What a crazy market we are in…
Rumors are circulating that the trade deal may collapse and—the President may get impeached…
But here we are— all-time highs.
Panic buying is sure to follow.
It’s been a momentum-buyers’ party, but deep down your inner self is telling you that dark skies are looming… and that it all can’t be real.
But what do you do?
Well, there are only a few choices you have:
Either join the party and buy up already inflated stocks or— short and risk getting steam rolled—traders have been predicting the death of this bull rally for a decade now.
However, I have a better alternative. It involves being strategic, and it entails not looking at the market through the lens of a bull or a bear. But one of an option trader, who views the market in terms of volatility.
Typically if a trader is interested in going short and using the options markets, the first thing that comes to mind is to purchase a Put.
A purchase of a put option does two main things for a trader. It allows a trader to benefit from the decrease in the price of the asset and it limits or decreases the amount of loss they may incur.
This is much less risky than shorting the underlying asset and the trader can use the leverage of options to increase their gains as well.
Here is a payout diagram for both a short stock and put option.
The diagram on the left shows a traditional short sale of a stock. With this, there is an unlimited loss as the share price increases!
The diagram on the right shows the purchase of a put option. With this, there are limited losses as the share price increases!
Pro Tip: If you want to go short a stock and you are aggressive with the direction, buying at the money puts gives you the most bang for your buck.
So what’s the benefit of using this strategy?
- There is limited risk if you get the trade wrong
- There is unlimited upside gains if you get the trade right
Unfortunately, there is something I must remind you of. If you are wrong on the timing, your options may expire and you will still lose the trade.
That’s the pain I feel all the time, and I don’t want you to go through this.
It really sucks to be right, just to be wrong.
But I have a solution that you will like, and it may surprise you.
It’s called a Call Spread.
I know that you may be confused, and it’s ok if you are.
Because I just told you to trade a Call when I think the markets are going to go lower. And that might be strange.
The Short Call
An alternative to buying a put is to sell a call.
This is usually described as a “naked call” and is one of the most terrifying trades anyone could place.
Just ask one of the many hedge funds that blew up from this trade.
It works… until it doesn’t.
As you can see in the risk diagram, you are subject to unlimited loss the further price increases.
I mean, who wants to sleep with one eye open?
Trading is stressful enough without having to worry about some pot stock going from $5 to $500 overnight causing you to lose your home and all your assets.
What if there is a way to still gain exposure to the short call and stay protected?
Let’s take a look at one of my favorite trades… the Credit Call Spread.
The Credit Call Spread
The Credit Call Spread (or Bear Call Spread) is a bearish to neutral options trading strategy.
It aims to capitalize on both downward price movement of the asset and theta decay.
Credit call spreads work extremely well in both directional and sideways markets as the options will expire worthless at the end of the trade, leaving the premium for the trader to collect on.
What does that mean exactly?
It means that you receive the cash upfront…
That’s right, you get paid to take that trade!
Another huge benefit of this trade is that it has a lower max loss compared to selling calls and even purchasing put options.
As a seller of options, we can still make money even in a sideways market!
This is such a great strategy since it allows me to trade a short call and have a max loss on the trade.
This is a must to capitalize on premium decay and also market direction on the trade.
The Odds Are Stacked In Our Favor
Option sellers take maximum advantage of the option time decay theory, commonly known as Theta Decay.
OTM options lose value quickly and become worthless at expiration.
This allows traders to not have to worry about correctly predicting the market direction or timing the market perfectly to generate income.
We can take advantage and be the house with odds in our favor on every trade.
Don’t forget that an option buyer needs to be right about direction and time!
Remember traders, there are many ways to make money in this market and selling options is one of my absolute favorite go-to strategies.
- Credit Call Spreads profit if the stock goes down, stays the same, or goes up
- Limited risk vs naked calls
- Puts the house odds in your favor
- Allows you to get paid to take risk
If you want to learn more tips from the Real Estate markets and more strategies for putting the odds in your favor, just read The Simple Cash Flow Options System.