By Geoff Garbacz, Senior Analyst, Market Rebellion
September can be a tough month for stocks — but a good one for Options plays, if investors can time the swings correctly.
In the last 10 years, the S&P 500 has fallen in 6 of those 10 years. 5 of the 6 drops were by more than -2% with 4 falling more than -3%. So how do we prepare for such a drop because odds are it is coming.
There are a few simple ways.
First, the most basic: Sell some of the stocks you own, raise cash, and then after the stock market drops and begins to recover buy some stocks that sold off and now are beginning to rebound.
Another way is to buy an ETF that gains in value as other stocks begin to fall. Our favorite one when that happens is the AdvisorShare Dorsey Wright Short ETF (DWSH). When the S&P 500 fell from March 1st to April 8th the S&P 500 lost -16.32% ,while DWSH rose 23.05%.
A third way is to buy some options that rise in value as stocks fall. You would buy a Put, which rises as a stock falls. Growth stocks tend to fall more than Value stocks do during a correction. As an example, if you bought a Put in Microsoft (MSFT) that expired in October, then you have until October for Microsoft to fall in share price.
Let’s say Microsoft fell from $520 to $480 and you owned a October $530 Put which cost $15.00 a contract, that covered 100 shares X $15 for a total cost of $1500 and then it hit $480. The Put would be worth about $50 in the first week of October. You would have a gain of $5000 and a profit of $3500.
Our favorite way to play downward action is to buy a VIX Call that makes money as the stock market gets more volatile. The VIX is a measure of the CBOE Volatility Index of Right now the VIX is at $14.52 and if the stock market fell 10% then the VIX might be worth $30.52, a gain of $16. An October Call at say $18 costs $3.40 or $340 could be worth $17 or $1700 during that first week of October.
As we say at Market Rebellion, “It’s Not An Option Not To Own Options.”