Investing using options is very different from constructing a classic long-term buy-and-hold portfolio.
In this segment from Motley Fool Live that first aired June 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss how options can help “scratch the itch” among investors who want to take action.
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Jim Gillies: There’s one other thing I want to tax out of number two. Again, thinking long term, as you use short-term strategies. This is going to seem so quaint and people are going to be fitting me for my old folks’ home and all that stuff.
Bowman: There you are, that’s fine.
Gillies: That’s true. I believe, I have no data to back this up, this is this anecdote based on other people have observed myself. People like to do something, I want to do something, Ellen. I want to do something. People will trade in and out of stocks. If you’re someone that just feels the need to do something, you don’t want to sit like, can you imagine in the year 2000. In the year 2000 Walmart (NYSE: WMT) –
Bowman: In the year 2000.
Gillies: I was going to say [laughs] there’s a song there, I’m sure. We’re going to completely nerd out on people. For future reference, I think. [laughs]
Bowman: Back on track, it’s 2000. We’re being serious.
Gillies: Walmart was trading for about $54 a share or something like that. You may have heard of Walmart. Small little retailer out of Arkansas.
Bowman: Mom and pop store, yeah.
Gillies: Mom and pop store, yeah. But I remember my sister sent me a note sometime in mid to late 2000 saying, “Hey, I really like what Walmart’s doing with their e-commerce.” I mean, that sounds quaint. “I really like what they’re doing with e-commerce and online, I’m thinking about buying some shares, what do you think?” My response was basically, You’re looking at the premier dominant retailer of our time, giant bricks and mortar exposure, where their e-commerce at the time was 0.01 percent of revenue. You’re looking at them for e-commerce? With all due respect, [laughs] no, don’t do that.
Bowman: We also don’t go to Walmart, but we also don’t go there for tuxedos necessarily. [laughs]
Gillies: But also at the time, then this goes back to rule one. Valuation first, the option, second. At the time, Walmart, which again, slightly dominant even in 2000, slightly dominant. Walmart was trading for 50 times earnings. There’s different tools to measure evaluation. But looking at Walmart on an earnings valuation basis was reasonable, and I’m like, “Okay, it’s 50 times earnings.” I wrote back to her. “Buy Walmart because they’re dominant. If you want, that’s fine. But don’t expect to make anything for the next little while. because at 50 times earnings, this company that we’ve seen growth slowing and they’re already in this dominant position, they’re probably not going to do much for a while.” I said, “that you would probably expect a decade or more of trading sideways.” That’s exactly what happened. I think it went from $54 in 2000, I think $54 in 2012. Having that recognition, having that understanding of the business you’re walking into, first off, would allow you to pick the right strategy for Walmart. Let’s say you owned Walmart, 12-years of going nowhere. Think long term, if you’re a stockholder, that suck. You’d probably get bored and be out of there. But as an options user, maybe I’m running that as a covered call, maybe I’m doing some other stuff around the edges. I’m using little short term things, that’s where I’m getting my need, that’s how I’m filling my need to do something.
Bowman: Right, we’re reactive creatures.
Gillies: I’m getting my action on.
Bowman: Exactly. We’re reactive creatures, we see news if something happened. I was thinking covered call when you were saying that too if you’re going sideways for 10 years, you can make money on it, you can do things with it, you can feel like you are involved. You’re not just watching it sit still, but you have to pick the right strategy or else.
Ellen Simonson Bowman has no position in any of the stocks mentioned. Jim Gillies has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.