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Win With Options During Market Uncertainty - By Zacks Investment Research
Forget about sequestration. Whether you believe the market will go up, down, or sideways, there is an option strategy for you.
More and more investors are using options in their trading as a way to beat the market. And that's why the number of options contracts traded has been setting all-time records.
Whether that's because of the recent market volatility or in spite of it, options can provide staying power.
Plus, options are flexible. You don't need a lot of money to get started. And it's a lot easier than you might think.
One of the key advantages with options is you can make money in any market direction. You can make money if a stock goes up, down, or sideways. And with some strategies, you can even be wrong on the direction of a stock and still make money with the option.
Of course that doesn't mean you can just close your eyes and pick anything. But it does mean that you can make money in virtually any market condition - even when you're unsure what the market will do.
Another advantage with options is leverage. You can get started in options with only a fraction of the money you would normally need to get into the actual stock. And many option strategies come with a guaranteed limited risk.
It's these advantages, and more, that can make options a perfect addition to someone's portfolio.
What's interesting, however, is that even though the popularity of options has soared, they are still not as well known or understood as much as stocks. But they should be.
If you're bullish on a stock, you can buy a call option on it and make money as it goes up.
Momentum stocks and Aggressive Growth stocks are probably the best kinds of stocks to use for this. These are stocks that are on the move with some of the most explosive upside potential.
Stocks with a Zacks Rank of 1 or 2 are some of the best candidates to profit with this strategy. These are companies that should outperform the market over the next 1-3 months and have the best upward earnings estimate revisions.
If you're bearish, you can buy a put option and make money as the price goes down.
Look for stocks trading at excessive valuations. Focus in on the ones with downward earnings estimate revisions. And if they are below their major moving averages like the 50-day and 200-day moving average, even better.
Stocks with a Zacks Rank of 4 or 5 will typically underperform the market over the short-term (some quite spectacularly), which is perfect for this strategy.
Big Move in Either Direction
If you believe a big move could occur in either direction, but you're not sure which way, you can make money with a straddle or a strangle. This entails buying both a call and a put at the same time.
One of the best times to use this strategy is before an earnings announcement, or an important event. Some of the best stocks for this option strategy are high beta stocks. These are stocks that can move big, and that's exactly what you want to see happen with this kind of strategy.
Once again, in order for a stock to make a big move, there usually needs to be a catalyst. One of the most reliable catalysts out there for big moves (up or down) is earnings reports. But lately, there have been plenty of political events, not just in the US, but around the world, that have sent stocks sharply in one direction or another. This can create the kind of potential volatility to really make a strategy like this work.
Slower, Moderate Move
If you're expecting a stock to go up or down, but you expect the move to be moderate or slower, then spreads are a great strategy for this.
For example, a bull call spread involves buying a nearby strike and selling a farther out one. If the stock goes up, but slowly, the nearby call you bought should increase in value, in spite of some time decay loss. But the call option you wrote will benefit from time decay, thus making the spread more profitable than had you only purchased a call. You can do this with a put spread as well. It works the same way, but instead, you make money as the market goes down.
This is a great strategy for stocks you expect to see move, but not necessarily with a big splash that you would see with the top rated or bottom rated stocks.
How about making money if the market goes sideways? You cannot make money in a stock if it goes sideways. But you absolutely can in an option.
Calendar spreads are one such strategy. Iron condors are another. (These are simply called 'combinations'.) These are strategies used by many professional traders to consistently make money. It's great seeing stocks go up. It can also be great seeing stocks go down, if you're properly positioned. But more often than not, stocks trade sideways, within a range.
With these types of strategies, a stock can go up from where you got in, or down from where you got in, or just sit still - and you can still make money. As long as it stays within that range, you profit. With such a low risk and high probability, every investor should have these in their portfolio.
The Option is Yours
These are just some of the ways to profit with options. And there are many more. As you can see, options give the investor numerous ways to make money in the market - and in any direction. And you don't always have to wait for the next bull market to make money, because a down or sideways market can be just as profitable.
If you're interested in learning more about how to take advantage of these and other profit opportunities, you may want to look into our Zacks Options Trader. It takes the guesswork out of options trading by doing all the research for you and presenting it in plain language with easy-to-understand signals.
We'll walk you through each trade step-by-step as we give you our unique perspective on some of the most popular options strategies, as well as on others that some people may never have even heard about. Including my all-time favorites for making money in sideways or down markets.