Always Be Trading. Another Simple Lesson for You

It's hard to take a day off from the market. Two weeks ago, I traveled to Amelia Island, Florida, for my first vacation in about six years. And – of course – while I was there, the momentum for the markets went negative. When the markets go negative, it’s like a big holiday shopping day for me.   Always Be Trading. Another Simple Lesson for You Dear Reader: It's hard to take a day off from the market. Two weeks ago, I traveled to Amelia Island, Florida, for my first vacation in about six years. And – of course – while I was there, the momentum for the markets went negative. When the markets go negative, it’s like a big holiday shopping day for me. You see, people are still buying up stocks in droves but not realizing that the undercurrent of the market is pulling capital back like a wave. It was a good two weeks for the U.S. dollar when the downturn occurred. It was a better opportunity to set the buying prices for stocks I wanted to buy at lower levels. Most of all, it was an incredible chance to trade on negative momentum. When the selloff comes, it comes fast and furious. So, targeting the weakness in specific sectors and the broader market as a whole is a valuable strategy. It’s especially valuable when you use options to build upon the leverage effect of the market. But if you're new to options, let me give you an example of an actual trade that I did to protect my long-term portfolio. Let’s take a look. AT&T Is My Cornerstone The cornerstone stock of my entire portfolio is AT&T. Full disclosure. I bought a lot of the stock when it traded at $26.00 during the crisis last year. It pays me about an 8% dividend, which is historically the return of the S&P 500. I believe that AT&T is one day heading to $60 once they figure out their debt issues, sell off useless assets, and focus on dominating streaming and 5G in the future. It could take a while. But I'm happy to accept an 8% annual return on dividends alone while I wait. That said, I do like to squeeze money out of my existing position as much as possible. When the market is negative – which we measure with the 5-13 Exponential Moving Average on the S&P 500 – I like to sell Covered Calls. This means I will sell One call at a predetermined expiration date at a much higher price than the stock. So, let’s say that the stock is trading at $30.83 like it is today. And let’s say that momentum goes negative for this stock and the broader market. I might look out to May 21 and see that the $32.00 call is trading at $0.25. I could sell one contract for $25 for every 100 shares that I own. I know that this might not look like a significant gain on paper. But for 45 days, I can guarantee a breakeven price on this trade at $32.25. The stock would need to increase by 4.6% in 45 days for me to lose money. And by losing money, I mean I sell the stock higher over the next 45 days. If it doesn't hit that level, I pocket the cash and add another 1% to my already existing dividend for the year. This is a very conservative strategy. The worst thing that happens is that you make $142 on every 100 shares you own and then have to sell them to the person who purchased the contract. And… you can repurchase the stock any time you want, given the lack of brokerage fees. The best case is that the stock goes to $31.99, you have a gain of nearly 3.7%, and you don't have to hand over your shares. It's a win, win. And not enough people do it because they don't understand the simplicity of the strategy. We’ll discuss this more in the weeks ahead, Garrett {NAME} © 2021 Godesburg Financial Publishing, Inc. 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