A UBS study polled 3,750 investors, and 81% are predicting another market crash before the end of the year.
After a 65% bull run, some of these major investors are anticipating a 35% drop in the coming months.
But this shouldn’t come as any concern to you – because I’m going to show you exactly how to protect your investments.
You don’t need to worry about your portfolio tanking 30-40% like it did in March.
With this strategy, you can hedge your portfolio against any market drop.
Here’s the best way to keep your cash safe over the next four months…
The Market is Indicating Another Crash – Protect Your Portfolio with Options
The major market indices all dropped hard and fast over the past four trading sessions.
Here’s what we’re seeing at the time of writing:
The elevated volume suggests that institutions are dumping stock. And although on Wednesday each index bounced up a bit, the trading volume, meaning the number of stocks being bought and sold, was a lot lighter than the prior three sessions. This indicates that bullish enthusiasm is muted and that the bears are still on the hunt.
The bottom line is that more downside is likely. And believe me, it’s way overdue. You can see from the graph below that the S&P 500 has risen a whopping 64% to an all-time high since bottoming on March 23, 2020.
Since last week, stock traders have already lost 5% or more, and this could very well be the start of another 35% decline like we experienced in March.
Now, just remember that the market ebbs and flows. As a trader, what you need to think about is your market prediction for the long term and the short term. You could very well be bullish in the long term and bearish in the short term – or vice versa.
But the one thing you can count on is more volatility.
Prudent investors and stock traders are going to cash or risk off assets like gold and silver. Others are biting their fingernails hoping that the markets don’t continue to fall.
Option traders, on the other hand, are drooling with anticipation. You see, for option traders, volatility means big profits, and a bearish market could play out to be like shooting fish in a barrel.
Options provide the following benefits:
- Spend Less (Leverage More Stock)
- Reduce Risk
- Increase Profits 10-Fold
And these are the perfect benefits to turn these volatile conditions into big profits.
Let’s start with some basics.
There are two basic types of options: Calls and Puts.
A call option provides you the right to buy a specific stock at a specific price (strike) until a specific date (expiration).
Calls increase in value when the underlying stock moves up in price and decrease in value when a stock moves down in price.
A single call contract controls 100 shares of stock.
Today, let’s compare a stock purchase to a call option purchase on Microsoft Corporation (NASDAQ: MSFT).
If you were to buy 100 shares of MSFT at $205 on 7/31/20, you’d spend $20,500
A MSFT September 18, 2020 $205 Call would cost $8.70 per share or $870 to control 100 shares of MSFT. This call option expires on September 18th, the expiration date.
Right off the bat, we’ve reduced our risk by an astonishing $19,630 to control the same asset.
Had you sold your shares at MSFT‘s all-time-high of $232.86 on September 9, 2020, you’d have profited $27.86 per share or $2,786 (13.5% ROI). Not bad!
But, if you cashed out on your MSFT September 18, 2020 $205 call on the same date, it was worth $2,700, a profit of $1,830 (210% ROI).
The call option greatly outperformed the stock position and with a fraction of the risk.
Had MSFT tanked $25 like it just did this week, you’d have lost $2,500 on your stock position.
You’d have lost a maximum of $870 on the option.
Spend less, risk less, and make 10x the profit on call options. To me, it’s a no brainer!
This is precisely why options are the way to go in this market. If you’re bullish, skip the stock and buy a call option instead. Should the stock tank, you lose a lot less with options than the stock.
Now, let’s move on to puts.
Put options profit when the underlying stock drops. This is perfect for the projected downside in the weeks ahead.
A put option provides you the right to sell a specific stock at a specific price (strike) until a specific date (expiration).
Puts increase in value when the underlying stock moves down in price and vice versa.
Similarly to calls, one put contract controls 100 shares of stock.
Puts can be compared to insurance. In fact, they can be used to protect stock in the same exact way. An insurance policy gives you the right to sell the asset at an agreed to price for an agreed to amount of time, and the same idea is applied to a put.
If you must hold stock, consider protecting them with puts.
Let’s take a look at an example on MSFT.
On September 9, 2020, MSFT hit an all-time high of $231.65.
Three days later, MSFT closed at $202.66, a $28.99 (12.4%) drop. 100 shares would have led to a $2,899 loss.
On September 9, a MSFT October 2, 2020 $232.50 put would have run you $1055 and given you the right to sell 100 shares of MSFT at $232.50. Three days later, this put option was worth $3,100, a $2,045 profit (94% ROI), offsetting most of the loss in the stock and giving you the right to still sell the shares at $232.50.
Now, here’s the icing on the cake.
If, in fact, we’re right about continued market bearishness, the time is now to embrace the world of options – particularly put options.
Buy puts on stocks that you think are poised to drop.
Here are some guidelines:
Puts Entry Rules
Buy Put Options 1-2 Strikes Lower Than Stock Price
Expiration Date 90-120 Days Before Expiration
Consider buying puts on market index ETFs like the SPDR S&P 500 ETF (NYSE: SPY), SPDR Dow Jones Industrial Average ETF (NYSE: DIA), and the Invesco QQQ Trust (NYSE: QQQ).
Options don’t just give you limited-risk and high-reward potential. They can also profit a whole lot faster than straight shares of stock.
Source: Power Profit Trades