Keeping Options Open with Chris Rowe

This issue of Investment Expert Insight features Chris Rowe, an internationally respected authority on options, nine-year Wall Street veteran and co-founder of Tycoon Publishing. He has been spinning off profitable trades for his Trend Rider since launching the service in 2005. Through his free weekly Tycoon Report articles, Rowe helps hundreds of thousands of investors across the globe by extolling the virtues of taking a business-like approach to both stock and option trading.

You’ll learn directly from Rowe how incredibly easy it is to consistently make money in bull markets, bear markets and flat markets when you have a proven system for trading. 

Chris, what advice are you giving subscribers/clients to weather the current storm?

There will be plenty of times when you don’t find trades where you can honestly say to yourself that you feel the odds are heavily stacked in your favor. I would estimate that 99% of individual investors don’t spend enough time on the sidelines.

One of the most common mistakes investors make is the belief that if you’re not in the market, you’re not making money. Anxious and over-eager investors force trades at the wrong time, mainly because they’re afraid of missing the next big gain.

Keep your standards high, and be willing to sit on the sidelines for as long as you have to. "Missed opportunity" is a myth. There will always be another opportunity around the corner so only trade when the odds are stacked very heavily in your favor. 

People ask: "When do I know when it’s the right time to be in or out?" The answer is: if you’re asking that question, it’s time to stay out.

Is your focus on safety or profits or both, and why?

It’s like they teach you in kindergarten: "Safety first." Studies show that over long periods of time (20 years or so) accepting a high volatility investment strategy has little to no benefit in terms of annualized returns. If you take the "safety first" approach, and use the process of elimination with high standards when screening for investment/trading ideas, the profits will come. In fact, profitable trades are just a byproduct of high standards.

It makes sense to find trades that you can hedge, and it makes even more sense to hedge your entire portfolio using option contracts (puts and calls). This will reduce your volatility and will therefore increase your returns over time. 

The reason hedging makes you more profitable is two-fold:

1. Small losses are much easier to recover from.

2. Perhaps more importantly, hedging reduces volatility and risk. When you are experiencing above-average volatility and increased risk, any human tends to react without letting their emotions cause them to make unusually bad decisions. When you are hedged, it keeps you level headed, and your decisions are much more sensible. 

What do you think it will take to inject confidence into the markets?

1. A retest of the recent lows (747 on the S&P500 and 7,500 on the Dow-30), and perhaps a second test of the same levels.

2. Higher highs and higher lows.

3. Less government intervention.

Would you have voted for or against the last "rescue" bill, and why?

Which one!? This is a tough call for me. My view is that Congress played the single largest part in this credit crisis after the Fed. So one should keep that in mind when asking if Congress should be voting to bail the victims out. When most people are posed that question, they answer from the standpoint that the folks being bailed out are the bad guys.

The government has convinced almost everyone that everyone is at fault except itself. They are painting the corporations as reckless, but it was Congress that recklessly lined its own pockets, and now the world will suffer. 

In the first few years of the 21st century, the Fed set the stage by doing what they always do - overreacting, and doing so too late, even when the writing was on the wall. The Fed lowered rates by too much for too long. But it’s in their nature to do that historically, so while it was a mistake, I discount their fault simply because that’s just what they do. (Would you fault a dog for sniffing another dog in strange places? No. That’s just what they do.)

However, Congress started meddling in the mortgage industry big time, taking advantage of the stage set by the Fed. And I won’t go on in detail here, but I’ll say that if you look at who made and who received millions of dollars in contributions, and you look at the recipients actions and inactions, their involvement is clear as day. The short story is Congress forced many hands in the financial system. A series of events started by Congress led to "predatory lending," a.k.a. "affordable housing."

What’s happening now on Capitol Hill is nothing more than an infomercial. What I see happening is the entire United States (and global) economy is now facing a serious crisis that was started by congress. The biggest banks in the world, individual states, the big three auto-makers, etc., are all asking for bailout money. They are sitting there asking for help from the very people who got them into this mess to begin with. But nobody can stand up on Capitol Hill and yell at the guys that control their destiny and say "Hey, we’re asking YOU for help because YOU got us into this mess to begin with."

Congress knows what it did. But for the sake of their voters, they have to put on this act like they are "grilling" everyone, asking how they got into this mess to begin with. They have to please the voters before they give the voters’ tax dollars to the people who are feeling the pain of Congress’ mistakes. 

I think whether they should be bailed out is the wrong question to ask. The mess has already been created. While I believe in a capitalist society, and I think we should almost always let the markets decide who survives and who doesn’t (which is what makes our country so powerful), I also think Congress was like a teenage drunk driver who hit a person, and perhaps now needs to pay the hospital bill. Of course taxpayers, in this analogy, are the parents of the teenage drunk driver, and THEY are the ones who will have to flip the bill. There are no winners.

What would be your fix for the financial crisis, and is a fix in this sector necessary to boost the markets?

I can’t answer this question. My expertise is helping people to profit from any situation presented to us. But I certainly don’t have any idea how to fix this situation … perhaps a time machine?

What three stocks would you buy today?

I would buy one stock and two ETFs:

Berkshire Hathaway "B-Shares" (NYSE:BRK.B)

iShares MSCI Singapore Fund (NYSE: EWS)

iShares MSCI Hong Kong Index Fund (NYSE:EWH)

These would all be long-term holds and very big winners. However, I’ll add a bonus short-term trade with timing: when XLF (Financial Select Sector SPDR) goes on a MACD sell signal ("signal line cross over"), which is easy to look up if you’re not familiar, then buy Direxion Financial Bear 3X Shares (NYSE:FAZ) for a quick 50% to 100% profit. This should be researched and done carefully as it involves 3-times leverage (inverse). In other words, if the financial sector moves DOWN by 10%, this should move UP by approximately 30%.

So again, when XLF has a MACD signal line crossover (confirmed sell signal), purchase FAZ, and don’t hold on for too long.

How does your advisory service help its subscribers/clients get through times like these?

We play both the bull and bear side of the market, and we don’t force trades or investments. I use put options and call options to take directional positions and to hedge. I use options to increase safety and not to use enormous leverage. 

I typically buy deep in-the-money puts or calls (which significantly reduces volatility risk), and I sell (to open) short-term at-the-money options to collect premiums, which have been enormous lately. I structure the trades in such a way that limits my risk without compromising the potential reward. In fact, when compared to a stock position, the way I structure the options positions often offers more reward than the comparative stock position, while at the same time accepting significantly less risk.

If you had an average investor standing in front of you, what would you say to him/her to ease concerns and raise confidence in the economy and markets?

I can’t lie and make someone feel confident in the United States or global economy. But in any economy, you can profit from the stock market, so you should mentally separate the economy from the stock market. Besides, they work on two different time lines and people often fall into the trap of confusing the two time lines. They place a stock market bet based on the economy’s time line.

The economy relates to paying your grocery bills, service, gas, and it relates to employment and quality of what you pay for. The stock market is a tool that we use to generate profits. You can generate profits when the market moves down, and you can do the same when it moves up. Heck, you can even generate profits when the market moves sideways. 

At the highest level, you are playing against yourself. Controlling your emotions is key. The way to make money in any market is to do the following:

1. Place bearish bets on the weakest stocks, and place bullish bets on the strongest stocks.

2. Adjust your bullish/bearish position ratio accordingly when the market shows clear signs of moving in either direction.

3. If possible, learn how to use "deep-in-the-money" call and put options for directional plays. If you would have bought 1,000 shares of a stock, remember that only 10 option contracts represents 1,000 shares. Assuming your comfortable position size would have been to buy (or sell short) 1,000 shares of stock, replace potential stock positions with 10 to 13 deep-in-the-money call (or put) options. If you do this, it will change your life.

4. Most importantly, when you don’t have a clear picture of what the stock market wants to do, reduce your stock market exposure. You don’t have to always be in the stock market. Eventually it will make sense again, and the picture will become clearer. You want to still have money when that time comes.