Today’s stock market winners will be those of you who sell naked puts. It’s the only way to say “I must participate right this second, but not at these high prices.”
Waiting for a pullback in a strong but overbought stock market can and will be painfully frustrating.
First the technical jargon, and then the strategy to take advantage...
Short-term breadth indicators say we’re overbought, but with demand in control.
Sentiment readings show that investors are overly bullish at this time.
When we see this type of market, we typically watch out for potential “market sinkholes” that want to swallow up the short-term traders.
However, with such a broad based rally, coupled with the fact that the U.S. stock market has increased its strength relative to the other 5 major asset classes, i feel the foundation for higher prices is quite solid.
Also, with “risk-on” assets, like commodities and international stocks (especially emerging markets and latin America) showing record-breaking strength, it’s tough to wait for any significant dip before buying.
The big money -- the kind of money that’s able to ferociously move global market averages -- is telling you that after 14 months of sideways base building in the stock market, it’s time to let the bulls run.
So waiting for a dip... trying to get in at better prices... could prove to be expensive.
I imagine another frustrating thing about this type of market is that the writers, analysts, pundits, "gurus" (lol) are afraid to state a clear outlook. They see the strength but are afraid to say "buy".
But most of them are restricted to one or two ways of making money.
Stocks and ETFs either go up or down. But options strategies allow you to profit both ways.
Most people feel more comfortable selling naked puts as a way of "backing into" (buying) a stock or ETF at a lower price than it's currently trading. In other words, they feel comfortable using this method when a stock or ETF has declined to an attractive price, but seems like it might go even lower.
Stock/ETF goes up - In either case, you won't end up owning stock/ETF...
Stock goes down - In either case, you end up owning stock/ETF...
Either way - You keep the income generated by selling the option (covered call or naked put).
If I don't own the stock and I sell the put options, I'm promising to BUY the stock at 81 if it's BELOW 81 on expiration day. Again, I'm collecting $1.80. Same thing happens, as above, for all intents and purposes.
If the stock declines, I'm still left owning the stock. If it goes up, again, I won't own the stock.