Value investing is the most intuitive investment strategy and the easiest to explain.
You try to figure out the value of the underlying business and how much that stock trades for on the open market. less than At that price, you buy.
Your expectation is that everyone else in the market will eventually “come back” and agree with you. They, too, will buy “bargain” stocks until the market price matches the “fair value.”
If you buy stock at a 30% discount, your profit will be 30% when the gap is closed. So simple, right?
Believe it or not, optional purchases work in much the same way. And it is often easier to establish a “fair value” price for an option contract than for a public company.
You may not be willing to trade options, or even start. In fact, our recent research shows just that.
But as a 20-year options industry veteran who swears by the usefulness of options, I’ll stick my neck out anyway. Now is the best time to get comfortable trading options.
As you know, options are the ideal form of portfolio insurance. I haven’t seen insurance this cheap in over 3 years…and I think now is the perfect time to shop.
I understand there is a learning curve here. That’s why I take you to the heart of the options market and explain how you can make relatively small investments in insurance policies that could save you from stock market catastrophe…
The value of portfolio insurance
Portfolio insurance mispricing (a.k.a. put options, more on that later) boils down to one metric: volatility.
You’ve probably heard of the “VIX,” or Volatility Index. However, if you have absolutely no idea what it is or what it does, here is the simplest explanation.
VIX is a measure of investor volatility Predict Stock will last for the next 30 days.
A high VIX means that investors expect the stock price to rise. very volatility. When the VIX is low, investors expect stock prices to rise. a bit volatility.
This is where the VIX nickname of the “Fear Gauge” comes from. Stock price volatility is expected to be high as the majority of mother and child investors hold retirement portfolios full of stocks. scared thing.
Analysts like to say: Satisfiedwhen the VIX is low.This is because a low VIX measurement means that investors no Stock prices are expected to be more volatile. What’s even more painful is that they don’t think the stock market will crash any time soon.
Now, with that in mind… where is the VIX?
It has just closed at its lowest since February 14, 2020.This is because investors More content today, less fear than just before the pandemic.
please look.
Here’s why this is so weird…
As experienced investors worry about stock market volatility, the desire for “portfolio insurance” increases. That protection is obtained by purchasing put options designed to rise in value when the stock price falls.
As these investors become increasingly concerned about stock market corrections and crashes, they buy put options at increasingly higher prices, which manifests as a higher VIX measurement.
But we don’t see anything like that today. No one spends money on “insurance” for their stock portfolio.
My team and I recently ran some numbers on the history of the VIX going back to 1990.
Based on weekly closing prices, we found that only 22% of the time the VIX fell below its current level (13.44). In other words, 78% of the last 33 years the VIX was higher than it is today.
I also found it interesting that after the 2022 bear market, the VIX fell to historic lows at an alarming rate.
For reference, the dotcom bear market officially ended in September 2001, but investors were still worried about another bear market. 3 years — The VIX never fell below 13.44 until October 2004.
The same pattern continued after the 2008 financial crisis. That bear market ended in March 2009, but investors feared it could last much longer. 4 more years — VIX did not drop to 13.44 until January 2013.
Meanwhile, the 2022 bear market is over last month …and the VIX is already down to historic lows!
This could mean one of two things.
- Low VIX levels today contrarian signal — “Fear when others are greedy,” in line with Warren Buffett’s famous adage.
All and their siblings seem to have jumped on the artificial intelligence bandwagon in record time, and no one is interested in paying for protective put options. This shows the emotion of the moment, which certainly feels impudent and greedy.
What if those people are wrong? The answer is… the market can collapse quickly.
- On the one hand, the return of the VIX to historic lows could mark the beginning of a new sustainable multi-year bull market.
That’s because historically, long periods of the VIX below 13 or 14 coincided with bull markets in equities. Of note, the VIX fell below 13.50.
- 129 weeks from 1990 to 1996 (bullish market).
- 101 weeks from 2004 to 2007 (bullish market).
- 171 weeks from 2013 to 2020 (bullish market).
The question looks like this: Will today’s low VIX readings be short-lived and soon return to the upside? Or is it the beginning of a new sustainable long-term trend of low volatility and rising stock prices?
Frankly, the answer is: nobody knows. The same is true for the “value investor” with the intuitive strategy we talked about earlier.
After establishing a company’s “fair value” and seeing its share price trading at a 30% discount to it…what if there was a company’s true value? Getting worse over the next year?
It’s impossible to know the future and no strategy can always win…but value investors routinely beat the odds by buying stocks that offer a significant discount to their fair value. .
and you can do the same with option…
Valuable Portfolio Insurance
In general, buying put options when the VIX is low provides a similar margin of safety as buying shares below fair value.
We showed that the VIX is currently around 13.50, whereas the VIX has averaged 19.5 over the last 33 years.
This means that option contracts can now be effectively purchased at a discount of approximately 30%.
If a particular put option on the S&P 500 is currently trading at $700 based on a VIX value of 13.50, it could be worth around $1,000 if the VIX average recovers to its long-term average of 19.5 . (This is purely due to the volatility factor. Corresponding moves in the S&P 500 will affect prices as well. But that’s another day.)
So, by spending $700, you’re buying portfolio insurance that will return you at least $300, and possibly more, if you were to simply return to the VIX’s long-term average.
Buying put options when the VIX is historically low will certainly give you better odds…but that’s not the only thing to consider.
when you buy phone option( bullish You can bet) that you really want the stock to go up during the holding period.and if you buy put option( bearish I’m willing to bet, but I’d rather see the stock price go down.
So you can’t just open a brokerage account and start buying options contracts that come your way. You need a proven system to predict whether stock prices will fall Up again under.
And that goes back to my 20 years of options trading experience…
Learn to love the options market
Listen, I’m not saying it’s easy to learn everything there is to learn about the options market.
But please understand… you you don’t have to learn everything to trade them and make money.
Inside me Maximum Profit Alert In this service, I have combined decades of research and practice of options into a series of easy-to-understand steps.
Each recommendation shares in simple terms why each deal makes sense. Next, we will explain the exact moves to get the most out of trading on your brokerage account. (After a few tries, you’ll find that it’s little different from buying and selling stocks.)
To be clear, my strategy is not just to buy put options when they are cheap. We hold bearish positions on assets that we believe will lose value ( certain car manufacturers and bankrupt bank) … and bullish positions on assets that are likely to rise (such as the trade I just recommended three days ago in a rapidly recovering industry).
But above all, the members Maximum Profit Alert Learn how to use this much-misunderstood and shunned financial tool for yourself. This kind of education is far more valuable than a single trade can offer (OK let’s be real, many single transaction).
Both links above give you access to my recent presentations showing how strategies work in different situations. Check them out to see what they offer.
But whatever decision you make, consider learning a thing or two about using put options as portfolio insurance. Without it, you don’t want to get caught in a big volatility spike.
to get a good profit
Adam Odell
Chief Investment Strategist, money and market
First quarter GDP growth was just revised upwards to 2%. Sales of new homes are also recovering, and factory orders are starting to show signs of booming.
It doesn’t look like the recession we’ve been warning about will start tomorrow, if it does happen.
Of course, that’s good news. Recessions are certainly not fun. But this new economic power makes it even more likely that:
The Fed will raise interest rates further.
As I said yesterday, Fed Chairman Jerome Powell is trying to “water down” market expectations. And investors seem to be paying attention.
of the Chicago Mercantile Exchange FedWatch Tools It uses movements in the futures market to signal a possible rate hike.
This tool is currently displayed 87% chance The Fed will raise interest rates next month.
Again, this is not all bad. If the Fed is comfortable raising rates, it means the economy is doing well and the Fed isn’t worried about slipping into a recession. wonderful!
But remember why The Fed decided to pause rate hikes at its June meeting. Powell & Co. was rightfully concerned that the recent string of bank failures was at risk of becoming a more serious and difficult-to-contain event.
So far, no such thing has happened. Fortunately, no additional bank explosions have occurred either.
But we also need to remember what caused Silicon Valley Bank and others like it to collapse in the first place.
that is of the Fed Unprecedented monetary tightening (and a general surge in bond yields) has left the bank with large losses on its bond portfolio.
Well, not all good news comes with a nasty caveat.
Sometimes good news is just good news. And I would like to take a positive view of the better-than-expected GDP growth. However, it still makes sense to remain flexible and maintain good risk management.
Take advantage of this booming market. However, know your exit strategy before you start trading.
Adam has always done a good job in this regard. His disciplined approach has allowed him to survive and thrive in his trading career as we navigate through crisis after crisis.
In fact, he sees the recent banking crisis as a unique investment opportunity. For example, a perfectly timed trade against Silicon Valley Bank would give him a 75,900% profit within 100 days.
And now 282 banks are at “high risk” of failure, he said. Latest report. Want to learn more about how to protect your assets? and resulting in huge profits, Visit here to watch his free webinar.
thank you.
Charles Sizemore Editor-in-chief, The Banyan Edge