The market keeps climbing despite red flags … how to use a pullback as a buying opportunity … the strategy that pays you to buy great stocks at a discount
Trouble’s coming.
So said legendary short-seller, Jim Chanos, on Monday.
This market is setting up to be one of the great short opportunities of all time. Trouble’s coming, I don’t know when, but it’s coming.
If anyone has the bona fides to make such a prediction, it’s Chanos.
The investor made fortunes betting against Enron and Luckin Coffee. And his most recent short against Wirecard banked him roughly $100 million.
Now, we don’t know exactly what Chanos is looking at in making his comment. But there’s no shortage of red-flag material he could choose from.
As we pointed out in Monday’s Digest, we have a pandemic that’s not going away … persistent unemployment … massive sovereign debt (which is growing) … social unrest … and an avalanche of newly-printed fiat currency.
On the other hand, a surefire way to lose money in the market is by fighting the trend — and today, the trend is decidedly “up” thanks to the bazooka of liquidity the Fed has fired at the economy.
So, what is it then? Up or down? Bull or bear?
Well, first, as we’ve pointed out in prior Digests, “the market” is not some huge monolith that rises and falls in unison. Rather, it’s a composite of thousands of individual stocks with wildly different prospects.
In a broad selloff, specific, high-quality stocks often experience much shallower pullbacks than the average S&P stock. And when markets eventually recover, these high-quality stocks typically race ahead much faster.
Given this, any softness in the broad market that drags down the price of a high-quality stock might be seen as a longer-term buying opportunity.
Today, let’s look at a strategy that’s tailor-made for buying such high-quality stocks in a correcting market.
It’s a strategy that puts money in your pocket today, while giving you the chance to buy an elite stock at discounted prices tomorrow.
If the high-quality stock you’ve identified keeps climbing, then you won’t own the stock, but you’ll walk away with a chunk of cash.
However, if the stock falls to a price you’ve identified ahead of time as a good entry-price, then you’ll buy it at that discounted price — and you’ll still keep a chunk of cash.
I’m describing a market strategy that our technical experts, John Jagerson and Wade Hansen, use in their service, Strategic Trader.
It’s called “put acquisition.” And for investors who want to buy a high-quality stock at a discount — and get paid to do it — there’s no better strategy.
Today, let’s jump into all the details as we give you another tool to help grow your wealth.
***A responsible way to use options
In their newsletter, Strategic Trader, John and Wade combine fundamental and technical analysis, along with historical market data, to profitably trade options even during times of massive volatility.
Now, you may get a bit nervous when you read “options.” Most investors have heard some story that links options with massive financial loss.
And those stories should be heeded. Options can lose investors lots of money. Of course, so can stocks … or bonds … or real estate … or commodities … or currencies …
But in all of this, the fault doesn’t lie with the financial instrument itself; it lies with the investor’s use of that instrument.
As an analogy, think of a car — is it good or bad?
Well, when used properly in the hands of a responsible adult, a car is an amazing tool providing mobility, comfort, and convenience.
But when used in the hands of an inexperienced teenager driving recklessly, it’s a dangerous weapon.
The issue isn’t the car itself, it’s the action of the person operating the car.
And so it is with options …
The strategy we’re about to dive into, which John and Wade use in their service, is a responsible use of options.
***Getting paid to buy a great stock at a better valuation
Let’s say you’ve put together a wish-list of elite, high-quality stocks — we’re talking the bluest of the blue chips. The ones that make their investors fortunes over time.
For our purposes today, let’s say Microsoft is on your list.
Now, you could buy Microsoft at today’s market price. But with a put option, you have another choice — you can get paid to buy Microsoft shares if they fall to a discounted price.
Here’s how it works …
Let’s say “Jen” is an investor who owns Microsoft shares.
Jen is worried that Microsoft’s price has gotten ahead of itself. She wants some protection if those shares are dragged down for any reason.
This “protection” takes the form of a put option.
When Jen buys a put, it enables her to “put” her shares onto someone else under specific circumstances — namely, if Microsoft shares falls to a predetermined price, within a predetermined amount of time.
Let’s say those conditions are, “if Microsoft falls 5% within the next 45 days.”
In exchange for this put option, Jen has to pay the investor on the other end of the deal a chunk of cash up-front.
With a put acquisition, you’re this “other investor” who gets paid cash.
You would agree to buy Microsoft’s shares from Jen if they fall to the price you’ve agreed upon with her, within the time-frame you’ve both agreed-upon. In exchange, Jen pays you a wad of cash up-front.
So, how might this situation play out?
Option 1 — Microsoft doesn’t fall to the pre-determined price.
In that case, you don’t get to buy Jen’s shares at the discounted price, so you won’t own Microsoft. But you will get to keep the cash she paid you up front.
Option 2 — Microsoft does fall to the pre-determined price.
Here, you will buy Microsoft at the price you and Jen agreed upon. However, you’ll still get to keep the chunk of cash she paid you ahead of time.
Not a bad deal.
***So, what’s the catch?
When you’re selling a put to investors like Jen, your biggest risk is that the stock suffers a freefall.
For example, let’s say news breaks that Microsoft has been cooking the books — a major scandal. Its shares drop 20% overnight.
If you agreed to buy Microsoft at a 5% discount to yesterday’s market price, but today the price is down 20%, well, Jen is going to offload her shares onto you.
That means you’ll suddenly be sitting on a double-digit loss.
This possibility points us to the required conditions for you to use a put-acquisition strategy …
You must truly want to own the stock in question … and you must believe that the buy-price identified by the put option would be a good entry price for you — even if the stock falls further.
When those two conditions are met, a put acquisition is a fantastic way to generate cash today, while giving you the chance to buy elite stocks at a discount tomorrow.
***This is just one of the strategies John and Wade use in Strategic Trader
For example, let’s say you used this strategy to get paid to buy Microsoft at a discounted price — which John and Wade have done.
Even though you could keep those shares for the long-haul, you could use a different options strategy to continue generating income from your shares.
John and Wade accomplish this with a “call option.” It’s beyond the scope of today’s Digest to dive into those details. But the takeaway is that options do, in fact, offer investors responsible ways to generate solid income from quality stocks.
If you’re interested to learn more, click here for additional details on John’s and Wade’s strategy.
Wrapping up, as we look at the market today, there are some red flags. But a put acquisition strategy — applied to quality stocks — can help you generate solid income, while potentially buying world-class companies for discounted market prices.
Have a good evening,
Jeff Remsburg
