Options

Your Antidote to the Recent Market Sell-Off

By Lee Lowell  |  November 1, 2018

I can’t say it enough – options contracts are your best friend, in good times and bad.

It’s been a brutal few weeks for the stock markets.

October shaped up to be one of the worst on record. The Dow Industrials fell 10.5% from high to low. The S&P 500 fell 11.4% from high to low. The Nasdaq fell a tough 14.6% 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 better stocks over time, so it’s almost a surety that it will keep rising.

But when we get sell-offs like we witnessed over the last few weeks, I know it’s hard to even fathom stepping in front of that freight train.

Just know this…

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 27 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 10 years.

And every small correction during that time was bought right back up.

Why?

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 trade and one being an option-selling trade.

Buying deep-in-the-money (DITM) call options is a fantastic way to buy in at current stock market levels but with 70% less money at risk, while gaining the opportunity to triple your returns.

After the recent market drubbing, not only are stocks at much cheaper levels, but can you save thousands more by using the DITM call option strategy.

If you’re looking for broad exposure, buying 100 shares of the SPDR S&P 500 ETF (NYSE: SPY) would cost $26,800.

By comparison, the SPY March 15, 2019 $197 DITM call option with a 90% delta costs $72.80 per contract.

With the $100 multiplier, that’s a cash outlay of $7,280.

That saves you $19,520 (72.8%) over the costs of buying the SPY shares outright. Plus, you’re getting 90% of the same movement as the stock.

If you want to read more about this strategy, check out the archives on our website: richinvestor.wpengine.com.

Selling out-of-the-money (OTM) put options gives you access to upfront cash payments while giving you 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 (NYSE: NFLX) is currently trading at $285 per share. That’s almost $140 cheaper than the all-time highs it hit back in June.

If you’re looking to potentially buy NFLX at even cheaper levels, the March 15, 2019 $185 put options are paying out a nice $4.00 per contract premium.

That’s $400 upfront in your pocket for every put option contract you sell.

This obligates you to buy 100 shares of NFLX at $185 per share if the price falls that far by March 2019.

If buying NFLX $100 cheaper than its already cheap price of $285 is in your crosshairs, then selling a put option could be right for you.

Becoming an Options Trader is Easy

So, when the market action has you feeling ill, try these two antidotes. And keep reading, because it’s my goal to turn you into a bona fide options trader, leaving your stock trading days behind.

You can achieve all your financial goals by using options contracts. Try it!

Lee Lowell

A former Wall Street insider and floor trader, Lee Lowell has worked in the market for nearly 30 years now. He began his option trading career in 1991on the floor of the New York Mercantile Exchange (NYMEX) in New York City.MORE FROM AUTHOR