Making money in a crazy market …


The world was hit with a pandemic that we first heard of in February 2020. This pandemic was/is known as Coronavirus (aka Covid-19). It is called the China Virus by our current president Donald J Trump because it originated in Wuhan China. Needless to say by March 23, 2020 the market was at a low and the economy was completely shut down. Check out the image below of the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Indexes:

Stock Indices from January 1, 2020 through March 23, 2020

Between January 1, 2020 and March 23, 2020 the Dow Jones Industrial Average (Blue Line) fell from 28,868 to 18,591 … a loss of 10,276 or about 35.6%. The S&P 500 (Red Line) lost 1,020 falling from 3,258 to about 2,237 for a loss of 31.32%. The NASDAQ Composite (Green Line) on the other hand fell from 9,092 to 6,861 for a loss of about 2,231 or 24.54%. With a market headed in the toilet we also had an economy headed in the toilet. Trump’s economy was/is in real trouble … and many thought and still think so is his chances of re election.

As a country we were told that this plague could kill between 1 million and 2 million people in America. Then those numbers were changed to 100,000 to 200,000. We were originally told to social distance and not have gatherings of more than ten people and that we did not have to wear mask as they would do no good but that we should wash our hands constantly because that would do some good. Then a month or two later we were told that we must wear masks in states that governors dictate that we do so. I really don’t need to go through all this nonsense as you are all familiar with it, and it will only end up making me mad … and I don’t want to write while I am mad.

It was about the time the Coronavirus was announced that I stopped writing articles here and place some short articles on my Facebook page. I decided at this time to write about my past life and make that my 100th article since my retirement from Financial Services in June 2018. However, I have not completed that article as of this date. Therefore, this is actually my 101st article with my 100th still being in the works.

We were told the economy would not recover for years and that had everyone selling out of their market investments which only drove the markets down that much further. You see … the markets to tend to lead the economy because when this happened the economy only got worse. But, the sad thing is that many lost money when there was no need too. Many people sold out everything only to see a very quick recovery (as I will show in a graph later).

I also believe that market action can be a “self-fulfilling prophecy.” If enough people say the market is going down and enough people believe it is going down … they will act in a way to make sure it goes down. If on the other hand enough people say the market is going up and enough people believe the market is going up they will do whatever is necessary to make that prophecy come true.

Did I sell?

I did sell some investments that I already had some gains on to capture those gains and have good money on the sidelines. I also had some investments sell under stop loss orders I had set which did cause me to take some minor losses. I will alway use money management techniquest that I have wrote about in the past, especially when it appears the market could be in trouble.

However, in early March I decided the market could not go much lower so I started to invest. I did some long-term investing in my wife’s account by purchasing some Exchange Traded Index Funds. Specifically I invested in the NASDAQ 100 ETF (QQQ), the SPDR Technology Index ETF (XLK), the SPDR Healthcare ETF (XLV) and the SPDR Dow Jones Index Fund (DIA). These funds are now (as of this writing) up 26.75%, 24.46%, 10.83% and 5.16% respectively. I recently also invested in the SPDR Gold Shares ETF (GLD) which is also up 10.85% since my investment on May 19, 2020. These are intended to be long-term investments that I have placed a 15% trailing stop loss on.

I do have two options accounts that I play with and those are what I am writing this article about. Before getting into those accounts and to show you how you can “Make Money in a Crazy Market” let’s see what the market has done since March 23, 2020. The following graphic is a continuation to the one above.

Stock Indices from March 23, 2020 to August 14, 2020

Here we see the Dow Jones Industrial Average (Blue Line) has gone from 18,592 to 27,915 … an increase of 9,323 points or about 50%. The S&P 500 (Red Line) has gone from 2,237 to 3,375 … an increase of 1,138 points or about 51%. And, the NASDAQ Composite (Green Line) has risen from 6,861 to 11,027 or an increase of 4,166 points or almost 61%. This would be an average return between the three indices of about 54%.

You see the market did not stay down that long and those who sold out of everything at the bottom (in March) have lost a lot if they did not get back in right away.

REMEMBER THIS IF YOU REMEMBER NOTHING ELSE!

Time in the market generally pays off a whole lot more than timing the market.

How to make money …

The best way to make money in the market is to “Buy Low and Sell High.” Many of you that sold out at the low and have not gotten back in yet may feel that you have lost the opportunity to do that. That is not necessarily the case. Who say’s the market (and stocks) cannot go higher than what they are now.

Most people Love the Apple

Did you know that in January 2000 Apple Stock (AAPL) hit a high of $5.00 per share. If I’d told you to buy it after it came off lows just a few months earlier of $1.00 per share you’d probably had some ill thoughts of me. By November of 2005 it hit another high of $12.00 per share. If you’d have bought at $5.00 per share five years earlier you’d have made a nice return of 140% on your money (an average of 28% per year). If I’d told you to buy at $12 per share … you’d probably thought ill of me again.

Then in December 2007 AAPL was at $28.54 per share. If you’d bought at $5 (an all time high at the time) you’d have had a return of 471% in 7 years. Or if you’d bought at $12 … another high you’d have had a return of 138% in just two years.

Just five years later in April 2012 … AAPL was selling for a whopping $90.52 per share. Man if you’d just bought at that first time $5.00 high your return in 12 years would have been 1,710% or at the other $12 high in 2005 your return would be 654% … or even at the other high of $28.54 five years earlier your return would have been 218%. Keep in mind the prices quoted above were “split-adjusted” prices.

By now you should get the picture … just because a stock or the market is at a high today does not mean it won’t be higher tomorrow, next year, the next five years or a decade from now. We need to also remember that stocks do split from time to time. For example AAPL has had 4 stock splits since 1985. They split 2:1 on 06/16/1987. They had another split of 2:1 on 06/21/2000. And yet, another 2:1 split on 02/28/005. Then on 06/09/2014 they had a 7:1 split. The price on that day after the split was $91.28 … which means the price before the split had to have been about $638.96.

As I write this AAPL is trading at $458.62. This means that if you would have invested $10,000 in the stock on June 2, 1995 at the split adjusted cost of $1.505 per share you would have purchased 6,644.518 shares (if it were possible to purchase fractional shares back then) and today – not included dividends over the years – that 6,644.518 shares would be worth $3,047,308.97. Hows that for a return in all kinds of wacky markets … 30,373.90%. Remember … time in the market is a whole lot more lucrative than timing the market in most cases.

Take a look at this picture thanks to https://www.macrotrends.net/stocks/charts/AAPL/apple/stock-splits

Chart copied from http://www.macrotrends.net

Is it too high now to invest in AAPL at $458.62 per share? I would say not hardly. It has already been announced that on August 31, 2020 Apple will do another 4:1 stock split for those who hold shares in the stock as of the record date of August 24, 2020. This means you would get 4 shares for every 1 share you own. So, if you broke down and invested $11,465.50 in 25 shares of the stock today … come August 31st you would hold those 25 shares plus be given another 75 shares (4:1) for a total of 100 shares. This means the stock on that date (if priced as it is today) would be worth $114.655 per share. From there do you think it has a chance to go back up to $400? I do, eventually!

Should you put all your eggs in one basket?

If this concerns you … then consider investing in QQQ – the NASDAQ 100 Index ETF. This will spread you money over 100 companies or more (and one of those companies happens to be AAPL). Look at this chart showing the price action of AAPL (Green Line) as compared to QQQ (Blue Line) over the period from January 2004 through today:

Apple Stock vs. QQQ ETF Shares

Keep in mind … these investment ideas mentioned are for longer term buy and hold schemes.

What can you do for shorter term investments?

I like to use options. With options you can invest less money and make great returns. You are also assured that the most you can lose is the amount you invest (when buying call or put options). Here’s a list of Call Options I purchased earlier this year and sold since April of this year.

These options were purchased and sold between January and August 2020

While this table may be hard to read … if viewing on a computer you should be able to right click your mouse and open in a new tab which will enlarge it.

You will notice I have had some with gains of as much as 267% and some with losses of as much as 95.5%. You are not going to win on every trade … but I did win on 9 and lost on 6 of these 15 trades. Overall taking my cost from $59,024 to proceeds of $87,673 making a gain of $28,650 or about 48.5% return through half the year or a little more. Not Bad!

In this portfolio I still hold 35 positions and am up from 2.69% to 222.21% on 22 of them and am down from 3.87% to 76.53% on 13 of them. My total cost in what I still hold is $131,422 and it is worth (as of this writing) $161,724. Therefore the remaining portfolio is up $30,302 or 23% – and these were all put in here since about March or later this year.

When I purchase call options I generally use time frames of between 9 months and 18 months as expiration periods to give time a chance to work for me. Remember when you purchase an option is is like buying a block of ice … it immediately starts to melt from the time you buy it and ends up at expiration (if the stock price has not increased enough) to be worth $0.00.

Photo by Enrique Zafra on Pexels.com

Another portfolio I love to use is my Put Portfolio. In this one I sell short term Put Options. When you sell a put option you are telling the buyer of the option that you are willing to purchase his stock at a specific price by a specific date if he elects to sell it to you at that price. When I sell a put option I have to make sure (since I am guaranteeing that I will purchase the stock) that I either have enough cash or enough margin to be able to purchase the stock if it is “put” to me.

Remember I said earlier to make money in the market you need to “Buy Low and Sell High?”

This is what I do with my Put Option Portfolio. Let’s say that I am interested in purchasing Apple Stock. Today as of now AAPL is at $457.60. If I was interested in it at that price I’d go ahead and buy it. But if interested more in selling a put option I am going to lower the price I am willing to pay for it. In this case I may say I am willing to pay 75% of today’s market value for the stock. So I have reduced the cost of the stock I am willing to buy from $457.60 to $343.20. Now I know that I am not going to get an option at that price since options come in $5 or $10 increments. Here’s an option chain for September 25, 2020 Put Options:

Option Chain for 09/25/2020 AAPL Puts

Notice the two I have highlighted. I could sell the $350 strike price and for each contract I sold I could get about $160 put into my account. Or I could sell the $370 strike price and for each contract I sold I could get about $234 put into my account. If I sold two contracts (agreeing to purchase 200 shares of the stock) I’d get $320 and $468 respectively. I would not have to worry about buying the stock unless it hits the strike price of $350 or $370 … meaning it would have to fall $87.60 to $107.60 per share before I would have to buy it. That’s a decline of 19% to 23.5% in value. It would have to fall that much in the next 43 days (since I keep my put options short-term … 45 days or less).

My belief is that if it worth $457.60 per share it is certainly worth between $350 and $370 per share. If it never hits that price I keep the money I received and sell more Put options sometimes between now and 43 days from now (generally before as shown below). It it does hit that price … I buy the stock and wait for it to increase in price before selling it. However, to generate more income I’d also sell Call Options against the stock at higher prices than the stock is selling at now to generate premium dollars coming into my account.

I have been doing put options in this one account since March of this year. I have two remaining active put options in this account that can be seen below:

Currently held put options

Here I have agreed to purchase 400 shares (4 contracts) of MRNA at $60 per share. I was paid $1,339.91 to make this offer and could buy my way out of this for $424 today which would net me a gain of $915.91. Or I could hold until expiration on 08/28/2020 and hope the stock keeps going up so that price of the option would keep going down and simply expire worthless leaving me the total premium in the account of $1,339.91.

You will also note I have 4 contracts on BNTX that paid me $939.93 and I could close those out for a cost of $760 netting a profit of $179.93.

I normally will hold these if they are making money until I see a P/L% of 80% or more. Take a look at what has been closed so far this year (and keep in mind this is just since March 2020).

Gains from Put Options Closed Out YTD

You will notice two gains and lost columns here. One is My Calculations of Total Gain/Loss % and the other is the Charles Schwab Calculations of Total Gain/Loss %. I am in an argument now with Charles Schwab as to how they calculate % gain/loss on put options. Seems to me that if I take money out of my pocket to close out a position (COST) and I keep the difference between Proceeds (money into my pocket) and COST (Gain) … then Gain divided by cost would be the real rate of return.

So in the case of MSFT $294.96 divided by $67.99 would be 422.83%. But the way they calculate it is Gain of $294.96 divided by proceeds of $362.95 is a gain of 81.27%.

At this point it does not matter who is right or who is wrong in their calculation. The bottom line is while the market was up and down — eventually trending up — I was able to turn a cost of $6,199.38 into proceeds of $17,647.41 for a total dollar gain of $11,448.03. The way Schwab calculates the return that is about 64.87% over a period of 5 months (which really is not bad) — or the way I calculate it a return of 184.66% over a period of 5 months (which is superior). Either way it is a heck of a lot better than average market returns over the same period of 54%.

Stretch these gains out over a period of years and watch your capital multiply — as long as we continue to live in capitalistic and not a socialist society (Yes … I had to put that in here).

I will close now … let me know if you have any questions by sending me a note.

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