The COVID-19 virus has caused stocks to trade at incredible discounts in recent weeks.
And right now, it’s presenting opportunities left and right to jump in.
Robintrack is a way to track the stocks that users of Robinhood, the popular trading app, hold over time. Right now, Robintrack shows that the most popular stocks are also the most beaten down.
All are down more than 50% from their February peaks — and that’s even after broad markets have rebounded.
The truth is, these stocks will remain highly volatile going forward.
In fact, each one could plunge another 50% from where it’s trading right now.
But today, I’m going to show you how to generate returns without picking a bottom. And I’ll show you how you can have exposure to these companies at an incredible value.
I’ll do this using a recommendation on one airline giant seeing tough times during this market crisis — United Airlines Holdings Inc. (Nasdaq: UAL).
This isn’t the exact trade I recommended to readers of my premium research service. (I can’t give those picks away for free!) But I think it’s a great example of how my strategy works especially well in times of volatility.
1 Strategy to Profit From the Market’s Lows
This airline giant popped up on the list of “most held” stocks on Robinhood.
Trading more than 50% off its February highs, there is still uncertainty around United Airlines’ stock. Shares could easily plunge another 50% from today’s price.
It’s tricky to buy stocks in this market when you’re looking for quick returns. Volatility is high, and that means shares will see even more wild swings up and down.
Timing these swings is nearly impossible.
But with a unique strategy that I have perfected, you don’t have to worry about it.
Instead, you can position yourself for a quick 3% to 10% return.
And it doesn’t matter if the stock jumps or falls. You’ll still have the same outcome.
I use a strategy of selling put options for steady income.
This is also known as writing put options or short put options. If you’re new to trading options, it may sound a bit overwhelming.
But stay with me. It’s a super simple approach that’s at its best in times of crisis like we are seeing today.
The first thing to know is the risk.
You run one major risk when selling a put option — you may end up owning shares of the stock that you sell the put option on.
It’s risky because you will be stuck paying the price you picked as the strike price for the put option. (More on that below.)
That will be the case regardless of how low the stock falls.
Now that you’re aware of the risk, let’s get back to United Airlines’ bottom — and let’s see how my approach can net you steady gains on this faltering stock.
Collect Steady Income From United Airlines’ Bottom
Let’s say we want to buy United Airlines for $20 a share. That would be our strike price.
Right now, the stock is trading around $25 a share. So shares could fall by 25% before we end up owning the stock.
But let’s assume the worst.
Say UAL plunges to $10 a share before our option expires. While it’s not likely, anything is possible in this volatile market.
In that case, we’ll still pay our strike price — $20 per share. Since the market price is $10, this results in a 50% loss.
Likewise, it doesn’t matter if the stock rises by 50%. We still walk away with the same outcome as if shares closed at $21, just above our strike price. And we still collect the option premium.
The option premium is the price at which we sell the option. That’s what we are looking to collect.
Again, with the $20 price for United Airlines as our strike, the July 17, 2020, expiration date pays us $2 to sell that option.
That’s 10% of the price we are looking to pay.
So we’re willing to buy United Airlines if the stock falls to $20 a share or less. In taking on this possible obligation, we get paid a 10% return in just over two months.
The 10% income is ours to keep. That’s true even if we end up owning shares of the stock.
That’s the power of selling put options. The scenario becomes a win-win since it’s a stock we already want to own.
And that’s my No. 1 rule. We get paid no matter what happens to the stock.
Come July 17, the expiration date, we will either have collected our income and moved on to a new trade with a 10% profit, or we’ll end up owning shares of United Airlines at $20 while keeping our 10% in income.
The bottom line is this: Use this strategy only on a stock you want to own, just like all those stocks investors are rushing to buy on Robinhood.
And why not get paid to possibly buy shares?
Now, I have a brand-new opportunity coming out tomorrow that allows you to put this strategy to the test.
If you want in, check out this presentation my colleague Matt Badiali put together about the strategy.
Chad Shoop, CMT
Editor, Pure Income