Wednesday, June 23rd, 2021

Profit from a Bumpy Stock Market

October 26, 2020 by Jim Walker  
Filed under Options Trading Tips

 

The stock market is in for another up and down stretch as the S&P 500 drops 600 points in early Monday trading. While investors worry when the market becomes volatile, options traders can profit from a bumpy stock market. CNN Business reports that the market is concerned about the increasing spread of Covid-19, the lack of action on stimulus measures, and fears about earnings.

US stocks sank at the opening bell in New York, and the selloff gathered pace as the session went on.

In the late morning, the Dow (INDU) was down nearly 600 points, or 2.1.%. The S&P 500 (SPX) — the broadest measure of the US stock market — fell 1.7%.

The tech-heavy Nasdaq Composite (COMP), which had briefly bounced back from its lows, dropped 1.2%.

With the election just a week away and big tech stocks set to report earnings this week, investors are looking at the big picture and getting scared. Options traders can take advantage of this situation.

Trading Options in a Volatile Market

We wrote years ago about how to profit from a volatile stock market. As we noted back then, the VIX “fear index” is a good guide to how concerned the market is. And, a long straddle is a good way to approach a market that could just as easily go down as up.

A long straddle consists of buying a call and a put for the same stock that have the same expiration date. With a long straddle options strategy a trader can do no worse than lose the money it took to pay the premiums for the call and put. This is what happens if the stock does not budge in price.With current market uncertainty, it seems likely that the market is set to move, and not in a good direction for investors. For options traders it makes little difference!

As CNN notes, the decreasing chances of a stimulus package passing before the next congress and administration is dampening enthusiasm for the market among new investors. And, old investors like Buffet are largely sitting on piles of cash waiting for bargains when stocks tank again.

The nice part about options trading is that you do not need Buffett’s piles of cash to profit from successful options trades. As Covid-19 spikes in North America and Europe, the Senate sits on its hands, and the prospect of lower earnings threatens the stock market’s tech leaders, options traders can position themselves to profit no matter how the market reacts.

Market Watch reports on the comments of Robert Schiller, the Nobel Prize-winning economist.

‘No one knows the future, but given the general lack of investor confidence amid a pandemic and political polarization, there is a chance that a negative, self-fulfilling prophecy will flourish. This highlights the importance of being well diversified in asset classes – including Treasury securities, which are safe – and not overexposed to U.S. equities now.’

This is just more evidence that investors are fearful of a market crash and that fundamentals are worse than any time except in the run-up to the 1929 crash that began the Great Depression. It is time for long term investors to protect their positions with options and for options traders to scout out opportunities.

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