My Favorite Way to Trade in Volatile Markets
Even though the latest dip in the stock market was not as severe as the one we saw earlier this year, I know it’s still enough to spook investors.
After all, that’s why we see corrections in the stock market — to shake investors out.
Once investors take profits, cut losses and have some cash, they re-evaluate the market and look for new opportunities.
It’s an endless cycle creating the back-and-forth in the market.
But, at times, like we saw in October, it can be nerve-racking to stay in the market. Much less invest new money during volatile periods.
Now that the S&P 500 Index has turned higher, investors remain skittish on worries the market will just roll over again.
Well, to ease those fears, there’s a unique way to invest in the stock market that doesn’t require you to pick the bottom of a stock.
Let me explain…
Make Money When Stocks Get Volatile
It’s one of my favorite methods of trading in the stock market. Not only to invest new capital, but to generate steady income and outperform the market.
The method is selling put options.
I’m sure you’ve heard of put options, but maybe not the term “selling” put options, or “writing” or “shorting” them. They all mean the same thing: That we are not “buying” the put options.
Instead, we use put options as a bullish take on the market.
Normally, when you buy a put option, you’re betting on that particular stock to decline.
When we sell put options, we expect that stock to stay about the same, or rise further.
The way it works is we sell put options to investors who expect the stock to decline. By selling the option, we take the possible obligation to buy shares of that stock at the strike price in the option, which we determine.
You can start to see why this is one of my favorite strategies.
If you want to own a stock at today’s price, you don’t have to buy it today. Instead, you can sell a put option at a price that is below where the stock is currently trading and get paid for doing so.
Then, the worst-case scenario is that the stock falls to your strike price (the price you want to own the stock), and you end up owning it at the price you chose. That’s it.
The other outcome is if the price stays above your strike price, and you don’t get to own shares of the stock. In this case, you would simply turn around and do it again: Sell another put option and collect income.
In either scenario, you still keep the income you collected for selling the option.
It’s the only win-win strategy that exists in the stock market, and it’s one I hope you are taking advantage of.
Now let’s look at a real-time example of how this works with Apple Inc. (Nasdaq: AAPL) so I can show you why this is my favorite income strategy.
Selling Put Options Is a Win-Win Strategy
Apple is a major blue-chip tech stock that got crushed on earnings recently. The stock has yet to recover, and it may not have bottomed yet.
But it’s also a great company sitting on a ton of cash, and it has a cult-like following. So it’s a stock I’d love to own. I’m just not sure if it will drift a little lower from here.
So instead of buying it at today’s price, around $195, we can sell a put option at the price I want to own it at and get paid for doing so.
I’d be happy to own the stock around $180. That’s the strike price I’ll select.
I also like to collect at least 3% of the stock’s price in income. Essentially, it gives us a 3% return even if we don’t end up owning the stock.
I found that premium in the February 15, 2019 $180 put option. It’s trading for $5.90, or 3.2% of the $180 strike price.
The way it works with your broker is they will tie up enough capital to buy 100 shares for every contract you sell.
So if you sell one contract at $180, your broker will tie up $18,000 in case you have to buy shares of the stock. In return, you collect $590 per contract that’s yours to keep.
There are only two outcomes if you don’t touch this trade, which is how I recommend using put options.
If the stock stays above $180 a share from now till February 15, you simply keep the $590 per contract. Your capital is freed up, and you can move on to the next trade.
The worst-case scenario is if Apple falls below $180 a share by February 15.
That means on February 15, or sooner if the buyer exercises the option, you’ll pay $180 per share for 100 shares of Apple, regardless of where the stock is trading at.
For making this trade, you keep the $590 per contract. But now you would own shares of Apple’s stock.
And that’s it.
I use this strategy constantly in my Pure Income service to capitalize on many unique opportunities to collect income from the stock market.
It has an incredible 95% win rate over the past six years. You can see why this is one of my favorite strategies.
Chad Shoop, CMT
Editor, Automatic Profits Alert