Prepare for the Next Stock Market Correction With Put Options
It has been a volatile year, but you can’t say I didn’t warn you.
2017 was such a low-volatility year, volatility had to snap back this year. It also matched up with the 18.5-year cycle I follow, which came true in the first two months of the year.
I apologize for bringing up the latest stock market correction again, but volatility for the year isn’t over.
The 1,000-point drops we saw in the Dow Jones Industrial Average are just a taste of what’s to come.
I expect a rally for now, but if you are not thinking about how you will do during the next stock market correction, then you set yourself up for failure when it comes.
I’m sure many of you saw some dip in your portfolio from the correction, likely a large dip or even a catastrophic decline.
This all depends on how leveraged you were, and what strategies you use, though.
For example, my favorite strategy for generating income was unfazed by the stock market correction.
And the correction actually created a ton of opportunity for us to collect even more income.
Making Money During a Market Correction
The strategy that is my personal favorite when it comes to generating income is selling put options.
I know some people tune out when I talk about options, and you may have heard how selling put options can be considered one of the riskiest strategies.
But I wanted to share with you today that it is one of the safest strategies that exist in the stock market.
And as long as you understand the risk, it’s a strategy that you can, and should, be taking advantage of all the time.
So today, I’ll explain how it is possible that the most conservative strategy I know of, selling put options, outperformed almost all other strategies in 2018.
First, let’s look at the stock market.
It started the year shooting higher, and then collapsed.
Right now, it is up roughly 1% for the year.
But it’s led by mostly smaller, more volatile stocks. Looking at the Nasdaq 100, it is up more than 5% this year.
And what is dragging down the S&P 500 Index are stocks that are usually conservative, like low-volatility stocks and high-dividend companies. These are two of the worst-performing strategies this year.
Yet my strategy of selling put options on similar stocks — strong dividend companies and stable blue-chip stocks — has grabbed income nearly every single week without a hitch.
And the volatility from the correction actually gave us more opportunities.
All in all, our strategy has performed as if the correction didn’t even occur. We took no losses and continued scooping up income.
That’s why this is my favorite strategy for income — it’s incredibly consistent.
No, it doesn’t help you get massive returns.
But it generates steady yields that add up to a portfolio that is growing constantly — without having to worry about a stock market correction.
Even though this strategy is so steady and profitable, many investors still don’t use it because it doesn’t satisfy our greed glands.
It doesn’t offer 100% gains in a few weeks.
Instead, it builds up steady income throughout the year.
This is a strategy that is critical to incorporate in your overall portfolio. You should have funds dedicated to steady growth, regardless of market conditions — and that’s what selling put options offers you.
Volatility for the year isn’t done, either. It will come roaring back at some point, and you have to be ready now. Incorporating this strategy is a great way to mitigate the impacts of a correction, and help you build income along the way.
A Simple Yet Powerful Income Strategy
Now, I mentioned you have to know the risk to utilize a put option strategy.
Well, the worst-case scenario when you sell a put option is that you end up owning the stock. At that point, you are at the same risk level as you would be if you owned a stock.
But to take the possible obligation of owning shares of the stock, you get to pick the price you want to pay — this is the strike price.
You always select a strike price that is below where the stock is currently trading.
You also get to pick how long you may want to own it by selecting the options expiration date.
And the biggest factor is that you get paid to do so.
That money you get paid is what creates a steady stream of income for you.
Since the strike price is below the stock’s current price, we hardly end up owning shares of a stock at all. And if we do, I have other option strategies we can implement to turn them into a cash-generating machine.
Chad Shoop, CMT
Editor, Automatic Profits Alert