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Investment Strategies To Survive And Thrive… Even As Stocks Fall
by Karim Rahemtulla, Advisory Panelist
Wednesday, January 14, 2009
In last Friday’s weekly Inside Mt. Vernon Research column that I send out to VIP members of Mt. Vernon Research, I noted that U.S. stocks were likely to re-test their lows.
This will happen as the “Obama Bounce” fades and we get back into the swings of volatility.
One strategy I recommended to soften the blow was to sell calls against your existing stock positions, something we covered in our mid-November issue, The Truth About Covered Call Investing. If you’ve employed this strategy recently, you’ve likely mitigated some of the fall. This comes as I read all kinds of articles recently that extol the virtues of selling covered calls.
It’s about time!
The Skinny On One Of The Best Investment Strategies In The Market Today
In a nutshell, when you engage in a covered call trade, you’re selling call options against shares that you already own.
When you sell a call – and you can do this in any type of account, even your retirement accounts – you immediately receive cash into your trading account. In return for this cash, you’re obligated to sell your shares at a certain price. This reduces your cost.
This works best when the market is rangebound – but that’s only the half of it…
What most people don’t understand is that you can use the same strategy with a major modification, which actually mitigates a ton of risk while still making money. It’s the exact strategy that I use and recommend regularly to my Strategic Income readers.
Two More Solid Strategies For A Wobbly Market
I also recently recommended the advantages of taking positions in Municipal bond ETFs, as did our Contributing Editor, Aaron Lehmann in our October issue. These have rallied nicely since our call – up by double-digits and paying sweet tax-free dividends, too.
Given the rise, they’re not in a good buying range, but anything is possible in this market, so keep an eye out for an opportunity to get back in.
Two words of advice:
- Only buy “AAA” rated funds.
- Buy those that are insured. Check out:
Another strategy to employ in this type of market is to sell put options.
If you think this sounds scary, it’s not. If you have the right type of trading account, selling puts can dish some tasty rewards by taking advantage of market volatility.
When you sell a put option, you receive cash right away and are then obligated to buy the underlying shares at a specified price.
The catch? If you sell puts on aggressive or speculative stocks, you may receive a lot of cash, but you may also get “put,” or be forced to buy the shares if the price moves against you.
So what should you do? Sell puts on top companies at really low prices. Good candidates for put-selling include infrastructure stocks like KBR (NYSE: KBR), energy companies like BP (NYSE: BP), technology powerhouses like Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT).
This strategy, coupled with today’s volatility, can put a nice chunk of change in your pocket with very low risk. The guy who’s doing this very successfully at the moment is our own Lee Lowell – and you can get more details here.
A Rash Of Refinancing And The Best Places To Put Your Dollars To Work
Mortgage refinancing is going through the roof.
Low rates are pulling in lots of business for banks. I’m actually refinancing right now, taking advantage of rates in the mid 4% range. Sure they may go lower – but if demand continues at the current pace, they may not.
If you’re looking for a bank that is offering great rates, check out smaller players like Everbank (www.everbank.com) and use the online site www.lendingtree.com. You’ll find rates lower than those quoted on www.bankrate.com.
In May last year, I told you about my Countrywide Indicator. At the time, the bank/mortgage lender was offering more than 4% on FDIC money market accounts.
This was in the face of lower rates when the company was in crisis mode. But since the Bank of America (NYSE: BAC) takeover, the rates have plunged back to market rates. Today, you get less than 1.5% on your money – a sign that capital is back in the system.
The financials are weak, but not as weak as they were last year. If you want a better bet for your deposit dollars, check out ING Direct and Everbank.
Lurking Around The Corner: Volatility
January has been interesting this far and February should continue with weeks will be interesting to say the least.
Barack Obama was sworn in as America’s 44th president in six days and has already made numerous changes… earnings season is in full swing – and as we’re finding out daily, they stink… and Washington lawmakers are still conducting hearings on what to do with our money.
That means you should expect some interesting trading days ahead.
If the Dow Industrials breaks 8,000, expect a re-test of the lows. This could be the opportunity to start buying in earnest. The way the market works is to use comparisons. By that, I mean it’s going to set a very low bar this year – and those comparisons that will happen 6-12 months from now will look quite good.
Remember that opportunities do exist in this market – on both the long and short side. We’re following the healthcare and materials sectors very closely at the moment - in fact, our healthcare expert Marc Lichtenfeld recently returned from the JP Morgan Conference in San Francisco. And while he was there, he dug up some future winners for Xcelerated Profits Report subscribers – just like he did last year.
Good investing,
Karim
- Deep-In-The-Money Covered Calls: How to Lower Your Investment Costs & Your Risk
- Covered Call Investing: How to Boost Your Bear-Market Income Right Now
- LEAP Options: Put Time on Your Side With This Trading Strategy
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One of the country's foremost specialists in options trading, Karim Rahemtulla's strategies have cashed in winners more than 75% of the time over the past three years. Such success led him to found The Xcelerated Profits Report – a newsletter devoted exclusively to making money using safe options strategies. 
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