Let’s be clear, nobody knows which way the market will move over the next 1-3 months. Anybody who insists they do is just guessing.
Some say up, with the historic uptrend continuing. Others say down (temporarily or otherwise), believing the 5 year bull market has run its course. And still others say sideways, as the market consolidates while waiting for new information to provide direction one way or the other.
Each side makes compelling and lucid arguments. After hearing one side, you can be totally swayed. Until you hear the other side, of course. And so
you have the current state of the market.
As an investor, knowing which way the market will go is typically a critical piece of information in order to make money. A critical piece that nobody knows.
But what if it didn’t matter?
What if, you could make money whether the market goes up, down or sideways? Put on the same position and profit regardless of which way it goes? And not even care
which way it goes because your profit potential would be the same either way.
Instead of one way to win, you’ve now got three ways to win, dramatically increasing your odds of success.
You’d probably feel like you had a secret trading weapon. And you would.
But it’s no secret. Granted, most investors don’t know about these strategies, let alone employ them. But these are strategies the pros use all the time to consistently make money in the market whether it goes up, down, or somewhere in between.
When so many individual stocks began rolling over last month, I’ll admit, I was just as concerned as anybody.
We all got used to the market going straight up. It was easy money. And who wouldn’t want to see that continue?
But whether it continued up or not, the writing was on the wall. The market was about to change. By that I mean the cake-walk of 2013 where almost everything went up was going to be replaced with a more trying market where fewer stocks will go up, plenty will go down, with most flitting back and forth in a volatile manner.
The media was ablaze with stories of doom and gloom. And for a few weeks, I’d even say there was a tiny degree of panic for some investors. Many felt helpless as the market seemed to go up and down for no apparent reason.
For me however, I felt a calm confidence instead.
What the market does is beyond our control. But it doesn’t matter. I knew how we were going to make money in this kind of market. And it was time to get to work.
Picking a stock that will trade within a broad range is much easier than picking a stock that MUST go up or down in order to make money.
The strategy to do that with is an iron condor. It’s a favorite of professional traders and one of the ways they make money in virtually any kind of market.
It’s classified as a neutral strategy because you don’t have to rely on just one direction. Instead, the price can go up, down or sideways — anywhere within that range — with any one of those three scenarios resulting in the same exact maximum profitability.
This is a low risk, high probability trade that can deliver consistent and impressive returns.
A calendar spread is another strategy that gives the investor tremendous flexibility when it comes to direction and timing.
Not surprisingly, it’s also a favorite of professional investors. It can go up from where you got in, down from where you got in, or just sit there, and you can still make money. You can even be wrong about which way you expect the market go and still be profitable. It’s no wonder this strategy is sometimes referred to as a ‘second chance’ spread.
This too is a low risk, high probability trade that can yield impressive returns, and is yet another way to profit in an uncertain market.
Classic Opportunities Made Better
Of course, there will be plenty of opportunities to make money on the most bullish of stocks by buying calls or bull call spreads. But this way requires only a fraction of the money needed vs. buying the stock, thereby significantly lowering your risk.
There will also be plenty of opportunities to make money on the most bearish of stocks thru puts and bear put spreads, without ever having to short a stock, thus providing a small and limited risk at all times along with big profit potential.
And there will also be opportunities to play both sides of the market on the most volatile of stocks with straddles and strangles, where a big move is expected in either direction. You don’t have to guess which direction it will be in. Either one can be just as profitable as the other.
Combined with the Zacks Rank, it’s easy to align the right stocks with the right strategy.
Peace of Mind
As you can see, options give the investor numerous ways to make money in the market, and in any direction. There’s great satisfaction and peace of mind that comes from knowing you no longer have to rely on a bull market to make money.
If the bull market continues, that’s great news. It’s wonderful when everything is going up. But the success of your investments doesn’t have to depend on the whims of the market.
If you’re new to options, that’s ok. These strategies are easy to put on and easy to understand. All with limited risk. Once you place your first trade, you’ll wonder why you haven’t done this before. Soon, they will become a mainstay in your investment arsenal, and you too will have a secret weapon like the pros.
And your portfolio will thank you for it.
Thanks and good trading,
Kevin Matras is our world-class research expert who has developed more than 30 market-beating strategies using the Zacks Rank. He also directs the portfolio service that combines Zacks Rank timeliness with the best professional options techniques, Zacks Options Trader.