Stock Markets Still Near Record-Highs
In my previous commentary last week, I suggested the stock market would likely go higher by year-end. But I also warned that investors keep their guard up and enjoy some profits.
Now here we are, a week later, and the stock market is at yet another record-high after the moves by the DOW and S&P 500 on Tuesday.
Technology continues to provide the stock market the leadership that is required during a bull run. The NASDAQ came within 22 points of breaking 5,000, which has not yet happened as I write this, but could very well occur next week. Such a stock market achievement after a 15-year absence would be more psychological than meaningful, in my view at least. Breaking out to 5,104 and a new record would be more intriguing.
On the charts, the stock market moves have been nothing short of impressive in February. The NASDAQ is up 7.18%, while the DOW and S&P 500 are higher by more than six percent as of the markets’ close on Tuesday. Small-cap stocks are also faring well, with the Russell 2000 up 5.8%.
But while I, along with the bulls, rejoice in the gains, my view is that the rate of the stock market advance is simply not sustainable. I expect an adjustment to come at some point, as stocks reach higher.
The stock market was pleased with the Federal Reserve and its chair Janet Yellen, who comforted investors after suggesting interest rate hikes will be considered “on a meeting by meeting basis.” Folks, the easy money continues to flow, which will help support the stock market.
Now, I would be hesitant at this time, but I also don’t want to miss out on any buying opportunity that could likely still present itself.
Call Options the Best Strategy for This Market?
Just look at Apple Inc. (NASDAQ/AAPL). The new darling of Wall Street continues to edge higher and will likely be the first trillion-dollar company in history.
I wouldn’t be buying a company like Apple via its stock, though. For a company like this, a better play would be for investors to consider trading via the use of call options. This would give leverage and controlled risk, as there’s a maximum loss.
The key is to select an appropriate strike or exercise price and time to expiry. What you want is for the underlying stock price to surpass the strike price plus the premium paid by the expiry. You can make some excellent returns if you are correct. It’s that easy.
For example, take the case of Tesla Motors, Inc. (NASDAQ/TSLA). The momentum play has good upside potential; but at the same time, it has downside chart risk down to around $180.00 and below. To play this risk, you could look at call options.
Buying 100 shares of Tesla, you need to expose about $20,600, based on the stock’s price as of Wednesday. Alternatively, you could consider buying via a call option contract on Tesla equating to 100 shares. To allow ample time for the trade to pan out, you could extend the expiry to the January 15, 2016 contract. The cost to implement an at-the-money $205.00 strike is $34.60, or $3,460 for the one contract, representing the maximum risk. The breakeven occurs when Tesla trades at $240.60 by the expiry. The consensus one-year price target is $264.25. (Please note: This example is for illustrative purposes only and is not to be construed as a buy recommendation.)
Chart courtesy of www.StockCharts.com
Call options are available for the majority of S&P 500 companies, as well as many outside of this realm. They are a decent alternative to play the stock market at the current highs while managing risk.