Dear Reader,
Inflation has been so mild over the past few decades, it’s hard to believe how corrosive 7%-8% inflation rates can be – which are at levels not seen in 40 years.
When inflation hit 8% this year you felt the pain at the gas pump and supermarket checkout stands – but the overall negative impact may not yet be fully understood.
Let me give you an example of how detrimental high, sustained levels of inflation can be for you.
Let’s take a look back 50 years when the median household income in the U.S. was $11,120.
If you were brining in the median income and didn’t receive a raise over the course of years, you’d soon enough find yourself well below the poverty income line.
The same is happening today, but just quicker. If inflation levels continue to remain elevated, it would take only three years and your income would be cut by nearly 25%.
Without generating some extra income to offset inflation, you’ll need to adjust your lifestyle – and nobody likes to feel of going backwards in life.
So let me tell you about how you can fight inflation WITH inflation.
Implied Volatility and Inflation
By now it’s clear to see the inflation of goods and services. In fact, let’s just look at a single food item and see how it affects you.
Just for fun, let’s look at the cost of a dozen eggs.
According to the illustration below, earlier this year the average cost of a dozen eggs was around $1.50. With some volatility, those same dozen eggs cost nearly $4.00 – a 166% increase.
You’re not just paying for the inflation at your breakfast table – the damage reaches beyond your home.
Not only are you paying highly inflated prices at your local grocery checkout, but also anytime you’re eating out at the local café, restaurant or other establishment with eggs on the menu.
You can count on those establishments to pass the 166% extra cost onto you, the customer.
I want to show you how to fight inflation with inflation.
Notice something else in the chart above – there is volatility (short-term price fluctuations) over time. This simply means that there are times when eggs are more inflated and other times when they are less inflated – consider April through August as prices were above $3 at times and below $2 at others – this is simply inflation and deflation in action.
Inflation and Deflation of Option Premiums
It works the same with option premiums (price tag for a call or put) – they can become inflated and deflated based on changes in demand just like any product.
Consider that there are times to be a buyer and a time to be a seller when it comes to trading options – and knowing when to be on the right side of the trade can mean the difference between success and failure.
During those times when option premiums are deflated with the potential to become inflated, I’m happy to be a buyer of options.
But, when option premiums are inflated, my attention turns to selling strategies.
Think about it like this – wouldn’t it be nice to sell a dozen eggs at $3.00 and then buy them back at $1.50… assuming they’re still fresh, of course.
Now, what if you could find the same dozen eggs trading at $4.00. Would you not want to sell those and then buy them back later at $1.50?
The answer is “Absolutely,” and the next question is how can I find the highly inflated eggs.
That’s where my free Toms Option Tools app can benefit you. You can find out more about options and my tools to find inflated option premiums by Clicking Here: Toms Option Tools App.
How to Find Expensive Options
The first thing I’ll have you do is get on your cell phone and search for Tom’s Option Tools or Toms Trading Room in your apps store. Then, download the Toms Option Tools App. Once you’ve opened it on your phone, click the Morning Report Tab as illustrated below.
Every day my Toms Option Tools App will give you a Top Ten list of stocks symbols that have “Expensive Implied Volatility,” or in other words, inflated option premiums – illustrated below.
You’ll notice in the illustration that the stock’s symbol is listed first, then you’ll find high implied volatility, low volatility and finally the current implied volatility on the right side.
I’ve highlighted the implied volatility for UNG. The 12-month high is 124.53, and the current IV is well above the low at 116.16. This tells us that UNG has inflated option premiums – these are those $4 eggs we’re looking for.
When the options on stocks have inflated premiums as illustrated with UNG, selling options at high prices and then letting them deflate so you can buy them back later for less is an income trading strategy.
If you’re new to trading options and want to learn more about how to capture profits from inflated option premiums as a means of generating extra income during our high-inflation economy, please join me each week as I discuss a variety of strategies to choose from.
Until next time,
Tom Gentile
America’s #1 Pattern Trader
Join Tom each Monday through Wednesday at 12:00 p.m. ET as he discusses a range of strategies to make money in a strained market environment.
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