The 10% first quarter advance in the S&P 500 marked the 13th time since 1928 that the index gained 10% or more during first three months of the year – and the average gain for the rest of the year…[was only] 1.4%…[with a] median gain…[of just] 5.8%! [That being the case I recommend that you] use a portion of your portfolio [in the form of credit spreads] to protect and drive income over the next nine months. It’s an extremely simple strategy to learn and arguably the most powerful strategy in the professional options traders’ tool belt. [Let me explain.] Words: 940
So writes Andy Crowder (www.wyattresearch.com) in edited excerpts from his original article* entitled The Best Way to Protect Your Profits.
This post is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds), www.munKNEE.com (Your Key to Making Money!) and the Intelligence Report newsletter (It’s free – sign up here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Crowder goes on to say in further edited excerpts:
I came across a few interesting statistics recently.
How did the market fare after exceeding its average annual returns in just one quarter? Bespoke Investment Group published the following chart that provides some insight into what we should expect going forward.
As you can see the average gain for the rest of the year is limited at 1.4%. The median gain is not much higher at 5.8%. In fact, only once did the return during the next three quarters exceed that achieved in the first three months. Even if we take out the huge down year in 1930, the average three-quarter gain is around 5% so there’s little doubt that gains after the first quarter are muted at best.
Knowing that we could be entering into a potential lull…[I recommend that you] use a portion of your portfolio [in the form of credit spreads] to protect and drive income over the next nine months….
Credit spreads, more specifically bear call spreads, allow you to create your own income – a monthly paycheck, if you will – while protecting against potential market declines . How? When you sell a credit spread, you collect cash (credit) up front while simultaneously transferring risk to the buyer. Best of all, you can create your own income targets when selling credit spreads and the sum of all of your so-called targets – when set properly – gives you a targeted monthly income.
A bear call spread is a credit spread composed of a short (sold) call at a lower strike price and a long call at a higher strike price. The nature of call pricing tells us that the higher-strike purchased call will cost less than the money collected from the lower-strike sold call. That’s why this spread involves a cash inflow, or credit, to you.
The ideal outcome is for the underlying stock price to stay below the strike price of the sold call through option expiration. In this case, the spread expires worthless, allowing you to keep the premium collected upfront.
The basic premise of the strategy is easy. You choose the probability of the trade. Increasing the probability of success will decrease your potential profits, and vice versa.
Let me explain using a recent investment in Apple…I’m sure most of you remember when the stock surged above $700 back in mid-September 2012. Amid the excitement, analysts were calling for the shares to race to $1,000 by yearend. I, on the other hand, noticed the stock had pushed into a “very overbought” state. As a result, I thought the shares were well overdue for a pullback, at least temporarily (the same exact situation is happening in the S&P 500 right now) so, with Apple trading at $690, I chose a short strike for my bear call spread that met my risk/return objectives.
Because I prefer a win rate – or probability of success – in the 70%-95% range, I invested in the Oct12 750/755 bear call spread. In other words, I sold the 750 call and bought the 755 call, with both options set to expire on the third Friday of October.
I also like to give myself a decent margin for error because it increases my probability of success. For this example, the 750 strike allowed for a $60, or 8.7%, cushion to the upside. In other words, Apple could have gained nearly 9% before October expiration and the spread still would have expired worthless, allowing me to keep all the credit.
The Oct12 AAPL 750/755 bear call spread met my expectations, bringing in a credit of $0.62, or $62 per contract [and providing me with a maximum]…gain on the trade of 14.2% (this is based on the margin required to open this spread) with an 86.6% probability of success. Apple would have to move above $750.62 for the trade to start losing value. As long as the stock price stays below $750.62 through October option expiration, the trade would be successful.
Nine days later I closed the trade for almost the max gain. A 10%-12% profit in less than two weeks on a fairly conservative trade … not bad.
Credit spreads are my favorite way to trade options, particularly selling verticals. It’s an extremely simple strategy to learn and arguably the most powerful strategy in the professional options traders’ tool belt – and I can use credit spreads as often as I like. (As always, if you have questions, feel free to drop me a line at email@example.com.)
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.wyattresearch.com/article/the-best-way-to-protect-your-profits/29648 (If you would like to learn more about options and how you can generate steady income month in and month out… then consider taking a free, 30-day trial to our real money alert service, Options Advantage. You’ll discover exactly how our resident options expert, Andy Crowder, is using high probability trades to steadily grow a $25,000 real money portfolio. Every trade is executed for real… and readers are alerted instantly, so they can invest right alongside Andy. Click here to try Options Advantage, free.)
It is hard to know what to buy or sell let alone just when to prudently do so. Thank goodness there are indicators available that provide information of stock and index movement of a more immediate nature to help you make such important decisions. This article describes the 6 most popular Momentum Indicators. If ever there was a “cut and save” investment advisory this is it!
There are many indicators available that provide information on stock and index movement to help you time the market and make money. Market strength and volatility are two such categories of indicators and a description of six of them are described in this “cut and save” article. Read on! Words: 974
The trend is your friend and this article reviews the 7 most popular trend indicators to help you make an extensive and in-depth assessment of whether you should be buying or selling.
While the average amateur investor may be excellent in their own career field, it doesn’t mean they know what to invest in, or how to pick stocks. In fact being very good at your field can give you the false sense that whatever stocks you pick or your broker picks for you must be good, because after all, you picked them and you picked your broker — and you’re smart so, no doubt, those stock prices will go up. Unfortunately, the smart and talented stock-picking neophyte is not investing at all but speculating. Words: 924
[No one would argue that] diversification is not a sound investment practice but exactly how much risk reduction, in actual numbers, is obtained through application of this philosophy? This analysis is an attempt to quantitatively determine its relevance – [and you will be surprised by the answer. Read on!] Words: 1317
Individuals are long-term investors only as long as the markets are rising. Despite endless warnings, repeated suggestions and outright recommendations – getting investors to sell, take profits and manage…[their] portfolio risks is nearly a lost cause as long as the markets are rising. Unfortunately, by the time the fear, desperation or panic stages are reached it is far too late to act and I will only be able to say that I warned you [- unless you take the time to read, and study the contents of this article]. Words: 1945; Charts: 10; Tables: 1
Protect your money by steering clear of these 10 most dangerous investing mistakes. Words: 716
80% of my investable income is in cash, precious metals and a small number of stocks. That might seem crazy, but the Pareto Principle, Zipf’s Law and the bell curve have convinced me that it’s a waste of time and money to get any more diversified. [Let me explain why that is the case.] Words: 396
The “Dogs of the Dow” is a simple and effective strategy that has outperformed the Dow over the last 50 years and generates almost 4% in yield. Here’s how it works. Words: 486
Regardless of the size of your financial pyramid, without a core-holding foundation, you are building it on sand. Core holdings are for protection, not for profit. They function as insurance against a catastrophe. [Let me explain.] Words: 754
By definition, rare events should seldom occur [and] applying that understanding to financial markets assumes that all market events follow a normal distribution or, in layman’s terms, a bell-shaped curve. More specifically, the statistics say that 99.7% of all daily movements should fall within three standard deviations of the mean, no more. Well, guess what? New research suggests that they clearly don’t follow such a pattern – that “unlikely” doesn’t mean “never”. [Let me expand on that.] Words: 1079; Charts: 1
Most investors don’t know anything more about diversification than you “shouldn’t put all your eggs in one basket” [but] spending some time trying to understand the ways you might be shooting yourself in the foot could seriously enhance your portfolio returns and stop catastrophic risk. [There are some advantages to diversification if you REALLY know what you are doing but the shortcomings can go a long way towards killing your portfolio returns. In this article we identify what they are and how best to avoid them.] Words: 1055
NOT putting all your eggs in one basket makes intuitive sense to many investors. Indeed, evidence indicates that putting more eggs in your basket may actually crack your portfolio, not protect it. Words: 515
The traditional view of portfolio management is that three asset classes, stocks, bonds and cash, are sufficient to achieve diversification. This view is, quite simply, wrong because over the past 10 years gold, silver and platinum have singularly outperformed virtually all major widely accepted investment indexes. Precious metals should be considered an independent asset class and an allocation to precious metals, as the most uncorrelated asset group, is essential for proper portfolio diversification. [Let me explain.] Words: 2137
Since there is such a wide range of emotions, it might be helpful for you to do a ‘gut-check’ before you actually buy or sell any type of security. Knowing how you “feel” about investing might turn out to be just as important as knowing what you “know.” Words: 737
One of the hardest things for individual investors to do is to know when to sell a stock. Many times, you might sell simply because a stock has gone up and you’ve made some money. More often than not, though, this is not a great reason to sell [because, as mentioned in the title of this article,] you will never – ever – have a 10-bagger if you sell a stock after a 2-bagger. That being said, what things should one consider before selling? Words: 912
Rules may be meant to be broken, but with investing ignoring the rules can break you – especially now. Investment rules are tailor-made for tough times, allowing you to stick to a plan just when you need it most. Indeed, a rulebook is important in any market climate, but it tends to get tossed when stocks are soaring. That’s why sage investors warn people not to confuse a bull market with brains. Here are 10 rules to survive this stormy stock market. Words: 769
I’m not going to candy coat it for you: making serious money in the stock market is a ton of hard work. It takes patience, savvy, and a certain level of market smarts – and the cold, hard truth is that if you don’t have them, the big boys will drain your portfolio dry. Unfortunately, those are the three areas that most retail investors need to work on the most. Otherwise, they will simply end up in a cat-and-mouse game where they are the mice. Don’t fool yourself for one second into believing that your “due diligence” can be done by watching a show or two on CNBC. It just doesn’t work that way but if there is one voice from the markets that should grab your attention every time you hear it, it belongs to Dennis Gartman, founder and author of The Gartman Letter. He’s sort of a guru’s guru. [Here is] a glimpse into how he views and trades the markets. Words: 106
The conventional stock market investing advice is rooted in myth – rooted in a false understanding of what the historical stock-return data says about investing for the long-term….Set forth below are five reasons why I believe that the conventional stock market investing advice must soon change. Words: 2067
Investment “rules” that were relevant for a century are obsolete. They were based on a world where economies grew, people’s standard of living increased and outcomes tomorrow better than today. Arguably each of these conditions will not hold in the future but if they don’t, neither do the rules of thumb that guided investing last century. These guiding principles developed and worked in a world that that no longer exists but applying them in the future will result in devastating financial outcomes. [Let me explain.] Words: 1261
Bill Ackman, founder of Pershing Square Capital Management, believes the following books are essential financial reading. Enjoy the summer! Words: 235
When the stock market reaches extreme levels of distress, the average investor – particularly those who have done their own research and made their own investment decisions – panic at seeing their savings diminish to such an extent. They often start questioning whether they should be making their own decisions and often their reaction is to salvage what is left and sell, sell, and sell some more. [Regretfully, that is not what one should do. Let me explain why that is the case and what you should be doing – NOW.] Words: 380
There’s a bewildering amount of advice on how to invest…so it’s worthwhile, especially in today’s volatile markets, to take a look at what has actually worked, as opposed to what people claim works. We’ve collected some of the finest wisdom on markets from the most respected and successful investors, past and present. Words: 865
Risk inherent to the entire market or market segment is referred to as systematic risk and modern portfolio theory says that a blend of investments has the potential to increase overall return for a given level of risk, and/or decrease risk for a given return that the investor is trying to achieve. The expected risk/return relationship is known as the efficient frontier. [If you have a portfolio of investments then you need to fully understand what all this really means and how you can apply it to your portfolio makeup to enhance returns under any circumstances. Let me do just that.] Words: 1325
There is a common notion that stocks, at least if held for a long-time, outperform other assets [and, as such,] should be the cornerstone of any long-term portfolio. [While that is indeed true,] it is best to focus first on how much you are able and willing to lose (i.e. what risk you are able and willing to bear) when determining the optimal allocation for your portfolio. [Only] then [should you] think about what potential investment returns you might be able to capture. [Let me explain.] Words: 1503
What hope can there be for motivated stock pickers – no matter how much they sweat and toil – to outperform the low-cost index funds that simply mechanically track the market? Well – in spite of the absurd rise of the Nobel-acclaimed, and highly promoted, Efficient Market Hypothesis that claims that individual investors can’t beat the market – it turns out there is plenty! Just ask Warren Buffett, for one. [Let me explain.] Words: 1574
The number, market cap and currencies of the constituents of the HUI, XAU, GDX, XGD and CDNX indices differ considerably from each other and, as such, each index presents a different picture of what is really happening in the precious metals marketplace. This article analyzes the make-up of each index to reveal the biases of each to arrive at the answer to the question in the title. Words: 1026
History has shown that investors who stick to disciplined, fundamental-focused strategies give themselves a good chance of beating the market over the long haul and James O’Shaughnessy has compiled data that stretches back to before the Great Depression, back-tested numerous strategies, and has come to some very intriguing conclusions. [Let me share some of them with you.] Words: 1325
People choose certain stocks for many different reasons: business location; sector strength; product innovation, but some investors choose what to buy based on company size, or market capitalization [believing that size does matter. Yes,] understanding the difference between small-cap, medium-cap and large-cap companies is the first step to making the right choice. [Let me explain.] Words: 600