Trade Alert: Five stocks to buy and three specific trades I’m making right now
Good morning and welcome back to the dog run, where it’s always better to play after a big rain. Does this pullback in the markets, which has now hit the lower end of my 5-10% pullback target that I started looking when the markets had rallied to multi-year highs, count for a big rain? It’s getting there, and I’m starting to put some money back to work today.
That doesn’t mean that I’m looking for a huge, instantaneous rally from these levels…but as always, I like to spread my buying out a little bit by using tranches in my purchases and buying over time at various prices with a heavy emphasis on buying weakness and selling strength during bull markets (we will reverse that approach when the markets appear to re-enter then next bear phase, whenever that might be).
Here are the five stocks currently in the portfolio that I’m going to start scaling back into after having trimmed most of these at higher levels:
* Level 3
* Sandisk
* Apple
* Fio
I’ll start my buying this morning with some longer-dated calls options in Level 3 and Google. Buying a call option gives me the right to buy 100 shares of a stock at a set price on a certain date in the future. So today as I’m looking to buy some Level 3 calls dated out into January of next year with strike prices of say, $25 a pop, then I would have the right to buy 100 shares of LVLT at $25 a share on the third Friday of January 2013 when those options will expire. If the stock rallies to $50, I’d have a 1000% gain or so, as I’d be selling the calls that cost $3 or so each for $25 or more each. Then again, if the stock rallies from $22 to $25 and/or if it falls from here and never gets to $25, then the call options would lose value as time wears on and the expiration date approaches eventually expiring worthless, which would leave me with a 100% loss on the trade. Big risks/big potential rewards in any option trade. And if you’d rather not mess with options (and I highly suggest you don’t trade options with any serious amount of money until you truly understand all of the stuff I just explained above and can explain it yourself), then simply look at building your common stock positions in those same five stocks I highlighted above. Nothing wrong (and a lot right) with simply sticking with common stock and not using options.
So the upshot for now is that I’m looking to start adding to all five of the stocks above, but I’m not going to rush into any or all of them. I’m going to buy some January 2013 LVLT calls with $25 and above strike prices, and I’m going to buy some January 2013 GOOG calls with strike prices near $700 or so. I’ll look to add to both of these positions on future near-term weakness in either stock.
One more trade to mention today. I’m going to take a tiny bit of my “pre-earnings gambling money” and bet on some near-term NFLX calls. I’m going to put in some bids to buy some slightly in and/or out of the money calls with strikes from $100 to $110 that expire in May and/or June. This, like most earnings report bets, is truly a gamble and not the most important part of outperforming over the long-term, though if we get just slightly more of these bets right than wrong over time, we’ll likely continue to nicely complement our returns as the payoff on these bets can be big when the work. Then again, you guys have seen me lose 100% on some of these pre-earnings gambles before. NFLX reports tonight and we’ll likely have some big losses or some big gains in these calls tomorrow as the stock reacts however it reacts. Be careful on these!
