The stock market is fun to talk about, like sports and politics, but it’s so complex that it’s hard for most people to understand.
So the next time someone wants to talk about the financial markets, these talking points will come in handy. “I can’t believe the bond market is telegraphing signs of recession and the stock market is going back to record highs,” he might say. Wave
it’s broken. It’s about 19, even though World War III is still possible, interest rates are rising, and geopolitics is less stable than American politics.”
I could also say something bland, like stocks are discounters, but J Pow (cool way of referring to Fed Chairman Jerome Powell) is behind the economic curve. If the conversation just won’t end, shrug, pull out your phone, and walk away saying you need to do an overnight OTC trade to get oil in a foreign market.
These lofty words are increasingly framing market discussions, making it more difficult than usual to isolate signals that are actionable and insightful from noise, or information of no economic value.
If you prefer to do more than waffle, consider taking a Stocks-First approach: focus on well-run companies that have smart management teams and, ideally, pay dividends.
we have mentioned
(ticker: KKR) in the past, and the private equity firm will still help you cut through the noise. As a company, KKR has the ability to be in the right place at the right time. He has an intriguing global investment portfolio and knows when to buy and how to profit. KKR, for example, was one of the earliest investors in
Academy Sports and Outdoors
(ASO) and recently came out with a tidy profit. Additionally, KKR has a dividend yield of 0.98%.
In early February, when KKR shares were hovering around $73, we suggest that investors consider selling the $70 of March put option and buying in March $75 call option, the so-called risk investment strategy, that is, selling a put option and buying a call option with the same expiration. The buy and sell premiums essentially canceled each other out, so the only costs associated with the trade were commissions and potentially buying shares.
KKR shares subsequently fell after the company reported fourth-quarter earnings later that month. Despite relatively good results. If you took our advice, you almost certainly own KKR stock now. Still, the stock bottomed around $50 in mid-March and has since risen 17% from the low. Investors appear to be concluding that rising interest rates won’t hurt private equity firms and that lagging stocks can once again lead the market.
KKR shares are close to crossing their 200-day moving average around $66, a critical test that could determine whether the stock retraces more lost ground or pulls back lower.
Doing nothing for now, and waiting for the many market-driving events to unfold, is a legitimate decision. However, aggressive investors may position themselves to buy KKR at a lower price as they wait for more earnings ahead of KKR’s first-quarter earnings report in early May, a potential stock-moving event.
With KKR at $59.31, the $55 May put could be sold for around $1.55, and the $65 May call could be bought for around $1. If the stock goes up to, say, $70, the call is worth $5. If the stock falls below $55, investors can either buy the stock or adjust their sell position to avoid a sale.
The risk reversal strategy is one of many ways to implement a Stocks First approach. Anyone who agrees with this plan of action can, of course, decide on their own options strategy. The bottom line of selecting stocks with options is to try to modify the realities of the market to reflect your views.
Steven M. Sears is president and chief operating officer of Options Solutions, a specialty asset management firm. Neither he nor the company has a position in the options or underlying securities mentioned in this column.