Selling to Optimists

by Wayne Ferbert on January 25th, 2012

I think Warren Buffet gets credit for the saying: “You want to buy from pessimists and sell to Optimists.” I am not sure he actually invented the saying but I think it is a great mantra for guiding your investment portfolio decisions.

Everyone knows that investor sentiment drives the bid/ask spread for every stock and ETF in the market. When an investor really wants out of a stock, almost any price is good enough. Conversely, when an investor wants in, almost no price is too high.

When you see signals of excessive optimism or pessimism in a stock, industry, sector, or market, stop and take a deep breath. Don’t follow the sheep. Think about the reasons why – and ask yourself whether you are buying from pessimists and selling to optimists. It is not the only litmus test you need to run – but it is a key one. Fight the urge to be one of those optimists or pessimists.

I bring this up today because Apple’s blow-out earnings make me wonder whether the optimists are going to come out in the Technology sector today. Apple rarely drives optimism in the broader tech sector. Most investors have realized that what is good for Apple is often ONLY good for Apple. But we do see some signs of a lift in tech today – the XLK and QQQ are both going to open up.

The lift in these two symbols might simply be the lift in their AAPL component alone – but it is a nice lift none the less. I like Apple products and think it is a great company. I wish I owned the stock (how often have I said that now?). But clearly AAPL investors are optimists about Apple given the heights to which they are driving the stock. Those heights may well be justified – only time will tell.

I think there is a chance for the Buy and Hedge investor today in technology to sell to Optimists. Specifically, there is a chance to sell covered calls. Technology is up nicely on the back of AAPL’s earnings. If you follow Buy And Hedge, you know that Technology is one of our preferred sectors to be over-weight.

With expiration last Friday, you might have a QQQ or XLK position that had been hedged with a collar. If your calls expired in the collar on Friday, you might not have had the chance to re-sell them yet. The premium in these two symbols for selling the calls has not been that great this week. If you haven’t yet, today might be a good day to look at selling those calls.

We always want to sell calls on up days – because we are selling to optimists. The AAPL earnings might give you that lift you need to get the premium you want for a strike price higher than you expected.

The key lesson here: when you see the optimists driving a stock or sector, look at your portfolio and ask yourself whether you have any opportunities in that sector to sell covered calls – by selling to optimists!

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