The market seems to make less and less sense every day. Stocks have rallied by 25% over the last three weeks despite unemployment claims smashing through historic records each week. It's an unprecedented rally for the economic numbers we're seeing.
It's hard to know whether to sit on the sidelines, waiting for than next leg down, or jump in as the market makes a sharp recovery. It could go either way.
But what if you could profit from either of these scenarios with one trade? It's not as crazy as it sounds.
Money Morning Capital Wave Strategist Shah Gilani has a strategy that can do just that.
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If stocks collapse again, you'll end up owning your wish list stocks at a massive discount. And if stocks keep their momentum, you'll be adding a pile of cash to your bank account.
Here's why it works and how you can make the trade work for you...
Why This Strategy Works
Let's lay out some truths.
The stock market over the long term tends to move higher. It has a natural bias to go up because companies want to make more money. Growing earnings translates into rising prices over time.
Of course, over certain short-term periods, stocks can move down in a hurry. We saw that in February and March, when the Dow lost nearly 40% of its value.
But these short-term shakeups create long-term opportunities.
One of the simplest ways to capture these is to buy stocks in excellent companies at massive discounts. If we went back to February when Amazon.com Inc. (NASDAQ: AMZN) was trading for $2,100 a share and I told you I'd sell it to you for $1,675, you'd have taken that deal in a heartbeat.
And that's exactly the deal you could've gotten if you bought Amazon on March 23. It's up more than 30% since then.
Plus, the short-term shakeups create huge opportunities in the options market as well.
We've seen options trades explode for gains of 1,000% or more as volatility surged. If stock prices are moving rapidly, then options prices are moving even faster.
The problem options traders are finding now is that options prices are getting expensive, making it hard to find a profitable entry point.
But there is a strategy that lets you exploit both the market's long-term upward bias and high options prices in a win-win trade...
How to Sell Puts and Cash In No Matter What
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You can sell options just as easily as you can buy them, and we can turn that into a win-win trade.
Of course, there's a totally different risk structure when you sell options. For example, if you sell a call option and the price of the underlying stock skyrockets, you could be on the hook to buy that stock at a very inflated price in order to deliver it to the options buyer at the lower, agreed upon price.
They same is true for selling puts, but we're going to make that work for us, not against us.
With options prices so high thanks to the volatility in the market, many people are thinking about selling options to take advantage of the higher premiums. When you sell a put option on a stock, your account gets a credit for the price of the option. If that stock either goes up or stays the same price, you get to keep that credit when the option expires. It's all profit for you.
Seems like easy money in a bull market.
But that sounds a little too good to be true. What happens if the market falls again and the put you sold falls into the money? You still get to keep the money you earned from selling the option, but now you may have to actually buy shares of that stock at the agreed-upon price, which will be higher than what they're trading for.
So the risk is you might have to cover the put and pay more for a stock than it's currently worth. But this can work to your advantage if you either own enough of the stock already or would like to own it at a discount.
Here's what do to.
Find a stock you'd love to own if the price was cheaper. Sell a put contract with a strike price at the price you'd like to pay. (Remember, a contract is for 100 options on the stock, so be prepared to buy at least 100 shares of the stock and buy more contracts if you want to own more shares.)
If the stock price drops, you'll simply own the stock at your preferred discount. And if its price stays the same or rises, you'll keep the fat premium from selling the put.
It's a win-win.
Either you make money selling the option outright or you get to own a stock you love at a lower price.
How One Formula Can Hand You the Best of Both Worlds
Tom Gentile has uncovered a low-cost, high-potential opportunity that's practically tailor-made for today's market.
Anyone can get started with as little as $371... and in just a few weeks, you could walk away with a fortune.