Monday, March 12, 2012

Monetizing Fear With General Electric Puts (GE)

Battling for every 1/10%.
From Barron's The Striking Price column:

When fear inflates put prices, sell puts on blue-chip stocks that pay dividends. Dividends are an incredibly important, and too-often overlooked, ingredient of investment returns.
A man is talking to a couple at the end of an elegant bar. It's after work. Everyone is wearing suits. They're drinking wine. They seem to know each other. "Sometimes, I sell puts. Other times I sell calls," the man tells the couple. "It's a full life."

The scene could have occurred in almost any big-city bar, but it is a New Yorker magazine cartoon published in February 2000. The cartoon came to mind during a week of Sturm und Drang. Although many bourses recovered later in the week as Greece appeared to have averted an immediate debt apocalypse, on Tuesday, the Standard & Poor's 500 Index fell some 2%, unleashing enough bearish noise to wake the dead. To be clear, noise refers to information with little value.

It is true, as palavering pundits pontificated, that other countries besides Greece are still problematic, the European Union might still collapse, rising oil prices menace America's economic revival, Israel may attack Iran, Iran may attack Israel, and technical indicators could foretell doom.

But here's a fact worth knowing: Palavering pundits always have a 50% chance of being right—offering no better than even odds for people who must try to effectively navigate the stock market....MORE