{"id":105083,"date":"2017-04-22T10:24:23","date_gmt":"2017-04-22T14:24:23","guid":{"rendered":"http:\/\/countingpips.com\/?p=105083"},"modified":"2017-04-22T07:25:03","modified_gmt":"2017-04-22T11:25:03","slug":"caveat-emptor-buyer-beware-on-shares-of","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/04\/caveat-emptor-buyer-beware-on-shares-of\/","title":{"rendered":"Caveat Emptor: Buyer Beware on Shares of\u2026"},"content":{"rendered":"<div id=\"inves-3663902035\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">April 22, 2017<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><p>By <a href=\"http:\/\/WallStreetDaily.com\/\"><u>WallStreetDaily.com<\/u><\/a> <img loading=\"lazy\" decoding=\"async\" class=\"attachment-home-th size-home-th wp-post-image\" style=\"display: block; margin-bottom: 5px; clear: both;\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/1116_trees_feature.jpg\" sizes=\"auto, (max-width: 580px) 100vw, 580px\" srcset=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/1116_trees_feature.jpg 580w, https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/1116_trees_feature-300x155.jpg 300w\" alt=\"\" width=\"580\" height=\"300\" \/><\/p>\n<p><img decoding=\"async\" style=\"float: left; max-width: 85px;\" src=\"https:\/\/duip7hn7nchpo.cloudfront.net\/editor-circle-louis-basenese.jpg\" alt=\"Louis Basenese\" \/>Dear <em>Wall Street Daily<\/em> Reader,<\/p>\n<p>The latest funds-flow data hint that investors are getting skittish.<\/p>\n<p>Stock funds are under heavy selling pressure.<\/p>\n<p>Meanwhile, bond funds are suddenly in favor.<\/p>\n<p>Here\u2019s a quick look under the hood\u2026<\/p><div id=\"inves-1782377287\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<blockquote>\n<p class=\"blockquote\">&gt;&gt; First-quarter inflows into U.S. bond funds just hit their best levels since Q3 2012. More than $7 billion flowed into bond funds in the latest period<\/p>\n<p>&gt;&gt; On the flip side, investors are exiting developed-market stock funds. Such funds just posted their biggest outflows since early in last year\u2019s third quarter.<\/p><\/blockquote>\n<p>Boy, this news holds bearish implications for the stock market.<\/p>\n<p>I asked my senior analyst, Martin Hutchinson, to make sure our readers are prepared for a correction.<br \/>\n<a id=\"video\" name=\"video\"><\/a><br \/>\nIs your portfolio insured against a downturn?<\/p>\n<p>Hutch\u2019s full analysis is below\u2026<\/p>\n<p>Ahead of the tape,<\/p>\n<p>Louis Basenese<br \/>\nChief Investment Strategist, W<i>all Street Daily<\/i><\/p>\n<hr \/>\n<p><script src=\"https:\/\/fast.wistia.com\/assets\/external\/E-v1.js\" async><\/script><\/p>\n<div class=\"wistia_responsive_padding\" style=\"padding: 56.88% 0 0 0; position: relative;\">\n<div class=\"wistia_responsive_wrapper\" style=\"height: 100%; left: 0; position: absolute; top: 0; width: 100%;\">\n<div class=\"wistia_embed wistia_async_8puge9wv1d videoFoam=true\" style=\"height: 100%; width: 100%;\"><\/div>\n<\/div>\n<\/div>\n<hr \/>\n<p><strong>Question:<\/strong> Martin, I want to take a break from our regular event-driven interviews and do something a little bit different. With the market a little bit toppy and some of Trump\u2019s policies, I thought it might be prudent to cover how to protect ourselves against the downside. So let\u2019s get into it a little bit. Are you up for it?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Sure. It\u2019s a very interesting topic.<\/p>\n<p><strong>Question:<\/strong> Suppose our readers want to take a position <i>against<\/i> the market. There are prudent ways to do that \u2014 and then there are not so prudent ways to do that. If you don\u2019t mind, let\u2019s cover a few of those. Let\u2019s start with the strategies that you would <i>not<\/i> endorse, Martin.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> There are two strategies I wouldn\u2019t endorse. The first is just selling the market short. In other words, you take a stock that you think is too high and then you short sell it.<\/p>\n<p>For retail investors, that\u2019s a very expensive strategy, because the brokers will charge you an arm and a leg. It also has the problem that your upside is limited. The stock can only go to zero, but your downside is infinite. That\u2019s a thing that stops me sleeping at night, I have to say.<\/p>\n<p><strong>Question:<\/strong> Let\u2019s recap that quickly for our listeners out there. You\u2019re saying that the downside is unlimited when you\u2019re short a position \u2014 whereas the upside is capped at 100%, because a stock can only go from its current price to zero.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> That\u2019s absolutely correct.<\/p>\n<p><strong>Question:<\/strong> It\u2019s also true that you need a margin account. You have to operate on margin to do this, because in a short, aren\u2019t you borrowing shares first and then buying them back later?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> You\u2019re borrowing shares and buying them back, and you can only do it on a few shares. That\u2019s because you\u2019ve got to be able to borrow them, and the brokers skin you an arm and a leg, particularly if you\u2019re a relatively small retail investor. Institutions can do it more efficiently.<\/p>\n<p><strong>Question:<\/strong> So as far as shorting a stock, there are probably going to be some instances where it makes sense, but overall, it\u2019s not for us. Let\u2019s move on.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Overall, it\u2019s not for us. The second thing I would caution against is selling call options on a stock. In other words, you give people the right to buy the stock off you at set price. That works fine unless the stock goes up \u2014 at which point you have to provide the stock.<\/p>\n<p>Now, obviously, you can sell covered calls on stock that\u2019s already in your portfolio. That\u2019s a very sensible strategy in many respects.<\/p>\n<p>But of course, you\u2019re not really shorting the market then, because you still own the stocks. So you\u2019re long the stocks even though you sold the call options on them.<\/p>\n<p><strong>Question:<\/strong> Let me recap that for us real quick. We don\u2019t want to sell a call even though we\u2019re going to get cash in our account right out of the gate. You\u2019re saying selling a call is not the way to go. We\u2019re going to get a nice cash deposit for doing so \u2014 but there may be some downstream impacts of that trade that you\u2019re not too keen on.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> That\u2019s right. If you do own the shares, then you haven\u2019t really gone short. And if you don\u2019t own the shares, as Daniel Drew I think said once, \u201cHe who sells what isn\u2019t his\u2019n, must buy it back or go to prison.\u201d<\/p>\n<p><strong>Question:<\/strong> And then the covered call is a prudent strategy, but it\u2019s not particularly a bearish one.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> That\u2019s right, absolutely.<\/p>\n<p><strong>Question:<\/strong> What do you say we talk about the way to properly go against the market?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> The best way to go against the market is buying put options, but not any old put options. You buy ones that, firstly, are long-dated and, secondly, are out of the money.<\/p>\n<p>The reason that you want them long dated is because, quite often, you think the market is going to go down but you have no idea of timing. Therefore, you buy the longest possible put options to give you time to be right.<\/p>\n<p>Then, the second thing is you buy them well out of the money, because you don\u2019t want to pay too much for them.<\/p>\n<p>Your downside risk with put options is the entire cost of the put option. But if the options are out of the money, that\u2019s not necessarily a huge amount.<\/p>\n<p>One stock we looked at is trading around $90. If you buy January 2019 puts at $75, that only costs you $5. So in that case, your downside is $5. But of course, the stock won\u2019t just stop at $75. If it starts going down, it could go to $30 or $40. Your upside then would be $35 or $45.<\/p>\n<p>So buying out-of-the-money put options, long dated, is a strategy that will make you many times your money if it goes right. And it\u2019s not going to be too expensive if it goes wrong. Your only cost is the put options, which won\u2019t be that expensive.<\/p>\n<p><strong>Question:<\/strong> What we\u2019re really talking about here is the power of leverage, right? We\u2019re not spending a lot to get into this trade, but we\u2019re magnifying our gains on the way down.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Absolutely, and it means that you can protect your portfolio by buying put options. For example, on the S&amp;P index, also out of the money, they are only a small fraction, maybe 3% or 4%, of the value of the portfolio. That\u2019s a very useful strategy if you think a crash is coming but you don\u2019t know when or how big.<\/p>\n<p><strong>Question:<\/strong> Fantastic, Martin. We should do more of these pieces. So this was \u201cHow to Go Against the Market,\u201d by Martin Hutchinson. Thanks a lot, Martin.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Great pleasure\u2026<\/p>\n<p><strong>Question:<\/strong> This is <i>Wall Street Daily<\/i> signing off.<\/p>\n<p>Smart investing,<\/p>\n<p><img decoding=\"async\" class=\"align-none\" src=\"https:\/\/sites.agorafinancial.com\/EMAILS\/images\/signature-martin-hutchinson.jpg\" alt=\"Martin Hutchinson\" \/><\/p>\n<p>Martin Hutchinson<br \/>\nSenior Analyst, <i>Wall Street Daily<\/i><\/p>\n<p>The post <a href=\"https:\/\/www.wallstreetdaily.com\/2017\/04\/21\/caveat-emptor-buyer-beware-shares\/\" rel=\"nofollow\">Caveat Emptor: Buyer Beware on Shares of\u2026<\/a> appeared first on <a href=\"https:\/\/www.wallstreetdaily.com\" rel=\"nofollow\">Wall Street Daily<\/a>.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By WallStreetDaily.com Dear Wall Street Daily Reader, The latest funds-flow data hint that investors are getting skittish. Stock funds are under heavy selling pressure. Meanwhile, bond funds are suddenly in favor. Here\u2019s a quick look under the hood\u2026 &gt;&gt; First-quarter inflows into U.S. bond funds just hit their best levels since Q3 2012. More than [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-105083","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105083","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=105083"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105083\/revisions"}],"predecessor-version":[{"id":105087,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/105083\/revisions\/105087"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=105083"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=105083"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=105083"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}