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As we've talked about before, the stock market can act as sort of a crystal ball for an impending U.S. presidential election.
I've done it, lots of independent analysts have done it, and you can see for yourself, too; we look at the three months leading up to an election to try and see if the incumbent resident at 1600 Pennsylvania Avenue NW will stay put, or be sent packing.
This analysis has shown that the S&P 500 can correctly answer that question 86.4% of the time - not bad.
Of course, these days, the markets are obviously undergoing a correction of some kind.
After a dynamite August, the big indexes - the Nasdaq, S&P 500, and the Dow - are down 10.7%, 9%, and 7.7%, respectively, from their Sept. 2 intraday highs.
Normally, that might get an incumbent president in the mood to look for movers.
But this bearish trend isn't necessarily decisive because, if we know anything to be true, this is a year and an election unlike any other.
So the S&P 500's uncanny predictive powers might be a little weaker this year. I think, regardless of who the frontrunner or ultimate winner is, it's likely we'll see more downside between now and then.
This is a fantastic opportunity for anyone who trades (and if you never have, you can certainly start now). That's because, for us, extraordinary times mean extraordinary profit potential.
This is real once-in-a-lifetime stuff...
No Question: Trading Options Is the Way to Go Now
It's not surprising that the market has corrected. The pandemic is surging again, as it might do through the autumn. Big global economies are still reeling from the effects of shutdowns, because demand for everything from staples to oil has taken it on the chin.
So buy-and-hold investors are staring down the barrel of the worst September since 2002.
But traders following along with my recommendations got the chance to take four double-digit wins off the table this week alone, and we're on target for four more in one day.
And these are not all on stocks going up - not by a long shot. In the here and now, the smart money is betting on lower stock prices - with bigger, faster moves to the downside - for the foreseeable future.
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You don't have to be a long-term bear to do this, though it's cool with me if you are. I'm bullish in the long term, but, like always, it's a mistake to "fight the tape."
I've put together a list of trades with specific instructions that should see you consistently making money between now and Election Day - and beyond, too.
How to Play the S&P 500
Like I said, the market is having its worst September in 18 years. To make the most of that, we want to look at playing the broadest possible basket of stocks.
The best way to do that is with the SPDR S&P 500 ETF (NYSEArca: SPY) - the perfect trader's proxy for the S&P 500. It's cheap, too; it tracks the S&P 500, but costs a tenth of the price. Seeing as how I hate to pay more than $500 for a trade, I play it all the time.
This short-term credit spread could put you in double-digit profits by the end of this week. At the time of writing, you can sell this spread for about $0.75 - or $75 per option and pocket that money, provided SPY stays at or below $440 by Oct. 2. That's a smart, high-likelihood bet right now:
- Buy one SPY Oct. 2, 2020 $345 call.
- Sell one SPY Oct. 2, 2020 $340 call.
There's a medium-term move to make, too - you can let this one run a while. It's a long put you can buy for $5.25 right now. Consider selling... once your money doubles:
- Buy one SPY Oct. 16, 2020 $320 put.
And to get you through to the end of October, almost right to the election, there's this long put spread costing $1.65. This one packs the potential to triple your stake:
- Buy one SPY Oct. 30, 2020 $325 put.
- Sell one SPY Oct. 30, 2020 $310 put.
How to Trade a Demand Drop in Energy
When the pandemic went global, we saw front-month crude oil futures do something unprecedented: head into negative territory, where it was (theoretically) possible for a trader to pay you to take a barrel of crude off their hands. Oil demand had crashed because no one was manufacturing anything and no one was driving.
I know my ride was getting about three weeks to the gallon in those days.
Many public health experts are saying this autumn and winter could be really rough in terms of big, cold-weather COVID-19 spikes or surges. And of course, we've got the regular flu season to contend with at the same time.
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The upshot is energy demand could take another monster hit, just like it did in March, when oil prices dropped 65% in a quarter. The easy way to track that performance is with oil companies, and the Select Sector SPDR Energy Trust ETF (NYSEArca: XLE), which tracks a basket of the market's biggest oil and energy companies.
There are two ways to profit here:
- Buy one XLE Nov. 20, 2020 $30 put.
This put is currently trading for about $1.40. Consider selling it for a double with a decline in the XLE. Don't try to chase it lower.
Exxon Mobil Corp. (NYSE: XOM) is the weakest performer in the entire XLE basket, to the point where it was recently kicked off the Dow.
- Buy one XOM Nov. 20, 2020 $35 put.
Sell this one when it doubles, as well.
(Another double? This is starting to look familiar - us traders are used to this happening.)
Two Bearish Real Estate Plays
Real estate is the second weakest-performing sector over the past three months. You don't have to be a JPMorgan analyst to see that the big contraction in incomes and spending - which could get worse - is going to have a detrimental effect on the real estate market.
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There's a lot of evidence that folks are fleeing high-cost, high-rent cities like New York and San Francisco for the suburbs, too, now that work-from-home has caught on. Commercial and residential real estate could take years to recover.
The Select Sector SPDR Real Estate ETF (NYSEArca: XLRE) is the best way to track the performance (or not) of real estate. One play I'd make is...
- Buy one XLRE Nov. 20, 2020 $33 put.
Once again, set your sights on a double.
Now there's an even more direct way I can think of to play residential real estate - a real estate investment trust (REIT) with a portfolio of residential properties. It's currently one of the poorest performers in the XLRE basket - the put I'm thinking of is going for $2.30:
- Buy one EQR Nov. 20, 2020 $50 put.
How to Profit on the Airlines' Cash Crunch
Moody's predicts that commercial airlines will continue to be ravaged by COVID-19 and won't recover until the end of 2023. I happen to agree 100%, so I'm recommending a play on the US Global Jets ETF (NYSEArca: JETS), which gets you exposure to the global airline industry.
- Buy one JETS Nov. 20, 2020 $15 put.
This put is currently going for $1. Consider selling it for a double.
You Can Cash In on Empty Hotels
I haven't been in a hotel all year, and I don't plan to be - and I'm not the only one. Hotels have been decimated by a lack of guests. Quite a few have actually been turned into makeshift coronavirus hospitals and isolation wards.
Even major hotels like the five-star Park Hyatt New York closed its doors due to the pandemic. Like so much these days, I'm afraid it will get worse before it gets better.
Summit Hotel Properties Inc. (NYSE: INN) is a REIT that owns select hotels - select upscale hotels - in the United States. Here's how you could double your money on it for just $250, or $2.50 per contract.
- Buy one INN Nov. 20, 2020 $7.50 put.
Once more, target a 100% profit on this.
(Another 100% gain. Are you sensing a pattern here? Yep, options have funny way of doubling your money.)
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We're not done yet - we're going to target one more high-profit move, and that will be it... for today.
It's kind of a play on the very essence of options trading itself...
How to Profit from Implied Volatility (IV)
Basic fact of trading: Options get more expensive when the market corrects.
The average expense is quantified by the Chicago Board Options Exchange Volatility Index, the famous VIX. My colleague and friend Shah Gilani helped establish it.
It's complicated - really complicated - but for the most part, the VIX rises when markets drop and vice versa. During the market crash in the first quarter of 2020, the VIX spiked up to a record high of 85.47.
Well, it's at 27 now, and another big bout with novel coronavirus means that "gap" between 27 and 85 is really just "room to run."
The iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS: VXX) is an exchange-traded note (ETN), very similar to an ETF, that tracks the VIX short-term futures. It's very option-able. I like this one - it's the only purely long play on this list.
- Buy one VXX Nov. 20, 2020 $25 call.
It's trading for $4.40 right now, or $440 per option.
Now wait - I know what you're thinking: "Target a double here." But the truth is, if we get a major correction that comes anywhere close to what happened in March, the profits will be, well, astronomical. If we get the "standard" correction, we'll have to be content with doubling or tripling our money. For $440, the risk/reward and breakeven all look extremely favorable.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.