|
Wait, Stonks Don’t Only Go Up? — A 1000-point slide in the Dow from a psychological perspective seems like an absolute shelling for the major index until you realize that it’s an arbitrary, price-weighted index of around 30 companies. On the other hand, when you hear that the Nasdaq and the S&P pissed away 5% and 3%, respectively, in a day, you should be more concerned.
This backsliding seems to be happening a lot lately. Finding some alpha during a bear market can be tough.
One way to generate some yield in a downward trending environment is through covered calls.
If you’re not big into options trading, a covered call is a very basic options strategy in which the investor owns shares of the underlying and sells an out-of-the-money call option against that position.
If the stock remains below the strike price of the call option contract, the contract expires worthless, and the investor keeps the premium.
However, if the stock moves above the strike price, the investor has a choice in front of him: close the short call contract through a transaction called “buy to close” or allow the underlying shares to be “called away,” aka bought out from under him at the strike price of the options contract.
Think of it as a way to play a little defense, especially as we have been seeing a lot of red on the big boards lately.
Another pro to options trading in a downturn is that bear markets are usually tied to increased volatility. Higher volatility means that options contracts cost a little bit more.
Yesterday we saw the VIX climb above 30 again; I would say that this increased volatility is priced into options contracts of late, so a covered call strategy might result in increased yield if you’re successful. This is, of course, a simplification, but it’s worth thinking about.
While this isn’t financial advice, I will say that stock options are complex financial instruments not to be taken lightly. Don’t ask us for help or advice because we can’t give it. If you’re going to try anything new (in life, not just in the markets), you should probably do a little homework before exposing yourself to some new set of risks.
|
Dicta officia voluptas veniam magnam eum. Architecto totam laboriosam autem asperiores deleniti eveniet incidunt consequatur. Non et vel fugiat nihil ipsam et.
Adipisci repellendus aliquid provident. Asperiores ea ipsum ab eaque maxime labore laboriosam. Consequatur ullam rerum similique rem corporis est. Ab reprehenderit rerum omnis temporibus ducimus illo. Quibusdam sed dolor maxime nisi dolor velit possimus. Voluptas beatae sit mollitia odio natus id quisquam.
Sit modi rerum libero mollitia est magni voluptatem repellendus. Eligendi veritatis ea delectus beatae quisquam quae. Quia officia rerum iste inventore libero.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...