Sell When There’s Blood in the Streets
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Baron Nathan Rothschild, 18th century British banker and nobleman, is widely credited with coining the go-to catchphrase of generations of investors: “Buy when there’s blood in the streets.”
(Like many popular expressions, people tend to leave out the second part, “even when the blood is your own.”)
But today, I’m ripping a page out of the Holy Investing Bible…
When blood runs through the streets, you can actually make a TON of money selling… not buying.
Understand, I’m not talking about selling stocks. Selling stocks in times of extreme market panic is usually not good practice.
No… I’m talking about selling something else.
Something that could simultaneously drive a significant cash injection in your portfolio… while also giving you the chance to buy stocks for even lower prices than they’re trading at.
Getting paid to buy stocks at a discount, when they’re already trading lower…
What could be better?
I’ll show you how this works today… and clue you in on a special trading algorithm that has the potential to double your portfolio every single year (just like today’s subject line, that’s no typo).
First though, you must understand why right now is the perfect time to use it…
The Third OptionMarkets have had a tiny bit of a freakout over the last couple months.
Stock prices slid about 7% from their highs, taking out a big chunk out of this year’s AI-driven recovery.
That’s got investors nervous. The most recent AAII Investor Sentiment Survey, published Ocrober 4, showed that 42% of respondents felt “Bearish” about the market and just 30% felt “Bullish”. That’s some of the highest and lowest numbers, respectively, since May.
If you’re one of these bearish investors, there are a couple things you can do.
You can sell stocks, to lock in what might be good prices before things get worse. Or you can buy put options to protect your portfolio from a further decline.
Put options go up in value when the underlying security goes down. You can also use them to sell stocks at pre-determined prices by a certain expiration date.
And there’s one other thing you can do, which I’d argue is much better.
But before we get there, some important background.
Most folks don’t know that put options prices guide the level of the CBOE Volatility Index (VIX) — aka the market’s “fear gauge.”
When investors see the VIX rise, they know to be fearful about stock prices over the next 30 days. This can make the value of put options skyrocket.
And right now, investors are loading up on put options. In fact, they’re buying more put options relative to call options (which rise along with stock prices) than at any other time this year.
Take a look at this chart of the CBOE Total Put/Call Ratio…
This chart tracks whether traders are buying more put options or call options. It’s a good way of gauging short-term investor sentiment.
When the blue line in this chart rises above 1 (the yellow dashed line), traders are buying more puts than calls. They’re fearful, and that’s contributing to higher volatility. As I write, it’s at about 1.2, right around the year’s highs.
Okay, infodump done. Now we put it all together.
So, if investors are paying a huge premium for put options right now, driving volatility higher…
And I say we should be “selling when there’s blood in the streets”…
What exactly should you do?
If you guessed “sell put options to these worried investors, taking advantage of their fear,” congrats on your gold star.
When you sell put options, you get paid in cash immediately. As long as those puts don’t rise in value too much before the expiration date, you keep the cash.
But let’s say they do… what then?
Well, whoever’s on the other side of the trade will, most likely, exercise the put options. And when they do, you’ll be assigned the shares of the underlying stock at — get this — a discount to the stock’s market value.
Jokes aside, selling put options is easier said than done. As I wrote on Tuesday, it’s a fairly advanced strategy that requires some startup capital and a bit of knowhow about risk management. It’s not something you want to dive into without a guiding hand.
Thankfully, we at TradeSmith have you covered…