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Global markets woke up yesterday morning in a free fall – the same one they’ve been stuck in for six trading days straight.
The coronavirus has a chokehold on stocks around the world, and it doesn’t appear to be loosening any time soon. It’s pulling markets into correction territory fast.
South Korea’s Kospi index has fallen more than 9% below its high made in January. Germany’s DAX was already in trouble – now, it’s shedding more points every day, already 2.2% lower at yesterday’s open, alongside France’s CAC 40.
This week alone, the Dow has lost more than 2,000 points, and the S&P 500 is officially negative for the year. The 10-year Treasury yield continues to hit record lows every single day.
You know that dream where you’re falling through the air and wake up right before you hit the ground? That’s what this market reminds me of… except we aren’t waking up. We just keep falling.
But don’t pull your parachute just yet. It’s time to take advantage of the free fall. Because this market isn’t a reason to panic – it’s actually the best place to snag high-probability, short-term profits.
While investors are moving their money around in a desperate cry for help, smart traders are grabbing cash like it’s floating in an arcade’s wind booth. And now, it’s your turn.
Here’s how to harness the market’s moneymaking opportunity right now…
Use the Bear Call Spread to Take Profits in a Falling Market
There’s an old adage that goes, “the bulls climb up the stairs and the bears fall out the window.”
Basically, stocks fall faster than they rise – and that statement has never been more true. The Dow has been climbing to new highs all year long. And then, Monday, February 24 hit. And every single one of those gains were erased, all in one day.
This came after news that the coronavirus had continued its spread outside China, cases spiking in South Korea, Italy, and Iran. People are scared – and fear grows like wildfire. As wealth dissipates, fear increases, and a vicious circle ensues…
But there’s a way to measure the fear in this market and use it to your advantage. The Chicago Board Options Exchange’s CBOE Volatility Index (SVIX), also called the “Fear Index,” is an averaged implied volatility (IV) of at-the-money (ATM) S&P 500 index options.
As you can see in the above $VIX chart, fear hasn’t been this high since October’s U.S.-China trade war. But here’s the thing about fear – it comes and goes. That much is evident in the chart above. Eventually, the fear will subside.
But before that happens, you can take advantage of the trading environment that this fear is setting up. Stocks are tanking, bears have fallen out the window, bulls will take time to rise, and options are expensive. The strategy is simple…
Sell expensive credit spreads far away from the price action and beyond reach of a short-term recovery.
Here’s what I mean…
Twilio Inc. (NYSE: TWLO), along with the rest of the market, has succumbed to the coronavirus-inspired correction. It tanked below its 200-day moving average (brown line) and below its 50-day moving average (purple line). Additionally, it breached strong support at $120 and $115.
All of these levels are now resistance… strong resistance that will impede any bullish recovery. Additionally, TWLO options are now very expensive.
This elevated IV will allow us to sell a credit spread at or above these strong resistance levels, and make a tidy, high-probability profit. Before this trade could get into any trouble, the stock would have to make a short-term, very strong bull run – a highly unlikely move, given the current market.
A bearish credit spread, also called a bear call spread, is constructed by selling a short-term call and buying a higher strike call typically five or more points apart, like the one below:
Now, opening this spread doesn’t cost you any money. In fact, it gives you a credit! Simply subtract the price of the call you’re buying from the price of the call you’re selling, and there you have it. Your account has been credited $100!
As long as the stock stays below $120 for the next 16 days, you can take this high-probability profit to the bank!
In summary, here are the four steps to selling a bearish credit spread:
- Find stocks that have dropped hard below support and preferably the 50-day and 200-day moving averages.
- If you have two or more resistance levels (including moving averages), sell a bearish spread above as many resistance levels as possible. More is better.
- Receive at least 1% of credit for each day in the trade. In the example above, we will receive 25% for 16 days of time in the trade, fitting this rule.
- If the stock closes above your short strike, close (buy back) the spread for a small loss.
It doesn’t matter if the market is heading up, down, or sideways. There’s always profit potential there – if you know where to look.
In fact, you can even look outside of stocks…
There’s a brand-new market that’s turning ordinary Americans into millionaires day after day… and stocks have absolutely nothing to do with it.
This market is made up of tiny coins called microcurrencies – and they could be your ticket to a lifetime of wealth. That’s because they’re used in practically every industry across the world – real estate, healthcare, advertising, shipping, biotech – you name it.
And as more and more industries grab ahold of it… the possibilities for wealth will only increase. Click here to learn how you can become a part of this ground-breaking opportunity.
Have a great weekend,
Tom Gentile
America’s #1 Pattern Trader
