Market Gyrations Got You Down? Here's Your Anti-Dote...
I can't say it enough - options contracts are your best friend, in good times and bad. I'll tell you why in a moment.
But first, it's been a brutal few weeks for the stock markets, as August is living up to its reputation of being one of the worst performing months of the year.
The Dow Industrials has fallen 6.75% from high to low, the S&P 500 fell 6.3% from high to low, and the Nasdaq fell a larger 7.8% from high to low.
No one likes to see that, especially if you've got a good portion of your nest egg tied to the markets.
But as I've told my readers many times - being invested in the stock market has been the best performing asset class over the last 100 years.
You have to be in it to win it!
Just investing in an S&P 500 index fund is all you need if you don't want to get fancy. It will go up over time.
And you know why an index fund can work even better? Because it replaces bad stocks with good stocks over time, so it's almost a surety that it will keep rising.
You have to dip your toes in at some point if you want to have the chance to see profits.
But when we get sell-offs like we've witnessed over the last few weeks, I know it's hard to even fathom stepping in front of that freight train.
Pull-Backs Are Healthy
Although it's extremely hard to try to time the market, being a chart watcher and knowing long-term support and resistance levels can certainly help.
I watch the charts all day long and have been doing so for the past 28 years. I've gotten pretty good at spotting patterns and being able to tell where I'd be comfortable scaling into new bullish positions.
Not everyone is a chart watcher though, and not everyone knows when to get in (and out!)
I'm here to tell you the current pull-back in the market is totally healthy, and well-needed!
You can't have a stock market that continually goes up unchallenged forever. Stocks will get overvalued when that happens.
Sure, we'd all like to see the markets go up unabated. That's what it's pretty much done for the last ten years.
And every correction (big & small) during that time was bought right back up.
Because the smart money knows value. And when the market sells off enough, the bottom pickers come out to play.
It will happen again.
If your time horizon is long, timing shouldn't matter too much. But it's still hard to see the market go down immediately after you've bought in. We've all been there. Doesn't it seem like the market knows to drop right after we buy? You're not the only one!
And that's why using options contracts can help you not only emotionally, but financially, as well.
My Two Best Options Strategies
I tend to default to two tried-and-true option strategies - one being an option-buying strategy and one being an option-selling strategy.
1. Buying deep-in-the-money (DITM) call options is a fantastic way to buy in at current stock market levels but with up to 80% less money at risk, while gaining the opportunity to triple your returns.
And after the recent market losses, not only are stocks at cheaper levels, but can you save thousands more by using the DITM call option strategy.
If an investor is looking for current broad exposure, buying 100 shares of the SPDR S&P 500 ETF (SPY) would cost $29,265.
By comparison, the SPY January 17, 2020 $238 DITM call option with a 90% Delta costs only $56.40 per contract.
With the $100 multiplier, that's a cash outlay of just $5,640.
That saves $23,625 (80.7%) over the costs of buying the SPY shares outright. Plus, it's getting 90% of the same movement as the stock.
Don't remember what Delta is or how the DITM strategy works? Take a look at this prior blog post that explains both in detail.
2. Selling out-of-the-money (OTM) put options gives you access to upfront cash payments while giving yourself an opportunity to buy stocks at extremely cheap prices.
If you think stocks have gotten a nice haircut lately and seem attractive at current levels, the put-selling strategy can allow you to potentially scale in at another 35% cheaper!
That's some great action!
For instance, Netflix (NFLX) is currently trading at $296 per share. That's almost $125 cheaper than the all-time highs it hit back in June 2018.
If an investor is looking to potentially buy NFLX at even cheaper levels, the January 17, 2020 $195 put options are paying out a nice $2.35 per contract premium (example only!).
That's $235 upfront in your pocket for every put option contract sold.
This would obligate the investor to buy 100 shares of NFLX at $195 per share if the price falls that far by January 2020.
If potentially buying NFLX $100 cheaper than its already cheap price ($296) is in an investor's crosshairs, then selling a put option could be the right play.
This is what we do in my put-option selling newsletter - Smart Option Seller. I will teach you how to sell put options successfully.
And I've written numerous blog posts about the strategy. You can view the latest one right here.
And for a free copy of my "Put-Selling Basics" ebook, just click here to grab yours today.
My ultimate task is to get you to become a bona fide options trader, leaving your stock trading days behind and helping you put more cash in your pocket.
If your current trading strategy isn't working for you, consider ours.
You can achieve all your financial goals by using options contracts. Try it!
Until next time...