Some specific financial lingo can keep you from starting to invest. Count me in. When I started, I was overwhelmed with all these financial terms. Even in books on financial education, some specific terms were not explained.
Luckily there are sites like Investopedia and Google. Surprisingly enough you will learn that most of these terms are actually quite simple. So her goes; Low Beta stocks.
Low Beta stocks are very relevant to the Super Snowball strategy. So writing this post as a reference for people that are starting out with the Super Snowball strategy.
What are low Beta Stocks?
Low Beta stocks are companies listed on the stock market of which the price stays stable. These stocks don’t have large price swings up or down. This movement in stock price is called volatility. This volatility is expressed in a value called “Beta”. If the “Beta” is low, this means there is not much movement in price. In simple terms, beta expresses if the stock is more or less volatile than the market.
Often these Low Beta Stocks are well established profitable companies. They are not the high tech internet companies or very dependant on raw material prices like oil.
How is Beta calculated?
The Beta of a stock is calculated with a formula that compares the price evolution of the stock with a benchmark of the market. In the US this is the S&P 500, in the UK the FTSE or any relevant index in the country.
If you want to calculate beta yourself, you can find the formula here.
How to interpret beta?
- 0.0 beta = there is no correlation with the S&P 500
- 1.0 beta = moves equally with the S&P 500
- 2.0 beta = moves twice as much as the S&P 500
- -1.0 beta = moves opposite of the S&P 500
When to invest in low beta Stocks?
Especially when there is turmoil in the market or fear that there will be a correction. Low beta stocks react less in a downturn losing less value.
As we currently have been in a bull market for a very long time and a lot of signals are directing towards a correction. I have been looking more into low beta stocks lately.
Why are low beta stocks interesting for selling/writing put options?
As the price of Low Beta stocks stays more stable, the probability that an option is executed is lower. For the investors that are selling or writing put options with the intention of generating income in the form of option premiums and not actually having to buy the stock.
The “Super Snowball” strategy is aimed to avoid the execution of the put options we write. Because we can generate higher returns getting the put option premium. We always write “out of the money” put options. Meaning we take the option price always under the current price of the stock. We always write put options on stocks we really want to own.
How do low beta stocks perform?
Maybe the most important question. How do these stock perform? Maybe controversial what you may think. These more “stable” stocks actually perform better than the market or high beta stocks.
Source graph: seekingalpha.com