My kids are impressed Mike Carr managed to work both porta potties and the “Big Stink” into his email yesterday.
But I was more interested in his take on “Sell in May” — which, if you haven’t already, you’ll soon be seeing in headlines everywhere.
Mike recommends using a moving average to Sell in May more selectively. With his technique, you’re only selling in May when the market’s not in an uptrend.
If you’re buying and holding stocks, this makes the strategy much more profitable.
But if you want to amp the returns up even more, with options, I have another way to trade this seasonal trend…
Best-case scenario? You pocket instant cash.
Worst-case scenario? You buy great stocks at a discount.
This strategy is the definition of a win-win — and not enough traders know about it. I’m changing that today.
Sell Puts in May
There are two ways to “Sell in May” using options.
You could either buy a put option… or sell a put option.
It might sound strange that two seemingly opposite techniques can benefit in the same scenario, so let’s break it down.
As we know, puts go up when prices go down. If you expect the market to decline, you want to look at a volatile index like the Nasdaq 100.
This index includes tech stocks like Twitter and Tesla, both of which are sensitive to news.
The Invesco QQQ Trust (QQQ) tracks that index. Right now, there are options available to trade on QQQ expiring in December, which would give you full exposure to the market’s “worst” period (May through October).
But these puts are expensive. An at-the-money put with an exercise price of $340 is about $30. Since option contracts control 100 shares each, you’re looking to pay $3,000 for just one options contract.
A more reasonable option, costing about $10, has an exercise price of $270. But that’s almost 20% below the current price of QQQ, making the trade a bit riskier.
Here’s the thing: If QQQ does fall 20%, you’ll want to buy. The stocks in QQQ aren’t going anywhere, and you shouldn’t pass up a chance to buy great names at a steep discount.
That’s where the second strategy comes in…
I’ve written before about the advantages of selling (or shorting) puts.
When you sell a put, you receive immediate income. If you sell the December 20 $270 put on QQQ, you instantly pocket about $1,000. Again, that’s $10 (the price of the put) times 100, since each contract covers 100 shares.
To complete this trade, you simply place a “sell to open” order on the option you want for the price you want.
But there are a few boxes you need to tick first…
First, you need to have sufficient margin in your account to complete this trade. Brokers require about 20% of the cost to exercise. That’s $5,400 for this option (20% of $27,000).
Second, you need to have buying power of at least $27,000 in your account. Buying power is cash or the unused borrowing power in a margin account. If QQQ falls to or below $270, you’ll use this to automatically purchase 100 shares.
If QQQ is above $270 when this option expires, though, you keep the $1,000 and the put expires worthless.
For this reason, selling puts is often thought of as an income strategy. But it’s also a strategy to buy stocks at a discount.
Selling puts forces you to act. If there’s a market decline, you won’t look back and wish you’d bought in at ridiculously low prices. You’re holding yourself accountable by ensuring you do.
And if prices don’t fall? You avoided a bear market, and pocketed $1k in cash for your trouble.
Sounds like a no-brainer to me…
Regards,Amber Hestla Senior Analyst, True Options Masters
Chart of the Day:T-Bond Yields Are Back in Black
By Mike Merson, Managing Editor, True Options Masters
(Click here to view larger image.)
For the first time since March 2020, the yield on the 10-year Treasury Inflation Protected Security is about to rise back above zero.
That means, for the first time in several years, investors going off the government’s inflation numbers can comfortably believe they’re getting a positive return on 10-year Treasurys. Just, not a very big one.
Pundits are ringing the bells, saying this will weigh on stocks more than it already has. And as a headline factor, it might.
But look at the chart above again, and tell me what you see.
The so-called “real yield” went above 0 on late 2013. What followed? The biggest bull market of all time.
And again, that’s if you accept the Fed’s “hedonistic adjustments” and think you’re actually getting a positive return by holding these Treasurys.
If you ask me, you’re not. And stocks are still the place to be.
And of course, bond prices fall as yields rise. So those following Mike Carr’s long-term put options trade on TLT are more than happy for the Fed to keep hiking rates higher.
(For more awesome trade ideas from Mike Carr, just like this one, click here to learn about his top option trading strategy.)
Regards,Mike Merson Managing Editor, True Options Masters