Investors are getting nervous about the events going on in Washington as the government shutdown drags on.
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, it’s that investors hate uncertainty.
But there is actually a way to earn thousands of dollars in cash off all this uncertainty. But first, some background on how this one simple investing strategy works…
One of the best ways to judge investor sentiment in the marketplace 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 more than 50% before falling back by 20% as the political back-and-forth continued to weigh on Wall Street.
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 around 16.5, 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 the House of Representatives on Thursday is received by the Senate, some experts predict the VIX could spike above 30.
And the deal only suspends the debt limit until Nov. 22, so expect more volatile market days 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 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.