital.net 

Investors are frequently influenced by psychological biases, which can lead to irrational decision-making and suboptimal investment outcomes.

Understanding and mitigating these biases, especially in times of heightened market volatility, is important for investors seeking to make informed and rational investment decisions.

One common bias is anchoring bias, which refers to the tendency to rely too heavily on the first piece of information encountered when deciding (Tversky and Kahneman, 1974).

In the context of investing, this can manifest as an investor holding onto a stock or other asset because of its initial purchase price, even if market conditions have changed significantly.

For example, an investor may purchase a stock at $50 and refuse to sell it even if the market conditions change significantly, because they are anchored to the initial purchase price.

Another bias that may impact investor decision-making is confirmation bias, which refers to the tendency to seek out or interpret information in a way that confirms one's preexisting beliefs (Nickerson, 1998).

This can lead an investor to cherry-pick data points that support their view of a particular stock, rather than considering a more balanced view.

 For example, an investor may only seek out information that supports their view that a particular stock will perform well, rather than considering a more balanced view.

 Alternatively, an investor may interpret information in a way that confirms their preexisting beliefs, even if the data does not necessarily support those beliefs.

Overconfidence bias, or the tendency to overestimate one's own abilities or the reliability of one's own information, is another common bias that may affect investor decision-making (Bazerman and Moore, 2002).

This can lead an investor to make decisions without seeking out additional information or seeking the opinions of others.

 For example, an investor may make a decision without seeking out additional information or seeking the opinions of others, because they believe they have all the information they need.

 Alternatively, an investor may ignore red flags or warning signs because they are confident in their own abilities to make good investment decisions.

Representativeness bias, or the tendency to judge the likelihood of an event based on how closely it resembles a typical example, rather than based on statistical likelihood (Kahneman and Tversky, 1972), is another bias that may impact investor decision-making. For example, an investor may judge the likelihood of a stock performing well based on how closely it resembles a typical example of a successful stock, rather than considering statistical likelihood. Alternatively, an investor may assume that a company's past performance is indicative of its future performance, without considering changes in market conditions or the company's competitive environment.

Loss aversion bias, or the strong preference for avoiding losses over acquiring equivalent gains (Kahneman and Tversky, 1979), may also influence investor decision-making.

 An investor with a loss aversion bias may be unwilling to sell a losing position because they are afraid of realizing the loss. For example, an investor may hold onto a losing position because they are afraid of realizing the loss, even if selling the position would be the more rational decision. Alternatively, an investor may avoid taking risks because they are more focused on avoiding losses than on potential gains.

In times of market volatility, these biases may be exacerbated as investors may become more emotional and less objective in their decision-making (Shleifer and Vishny, 1997).

Therefore, it is especially important for investors to be aware of and attempt to mitigate these biases in order to make informed and rational investment decisions. Investors must remain focused on their long-term investment goals and not make impulsive decisions based on short-term market movements. It can also be helpful to stay diversified in your investment portfolio and to have a plan in place for managing risk.

Seeking the guidance of a financial advisor or professional can also be helpful in navigating market volatility.

References:

Bazerman, M. H., & Moore, D. A. (2002). Judgment in managerial decision making (Vol. 6). John Wiley & Sons.

Kahneman, D., & Tversky, A. (1972). Subjective probability: A judgment of representativeness. Cognitive psychology, 3(3), 430-454.

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica: Journal of the Econometric Society, 263-291.

Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of general psychology, 2(2), 175.

Shleifer, A., & Vishny, R. W. (1997). The limits of arbitrage. Journal of Finance, 52(1), 35-55.

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131.

As of lately, Tesla has been on a run that defies any imagination . We are not gonna get into a debate of what drove that run or any emotional arguments about the merits of it.

As a rational trader, you have to wonder whether there's any money to be made along the way, and what would be the best way to do it.

If you think the next move in the stock would be to the downside the best way to make money is to short the stock. Now we know that doesn't always go as intended and Tesla shorts have been fried before. Big time! In fact, a lot of this big rally has been attributed to a giant short squeeze, but like I said, we are not going there.

Options provide the opportunity to take a position with limited risk, and Tesla has a very active and liquid options market. You can find options going all the way to Sep 2022 (Leaps) and ranging widely starting all the way from 1$. Yes! some traders think Tesla could be worth $1 or less come Jan 2022, or June 2022, based on the volume of trades, and open interest on those dates, which is huge.

I tend to be not that far from those traders and my trade is a debit put spread for Jan 2022 at the 10/5 strikes level. More exactly I bought several of the $10 puts and sold the $5 puts. All for a $5 debit per spread. That's my max loss in case TSLA is above $10 at expiration. The max potential payout is $500 per spread or the width of the spread. In other words, spend $1 to make $100.

Now this trade doesn't have to pay all of its potential win in order to be profitable. It can easily double, triple, or pay tenfold your money and still be profitable. And one great way to play it would be to take some early lesser profits (if any) and let the rest run on the house's money. In fact, as I write this, the spread already trades at $10, so a double.

All in all this is a great way to participate in trading TSLA with limited risk and a great potential reward. Leave some comments if you have any questions, and good luck!

Gabe

stardustcapital.net

A buy-write strategy could work in these market conditions. Some stocks are particularly suited at the moment. I'll provide some specific examples in a minute, but as a general rule, you want stocks that are stuck in a range, preferably lurking at the bottom of the range, without much of a perspective of dropping further. Slightly drifting higher or lower is ok.

What is a "buy-write"(BW) strategy? A BW is a strategy where one simultaneously buys 100 shares of stock and sells 1 call contract against it.

Weekly options are desirable because of increased frequency and hence greater revenue potential. With the right selection, a realistic expected profit should be around 2-3% per week.

Candidate nr 1 $CAH . With the exception of a brief pop in early June the stock has been stuck for a while between 50 to 52 range. Fairly narrow. This makes it a great candidate for BW. Weekly options implied volatility is around 30%,(not that high) but it still provides for a 2% weekly gain approximatively.  EX. just last week I bought 100 sh at 51.13 and simultaneously sold a 51.5 call for $63. The strategy expired in the money, I got assigned, and cashed in $100 or 1.95% for the week.  https://twitter.com/gabe_rich_/status/1277599139623297024  For next week I have another one at 52.5.

Candidate nr 2  $WBA . Here again, we have a stock that cannot get out of a range. Its weekly calls implied volatility is higher(around 48%) which means a potential for greater returns. I have a trade for next week at the 42 strike.  https://twitter.com/gabe_rich_/status/1278718164017336323 

Other potential candidates $INTC , $CSCO . And the list could go on.

What are the BW potential downsides? Well, the obvious one is that the strategy expires out of the money which leaves one owning the stock. The profit from the sale of the call is realized anyways, and if you don't mind owning the shares nothing is lost. Another call can always be sold later on the same shares. A bigger problem would be if the stock drops dramatically, because is harder to sell a call far out of the money, in order to break even. That's why stock selection is critical and finding stocks that are " lurking at the bottom of the range" provides some security that they won't drop much lower. But in general is better that you don't trade anything that you don't want to own.

Good, reliable dividend payers are desirable, and great candidates. That's why you find them on my list. In the event you get to own them, you get paid to wait.

In conclusion, BW is a great strategy that can be used to produce extra weekly income. It's flexible, easy to execute, and with limited downsides provided you select your stocks carefully, and according with your goals.

Have some stocks that you consider great candidates? please share with us in the comments section.

oh... btw ..has anyone figured how much 2% per week is annualized?

Gabe

Worried About A Market Top? Use Options To Hedge Your Positions.

The market recovered nicely from the March lows, in a relatively short period of time.

Some stocks recovered all the way to their pre-crash highs, and some even went on to claim new all-time highs. If you've been around this market even for a minute you know who those stocks are, we are talking about the usual suspects: FAANGs, and MSFT 

Here's a YTD performance map.

https://finviz.com/publish/053020/sec_ytd_085119949.png    

At this juncture, some people could become nervous and might wonder how much more room to the upside these stocks can have ?! 

If you are one of those people and worry that the next move can be to the downside, then you should probably start thinking about hedging.

Options could provide a great way to hedge positions or entire portfolios. One of the most popular strategies for hedging is a collar, aka "split-strike conversion". 

A collar is defined by selling a covered call and using the proceeds to buy a protective put. The strategy basically limits the upside and protects the downside. Most people set up collars "at the money" (at the price where the stock trades), and try to pay as little as possible, or nothing at all (zero-cost collars) 

Let's take a look at an example. Will chose $MSFT which is up 15% for the year, but any FAANG's from the map are great candidates.

Trying to select an expiration, the November one looks like an excellent choice for obvious reasons of elevated risk around elections, and a fair amount of play-out time, 177 days to expiration. As for the strike will choose $180. The stock trades a bit above that at $181 and change. The collar is slightly in the money but that's great because it will bring a bit of credit.

On an existing 100 shares lot, here's the trade:

Nov expiration - Sell one $180 call: credit 16.8. Buy one $180 put: debit 15.45

All for a net credit of $135.

This is a classic way to set up a collar, and if you feel nervous that the stock is at the top and want protection to the downside, this trade will do the job.

Building on this basic setup there are many other advanced arrangements that can be constructed. One of my favorite, which I use all the time, is a modified collar, where instead of a single put I use a put spread. Depending on the width of the spread this way I can bring in more credit. Another alternative is to sell the call way out of the money so the upside has more room. Obviously that way the cost will be higher.

No matter how you layout your collars, the initial trade is just half of the job. Once the collar is in place and you feel good about being protected you should start asking yourself some obvious questions such as: what is my exit strategy? when do I exit, when the stock drops 10% or20%? Do I leg out( close only one side)? Should I exercise the put or just sell it? what if I get assigned?

Many people lose the opportunity to capitalize on their hedges because they fail to answer these questions correctly, or simply because of unrealistic expectations.

An answer to all of those questions and some exit techniques will be the subject of a follow-up article.

Thanks

Gabe

Market Sell-Off Brings Opportunities

"Buy when there's blood in the streets " is one of the most famous Wall Street aphorisms, and everyone agrees it's a valuable investing advice that stood the test of time.

Except, when the time comes to put it to work everyone seems to forget about it and run for the hills.

This past week was no different when markets took a dramatic dive, and all buyers seem to have been evaporated.

The selling pressure was tremendous amongst fears of the coronavirus, some election-related issues, and unwinding of some positions by hedge funds.

At Stardust Capital, we saw a great opportunity to take advantage of this weakness and to initiate new positions. We specialize in selecting value stocks that are undervalued and we enhance the returns through the use of options.

The selection criteria we apply include earnings reliability, safety of the dividend, dividend percentage compared with its historical average, low payout ratios, low P/E's and others.

Here's a sample of positions we initiated, either through options, or outright buys.

Dividend Aristocrats:MMM, ABBV, WBA, BEN, T

Reits:                     APLE, CORR, IRM, VTR, APTS

Stocks:                   IVZ, GT, QCOM, CVS, TAP

CEFs:                      RQI, ETJ, HQH

ETFs:                      QYLD, SPHD, PFFR

Dividend Aristocrats are companies that have paid increasing annual dividends for the past 25 years or more. On our list, 3M did so for the last 61 yrs, Abbvie for 47 yrs, AT&T for 35 yrs.

REITs are Real Estate Investment Trusts, and do business by renting buildings or infrastructure. They are legally bound to return 90% of their profits to shareholders, and they pay reliable high dividends.

CEFs are closed-end funds. They pool together stocks of companies from specific sectors and then they are sold as a unit. The funds in our selection are selling at a discount to NAV(net asset value) such as RQI -13.28%, ETJ -3.04, HQH -10%.

ETFs are Exchange Traded Funds, somewhat similar to CEFs but with lower expense fees.

Here are some of the trades in detail:

Option Strategy MMM: Jan 2021 sell 150/140 put spreads, premium  $500

Rationale: The stock price has been going through some rough times lately, but we think it's close to a bottom and poised for a rebound. On top of that, the company is the biggest producer of specialized medical face masks that are used in the prevention of the coronavirus, and the company is working overtime to keep up with the demand.

Playout: If by Jan 2021 the stock is above $150 the strategy finishes out of the money and the whole premium amount is pocketed. That would be a yearly ROI of 50%. If the stock is below $150, or it gets assigned the effective purchase price is $145 minus the sale value of the long leg, potentially somewhere around low $140s. It would be a great entry for a dividend aristocrat with a dividend upwards of 4%.

Option strategy GT: Oct 2020 ratio spread, buy one 12/sell two 11 put spreads, premium $120.

Rationale: Good Year is one of the dominant auto tires makers. It has a great dividend and a low valuation. The stock has been dragged down unfairly and beyond any rational measures. It has a low P/E of 9.3 and a dividend of 6.6%.

Payout: If the stock is above $12 by Oct the spread expires worthless and the premium is pocketed. If the stock is below 11 dollars by Oct this spread actually produces an extra $100 for a total of $220 in premium. At that point, the single 11 leg might be assigned, for an effective stock purchase price of $8.8. If stock ownership is not desired at that time, the put can be rolled further out in time to a different expiration date.

Option strategy ABBV: June 2020, sold 85/82.5 put spreads. premium $130

Rationale: ABBV is one of the dividend aristocrats with the highest dividend pay at 5.5%, and after the recent acquisition of Allergan the stock is expected to rise.

Payout: This is a narrow put spread with a 54% ROI potential if the stock recovers above $85 by June, which there is a great chance it will. We like to close those spreads when they drop to about 10-15% of the value of the premium.

In conclusion, what comes next in the markets is anybody's guess but generally, after such a sharp selloff a rebound is due sooner than later. The important thing is not to panic and stick with the old aphorisms. They stood the test of time for a reason.

Good Luck

Gabe

Collect Some Revenue On VTR

Ventas has dropped nearly 20% from its highs after the recent earnings report.

The issues were minor, but the market was nonetheless ruthless.

The stock it's looking like it might want to stabilize around 59/60 level. At this level, the dividend yield is back to 5.5% which is very enticing in this low rate environment.

From the technical point of view, it looks like forming a double bottom with its May's lows. That would provide resistance for further price erosion, and it could set it up for a bounce.

With all this in mind, I set up a credit put spread as follows.

Feb 2020, sell 60 put / buy 57.5 put . All for a premium of around 1.3, or $130 per lot.

Put spreads are great income strategies, and they provide one of the highest returns of all option strategies. They are best set when stock prices are low and poised for a reversal.

Of course, stock can continue to go lower but spreads are very flexible in managing. One example of spread management is to "widen" the spread, ex; sell the long put and buy another at the next strike. Here it would be selling the 57.5 put and buying the 55. Legging out of the long leg would be another way to capitalize if the stock keeps dropping.

All in all, I consider the timing to be about right for this type of trade, and I've done it myself, and posted live on twitter  https://twitter.com/gabe_rich_

The potential return for this trade is about 50 %, but if everything goes ok I  will probably buy it back for around 0.2( $20) which would be a 40% return. I will provide updates as I manage, or close this trade.

Good luck,

Gabe

Great Premium Trade On QCOM

Summary

ratio call spread.

nice premium.

room to the upside.

Qualcomm has had a nice run up for the past trading sessions, and it might continue, but the volatility is high and that means it could be as well poised for a reversal. Without getting too technical, its standard deviation of the 200 day moving average is the highest it's been in a while. Also, earnings are coming soon which poses a reversal risk.

With all this in mind I devised an options trade with calls, that brings a hefty premium, leave room for upside, and can potentially bring even more revenue.

Here's the trade:  expiration  June 2020 

                         Buy 1    87.5 call

                         Sell 2    90    call 

It's a credit ratio spread and premium should be around $380, with the stock around $83.

What I like about this trade is that the short calls are nicely out of the money, which leaves room for the stock to move to the upside, 8.5% to be more precise, which reduces the risk of being called away.

Second, If the stock goes to 90 by June, the trade appreciates by another $250.(the 87.5/90 long call spread goes in the money ). At that point the total premium would be $630, which is 7.5% of the current stock price.

The trade is suitable for longs in the stock, but buy write works too. And the nice thing is that the dividends are coming in all the while.

Now to the downside. This ratio spread has a delta of about 34, which means that for every dollar the stock moves, the spread moves 34 cents. So if the stock starts a reversal, and it moves down 3,4 dollars or more, the spread can easily lose half of its value. At that point I would be interested in buying it back.

I've done this trade myself, and I've done it in the past too, and I will post updates if there are any.

This trade was posted on Twitter in real-time, https://twitter.com/gabe_rich_ where I post other trades as well.

Good luck 

Gabe