Last week, I alerted readers to the buzz surrounding what might be a very dangerous chart pattern forming — the “triple top.”
As a quick review, in 2000 and 2007, the S&P 500 peaked near current levels. The market then plummeted into long and agonizing bear markets.
And what happened this week? The S&P 500 is down more than 2% in just the past three days, while the Dow has lost more than 300 points.
So, has the dreaded triple top arrived?
I don’t know. But I will tell you this, even if it has, I’m not worried — and neither are followers of my Instant Income strategy. 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.
The stock market, as measured by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), actually suffers losses quite 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.
This is supported by slicing that time frame into overlapping one-year periods. For example, we can look at one year from Jan. 1, 2001, and then look at the one-year period that began on Jan. 2, 2001, the one-year period from Jan. 3, 2001, and so on through the present. This gives us 2,923 individual one-year periods to study and losses occurred in 27% of those periods.
Down years should be expected by investors, but if losses occurred 27% of the time, that means 73% of the time the market was higher one year later. So rather than panicking and selling into a decline, successful investors should have a strategy for buying at those times.
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 that.
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 of the option) until the option expires. Sellers of puts have the obligation to buy shares of the underlying stock if the put buyer exercises their 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 prices 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 worried about a market decline may be building up cash in their portfolio waiting for a pullback. Selling puts could allow them to generate income from that cash.
The amount of income can be substantial. In fact, just this year, my Income Traderrecommendations 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.
And the opportunities to generate income may become even more substantial. You see, 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. And if we have hit the peak of a triple top, we could be in for a serious market decline. That is precisely why you should have a plan in place now. Click here to learn how to protect your assets from the collapse, and even profit while others lose their shirts.
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