Cody Kiss & Tell: Hedging, puts, oil, volatility and more
Here is the transcript to this week’s Live Q&A Chat. Visit the Trading With Cody Chat room on the Trading With Cody iPhone App, the Trading With Cody Android App or in the Chat Room. If you have any questions about our service, just email us at support@tradingwithcody.com.
Q. What do you think about the direction of oil? Back to 40 or up and through 50 in the next few months?
A. There’s a ton of oil producing capacity from fracks and other sources that will kick on any time oil gets into the $40s and especially in the $50s. That excess and easily-tapped production capacity is likely to keep a lid on oil prices. I expect we’ll see oil bounce between the mid $20s and mid $50s for the next few years.
Q. Cody, do you know if most mutual funds and hedge funds are under invested? Is there a lot of cash still sidelined?
A. Here’s what I found when I searched Google News for “cash sidelines”: Record cash on the sidelines Yahoo Finance UK-Aug 15, 2016 The “FMHR” traders discuss what’s going to happen to the market rally as some investors are still sitting it out. Story image for cash sidelines from Seeking Alpha Seeking Alpha 3 Things: Cash On The Sidelines, Yields, Saw This In 2007 Investing.com-Jul 20, 2016 Here is a myth that just won’t seem to die: “Cash On The Sidelines.” This is the age old excuse why the current “bull market” rally is set to … Story image for cash sidelines from CNBC Billionaires are holding $1.7 trillion in cash CNBC-Aug 10, 2016 The world’s billionaires are holding more than $1.7 trillion in cash — the … said billionaires may also be sitting on the sidelines waiting for stock …
Q. Good morning/afternoon: You just indicated “Planning to add some $SPY puts next time I buy puts.” But for a person for whom this would be the FIRST hedging move (other than short stocks in my portfolio) — in other words, no $QQQ or $DIA — would $SPY be the first ones to buy? If not, as of right now, today, can/should we “catch up” with those other instruments — and what would you recommend as a first move? Not sure of the different aspects of each. Thanks.
A. First, don’t rush. We’re not turning bearish, we’re just hedging our portfolios a little bit. You can trim, and slowly buy some puts like I am, but don’t try to nail the top in the markets near-term or anything. It’s impossible to do that consistently anyway. If you want to add some index puts as hedges, just nibble a tiny position to get started. My strategy for buying these put hedges of late is to use strike prices that are 3-5% out of the money and date them out to November or December.
Q. Can you please put what percentage of your portfolio makes up your hedges?
A. My puts are just a tiny starter position, say 1-2% at most at this point. We are down on our puts which means our core holdings have likely been going up, which is a good thing frankly. The puts are just hedges, we’re not trying to make a bunch of gains by trying to time a market pull back.
Subscriber follow-up: I think the answer to the puts question helps. Currently it seems you are between $1 and $2K invested in puts, for every $100K in your portfolio, correct?
A. I would think that proportion isn’t a bad way to start hedging.
Subscriber follow-up: Thanks for the put answer: “If you want to add some index puts as hedges, just nibble a tiny position to get started. My strategy for buying these put hedges of late is to use strike prices that are 3-5% out of the money and date them out to November or December.” But which — QQQ, DIA, SPY — would you recommend? (I’m long mostly in TWC recommended stocks + gold miners and gold ETFs.)
A. I did a little of each, so that’s probably what I’d still recommend — $IBB, $QQQ, $DIA and/or some $SPY (I haven’t bought the $SPY puts yet though personally).
Q. Cody, think the latest chatter on a Fed rate hike could cause a market selloff?
A. Always a possibility that Fed chatter is a catalyst, but it’s usually just a one-day catalyst at most.
Q. On CNBC, I am always hearing the fast money traders say they are buying volatility to hedge their portfolios right now but they never really say what they are buying to do that. They never mention they are buying the $SPX, etc, or any major index. Possibly they do that though. I have emailed a couple of times to describe what buying volatility actually means. What do you think they would be doing? Is it anything different than what we do buying puts against the indices?
A. “Buying volatility” can be done many ways. I doubt they mean they are buying puts on the indices when they say “buying volatility” though they might! LOL. I can’t answer for them obviously. Here’s something I found that looks like one reasonable example of how you can “buy volatility”.
Subscriber follow-up: Thanks….While I learn a lot by watching shows on CNBC and other places the knowledge of how to do things I appreciate coming from you. Thank you for all you do for us who are at different stages of investing.
Q. My daughter has her first job out of college and is beginning to build her investments/IRA. The amounts she is investing monthly doesn’t make much sense to pay commissions and start out in a 5-10% hole. I’ve got her buying in a combination of no-commission Mutual funds and ETFs. Am I missing anything?
A. There’s no easy solution that fits all. But I don’t think you’re missing anything to get her started saving/investing from day one in her career.
Q. Optical networking stocks seem to be holding up well. If this is indeed the beginning of of multiyear super cycle, is it time to revisit them as a longer term investment?
A. Maybe, the action in optical networking stocks has been reminiscent of other low margin tech/commoditized tech industries such as DRAM and $MU or storage such as $WDC. That is, if you catch the cycles right, you can really make some money as the stocks rally or crash. I am doing some homework on the optical sector and stocks but I am not close to pulling any triggers there now.
Q. Cody, do you have a target buy price on $FSLR or just wait and see? Thanks.
A. Doubling down on my $FSLR homework before thinking about doubling down on the stock. 🙂
Q. Are you buying another tranche of FSLR?
A. Not yet. As noted above- I am doubling down on my $FSLR homework before thinking about doubling down on the stock. 🙂
Q. $Z and $FSLR have given up about 20% each the last few weeks. The old buy, sell, or hold question?
A. $Z is probably a buy, $FSLR a hold.
Q. Looking to add a bit more Z. If I remember right, some were looking to add also and Cody kept his powder dry … looking for a possible tranche buy. I’m feeling apoplexic?
A. I could see adding some $Z at these levels. Gently as always.
Q. Thoughts on $PANW? I bought a small amount in the low 120’s. Would you wait for it to head back down or would you add as it goes up. I believe they are the leader in their industry and PE is reasonable. Good long term hold?
A. I agree with you that $PANW is likely the leader in cyber security and probably the single best pureplay for the sector. I am likely to put a toehold into that stock at some point soon. That said, I don’t necessarily call the P/E at 50x next year’s earnings estimates “reasonable” per se. Then again the P/E isn’t not outrageous since it’s growing topline 30-50% per year.
Subscriber follow-up: Reasonable was poor word to use….I agree it works if they keep growing as they are but could be considered a little high in most cases. Thanks for the answer
Q. I owned EQIX a few years ago and did well when it was rumored it would convert to a REIT. I’ve lost touch but went back to see it is up about 200% from where I left it clearly benefiting from Big Data. Do you think they can compete with AMZN and the other data center giants and continue their climb or are they a short opportunity?
A. Haven’t looked at $EQIX in a long time either, but my gut says it’s probably a better short at this point than it is a long. I’ll take a look though.
Q. Cody, still up 18% in $FIT. at what point do you add to a winning trade, on any stock for that matter?
A. Every trade/investment/stock is different. If you want to add to your $FIT, maybe just nibble a small 1/10th tranche two or three times in the next few days.
Subscriber comments: 1. Thanks, Cody. 2. Thanks Cody! 3. A threepeat: Thanks, Cody!
A. You know I have to send Pat Riley a nickel now since you just used “Threepeat” in my chat room. Oh great, now I that I said it too, I have to send him a dime!
Jeez. I’m sorry. Maybe I should have said “hat-trick.” Or would you have to slide some cash over to Scotty Bowman for that?
A. I was just thinking I should Google the origin of “hat trick” the other day. Will have to do that sometime and find out its etymology.
Okay, that’s a wrap folks. Exit stage left. I’ll be back in an hour or two and will be here in the chat room most of the day tomorrow as usual.
