How Scared Are You?

| October 15, 2014 | 0 Comments

October is Halloween month, so it seems like everywhere you go you see spooky decorations and references to all that is scary. It’s fitting then, investors appear to be really spooked by the markets these days.  

Volatility has crept back into the stock market in full force.  This week, the major indices have been hit with large percentage moves on a daily basis.  Mostly, those big moves have been down. 

In fact, the S&P 500 is down over 3% since this time last month, and has gone from a year-to-date gain of nearly 10% to under 6%.  And, the benchmark index is quickly approaching the important 200-day moving average. 

Is it time to run for the hills? 

Not quite.  At least for the time being, I don’t believe we’re experiencing some kind of market correction.  My guess… this is nothing more than some spooky short-term volatility. 

You see, there’s a big difference between now and the last few major selloffs we’ve seen.  In a nutshell, I’m simply not seeing the panic you’d expect if a major correction is underway. 

Here’s the thing… 

The US economy is still doing quite well.  Relative to the rest of the world, American’s economy is more like a shining star.  And, there’s no reason to believe that’s going to change anytime soon. 

As long as the economy holds steady, US-based companies should continue to perform reasonably well.  For the most part, large US firms are having good to great years.  That’s shown up in equity pricing so far. 

What’s more, there’s been no rush to buy gold or other precious metals this time around.  The price of gold has barely ticked up this week (relative to what it’s done in the past).  As a matter of fact, if there’s any “safe-haven” buying going on, it’s all going into US bonds.  That’s another sign investors aren’t overly worried about the US economy. 

So if you aren’t scared, can you profit from the volatility? 

Of course you can.  We’ve talked about using index ETFs to hedge, but how about for speculative purposes?  Instead of buying puts on an index ETF, what about selling puts or put spreads? 

By selling index puts, you can profit off investor fear, while setting a level you don’t mind getting long the market.  Or, you can sell puts at a level you believe there’s no way the market will reach.  Either way, you’re using options to capture added volatility (and converting it to profits). 

It may be Halloween in a couple weeks, but right now, don’t be spooked by stocks. 

Yours in Profit, 

Gordon Lewis

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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