Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Profit From Stock Market Volatility

Stock-Markets / Options & Warrants Jul 16, 2009 - 04:32 PM GMT

By: Q1_Publishing

Stock-Markets

Best Financial Markets Analysis Article“How can I make a lot of money in this market?”

That’s the question I wake up to every day. Sometimes it’s a real thinker, especially in bear markets. Other times, when there’s a genuine bull market, it’s a lot easier.


Right now, we don’t have either one. We have a flat market. And we will continue to have a relatively flat market.

As we’ve looked at in the Prosperity Dispatch over the past few weeks, there are plenty of ways to beat a flat market. And how to do it without having to take big swings or trade actively.

There’s one more way to beat – more like trounce – a flat market. It’s a simple strategy really. It has been used by Warren Buffett to buy stocks as much as 15% below the market price. It has beaten more than 90% of mutual funds in the past two years. Still though, most investors don’t even know about it. Let me explain.

A Bull Market in Uncertainty

Now, I realize the major indices have been climbing this week. The Dow is up almost 5% in three days. The bulls are charging.

Earnings season has been good so far – much better than expected. Goldman reported huge profits. Intel’s latest earnings stunned Wall Street as well. As we like to say, great expectations lead to great disappointments. We’re watching the inverse right now. Low expectations lead to big surprises.

If we take a step back from the excitement and look at where those profits come from, we’ll get a much better idea of how sustainable they really are. In Goldman’s case, most of the earnings came from trading activities.

Those are very low quality earnings. Trading profits come and go. There are only so many cost-cutting measures managers can take.

So when the next earnings season comes around, there aren’t too many reasons to expect a repeat even though expectations will be much greater for many companies.

Then there’s the monthly reality check for the markets when the unemployment numbers are released. There’s no good news coming from there for a while.

That’s all part of the reason why we’re headed for a flat market over the next few months. There will be more signs of a recovery followed by more setbacks. The ups and downs will keep many investors on the sidelines. The markets will be volatile and generally flat leading to even more uncertainty.

The bull market in uncertainty is unwavering and the best opportunity is to turn uncertainty into cash.

Make 60% Safely in Six Months

There have only been four really good times to capitalize on uncertainty in the past 20 years. This is the best time of them all.

The best way to make money in this market is with stock options (if you’ve never considered options, please bear with me, it’ll be worth it).

Now, I’m not talking about swinging for the fences by buying highly leveraged options. Then hoping everything works out (although that makes great testimonials for infomercials).

Heck, this is probably one of the worst times to be buying options. The odds are just so stacked against you. Basically, if you’re right, you’ll make a little bit.

If you’re wrong you’ll lose a lot. That’s almost never a winning combination, but it’s not enough to turn traders and speculators away from it.

That’s why I’m talking about taking the other side of the options trade - writing options.

Writing options is like selling insurance. Most option traders want to hedge their portfolio’s risk. They use options as an insurance policy against a sharp drop in share prices.

The greater the risk (or perceived risk – a.k.a. uncertainty) is, the more insurance costs. Think of what teenage drivers or homeowners in hurricane-prone areas pay for insurance.

The best measure of the current cost of insurance is the CBOE Volatility Index (or the “VIX” or “fear index”). This index tracks how much portfolio insurance costs. It is a measure of the “premium” investors are willing to pay.

The chart below shows the VIX over the past 20 years:

The chart highlights four times the VIX was above 30 in the past two decades. They correlate with major events. First was Operation Desert Storm. The second was during the Asian Currency Crisis and Russian debt default. The third was the bear market of 2002/2003. The final is the current credit crunch.
When the VIX is at or above 30, the cost of “insurance” is high.

What do you do when insurance prices are high?

That’s right, you sell insurance.

The VIX at these levels create an opportunity for ordinary investors to collect 60% or more in “insurance premiums” per year.

There are three ways to use options to significantly boost your bottom line when uncertainty is high.

How Warren Buffett Gets Paid to Buy Stock

Last fall the markets were in a state of total confusion. The ultimate long-term investor, Warren Buffett, took the opportunity to buy stocks on the cheap. But he wasn’t simply buying stocks the way most investors do. He was getting paid to buy stocks.

Buffett was using strategy called writing naked puts. Basically, he sold a put option. By writing (which is selling) a put option he gave the option to someone else to force him to buy shares of a specific stock at a predetermined price in exchange for an upfront cash payment.

For instance, October 8th Berkshire Hathaway wrote options for someone else to require the insurance giant to buy shares of Burlington Northern Santa Fe (NYSE:BNI) at $77 before the end of December. Berkshire collected a $5.78 per share premium in exchange. That day BNI shares closed at $81 per share.
So by using this strategy added a layer of safety. In fact, Berkshire was paid $5.78 to buy shares it was likely to buy anyway if BNI kept falling. The options just added a cash cushion of about 8% on top.

Don’t get me wrong, writing put options can be extremely risky or extremely rewarding. There is a lot to understand about the risks and rewards before doing it (I recommend picking up a book on options valuations – not a “get rich quick” trading guide, a good educational book on options strategies) and finding an experienced, trusted advisor to work with for the first few trades.

It may be a little bit more time consuming, but this is a great time to learn this strategy and start applying it. If you learn it fast enough, you may never buy a stock again, unless you’re paid to do it.

Getting Paid to Wait

Writing put options isn’t the only way to turn uncertainty into cash. You can also write covered call options.

This strategy is a bit different. It involves buying stocks and then selling a call option. The call option gives someone else the option to buy the stock away from you at a predetermined price, once again, in exchange for cash.

Basically, you get paid to hold the stock. If the shares go down or stay flat you have the cash premium to offset losses. If it goes up, you have the gain on the stock up to the predetermined price, and the cash from the premium.

One of the best sectors to apply covered call options writing to is with gold stocks. This is something we proposed during the credit crunch given our outlook on gold. Since we expect it to take years for gold and gold stocks to really pay off, using a covered call strategy you can collect an additional 30% to 60% per year from all the volatility in gold stocks.

We talk about getting paid to wait a lot. When it comes to covered calls, you get paid extremely well to wait.

Let the Pros Do All the Work

Finally, there is one more way to turn uncertainty into better gains. That’s with a closed-end fund like iPath CBOE S&P 500 BuyWrite Index (NYSE:BWV).
This fund basically does all the work for you. It tracks the CBOE S&P 500 BuyWrite Index which is an index which tracks a covered call strategy as applied to the S&P 500 as a whole.

We’ve looked into this fund twice in the past year as a way to safely wade into the markets. Once was last fall and the last time was on March 6, right before one the greatest rallies in history.

The chart below shows how well the covered call strategy, as tracked by BWV, reduces downside risk without sacrificing very much upside.

-------------------------------------------------------
Investing Successfully 101
When it comes right down to it, the markets haven’t changed much at all in the past couple of years.

The bear market may seem to have “changed the rules,” but they’re still the same.

All the things that made some investors successful before will continue to make them better in the future. That means keeping an eye on risk and reward, limiting valuable capital to the best opportunities, and learning new strategies which work exceptionally well for the market conditions.

There’s always an answer to: “How can I make money in this market?” You’ve just got to find it.

The path to financial independence hasn’t closed. It might look a little different, but it’s still open to anyone willing and able to walk down it.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in