Talking Options with Mike Tosaw of Know Your Options
I'm Matthew Boesler. Joining me on the line now is Mike Tosaw, options expert at Know Your Options and author of the recent book entitled Go Long: New Options Strategies for Buy and Hold Investors.
How are you doing today, Mike?
How are you doing today, Mike?
Mike Tosaw: I'm doing well, how about yourself, Matt?
Doing good. You say in your book that the bottom line of stock investing is that you must ask if a stock will move, and not how. Can you expand upon that a little bit?
Mike Tosaw: Well, one of the things I like to tell people -- and we expand upon that a little bit in the book -- is that the how, who cares, quite frankly? With that in mind, like for example, we've been bullish on some natural gas stocks, before the Libya fiasco and before the Japan incident. With that, we were bullish on natural gas before it, not because we knew this was going to happen, by any means, but we had a lot of reasons for being bullish on it, from a technical standpoint to where the price of natural gas is, from the reaction of how a lot of the stocks were doing. Plus, they were good fundamental stocks which we were bullish on.
In terms of how they've actually moved this last couple of months, well, a lot of it had to do with what happened in Libya and what happened in Japan because a lot of natural gas stocks also have oil exposure, and that was how they actually moved. It wasn't because of our ingenious expertise a few months ago -- we had more of a longer-term approach to them -- but the how was not what we expected. In time, we're still bullish on a lot of natural gas stocks, but my point is that the Libya and the Japan things that have happened have been the "how" the stock has moved. Like I said, obviously we don't want to wish bad upon anybody, but that's something that has benefited our stockholders in those stocks in which we've been working.
It sounds like a very fundamentally-driven approach.
Mike Tosaw: Fundamentally, technical, a little bit of both, I would say.
Ok.You also say in the book that short term derivatives can play a big role in long term investing. What exactly does that mean for buy and hold investors?
Mike Tosaw: Well, I'll tell you, Matt, I've based my whole career on the fact that options can play a role in the long-term section of the portfolio. Let's say that I'm a baby boomer. I'm about to retire, or I've just retired, and I have a pretty nice next egg built up, let's say. As a baby boomer, I like the idea of the stock market -- historically, it's had very nice returns -- however, in 2008, the thought is, ok, we've lost 40 percent, but if you just wait long enough, the market will come back. That's the theory behind it. And there is a lot of truth to that.
However, if you're a baby boomer and you need your money in a more recent time frame, or if you need the money a lot sooner, you don't have time to wait that much. So, by using derivatives, such as options and potentially futures, then you have the ability to customize your own risk, and you have the ability to invest and be a part of the stock market. However, you have some type of downside protection. You could set up trades and investments in ways with which I know, worst-case scenario, if the market were to go to zero, the most I could lose is "x." And everyone can customize their own portfolio whatever way they need to.
And overall, you're long-term bullish, correct?
Mike Tosaw: Most definitely. It's hard to argue with the past performance of the stock market, even with years like 2008.
Now, you offer managed account services at Know Your Options. What is the firm's general approach to managing clients' money?
Mike Tosaw: Well, to kind of expand upon the last question a little bit, we're long-term bullish and short-term cautious, meaning that we do believe in long-term stock markets throughout time. However, pull-backs happen. Based upon our approach, we believe that the market is going to pull back at times, we're going to have corrections, and we're going to have down years. It's not going to go straight up all the time, although it does kind of feel like it from last September until now.
Within the managed account, what we try to do is -- number one, we know our clients intimately. We pride ourselves on how well we know our clients. Different people will have different appetites for risk. So, as we look at that, some people, if they're looking to be a little bit more aggressive, we'll set up an options portfolio in a way that matches a more aggressive stance. For other people, we might hedge the entire portfolio by using covered calls and long puts and a variety of different things. So, we like to use the option product as a way to customize the exposure for each individual client.
These are things that hedge funds do for a larger net-worth clients. What we believe we do is bring that type of sophistication to the retail world.
You said you were cautious in the near term. Where do you think the market is headed from here?
Mike Tosaw: First off, I want to re-emphasize my first answer of "I don't know" for the short term, but, in looking at it, a couple of key numbers that I think we need to respect: 1300 on the S&P 500. That's one where the S&P [was] struggling to get through that number. 12,000 on the Dow. So those are some definite key numbers. I think $100 is a key number on oil. Will oil hold over $100? I think $4 is a key number on natural gas. So, overall, we're at the fork in the road in a lot of very key areas. So, in terms of where do I think it's going to go, I don't know, but I'm definitely at a stage where I think we should have exposure to the market, but how much of it, and where it should be, that's dependent upon the individual.
We're talking about being at forks in the road in all of these various asset classes, and we've had major exogenous factors weighing on the market right now between what's happening in Japan and in Libya, for example. These could really send prices one way or another while they're hovering around these critical points.
Mike Tosaw: Absolutely. I remember [a few weeks ago] there was the "Day of Rage" they were supposed to have in [Saudi Arabia], and people were concerned about oil going through the roof. I remember it; it was on Thursday, the 10th, and people were concerned about the big "Day of Rage" that was supposed to happen on Friday, the 11th. I remember that afternoon watching oil, and there was news coming out that shots were fired, and bad stuff was going on. Oil went up, but it only went up a couple dollars. It didn't really shoot up to $115-120 level, like a lot of people were afraid that it would. After that, I remember watching and thinking, "Ok, maybe this is at a top for oil right now." So I wasn't too concerned with oil going through the roof, after the fact that, on that news, it didn't really move too much.
So, I definitely think that oil people are still watching what's going on in the Middle East, for sure, but a lot of it may be priced in. Now, keep in mind, you always do have that headline risk that exists, but from what I can tell with oil, a lot of it looks like it's priced in. But who knows. We might have more events.
What types of options strategies are you employing to trade the unrest in the Middle East at Know Your Options right now?
Mike Tosaw: Well, the way in which we're doing it -- we're not necessarily trading the Middle East events. What we are doing, though, is we have set plans in place with our energy exposure. For example, we have exposure to a handful of stocks. What we've noticed for an opportunity recently -- and it may or may not be there right now -- but recently, what's been going on as an opportunity in a lot of these natural gas and oil stocks is that implied volatility has been higher in near-term months. Meaning, selling options has been attractive, at least from our indicators. Obviously, it's up to an individual trader to determine if volatility is high or low, but from our indicators, volatility has been higher in the near term for a lot of these stocks.
So with that, what we've been able to do is sell puts on the near term, giving ourselves exposure to the stock, and with the premium that we would collect from these puts, we've been buying longer-term calls or longer-term call spreads. It's been taking about a month or two, but after selling the puts for about a month or two, we then have, in some cases, risk-free exposure to the stock, with a call spread several months out. Granted, there's risk to it. We're taking on exposure to the stock, and our plan in case it goes down -- we're fine owning these stocks, but we believe that with that type of opportunity, that's the most appropriate options strategy, at least as of a week or two ago. We're still looking at a few things right now in terms of selling more near-term puts, but that was the opportunity as of a week or two ago, and what we're going to continue to look for as this rally may or may not continue.
What about Japan? Obviously they've been dealing with the destruction caused by the earthquake and the tsunami a couple weeks ago, but now, also, the nuclear power issues that have since arisen. How are you addressing this in your portfolio at Know Your Options?
Mike Tosaw: Similar way, actually. It's ironic, but I think that natural gas is now the popular energy from the politicians' standpoint. Whether it's right or wrong, if politicians like it, it's going to make it right. I'm the most anti-political person that I know, but with natural gas being at the forefront, I think that we're in a very good position with our natural gas exposure that we have.
From the standpoint of an investment professional, what do you feel is being under or over-reported in the media right now?
Mike Tosaw: One of the things that I think is being over-reported is the fear that's going on right now. One thing I always tell people is that we live in America. We've been through two world wars, the Great Depression, Korea, Vietnam, the tech bubble of the 1990s, the high-interest rate crisis of the 1980s, the S&L crisis in the early 1990s. We're currently getting through the credit bubble right now. America is a very special place, folks. We've survived a lot of horrible things over the years. I could go on and mention a lot of other things throughout our history.
One thing the media often forgets is that we are a resilient nation. We've been through a lot. To quote Johnny Cash, we've been through the fire before and I believe we can take a whole lot more. So, on that, I'm a very positive person, and I have faith in the American people. That's what needs to be reported on more.
What are your thoughts on the fear trade, then? Do you think it's causing a lot of these commodities to be valued way over fair prices?
Mike Tosaw: It could be. I think the driver of that is just simply inflation. I guess inflation could be under-reported right now -- supposedly we aren't going through inflation right now, but magically I seem to be paying a lot more at the gas pump than I was a year ago. I think that's kind of an area that's driving the commodity prices right now. In terms of the fear, I think that commodity prices going up just has more to do with inflation. The fact that we continue to print money is not something that's going to be good for the dollar in general.
Now, keep in mind, it might be good for Americans, it might be bad for Americans. Time will tell. But, the fact is that if you continue to make more of something, the value is going to go down. So, as the value of the dollar goes down, it's going to raise the price of commodities. I think commodities are just driven by a sinking dollar, quite frankly.
Very good. Mike Tosaw, options expert at Know Your Options and author of the recent book entitled Go Long: New Options Strategies for Buy and Hold Investors. Mike, thanks so much for coming on the program today.
Mike Tosaw: Thanks for having me, Matt. It was a lot of fun.
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