Market Moves For 03/23/2022

Theta gang money printing strategy goes BRRR

A Different Take On Thetagang…

I’m just gonna be upfront with you guys, I HATE companies like AMD and TSLA. Ok maybe not really hate, but as far as theta gang candidates, I think they’re a poor choice, and here’s why…

Take a look at this picture.

This is what AMD’s PE and PB ratio look like right now. For reference, Benjamin Graham (The father of value investing/fundamental analysis) said that PE ratios should ideally be below 15 and a PB ratio should be below 1.5. Why did he recommend this? Because that’s what the historical ratios have been for the stock market for decades.

(Historical PE ratio of S&P 500)

So is AMD a good value based purely on earnings and book value? The fundamentals would say no. And while I understand that many people think “AMD is gonna keep growing really fast so its valuation is justified” at some point you also have to realize that for AMD to bring its PB ratio down to a more reasonable ratio like 2:1, it would need to increase its shareholders equity by 10x!

Whether you think that’s possible or not is beside the point I’m really trying to make though.

The point I’m trying to make is that theta gang is supposed to be a money printer strategy. So if theta gang is a money printer strategy, then why are we using theta gang strategies on growth stocks?

We should be selling puts and calls at prices that we would be willing to sell at purely based on fundamentals. So while that $105 strike put on AMD with $233 in premiums looks kind of nice, will you think the same when the price drops to $72? After all, it was at that price only last May, its not completely unthinkable that it could drop back to that price range.

So What’s Our Alternative?

I propose that we go back to the roots of what theta gang really should have been about in the first place… We sell puts and calls on companies with sound fundamentals just like what our old friends Warren Buffett and Charlie Munger would do.

As it happens, I’ve designed a screener program in Python that uses the TD Ameritrade API. This way I can pull all the stocks from the S&P 500 within a minute for any expiration date and perform an ROI calculation. To do this we simply take the last traded price for the contract and divide by the cost to buy at the strike price (if you’re selling puts) or by the cost to purchase shares right now (if you’re selling calls).

Even on companies with sound fundamentals in boring sectors we can find monthly options priced as high as 4%.

That’s 48% a year on boring blue chip stocks.

How about that? and we don’t have to worry about wild swings in price like you would with high growth tech stocks.

Now obviously, that’s a bit of a rosy picture there, but after using this screener to find stocks that fit within our rough criteria for good fundamentals (5-30 PE and 1-4 PB ratios) I have figured based on some trades that I have already made, that this could reliably generate somewhere between 12-20% a year.

That’s still pretty good in my opinion.

And the other great thing is that we don’t need to do perform any market prediction voodoo or rubbing the crystal ball, or just hoping that maybe, just maybe that the stock performs well over the next year.

We just need companies that are good values, have low price volatility (hint hint, good value companies generally do), and generate good premium.

So without further ado…

Here are my five picks for market open tomorrow!

Sell CCL $16P 2022/04/14 for $25 which is a 1.56% ROI PE: -2.03 PB: 1.66

Sell PENN $38P 2022/04/14 for $52 which is a 1.37% ROI PE: 17.89 PB: 2.16

Sell PVH $65P 2022/04/14 for $80 which is a 1.23% ROI PE: 10.43 PB: 1.49

Sell SWKS $123P 2022/04/14 for $116 which is a 0.94% ROI PE: 15.32 PB: 4.78

Sell ALK $47.5P 2022/04/14 for $45 which is a 0.95% ROI PE: 13.34 PB: 1.73

Disclaimer:

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There are risks associated with investing in securities. Loss of principal is possible. Some high-risk investments may use leverage, which could accentuate losses. Foreign investing involves special risks, including a greater volatility and political, economic and currency risks and differences in accounting methods. Past performance is not a predictor of future investment performance.

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All views expressed are personal opinion and are subject to change without responsibility to update views. No guarantee is given regarding the accuracy of information on this post