Base Hits, Not Home Runs

by JDH on May 25, 2013

Despite the fact that this was a relatively uneventful week, I did well by playing for base hits, not home runs.

Home runs, of course, are great.  On Thursday night I watched Edwin Encarnacion of the Toronto Blue Jays hit a home run with the bases loaded, a grand slam, four runs with one swing of the bat. Sweet.

The day before, Jose Bautista hit two home runs, but he won the game in the 10th inning with a single.

So what’s better, a single or a home run? Home runs are “better” because they are a guaranteed run, but it is much more difficult to hit a home run than a single.  60 home runs in a season, in the non-steroid era, probably means you are a Hall of Fame caliber player.  60 singles in a season is average production for the average player.

But, as Jose Bautista realized on Wednesday night, down 0 and 2 in the count, with a runner on third, all that was required was a single to win the game, which is what he delivered.  He could have swung for the fences, missed, and not won the game.  Instead, he went for the simpler alternative, hit the single, and won the game.

In my younger days I loved playing the options market.  I would buy calls and puts, and watch them erode in value and expire worthless.  Occasionally I would get lucky and buy and option for 50 cents, and sell it for $2, a home run, but most of the time I struck out and lost all of my money.  Hitting one home run and striking out 19 times won’t keep you employed for long.

Hitting a single or a double one time out of three will keep you in the major leagues for 20 years.

Which is why, over the last few weeks, with the stock market experiencing irrational exuberance and the gold market in the doldrums, I’ve played for the single, not the home run.

As I reported last week, I sold call options against stocks I owned.  Instead of buying a call and hoping for a big score, I sold a call and hoped that it would expire worthless, which they all did.  That’s not a strategy that will earn a lot of money, but it’s a simple, easy, low risk strategy, and it’s worked recently.

I also took out an “insurance” policy, buying some puts on GLD.  A significant amount of my portfolio is in gold stocks, which will do well if gold increases.  However, if gold drops, it’s nice to have insurance.

So, if you have $100,000 in gold stocks, it’s not a totally crazy strategy to buy $2,000 worth of puts.  If we have a big drop, the puts are worth a lot more, and I still own the gold stocks, which will increase when the eventual bounce back occurs.  That’s exactly what happened.

I bought GLD July 130 puts on May 8, for $1.35;  I sold half of them on May 17 for $4.10, and liquidated the other half on May 24 for $2.82 The net result was a profit of 252%, which helps mitigate the loss on my gold stocks.

I was in a “no lose” position.  If gold increased, the portfolio goes up.  If gold crashes, as it did in mid-May, the puts pay off and mitigate the loss.

I could have swung for a home run by owning nothing but calls or puts depending on what I expected from the market, but that risks losing all of the premiums.  Placing small bets is much safer.

Now, I will sit in a room and ponder whether or not the double bottom in gold is a sign that the correction is over, or it more downside is likely.  If I figure it out, I’ll let you know.

Thanks for reading; see you next week.