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Steve's note: This weekend's essay is from one of the best traders I've ever met, my friend Jeff Clark. The high levels of investor uncertainty we're seeing right now make Jeff's strategies a great way to make big income off your investments. And if anyone can guide you through this unique strategy, it's Jeff Clark. How to Make Money – Safely – in a Bear MarketBy
Saturday, April 12, 2008
Making money in a bear market takes unconventional thinking.
We closed the XHB position three weeks ago for a 17% gain. The S&P was down 11% for the same period. Not bad for a three-month trade in a bear market. (Check the sidebar for a summary of how a trade of 100 shares worked out.) That's the beauty of covered call writing. You can buy a stock, create immediate income, protect your downside, and continue your income stream as long as you own the shares. It's a great strategy to use for generating income. And it's a fabulous strategy for dealing with bear markets. In fact, today's market is the ideal environment for getting started with this technique. Options are expensive because of the recent market volatility, and a large number of stocks are trading at ridiculously low valuations. So investors have a unique opportunity to pick up low-risk value stocks and generate high rates of return by selling those expensive calls against them. My point is, it's possible to make money during bear markets... far more than you'd ever expect, actually. And selling covered calls on low-risk stocks is the single best strategy I know to profit when stocks are falling. Sure, you can speculate and bet on stocks falling farther – but there's more risk involved here than most people are willing to accept. On the other hand, if you write covered calls on the right stocks, there's very little risk. And you can generate safe income even in the worst bear markets.
Further Reading:
Mortgage Your House and Buy as Much of This as Possible Market NotesWHY SELLING CALLS IS WORKING
In today's essay, Jeff Clark mentions the key reason why writing covered calls is working so well right now: increased volatility.
This week's chart is the picture of that volatility: the past five years of the "VIX." Called the "fear gauge," the VIX tracks the prices traders are willing to pay for portfolio protection... in the form of stock options. For much of the bull market of 2003-2007, volatility was nonexistent. Everyone was serene, as their stocks, real estate, and commodities worked their way higher. Now, as the credit and housing market boils like a pot of hobo chili, protective options are being "bid up" to the sky... So Jeff does the prudent thing, he sells them.– Brian Hunt |
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