Use this Options Strategy in Down Markets

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A good friend of mine recently read an excerpt from TD Ameritrade 's Chesley Spencer stating, "Buy and hold may not be dead, but it's no longer the straightforward process it used to be. It is, in fact, a brave new world - with short-term holdings, hedging and derivatives becoming ever more a part of the individual investor's mindset."

After hearing Mr. Spencer's wise words I decided it was important to present my loyal readers with the following presentation, " My 2014 Gameplan: Earn 5% a Month Even When the Market Drops. "

Yes, alternative investments, more specifically options may seem like voodoo to the uninitiated. But given the fact that you can make money in up, down, or stagnant markets why would you not invest your time to learn what is becoming the wave of the future in the investment world?

Let's face it: When all you have is a hammer, all you're going to see is nails.

The market moves, up, down and sideways, yet most investors limit themselves to the mercy of Mr. Market and only make money when the market moves in one direction - higher.

And that's where I come in….

By implementing the following options strategy in your overall portfolio plan, you will be able to make money in an up, down or sideways market.

The strategy is known as a vertical call spread or bear call spread .

It's a type of options strategy used when a decline or at least limited upside in the price of a stock or ETF is expected.

For example, let's assume that the S&P 500 ( SPY ) is trading at $182.00 and you expect there is limited upside over the next 30-60 days. As a result, you have decided to use a bear call strategy.

By definition, a bear call spread is achieved by selling call options at a specified price while also buying the same number of calls, but at a higher strike price. For instance, with SPY trading at $182, an options investor would sell the 187 strike for $0.75 and buy the 189 strike for $0.40. If you subtract the two you end up with a total of $0.35, which equates to a 21.2% return over 37 days.

options strategy

Now if you look at the strike sold at 187, the Probability of Success (Prob. OTM) is 79.56%. That means that there is a 79.56% chance SPY remains below $187 at the time of March expiration in 37 days. So basically, as long as SPY stays below $187 over the next 37 days, you will make 21.2% and the chance of that happening is 79.56%. Are you starting to see why so many professional options investors use this strategy as their bread and butter strategy?

If you would like to learn how I use this strategy among several others, check out my webinar from Thursday . I go over in great detail how I use the options strategies to make a consistent monthly income. I realize that for some of you these concepts are completely foreign, but I can promise you that once you begin learning about how options can work to your advantage, you will never go back to just the buy-and-hold strategy.

There's just too much opportunity to put your hard-earned money to work in more effective ways. Whether you want to provide another source of monthly income or just protect the hard-earned profits in your buy-and-hold portfolio, options are the ticket. I hope you can join me in what is becoming the fastest-growing sector in the investment world.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: SPY

Wyatt Investment Research

Wyatt Investment Research

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