You probably hear that selling put options for income is a bullish or even a neutral strategy best employed when the market is in an upward trend.
But you can also enjoy success in selling put options in a declining or sharp market sell-off for three very simple reasons.
Late Market Participation
First, a lot of institutional investors (big money) didn’t fully participate entirely in the market run-up. They are almost forced to be “buyers” in this current market sell-off hoping to get into stocks at lower prices and push these positions higher to boost their portfolio returns.
Second, at the same time hedge funds and other institutional investors are using options to hedge positions by “buying puts”, pushing the price up of those put options for the “sellers” of puts.
That means stepping into this seemly contrarian position during a falling market to sell “options” puts to eager institutional buyers at higher prices can make a lot of sense (and generate a lot of cash) for income investors.
The third reason is volatility — when markets fall, volatility rises (it is measured by something called the VIX – the CBOE Volatility Index or the “fear index” as some call it) – and this creates two ways to make tremendous chunks of cash selling put options.
You can sell put options on great stocks that are resisting the downturn, they may not be moving all that much – stocks like First Solar (FSLR) and American Airlines (AAL) – but the premiums or prices for their put options tend to spike when volatility spikes.
Also, you can sell puts against the VIX itself through iPath S&P 500 VIX Futures (VXX) ETN.
Selling Puts On Inverse ETFs
During Bloody Monday there were no such thing as ETFs or inverse ETFs,
During the Great Crash, there were a handful of inverse ETFs and most were not very liquid and were too hard to trade until the crash was well underway.
And now the world can be prepared – the trading world — the smart trading world can be prepared for a selloff, a correction, a bear due to the proliferation of inverse ETFs. Want to see your cash pile up? Sell put options on inverse ETFs – they go up when an index or sector index or commodity goes down.
And when a selloff is due to a short term geopolitical event that prompts an over reaction on Wall Street, such as trouble with the Chinese economy, the Greek and Eurozone crisis or even the threat of politicians in the Congress trying to shut down the US Government, this presents opportunity for income investors.
You can also sell puts options against commodity and currency ETFs, even some bond ETFs, that will quickly move up during nervous market swings.
About The Author
Michael Shulman is a 30 Year Veteran of the financial markets – as a trader, a financial analyst, a financial writer and most recently as an educator.
Mr. Shulman made his first option trade in 1985 – COMPAQ Computer calls – a position that expired worthless. His second trade broke even; the third brought him a year’s salary, a near twenty to one return on his investment. He has never looked back. He entered the financial publishing business formally in 2001 as director of research for ChangeWave Research’s institutional research business and as the writer and editor of Hedge Fund Investing.
He has published two books – Sell Short and Made in America – both of which can be found on Amazon.com, and he is a frequent contributor to reputable financial sites like Seeking Alpha, MSN, MainStreetInvestor, and Traders Reserve.
Most importantly, since 2010, he has dedicated himself to teaching income investors how to get more income from their portfolios using simple yet safe options selling strategies which produce income every week. This approach was developed from the ground up in Mr. Shulman’s own accounts, his goal to develop a strategy that cannot be replicated by institutional investors of any size and therefore independent of fads and trends that change too often to provide a consistent approach for individual traders.
His trade recommendations in his Options Income Blueprint, Perpetual Income Portfolio Club and Income Masters services maintain a 98% success ratio, meaning his trades produce the expected income 98% of the time. No one’s perfect.