Guggenheim Partners Chief Investment Officer Scott Minerd is at a bit of a loss for what to do in today’s equity market. It could be a “mania” where stocks have driven too high and have nowhere to go but down. Or we could be headed another 15% higher.
As a result, he told Yahoo Finance Editor-in-Chief Andy Serwer during an interview in Davos, Switzerland, he’s moved away from buying equities outright and is instead buying options.
“I think this kind of a market is the most difficult place at all to invest,” said Minerd, who as CIO has a hand in Guggenheim’s more than $305 billion of assets under management. “We can easily support another 15% appreciation. But the other thing is that this is starting to feel like a mania.”
Despite his reservations about the potential of a mania overtaking the market, as an asset manager Minerd says firms can’t afford to miss out on a big rally. Given current multiples, he said he could see the S&P 500 (^GSPC) rising to 3600 in the next six to 12 months.
“If I’m right and we’re likely to be 15% to 20% higher, I’ve risked 5% or quarter of my return to be long,” Minerd said. “And if we going into a mania, well, then the payoffs are even higher.”
Options allow investors the option to buy a stock at a certain strike price without requiring them to invest the money. Call or put options represent a certain number of shares below or above a stock’s current trading price and allow investors to pay only the price of the option to own them rather than buying the security outright.
That also makes options easier to leverage, meaning a bigger payout for investors whose wagers are correct. And it means much lower losses if those prognostications aren’t right.
The big drawback, however, is that options expire at a set date, so if a stock reaches a selected price even one day after its strike date, the investor misses out on everything but paying up on the cost for the option. This can mean missing out on a major payday when stocks are booming simply because a selected security didn’t boom quite quickly enough.
Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.