Masters Series: How You Can Bend the Market to Your Will
Editor's note: While the financial media were engulfed in discussion about the "Brexit," Retirement Trader editor Dr. David "Doc" Eifrig wasn't losing sleep at night.
In today's Masters Series essay – adapted from the June 24 issue of Retirement Trader – Doc explains why instead of joining the market panic, he saw it as a juicy trading opportunity...
How You Can Bend the Market to Your Will
The "Brexit" crushed the stock market earlier this month...
The S&P 500 stock index was down nearly 3%. The British pound fell more than 10% overnight – the largest one-day decline on record. British stocks had their worst day since the bankruptcy of investment bank Lehman Brothers sparked the 2008 crisis.
And in the U.S., market fear, as measured by the Volatility Index ("VIX"), spiked nearly 40% from the previous day's close.
We take it most readers know the basics of the Brexit. The United Kingdom held a referendum to determine whether to stay in the European Union. Voters chose to walk away.
Some traders love this sort of high-volatility event... But this type of trading is little more than gambling. It's not how we make money at Retirement Trader.
We avoid the big-volatility events that send prices gyrating. Instead, our strategy sets up our trades so we earn a little more income each and every day.
We don't need big events. We prefer when markets move regularly. We wait for "adult swim" time and avoid when the children are going wild in the pool.
So today, let's take a moment to examine the markets and explore how our system works. The better you understand the system, the better it will work for you.
And when markets are volatile, we can use options to force the market to act more reasonably... and more profitably.
Over the last 20 years, the S&P 500 has returned approximately 0.03% on average every day, with a standard deviation of 1.2%.
Essentially, that means that the S&P 500 is... on average... going slightly up within a certain range. And if markets were "normal" in a statistical sense, the daily returns of the market would look something like this...
You have some up days and some down days. You'll get some days when the market moves about 4%. This even pattern would be ideal for consistent trading. You know that the market earns a little bit each day, even if there are fluctuations. You could just sit at home and collect your money.
In reality, we don't have that luxury. The market doesn't look like that at all. Here's what the real daily return numbers look like...
At some times, returns are big. The market is often up or down 6%. There are even much bigger gains and losses. You'll also notice that volatility comes in clumps.
Sometimes markets are crazy for weeks or months in a row. At other times, like the stretch from 2004 to 2008, they are calm.
You can interpret this reality in two different ways.
For some, those big spikes are treated as opportunities. They spend their energy hunting for the next big surge in the market or trying to dodge the next crash.
These folks try to figure out how to trade the Brexit... the "Grexit," when Greece was threatening a similar move... the next Federal Reserve announcement... or the next meeting of the Organization of the Petroleum Exporting Countries (OPEC).
Of course, that type of trading is difficult. More important, it's not consistent.
Our goal at Retirement Trader is to make steady income with a safe options strategy. And we can use our tools to "trick" the market into acting more like the steady simulated data...
You see, when we sell an option, it has a certain amount of "time value."
If the share price remains stable, that time value erodes a little bit each day. Because we sold the option, we want its price to fall. So time value works in our favor.
For instance, when the June expiration date approached, we closed out a position in pharmacy-benefit manager Express Scripts (ESRX). We sold a put on April 8 for $2.24 and held on as it marched to $0. Each step downward brought a little more income our way...
Not every trade ends as cleanly as this. But we're proud to note that most of ours do well – about 93% have worked out to be winners.
However, stocks move up and down. Sometimes we need to roll and occasionally we get caught in market action that leads to losses. To overcome these challenges, we focus on choosing the best stocks and spreading our bets among different positions. And we encourage you to do the same.
Overall, we take a wild and fluctuating market and turn it into one that's more consistent, predictable, and profitable.
The nature of our trading reduces our downside risks by lowering our costs. It squishes the daily returns to look more like the simulated data and less like the wild markets.
Options trading is intimidating. But our goal is for all of our readers to learn how to make trades on their own. Once you can trade options on your own, you'll have outstanding earning power. When you need some extra income, you can go out and get it.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: You don't need to be a millionaire to put Doc's Retirement Trader strategies to work. He has helped thousands of readers generate $5,000... $10,000... even $40,000 a year in the markets. That's why Doc just put the finishing touches on a brand-new video presentation detailing how you can use his strategies to "upsize" your retirement... and made a special, limited-time offer to sign up for Retirement Trader. Get the details here.