July 07, 2010 at 07:24 AM EDT
9 Fabulous Dow Plays Plus A Chip Shot (Members Only)
We were discussing what to invest in in a terrible market this morning in Member Chat . I thought it would be handy to add this post to our Buy List because 9 of my 10 picks below are Dow components and there are very easy ways to hedge our Dow purchases against disaster so it will be a good opportunity to construct a self-contained portfolio filled with dividend-paying stocks that are suitable for a long-term retirement account that we can buy using our discount strategy . Let’s say we allocate $5,000 to each of these positions and we intend to buy $2,500 in the first round and hold $2,500 on the side in cash, in case the Dow does fall more than 20% and the majority of our stocks are put to us in a second round. In the below list, XOM and WMT are more expensive but others are less so you can buy 100 of the big boys (price-wise) and see what’s left or allocate a double helping for those two, so you’d be buying 100 shares for about $4,000 a block (after our discount) and hold back $4,000 on those two. This is acceptable because we do have $50K in cash sitting around and A) We don’t really believe the Dow is falling below 8,000 B) When the stock is put to us our margin requirement will still be just $50K as our short puts will be gone C) We will have a disaster hedge. On all of these plays, the upside is at least 25% so that’s also our built-in cushion, all the way to Dow 7,307 so we really only need our protection to kick in below 8,000. Aside from our weekend 500% DXD disaster hedge, which is perfect to cover this group, we can do a very simple, margin-free hedge like the DIA 2012 $95/80 bear call spread for $5.50, which pays $15 if the Dow is below 8,000 in Jan 2012. So $5,500 put into this play returns $16.500, offering us an additional 20% downside protection, now down to Dow 5,845. If that seems silly to you (it does to me) then a $2,500 hedge that gives us an additional 10% downside protection would seem to be plenty . Once we have that hedge in place, we can aim to make it free by selling puts. To make up $2,500 over 18 months, we need to sell $138 a month worth…
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