Investors are getting nervous about the events going on in Washington...
As the United States shutdown continues to drag on, Congress is no closer to reaching a resolution than they were when the debate began.
While we think that the shutdown is nothing more than "political theater" and should have no long-term effect on stock prices, the U.S. government's most recent antics have nonetheless introduced an element of uncertainty into today's market.
And if there's one thing we've learned after years of following the stock market -- investors hate uncertainty.
But there is actually a way to earn thousands in cash using one simple investing strategy off all this uncertainty. But first, some background on how this strategy works...
One of the best ways to judge investor sentiment in the market place is The CBOE Volatility index. The index, normally referred to as the "fear index" or simply the VIX, is a gauge that tracks volatility in the stock market. When the VIX goes up, investors are getting nervous. In the past two weeks, the VIX surged 48% before falling back by 20% as the political back-and-forth continued to weigh on Wall Street. After no deal was reached over the weekend the VIX shot back up 12.3% Monday morning...
Given all the excitement lately, the spike comes as no surprise. But while the VIX's most recent move is dramatic, at its current level of about 17.6, it's still nowhere near the high of 48 it touched back in 2011 -- the last time we heard about the debt ceiling.
That could change if Congress doesn't come to an agreement soon. The longer we go without a budget deal, the more volatility we can expect to see in the stock market. Additionally, depending on how the deal floated by U.S. House on Thursday is received by the Senate, some experts predict the VIX could spike past 30.
And, the deal only suspends the debt limit until Nov. 22, so expect another volatile market as that deadline approaches.
Generally speaking, volatility spikes during periods with lots of selling -- which is bad news for anyone who is bullish on stocks.
But in the world of investing, what's bad news for some is often good news for others. Even during the bear market of 2008-2009, when the S&P 500 Index fell more than 40% in 18 months, short sellers -- investors who bet that stock prices will go down -- made a killing.
We're seeing a similar opportunity develop in today's market. And just as investors with enough foresight to short the market in 2008 got rich in the process, this opportunity could bring similar results.
Before I get into that though, I want to make something perfectly clear. It's highly unlikely that Congress will let the U.S. default on its debt, so chances are sooner or later a long-term deal will manifest. If you're a buy-and-hold investor, your best bet is to view any market weakness over the next few weeks as a buying opportunity, not a reason to panic.
We're also not recommending you short the S&P at these levels. While Congress may continue to weigh on stock prices in the short term (and the opportunity I'm going to tell you about benefits from that), with the Federal Reserve's recent decision to keep buying assets and the U.S. economy steadily showing signs of improvement, betting against stocks right now is too risky.
Instead, there are better ways to take advantage of the volatility being caused by the political gridlock.
Selling options is one of the best ways to make a lot of money in a volatile market. It's also something that can generate plenty of extra cash during stable periods... but the big money is made during times like these.
You see, the value of options depends on many variables, one of the most important being volatility. When volatility goes up, so does the price of options. When it goes down, options become cheaper.
With the VIX currently near its two-month high and the uncertainty surrounding events in Washington likely to push it higher, today's environment is a great time to be an options trader.
But before you jump into the first options trade you find, be warned that buying options can be a risky proposition. According to our research, close to 80% of all options bought expire worthless. That means nearly 4 out of 5 people who buy options contracts lose money in the process. Naturally, these kinds of odds scare most investors out of even considering options.
Yet if you read the preceding paragraphs carefully, you'll notice I said we recommend "selling" options, not buying them. A little reverse math tells us that if 4 out of 5 options buyers are losers, then by transitive property over 80% of all options sellers must be winners.
That's one reason Amber Hestla -- Income and Options Strategist for Income Trader and our resident options expert -- focuses her newsletter on selling "put" options. By selling put options, Amber is able to capitalize on volatility in the market while also mitigating much of the risk of being in an options trade.
So far, Amber's strategy has worked well. Of the 25 trades she's closed this year, all of them have been winners -- giving her (and her subscribers) a perfect 100% win rate.
Yet selling put options isn't without risk. As an options seller, you could be obligated to buy shares of a stock if it falls below the strike price. For example, if a stock falls 13% in a single day on news of a federal investigation, investors that sold puts might be required to buy the stock for more than its current price.
But Amber's strategy has an answer to that potential problem. As she explained in a recent essay on selling options:
"I always make sure that I am selling options on stocks I wouldn't mind having in my own portfolio.
"When this happens, I get the opportunity to buy shares of a company I want to own anyway -- just at a lower price than the market was offering when I sold the put. I'll even know the price upfront before I enter the trade."
In other words, selling put options on stocks that you otherwise wouldn't mind owning is a way to buy shares of a stock that you already like... and at a discounted value.
But as I said earlier, this is a rare occurrence. In Amber's experience, more than 80% of options expire worthless, meaning the seller doesn't have to buy the shares and the "Instant Income" they receive when selling puts is pure profit.
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