The S&P 500 dropped -8.2% in May, leaving investors with
some tough decisions to make in June. The downdraft pushed many
solid investments into the loss column, year-to-date.
If you are sitting with a loss on a fundamentally sound investment,
what can you do?
Here are some options:
You could buy more shares now and reduce your
. This, of course, isn't the easiest thing to do. If the market
continues to drift downwards -- or even sideways -- over the
short-term, you'll have that much more invested in a non-performing
Bite the bullet and sell at a loss. Then, sit on the sidelines and
wait for some positive movement and try to pick up the stock on the
upswing. Of course this strategy isn't without its issues.
If the stock starts to move within 30 days of your sale, there
might be some tax implications if you buy it back. If you need to
wait longer than 30 days to avoid the
rule, you might miss out on some nice gains. (Read this
explanation of the wash rule
Or you could just invest in something else. But if this is
fundamentally the same company as it was when you bought it, why
wouldn't it still be on your short list to buy?
Just hold on to the stock and ride it out. You'll avoid spending
any more money on trading commissions. And you won't miss any price
on the upswing. Of course there is the possibility we are heading
into a sideways-trading market -- so you might spend a long summer
staring at your losses.
Or…You Could Get Paid to Hold
Every day, investors get paid to hold stocks in their portfolios.
In fact, it's a tried and true investment strategy employed by
retirees and income investors.
How do they do it? They write -- or sell -- covered call
options. When someone buys a
, they pay a premium to buy the right to purchase a stock at a
specified price, called the strike price. They buy the right, but
are not obligated, to go though with the sale. In fact, most
options are bought, but not exercised, by the time they expire.
So to make a little extra income off of a holding, an investor can
sell a call option and collect the premium. When the call writer
owns the underlying stock, it is called a "covered call." The vast
majority of time, the call option is not exercised, and the
investor keeps the underlying shares. Investors can then write
another covered call to collect even more income. If the call is
exercised, the call writer has to surrender the shares at the
Here's an example:
Let's say you bought 100 shares of the department store chain
) on January 5th for $54.00. The store seemed busy over the
holidays and you believed the performance of the retail sector was
going to be rosier than expected. And to some extent, you were
right. Your position gained throughout the year -- until May came
along. Today, it is hovering at about $51 a share.
You still very much like Kohl's outlook and would like to hold on
to the stock. But May's retail sales were just released and were
lower than expected -- down -1.2%. So it might be a while before
the market bids this stock back up to your breakeven price.
In the meantime, you could write a call on Kohl's at a strike price
of $55.00 and collect a $2.00 a share premium. The option would
expire in October.
By collecting the $2.00 per share call premium, you are now
breakeven at $52 a share -- instead of your original purchase price
of $54 a share. And if the option never gets exercised, you'll keep
the shares and collect even more income by writing subsequent call
options. If the share price runs past $55, you'll have to surrender
you shares, but at a +5.7% profit.
Before the call option is exercised, you can buy a call option at
any for the same strike price and
to erase the trade.
Options are offered at many different strike prices above and below
the current market price. They also have different expiration
dates. It might take a little shopping around to find the right
combination that fits your needs and goals.
With the tough decisions investors are facing this month, it's nice
to have another choice -- one that can turn a loss into a profit --
or a long unprofitable wait into to an income-producing exercise.
(Read more about
options selling strategies here
Action to Take -->
I've found two securities you can use to put this strategy into
1. With the oil troubles in the Gulf, shares of the offshore
drilling contractor Diamond Offshore Drilling (
) lost -20.2% in May. The industry is holding its breath, waiting
to see what new offshore drilling regulations will materialize.
This could keep a lid on the share price in the near term. Right
now, investors can get a $3.80 per share premium to sell a DO call
option at a strike price of $66.75 a share. DO is now trading near
$61 per share and the option expires in September.
2. Shares of the seed and herbicide company Monsanto (
) lost -19.3% of their value in May. It's been a tough year for
this agribusiness powerhouse. Crop prices are low, which makes
farmers less likely to spring for Monsanto's state-of-the art
products. And this situation may not change until the next planting
season. Right now, you can get a $2.50 per share premium to sell a
call option at a strike price of $55.00 per share. MON is trading
at roughly $51.25 per share and the option expires in October.