Is the market about to correct?
That's the question investors are asking right now. And judging by the market's action over the past weeks, it's for good reason. The Dow shed more than 800 points in the month of August, and while we've been seeing a few days of modest rallies, many investors can't help but wonder how long those will last.
But followers of my 'Instant Income' strategy shouldn't be worried. Rather than engaging in panic selling or trying to buy on a dip (potentially catching a 'falling knife'), they're taking the emotion out of investing by telling the market exactly what they want to pay for quality stocks they want to own. Even better, they get paid to wait until they buy.
Why is that better than buy-and-hold investing?
Investors seem to be lulled into complacency by the thought that, over the long run, stocks have delivered an annual average return of 7%-10% a year.
This has led many to conclude that buy-and-hold investors are rewarded over time. But returns over one-year periods are actually negative more often than most investors realize...
The stock market, as measured by the SPDR S&P 500 (NYSE: SPY), actually suffers annual losses regularly.
When discussing annual returns, most investors look at the time from Jan. 1 to Dec. 31 each year. Using those dates, there have been 12 one-year periods since 2001 -- and three of those years have seen negative returns. So, one in four years, on average, is a down year.
But unfortunately, bull markets do not always coincide with major milestones in the life of an investor.
But down years should be expected. Rather than panicking and selling into a decline, successful investors should have a strategy for buying at those times.
Some stocks will fall more than others, and many stocks will become attractive in a market decline. Knowing that there is a 75% likelihood that stocks will be higher one year from now, investors should look at declines as a chance to add bargains to their portfolio.
Of course, it is never easy to buy when prices are falling. Because it can be so difficult, investors may benefit from a strategy that forces them to buy at times like this.
Selling put options creates an obligation to buy a stock when the price of that stock reaches a level you define as a bargain. By selling puts on high-quality stocks, you could accumulate a portfolio that positions you for profits when the next bull market begins.
A put option gives the buyer the right to sell 100 shares of a stock at a certain price (the exercise or strike price) until the option expires. Sellers of puts have the obligation to buy shares of the underlying stock if the put buyer exercises her option. Put buyers will generally only exercise their option when the stock is trading below the exercise price, so sellers will only get to buy stocks this way when prices fall.
One advantage of the put selling strategy is that put sellers choose what exercise price they will sell options at. This allows them to decide what stocks offer value when prices are rising and helps them avoid having to make emotional decisions during a market pullback.
If an investor thinks a stock is a buy if it falls by 10%, they can sell a put option with an exercise price that is 10% or more below the current market price.
Another benefit of selling puts is that the trade delivers 'Instant Income.' Investors concerned that stocks are overvalued may be building up cash in their portfolio waiting for a pullback. Selling puts could allow them to generate income from that cash.
And the amount of Instant Income can be substantial. In fact, just this year, my recommendations would have made subscribers a minimum of $1,873. But readers are easily scaling up to make $6,000... $19,500... or even just under $150,000.
As the market declines, the prices of put options should rise as volatility increases. Higher volatility could lead to higher income from selling options, and long-term investors will have the opportunity to buy stocks they'd like to own at prices they believe are a bargain.
History tells us that markets fall about one-fourth of the time. Having a plan for those times could increase your profits in the bull markets. Consider selling put options as a strategy to ensure that you buy bargains in the next, and potentially imminent, market decline.
Stock market history tends to repeat. And right now the S&P 500 is trading near a critical level and what could be the peak of what market experts have historically called a 'Triple Top.' A crash could be coming and investors need to have a plan in place now. Click here to learn how to protect your assets from the collapse, and even earn income while others lose their shirts.
Good investing,
Amber Hestla
Income Trader
