Don’t fall into the trap of a deflationary crisis. This isn’t the time to sell everything and hold cash only.
Yes, cash is precious right now, since it provides you with liquidity to buy undervalued assets, but we’re not in a liquidity event.
This is not 2008.
Cash is abundant, from big corporations to the mega sovereign wealth funds. It’s everywhere, except for where it should be – in the hands of hard-working people.
Nevertheless, the business fundamentals of Corporate America are sound. It is not businesses, which are suffering. Instead, it is the average person, shackled in the claws of the Federal Reserve System, which has never failed to inflict misery on the working class.
Now, after they’ve helped all the failed banks from 2008 go back to record profits and record bonuses, and after they’ve piggy-backed the most orchestrated bull market of all times, they’re tightening and selling assets into the market. Goldman Sachs and other Wall Street gangs are putting out buy reports for their mom and pop clients, who are seeing their wages increased and their taxes lowered for the 1st time in decades.
It’s so vicious that it boggles the mind, but you know that the average person, watching CNBC right now, is going to buy at precisely the wrong time. It is the nature of the beast. In fact, on the other end of the trade will be the very same institutions, which put the average person in this tough spot. Central banks will take profits, while the individual, who is working 3-4 part-time jobs will be left holding the bag.
You see, most people invest to make up for lost income suffered elsewhere.
2017 was the calmest year on record. Risk-adjusted, as I see it, last year was the best trading environment since the birth of the index.
2018 is an altogether different beast.
Volatility is the friend of the sophisticated options trader.
I’ve been making use of a strategy called selling puts. It’s a thing of beauty.
Case Study: Walgreens Boots Alliance
Walgreens is one giant operation, and last year, they acquired Rite Aid, another drugstore behemoth.
The market didn’t like the takeover. Take a look:
While the market rallied big since 2016, Walgreens has dropped like a rock.
This type of quality business doesn’t stay cheap for long.
The best strategy right now is to sell puts on it, which is very simple, and it can generate huge gains, without even buying the shares.
Here’s how this works:
- Selling a put creates an agreement, by which a current shareholder of WBA is willing to pay you, for example, as the seller of a put option, a non-refundable cash premium right now.
- In exchange, you are obligated, no matter what the open market price is, to buy WBA shares at an agreed-upon price when the agreement matures.
This is called the option chain, and my favorite length for an options contract is 90 days. You can see that July 20th is the day, which marks the end of this chain.
Currently, Walgreens trades for $65 per share, which I’m personally more than willing to pay, since my 86 day analysis of the company has led me to compute a 20% growth curve over the next decade for the business – that’s more than virtually any other fortune 500 company in the world.
But, you can even make a greater return by selling the $65 put on July 20th. As the chart projects, you will receive a $3.35 cash premium right now.
Three possible outcomes will result from this:
- The stock trades above $65 on July 20th. You will keep the premium and never buy the shares.
It would be similar to how an insurer receives a premium, but a claim never occurs, so they keep the money.
That’s an infinite ROI, since you put $0 at play, and made $335 for every options contract (100 shares).
- You get exercised. In other words, the share price is such that the current shareholder wants you to buy it from him at $65.00.
Since you received $3.35 in advance, it would be essentially the same as buying shares for $61.65.
Now, since you were already willing to pay $65.00 for them, this transaction saved you 5.1% in 3 months. Annualized, that’s 20.4%, which is better than Warren Buffett’s 19.7% career average yield!
Here’s the kicker – 68% of puts options expire without the seller getting exercised, so there’s a high probability that you will bank the premium cash and never own the shares – infinite return on investment.
This works best when traders are fearful, and the VIX is high, like today.