Institutional investors pretty much own all of the same stocks, yet another bank recently noted. A realist might conclude that such investors operate expensive index funds that all buy the same things and charge high management fees for doing so.
If you want to give your money to these guys, go ahead. But something tells me that is about as appealing to you as buying stocks that are dancing around highs.
Many investors are worried about high valuations and economic uncertainty, and that has helped created the proverbial wall of worry that defines a bull market. Those concerns have plumped the premiums of many downside put options, which nervous investors buy to hedge their stock positions and portfolios. (Puts increase in value when the underlying security price declines.)
That creates some interesting opportunities for investors willing to sell puts.
In a time of heightened nervousness, downside puts almost always trade with a fear premium. This is widely known among market insiders, who often refer to selling puts on blue-chip stocks—allowing the seller to pocket a premium if the underlying stock rises in value but also committing him or her to buy it if its price falls—as one of the truly great strategies.
(ticker: MSFT), one of the crowded stocks. Its shares are up 39% this year, about double the return of the
S&P 500 index.
The company recently reported good earnings, drawing praises for success with its Azure cloud-computing business and software subscription sales, and the stock is hovering at its 52-week high. During the past year, shares have ranged from $93.96 to $141.68. Several analysts have issued price targets of $155 to $160.
When Microsoft’s stock was around $136, the October $130 put could be sold for $2.45. This positions investors to buy the stock at an effective price of $127.55. Should the stock price be above the strike at expiration, investors can pocket the put premium. The key risk of the strategy is if the stock plummets far below the put strike, obligating investors to buy back the put for more money than was received for the sale or to buy the stock for the put strike price even if the stock price is lower.
The approach works for any stock you would be willing to buy at lower prices, but is particularly appealing for trading major technology stocks that are almost certainly now being investigated for antitrust violations by the Justice Department.
The move follows a letter sent to the Federal Trade Commission by the Retail Industry Leaders Association, or RILA, in late June. The trade group represents more than 200 retailers, including
The association was not complaining about competition from
(V), or any other tech or payments platform, wrote Brian Dodge, RILA’s chief operating officer. Instead, he contended that his members want a level playing field. He charges that tech companies influence prices and even determine what shoppers see when they are ready to buy.
In the past, we have recommended selling puts on Facebook and buying stock in anticipation that the government might try to break up the company. The new investigation—even though the DOJ did not name any companies—validates the recommendation and should solidify the fear premium in the company’s puts.
The pressure on big, crowded tech stocks is likely only to increase, and that is good for investors. Fear, as we have often averred, is one of the few real friends anyone has in the financial markets, and selling puts—especially on dividend stocks that are in demand for their yields—remains one of the greatest ways that well-heeled investors who can warehouse quality stocks can take advantage of the market mob.
The higher stock prices go, the edgier investors will become. Should the great shakeout occur, many put prices will further inflate with even richer fear premiums, creating even greater opportunities.