There’s No Such Thing as a Flat Stock Market
I love a choppy stock market. While index investors are nervously riding out the highs and lows, I’m trading them.
Choppy markets do two things that work in my favor: they cause most investors to behave irrationally, and they drive up options premiums. When both of those factors collide, the result can be astounding.
For example, last week I closed out a call option trade on Expedia Group (NSDQ: EXPE) that netted my PF Pro readers a gain of more than 200% in less than a month. Over the same span, the stock was up 20%.
In other words, my call option trade returned ten times the appreciation of the underlying security. By the way, that trade was not a once-in-a-lifetime situation.
In fact, it wasn’t even a once-a-month situation. Three weeks earlier, a put option I recommended to my Mayhem Trader readers quadrupled in price in just two weeks!
In that case, my stock screener told me that fiberglass manufacturer Owens Corning (NYSE: OC) had become overvalued. Its share price was rising despite high mortgage rates and soaring office vacancies that I believed would decrease demand for insulation and shingles made by the company.
As I expected, when Owens Corning released its third quarter results in late October it tamped down expectations for sales during the fourth quarter. That’s all Wall Street needed to hear to abandon the stock.
That day, OC fell more than 10%. At the same time, our put option skyrocketed in value (a put option increases in value when the price of the underlying security goes down).
The reason my system works so well is that it identifies mispriced securities. For one reason or another, some stocks become grossly overvalued or undervalued before reverting to their mean. When that happens, buying a call option or a put option can be quite lucrative.
Consider this; over the past five months, the S&P 500 Index has gained no ground. It hasn’t lost any ground, either. If you are an index investor, you have nothing to show for it.
If you are an options investor, however, you could have made a lot of money. Over the past five months, I have booked the following gains in my Mayhem Trader portfolio:
- 66% on a call option for The Lovesac Company (NSDQ: LOVE)
- 106% on a call option for Logitech International (NSDQ: LOGI)
- 100% on a call option for Discover Financial Services (NYSE: DFS)
- 367% on a put option for Driven Brands (NSDQ: DRVN)
- 108% on a call option for Dick’s Sporting Goods (NYSE: DKS)
To be sure, we have also had some losing trades along the way. But when you are booking triple-digit gains on a regular basis, you can afford a few losers.
What you cannot afford is to sit still and do nothing. We’d all like to believe that the stock market is going to rebound strongly in 2024.
They may happen, but it may not. If we’ve learned nothing else over the past few years, it’s that you never know where the next curveball will come from.
Three years ago, it was the coronavirus pandemic. Two years ago, it was Russia’s invasion of Ukraine. Last year, it was an unprecedented increase in interest rates by the Fed.
Know When to Act
I understand why many investors shy away from options. They seem complicated. They are volatile. They require close attention.
In truth, trading options can be quite simple. Some strategies are complex, but others (such as the ones I mention above) are no more complicated than buying and selling a stock.
Options are volatile, which is why you can earn the types of returns cited above. Volatility is only a bad thing when it goes against you.
You should watch your options positions closely. But you can also set up automated price alerts with your broker so you’ll know when it’s time to act.
In truth, there is no such thing as a flat market. Every day, some stocks are rising while others are falling. While the overall impact may be a push, there is an opportunity for profit on individual securities.
If you’re tired of watching the stock market struggle to get back to where it was two years ago, consider options trading. It’s the only way I know to book triple-digit winners while index investors are making nothing.
Like I said at the start, I love a choppy stock market!
PS: Jim Pearce has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn the details about his next market-thumping moves? Click here now.