Many analysts would agree that stocks are in a bubble. Can policy makers orchestrate a soft landing, or are they going to blow it? 🙂
And how should you even invest in today’s bubble-like environment?
One strategy I’m using is to sell put options on high quality companies.
It lets me buy the stocks that I like, without overpaying for them. I first determine the fair value of a stock, and then use a put option to make sure if and when I do buy the stock, I pay a reasonable price for it, and not the current overvalued market price.
BlackRock – Fundamental Analysis
In this week’s video I breakdown how to calculate a stock’s intrinsic value using BlackRock as an example.
And demonstrate what a put option looks like. I made $259 from this single options trade with minimal risk! 🙂
Click here to watch the video or see below.
BlackRock is certainly a company worth investing in because it has strong revenue and earnings growth. 🙂
It’s the world’s largest investment management company and I think it will continue to grow over time.
But here’s the problem: The stock is currently too expensive.
BlackRock’s historical P/E ratio is around 19x. But today it is trading at 24x. This makes it about 26% overvalued.
So instead of buying the stock directly at the current inflated price, I have given myself the option to buy it at a more reasonable (lower) price point of $740.
Keep BLK may not fall to this price, and there are other risks involved with this trade. I talk about all the details in the video.
If my $740 put options gets assigned, I will be borrowing $74,000 on margin to pay for the shares.
IB will charge me a 1.58% interest rate on this debt.
Luckily, my dividend yield from BlackRock will be 2.23% which is enough to cover my cost of borrowing.
Let me know if you have any questions. 🙂
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Random Useless Fact:
Great video showing how you go through the valuation analysis, and I love how you then transition that to choosing your option position. Very well thought out, and also, a $74k naked put on margin, nice.
Glad you liked the analysis. I’m just grateful to have all the research and tools for free. It makes the due diligence quick and easy for investors. 🙂
A part of me wants this option to be assigned so I can maybe start the wheel strategy, lol. $74K margin is a lot. But I have the room for it. Plus there’s always an untapped HELOC if I really run into trouble.
Thanks to the juicy $259 premium from this BlackRock put, October’s option income has been amazing so far. I hope your options trading is going well too. 👍
Thank you for this informative post. Can you please help me understand this as i am very confused and not very confident in option tradings. Lets say I like Sofi Technologies (ticker Sofi). so instead of buying 100 Sofi shares at todays price $19.5 per share . i could just sell one December 17th put option for strike price of $17.5 and collect premium of $1.14*100=$114. This way i could collect $114 in premium for a promise to buy Sofi shares at $17.5 if it falls below $17.5 on or before december 17th . is it correct? just wondering why would someone pay me premium of $1.14 per share just to be able to sell shares at much lower price than what it is trading today. can you please help me understand if i am understanding this correctly. In case , i have strong conviction on the company with long time horizon and eventually thinking to add to my already existing sofi position but only if share trades at lower price than in that case selling December 17th put option at strike of $17.5 seems to be best way to go. isnt it? And one more thing i dont have… Read more »
I Dipu. Thanks for the questions. Everything you mentioned would be correct. On December 17th, if SoFi is trading below your strike price then you will likely be assigned the stock and pay $1750 per contract. The reason someone would pay you for this privilege is because they think the stock might drop in the short term, and want to buy some insurance. For example, by Dec 17th the stock market has fallen by a lot, and SoFi is trading at only $10/share. The buyer of the option you sold can now sell the shares to you for $17.50. And buy it back from the open market at $10/share if they want. Essentially they can buy low and sell high, making a profit. 😉 If you have strong conviction on a stock, one risk you face with selling a put option is the stock never goes low enough to your strike price. If the stock continues to move up you lost money in the form of opportunity cost because you would have done better by just buying the stock outright at the market price. Finally if you don’t sell options in a margin account you’ll need to have cash set… Read more »
Thank you Liquid for taking the time to answer my question. I appreciate it. Yes I agree there is a risk if stock never goes low enough to strike price in case I have strong conviction on it and miss buying But it seems best way if I already have position and willing to add additional position only if price goes lower. Thank you! I regularly follow your blog however I rarely comment. It is very inspiring to read how you have been so successful. unlike other financial blogs which is mostly focused on dividend investing and what to buy your blog is a mixed of topics including option trading, crypto, farmland , real estate, dividend investing, learning videos and random useless facts at the end . Thank you so much again.
Hi Liquid
Record low interest rates for over 15 years, expansive monetary policy has inflated stock prices. I have been thinking a lot about that „bubble“. I like your approach with option trading.
The overvalued stock market is a long term problem as it makes it nearly impossible to invest for attractive prices. But remaining at the sideline would be risky as well. Just thinking of leaving savings at the bank, with inflation eating it. There are no real alternatives to stocks or/and ETFs and also – to some extent – Cryptos.
Cheers
No good alternatives indeed. The only thing I’m doing differently now is lowering my expectations for future investment returns, lol. 😂
I keep on telling people this… majority of us are average folks that’ll make an average salary over the course of lives, so THE ONLY way to get ahead is to use that hard earned money and put it to work by investing it. To see Liquid teaching us and ultimately showing that anyone can make a decent chunk of change by just simply reading up on things to establish a better relationship with money, is just a great sight to see. $529/day that’s like more than what an average worker makes in a day for sure, yet we still slaving away.
Thanks for the positive comment man. 🙂 I like to think we can learn a lot from those who have already made a lot of money, and simply do what they do. Perhaps not all knowledge is useful to everyone. We have to filter out what works for us, and what doesn’t. Absorb what’s useful. Discard what is not. Repeat until goals are met.
Great video walking through fundamentals.
Thank you for watching. 🙂 I hope more people can learn the difference between value and price so they can become better investors.
[…] through research via brokerages. Shout out to Liquid from Freedom 35 who put together a video on valuating Blackrock (BLK). It’s well done and goes through the research links that you can find on TD Waterhouse. […]