Most Recent Investing Failure | Negative Market Divergences | Around the Web
I’ve been talking about the success of my $GDX, $SLV, and $VXX options experiment over the past few months.
Time to talk about a similar experiment that failed miserably.
As I’ve mentioned before, I either subscribe or have access to a number of different investing newsletters and services. Some are amazing, some are good, and other are hit and miss.
One of the “amazing” services released some research several weeks ago about an anticipated company buyout on the horizon. The research was complete with very sound reasoning for the timing and likely buyout price.
While in the midst of my other options experiments, I decided to take a rider on this opportunity as well.
(How could I possibly lose?!)
I looking into out of the money call options based upon the anticipated buyout price. If the analysis proved accurate, I’d have a 10x return in less than two months.
So, I bought and waited.
Eventually, I checked my portfolio tracker and the underlying security had jumped in price by well over 30%! I was pumped and quickly logged into my broker to collect my winnings.
Problem.
While the buyout did indeed happen, it was at a lower price than projected. In fact, it was lower by a margin large enough to render my options virtually worthless since it was so close to the strike price of the options. I sold them off at a fraction of the original price.
Fortunately, it was an experiment so the loss was minimal.
(This is how I imagine the remaining value of my options to look.)
Lessons learned?
- No one knows the future and every forecast has the chance of being wrong.
- When you swing for the fences, you risk striking out. If I had purchased a lower strike price, the potential gains would have been smaller, but the risk of loss would have been as well. I’d rather have a high probability 100-200% gain than a lower probability 1000% gain.
- In the future, build in cushion in both the date and the strike price.
Negative Market Divergences
All signs continue to flash red on the market, yet upward we climb.
What signs? There are plenty, but two quick examples would be the price divergence between high-yield bonds and oil and similar divergences between U.S. stocks and the Chinese Renminbi (Chinese currency).
Oil prices are a big driver of corporate profitability which is tied to the default risk of a significant portion of high-yield bonds. Translation? Low oil prices mean increasing risks of defaults on high-yield bonds which means these bonds should better match oil.
A falling Chinese currency tends to lead to a lower prices globally and could also indicate further capital flight from China. This would tend to drag down U.S. stocks, but currently they are diverging.
Let me know if you have any questions or if I can help in any way.
Best,
Brian
Things on my Mind for Future Articles:
- Determining the value of an investing service
- My biggest regrets right now
- Writing put options as a way of generating cash for my portfolio
- Shorting or buying puts on “doomed” highly leveraged ETFs
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Ian Bezek – How to Outperform Any Hedge Fund
Income Inequality and the Upward Crashing Market
The Weekend My Wife Left Me + GDX Options Up 338.69%
Around the Web this Week:
Does A Steady Fed Policy Mean Higher Highs? | Seeking Alpha
Central Bank Bubble Blowing: The Reflation Trade Is Alive | Seeking Alpha
Jon Corzine Was A Fortune Teller Ahead Of His Time | Seeking Alpha
China Is Building Its Future on Credit | Stratfor
Five bricks in the wall of worry ~ Macro Man
What Is Loss Aversion? – Scientific American
Most Recent Investing Failure + Negative Market Divergences
Disclosure: This article is for information purposes only. Comments made by my guests do not necessarily represent the views of Brian or Investor in the Family. There are risks involved with investing including loss of principal. Brian and Investor in the Family makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met.