When Stocks Become Sinkholes
As earnings season kicks off, we all know disappointments lie ahead, to be followed by painful selloffs.
Blowups always generate the same inevitable questions. And AutoZone (AZO), Electronic Arts (ERTS) and General Motors (GM) have inspired a flurry of reader emails seeking guidance on either how to minimize the damage or how to seize opportunity.
To Resuscitate, Not ResurrectAs a devoted options columnist, I am obviously a firm believer in the benefits of embracing options in your daily trading life. That said, I also recognize their limitations and always warn they do not offer miracle cures or immediate financial salvation.
So anyone who has seen a position obliterated must first understand that options can do only so much to redeem a position gone bad. Options can give a second wind to positions that still have a pulse, but do not expect them to perform a resurrection. In fact, in the case of a blowup, many professional traders would opt to take the loss and move along to a new opportunity.
The thinking is there are better places to deploy time and capital than fighting what will likely be a losing battle. In fact, when applied to a losing situation, options have the power to make you even more wrong and cause even more pain than if you had just let the position die.That said, there are some standard operating procedures for at least trying to briefly stabilize before making an honorable retreat. One of the most popular techniques is often referred to as a current portfolio repair (CPR) strategy, which consists of adding a 1-by-2 ratio call spread to the existing holding. The goal is to increase your long exposure at little or no additional risk or cost. For example, assume you own 1,000 shares of XYZ, which is currently trading at $30 per share. (The cost basis is inconsequential.) You would buy up to 10 of the $30 calls and sell up to 20 of the $35 calls for even money.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV