The Dow Jones Industrial Average slid more than 2,000 points on March 9 (Monday). And while that's a jarring single-day loss, it wasn't all that surprising given current market fears.
Concerns about the COVID-19 coronavirus are no laughing matter. But it's important to realize that even in a market gripped by fear, there are profit opportunities.
Specifically, we're going to show you an options trading strategy that returned 1,025% in less than 30 days.
Tom Gentile, Money Morning's options trading specialist, shared it a few weeks ago.
But where is the opportunity now that the market has taken such a steep drop? Does it have further to go?
We're going to show you the strategy Tom mentioned that's now almost 1,000% in the green. Then we'll show you the next options trading strategy you'll want as the market passes through this valley.
How Tom Predicted 1,025% Profit
To give the devil his due, Tom didn't predict a whole 1,000%. He believed this investment could "double your money," which it did… and then it multiplied.
But the point is Tom's research and strategies are second to none. It could be worth hearing him out the next time he expects a stock to go a certain direction.
Yes, there's an enormous swell of volatility and uncertainty about where stocks are headed the rest of the year. The CBOE Volatility Index (VIX) has punched through 10-year highs and is currently above 50.
But as far as the first few months of the coronavirus are concerned, there are some valuable knowns – possibly even more concrete knowns – in the coronavirus market than we're used to.
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The great thing about gigantic market swings like this is that it's easier to separate winners from losers. It's almost like a hurricane displacing water in a lake to expose the rocks underneath.
In all this chaos, market exposure is more pronounced. For example, the coronavirus didn't just hamper supply chains from China; it's weakened travel, hospitality, and even oil.
That's why options trading strategies work well under conditions like these. A stock's direction, in some cases, is more predictable.
You could have predicted those losses on coronavirus news alone. But OPEC has responded by introducing even more chaos to the energy industry.
The oil cartel couldn't seem to agree with Russia on a supply cut last weekend. So Monday is where you see a steep ledge for these oil stocks.
Anyone holding a $10 put option on MRO, expiring April 17, which we first recommended on Feb. 26, made off like bandits. The contract has gone from $1.40 to $6.15.
A 339% gain in about three weeks.
Tom's options trading recommendation has earned even more since he talked about it Feb. 21.
Tom recommended a put option on Carnival Corp. (NYSE: CCL), and it has done exceptionally well up to now. It was a $40 put expiring April 17.
And cruise lines affected by the coronavirus are still a mess. People are getting medevaced from the Carnival Grand Princess on helicopters. They say it could take days to evacuate the ship while also containing the virus.
At the time, the Carnival stock was trading for $42. The $40 option was out of the money, and that made it cheap.
In fact, you could have bought it for $1.60 per contract and ended up at $18 today. That's turning a $160 investment (controlling 100 shares) into $1,675 – otherwise known as 946% profit.
Of course, those gains are in the past. We have a similar opportunity for you today. But here's something to consider first…
How to Time Your Options Strategy
Put options give the holder the right to sell a stock at a certain price on a certain date.
Carnival stock is hovering around $20 right now, about 50% less than the strike on Tom's recommended put. That gives the holder of the $40 Carnival put the right to sell for $40 when the market prices at $20.
And that makes the option hugely valuable.
But stock price is only part of the equation.
Two key measures of an option's value are time value and intrinsic value. Intrinsic value is how "in the money" the option is. Time value is how far away from expiration the option is.
The farther away the stock's expiration, the greater the time value, and the more expensive the option. It's more expensive because you're taking less of a risk. The stock's price has more opportunity to fluctuate over a longer period of time.
The best-case scenario when buying an option is the stock price going further and further into the money as the option approaches expiration. And that's exactly what's happened with Carnival.
Carnival has sunk 50% below the $40 strike on that April 17 option, still more than a month from expiry. That gives the contract outstanding time value and intrinsic (in the money) value.
Right now, though the long term is unknown, and near-term market movements have been less surprising. And part of what makes the stock market so scary right now is what makes options so profitable. Stocks taking big swings over short periods of time.
But this might be the best options strategy to profit without exposing yourself to too much risk.
Your Coronavirus Options Trading Strategy
About the Author
Mike is a graduate of the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.