Mark,
Thanks for your question as to why I bought COSW and why I did or didn’t buy the underlying, COST.
For sure, COST is a dominate player in its industry and might be a good stock to buy if one is a long-term investor, which I’m not. I’m a trader, which is a different gig, even though some of my stock and ETFs holdings were bought years ago and really are Buy-and-Forget holdings, e.g. my mining stocks, never mind that that my bond holdings, roughly 35% of AUM, have an average duration that I will likely not outlive.
So this question has to be asked, “Where are we in the current economic cycle and how well is COST likely to do going forward?” Here’s what Simply Wall Street, a fundie website I depend on, thinks of COST.
Pretty sucky, right? Its current price is $856, but its ‘Fair Value’ estimate is just $581. Ouch. COST is so far over-bought as to be of no interest to me. Based on a consensus of analysts that track COST, SWS estimates COST’s future earnings growth rate to be a modest 8.4% and its EPS growth rate to be a similarly modest 8.52%. Both those numbers are too low to make COST interesting to me as a long-term holding. But COST might be a good short-term trade. That’s what I don’t know and am just guessing.
However, this difficulty arises for me. Its share price is higher than I want to venture on one bet. For sure, I could buy a fractional share of COST --from nearly any broker these days–, but then I wouldn’t be able to trail a stop, and that has become a fixed rule for me. My speculative bets have to be able to be trailed with a stop, not so much to limit losses which trailing a stop does ensure, but to harvest profits before the market takes them back. Thus, if I get kicked out of a position in a day or two or ten, but have achieved a decent gain, that money put at risk has earned a vacation, and I’m content to park it for the rest of the year in T-bills.
So, yeah, I’m willing to take a position in COSW – plus a dozen others-- as an experiment that represents less than one-quarter of 1% of AUM. But those positions will get dumped if their underlying starts to tank, because I’m not willing to suffer share price erosion for the sake of receiving a fat dividend. Total returns matter to me, not an income stream.
As for owning the underlying and then writing calls against it, that’s just not a gig that interests me. I have permission from the brokerage firms with which I have accounts to do so. But betting against myself, by owing a stock that’s going sideways or not up by very much and writing calls on it, is a really lame thing to. If a trade isn’t working, it needs to be gotten out of, not milked for a few pennies while hoping its prospects improve, never mind the math and cost of owning a round lot of COST in hopes of collecting some prem.
Lastly, though I solved the problem of financing retirement years ago and my current income streams are 5x my current expenses, I haven’t forgotten the poverty I escaped from, and my concern is to find methods by which those with tiny money and tiny skills can learn to pull more money out of markets than they bring to them. That’s why I run my experiments.
Schwab is still running its Starter Kit offer whereby opening an account with $100 get you $50 in cash or stocks. (It used to be $50 to open and a $100 bonus.) But an instant 50% gain is a decent return on one’s risk capital. Now comes the problem of what to do with that $150 and figuring out which might be the easier path by which to compound it? Possibly, just possibly, trafficking in CC ETFs might be a good way for a beginner to go. At this point, I just don’t know. That’s why I’m exploring. Not to make recommendations, but to discover for myself what might be possible. My trading buddy, Quill, thinks CC ETFs are the cat’s pajamas and has loaded up hugely on them. I’m not convinced. That’s why I’m exploring.
