“In and Out” Beats “Buy and Hold”

Last week, I heard a stock market pundit say that nobody he knows is making money in this market. “Everything except energy is down this year,” he correctly pointed out, “and everybody owns too much tech to offset those losses with gains from oil companies.”

I chuckled when I heard that. Over the previous two months, I closed out short-term trading positions with gains of 59.6%, 307.9%, 781.3%, 505.1%, and 169.4%. Their average holding period was less than a month.

To be fair, all of those trades involved put options that increase in value when the price of the underlying security goes down. I believed that retail stocks would take a shellacking when they released their first-quarter results in May so I recommended buying put options on several of them.

My Mayhem Trader subscribers were handsomely rewarded when my hunch proved correct. Cumulatively, we booked gains in excess of 1,800% in less than a month.

I’ll be the first to admit that I may never again see so many huge gains like that in such a short period of time. The combination of rapidly rising inflation, escalating war in Ukraine, global supply chain bottlenecks, and interest rate hikes by the Fed were just too much for the stock market to absorb.

But now that all of that bad news has been priced into stocks, I believe the market will soon bottom out. Investor confidence couldn’t be much lower, so it will be easy for most businesses to live up to Wall Street’s muted expectations.

Sound Methodology

For that reason, I am taking a different tact now. Instead of buying put options on stocks that I think will go down, I am buying call options on stocks that I believe will go up.

After retail stocks got slammed in May, I recommended buying a call option on Dollar Tree (NYSE: DLTR) to readers of my PF Pro trading service. One week later, that same option could be closed out for an 88% gain after Dollar Tree released respectable Q1 results.

It took guts for me to make that call. But my proprietary valuation model told me that Dollar Tree had become grossly oversold.

Here’s how it happened. Target (NYSE: TGT) fell 25% on May 18 after releasing shockingly bad Q1 results. That same day, DLTR fell nearly 15% even though it was not due to release its Q1 results until the following week.

I didn’t waste any time. That afternoon, I recommended buying a call option on DLTR at the $125 strike price that expires in January 2024 at a limit price of $30.

On May 26, DLTR jumped more than 20% after releasing its Q1 results. As a result, our call option was trading above $55 by that afternoon.

Admittedly, a gain of that magnitude in such a short period of time is not the norm. Especially when the overall direction of the stock market is down and we are betting on a stock to go up.

But if your methodology is sound and you have the courage of your convictions, trades like that can happen. And with so much volatility in the stock market these days, you don’t have to wait long to be rewarded.

Volatility = Opportunity

Here is what I would say to that stock market pundit. Don’t tell me you can’t money in this market. You can, but you cannot do it using a traditional buy & hold approach to investing.

Eventually, the considerable macroeconomic challenges roiling the stock market will subside. And when that happens, index investing will start working again.

But until then, capturing short-term share price movements using put and call options may be one of the few ways to rack up big gains from the stock market. I call it “in and out” investing instead of “buy and hold.”

Forget about cryptocurrencies, NFTs, IPOs, SPACs, and just about everything else that was riding high a year ago. For now, all of that is dead money.

The extreme volatility caused by Wall Street’s herd mentality is your opportunity for quick trading profits. And if you don’t know how to do that on your own, I suggest you consider joining my PF Pro trading service where I will do that for you.

I’m the chief investment strategist of our flagship publication, Personal Finance. Since its inception in 1974, PF has helped readers successfully navigate some of the worst financial disasters of modern times, including the dotcom bust, the Great Recession, and the COVID-induced crash.

We’ve launched a premium adjunct service, called PF Pro, which takes my advice to the next level, for even greater gains. Click here for details.