Options are the greatest way possible to invest in the stock market for several reasons according to options trading articles.
The first is that you can dramatically decrease risk without decreasing potential reward.
The second reason is that, no matter what the market is doing, you can insulate yourself from activity in the broader market and even position yourself to profit from it!
No one knows, for sure, what’s going to happen to this market next. But one thing that’s very possible is, while the economy is working out some very serious long-term problems, the stock market will reflect that process.
This means that, while the market will encounter spikes and drops, it just might end up in the same long-term range for quite some time, which has happened several times before.
Check out this chart of the Dow Jones Industrial Average (DJI) from 1965 to 1981.
Does the current state of the broader market matter to me? Nope.
Why? Because when you’re trading stock option contracts, it’s possible to take advantage of “direction” or “fear” (implied volatility), or both.
For example, in the chart above, you can imagine (and many of you can remember) how fearful investors were in 1970 after the Dow declined by about 35% and bounced up to the red dot. Using options in a situation like this, you can profit in two ways:
1. By betting on the market trading higher.
2. By betting the amount of fear in the market will decline.
One strategy you would use in this case could be selling a vertical put spread.
Typically, the two things will happen at the same time (a reduction in fear when the market moves higher). But what if the market traded sideways for a period of time instead of moving higher?
What would likely happen in that case is the fear in the market would still decline, which means you would have generated a profit even when the market didn’t budge!
You would do the opposite in 1973 where you see the green dot. Using options in a situation like this, you can profit in two ways:
1. By betting on the market trading lower.
2. By betting the amount of fear in the market will increase.
Typically, the two things will happen at the same time (the market moves lower while fear increases). You can see on the chart that the market dropped by 40% relatively fast.
This would cause a double-whammy for people who owned put options. They would become more expensive as the market traded lower, but since it happened so fast, the fear level in the market absolutely exploded!
What if the fear level didn’t explode? If the market just gradually lost value, you would still profit because you were right about the direction.
What’s amazing about options is it doesn’t have to be a 50% bet on direction and a 50% bet on fear. Depending on the option you choose to trade (in this case, the put option you decide to buy) you can bet more on the direction and less on fear or vice-versa. If you want to bet more on the “directional play” you would do what I like to do: buy deep in-the-money puts.
On the flipside, what if you were betting the market would move higher by buying call options? Well, the smartest way to make that bet is to buy deep in-the-money (ITM) call options. But if you made that bet at the green dot on the chart, you would probably have lost money.
However, since fear increases when the market declines, your ITM call option would decline, but by a lesser amount than the underlying stock would.
If a stock declined by 5 points and you owned 1,000 shares, then you would lose $5,000. But if, instead of buying 1,000 shares, you bought 10 call option contracts (representing 1,000 shares) you would probably only lose 3.5 or possibly 4 points.
Why would the option trade down by so much less? Because options become more expensive when the level of fear increases.
I’ll give you another reason why options are the greatest tool for investing.
You can use them in conjunction with your current stock holdings. If the market trades sideways, causing most of your stocks to trade sideways for the next several years, you can make a fortune by selling covered calls on the stock positions.
See the little black dots? Your timing doesn’t have to be absolutely perfect. But if you sell covered calls on the positions when you think the market is a bit too high, you will continue to collect income on your positions.
This way, even if the market trades about 13 years without making even 1% (like it did from 1968-81), you can still profit from your stock positions. In fact, by selling covered calls each month or even every other month, you can get paid to own your stocks!
One last reason why I think options are the greatest tool on earth:
What if you have cash on the sidelines and you think it’s the greatest time to buy because the stock market has sold off enormously? Well you’ve always heard about how dangerous it is to try to “catch a falling dagger.”
On the other hand, you know the best times to buy, historically, is when everyone was fearful and nobody thought the market wpuld trade up.
So, what do you do?
Do you see the black rectangle on the chart? That’s about where you would be thinking about this.
Remember, using options you can trade both direction and fear. When fear is at its highest, options on the stock market are at the most expensive prices.
Not only am I making a case for options, but I’m also making the case for trading. The “buy-and-hold” approach isn’t always the right way to play, as we can see in the 1968-81 chart of the Dow.
You’d probably be pretty upset if you just hunker down for five or 10 years, watching the market trade up and down 50%, only to end up right back to where it started from.
Ask anyone who bought and held from ’68 to ’81, or from 2003 through NOW!
This market is packed with opportunities to make big money … if you know where to look. Find the hidden money-doublers in today’s stock market. Learn more in your FREE Options Report.
