While the Federal Reserve helped kick off what’s shaping up to be a Santa Claus rally in the stock market this year, the last week also served as a strong reminder about the downside to the ever-increasing digital and connected world in which you and I live. I’m referring to the cyber attack on consumer electronics and entertainment conglomerate Sony (SNE). In case you missed it, Sony was hacked, according to the FBI, by North Korea, and saw all sorts of “news” leaked to the press. That “news” included emails, contracts, scripts and other items associated with Sony’s entertainment business. Yes, some of it was kind of interesting, but more than a fair amount of it was mundane and some was just plain office gossip.
We all can agree about the need to beef up cyber defenses. While many are marveling at the new iPhone models from Apple and Xbox One gaming system from Microsoft (MSFT), they both open you up to potential problems. The same holds true for corporate America, which has been embracing Bring Your Own Device (BYOD) and migrating into the Cloud. As you might suspect, that shift takes the risk to another level entirely.
It is pretty clear that Sony did not invest adequately enough in its cyber security, even though top management knows that spoilers and leaks can quickly turn a potential box office dynamo into a dud.
Will Sony open up its wallet and spend on cyber security? I don’t think the company’s management has a choice. Whether it’s to protect the business they have or the need to reassure those behind future projects that it’s licked the problem, Sony needs to spend on cyber security and spend big. Stepping back a bit, Sony may indeed be the big cyber security story as we close out 2014, but it was far from alone. The movie studio’s breach is just the latest in a series of hacks, including attacks on Target (TGT), Home Depot (HD) and JPMorgan Chase (JPM) that compromised the personal information of tens of millions of customers. I suspect we will see a new C-level officer being created in corporate America — Chief Security Officer — as well as cyber security efforts becoming a frequent conversation in the board room.
If you think that hacking is just hitting corporate America and identity theft targeting individuals like you and me, you’d be wrong. Government institutions are also in the crosshairs and you’d be surprised what these hackers and digital terrorists can get. Unknown hackers broke into more than two dozen servers at the U.S. Postal Service earlier this year, including one containing names, Social Security numbers, birth dates and other personally identifiable information on about 800,000 workers and 2.9 million customers.
While that may seem fairly gloomy, you can not only protect yourself, but also profit from this pain point. It’s a meaningful part of my Safety & Security PowerTrend that has resulted in double-digit percentage stock gains for subscribers to my newsletter, PowerTrend Profits. If celebrities like Brad Pitt and Angelina Jolie think they have to hire a cyber security team to monitor their children online and Sony has to cancel a film to avoid the risk of further hacking, then I would say the outlook for cyber security stocks is rather vibrant.
The Skinny on Setting an Option’s Strike Price While the hacking of Sony I described above serves as a harsh reminder of cyber attacks, the ensuing spending to combat that problem offers a world of profit for the prepared investor. Most would leave it there, but I would point out to you it was a great opportunity for the short term, as well as for the long term. Let me explain…
As the news broke that Sony had been hit and all sorts of information leaked, nearly every single cyber security stock bolted higher in a knee-jerk-like fashion. People knew, as did I, the news would jump start talk of cyber security spending, and in hindsight we were dead on. That popped the stocks higher and resulted in a significant move for the call options associated with those stocks.
Owning cyber security call options was a smart move, but owning them at the right strike price made all the difference. The strike price (or exercise price) of an option is the fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security. While there are a few things I have to determine before making an options recommendation in my PowerOptions Trader service, such as the underlying security and time to expiration, I take great care in selecting the strike price because it has an enormous bearing on how your option trade will play out.
I tend to favor out of the money calls, which means a strike price that is higher than the market price of the underlying asset. For example, consider a stock that is trading at $10. For such a stock, call options with strike prices above $10 would be out of the money calls. Out of the money options are significantly cheaper than in the money or at the money options, and offer the biggest leverage or bang for the buck if the option trader’s view proves to be correct.
Combine the cyber security explosion with a well-placed, out-of -the-money strike price on a call option, such as the LifeLock (LOCK) February 2015 $17 calls that have moved from out of the money when my PowerOptions Trader subscribers bought them to into the money, as LOCK shares are currently trading at $17.40, and we’re poised to profit.
Once you understand the lingo associated with trading options, it’s as easy as buying and selling stocks. If you trade wisely, you can reap big rewards with far less capital at risk.
In case you missed it, I encourage you to read my e-letter column from last week about stocks with consistently rising dividends.