Options
By Mike Stenger, Associate Editor, Money Morning •
The Dow Jones Industrial Average slid more than 2,000 points on March 9 (Monday). And while that's a jarring single-day loss, it wasn't all that surprising given current market fears.
Concerns about the COVID-19 coronavirus are no laughing matter. But it's important to realize that even in a market gripped by fear, there are profit opportunities.
Specifically, we're going to show you an options trading strategy that returned 1,025% in less than 30 days.
Tom Gentile, Money Morning's options trading specialist, shared it a few weeks ago.
But where is the opportunity now that the market has taken such a steep drop? Does it have further to go?
We're going to show you the strategy Tom mentioned that's now almost 1,000% in the green. Then we'll show you the next options trading strategy you'll want as the market passes through this valley.
How Tom Predicted 1,025% Profit
To give the devil his due, Tom didn't predict a whole 1,000%. He believed this investment could "double your money," which it did... and then it multiplied.
But the point is Tom's research and strategies are second to none. It could be worth hearing him out the next time he expects a stock to go a certain direction.
Yes, there's an enormous swell of volatility and uncertainty about where stocks are headed the rest of the year. The CBOE Volatility Index (VIX) has punched through 10-year highs and is currently above 50.
But as far as the first few months of the coronavirus are concerned, there are some valuable knowns - possibly even more concrete knowns - in the coronavirus market than we're used to.
Market Chaos Action Plan: Coronavirus panic has the market unhinged. Get three strategies for beating volatility, including the most powerful wealth-building tool for buying low. Click here now...
The great thing about gigantic market swings like this is that it's easier to separate winners from losers. It's almost like a hurricane displacing water in a lake to expose the rocks underneath.
In all this chaos, market exposure is more pronounced. For example, the coronavirus didn't just hamper supply chains from China; it's weakened travel, hospitality, and even oil.
That's why options trading strategies work well under conditions like these. A stock's direction, in some cases, is more predictable.
It's what Tom foresaw when he pointed to stocks like Cimarex Energy Co. (NYSE: XEC), Marathon Oil Corp. (NYSE: MRO) and Apache Corp. (NYSE: APA). These have all tanked more than 50% since January.
You could have predicted those losses on coronavirus news alone. But OPEC has responded by introducing even more chaos to the energy industry.
The oil cartel couldn't seem to agree with Russia on a supply cut last weekend. So Monday is where you see a steep ledge for these oil stocks.
Anyone holding a $10 put option on MRO, expiring April 17, which we first recommended on Feb. 26, made off like bandits. The contract has gone from $1.40 to $6.15.
A 339% gain in about three weeks.
Tom's options trading recommendation has earned even more since he talked about it Feb. 21.
Tom recommended a put option on Carnival Corp. (NYSE: CCL), and it has done exceptionally well up to now. It was a $40 put expiring April 17.
And cruise lines affected by the coronavirus are still a mess. People are getting medevaced from the Carnival Grand Princess on helicopters. They say it could take days to evacuate the ship while also containing the virus.
At the time, the Carnival stock was trading for $42. The $40 option was out of the money, and that made it cheap.
In fact, you could have bought it for $1.60 per contract and ended up at $18 today. That's turning a $160 investment (controlling 100 shares) into $1,675 - otherwise known as 946% profit.
Of course, those gains are in the past. We have a similar opportunity for you today. But here's something to consider first...
How to Time Your Options Strategy
Put options give the holder the right to sell a stock at a certain price on a certain date.
Carnival stock is hovering around $20 right now, about 50% less than the strike on Tom's recommended put. That gives the holder of the $40 Carnival put the right to sell for $40 when the market prices at $20.
And that makes the option hugely valuable.
But stock price is only part of the equation.
Two key measures of an option's value are time value and intrinsic value. Intrinsic value is how "in the money" the option is. Time value is how far away from expiration the option is.
The farther away the stock's expiration, the greater the time value, and the more expensive the option. It's more expensive because you're taking less of a risk. The stock's price has more opportunity to fluctuate over a longer period of time.
The best-case scenario when buying an option is the stock price going further and further into the money as the option approaches expiration. And that's exactly what's happened with Carnival.
Carnival has sunk 50% below the $40 strike on that April 17 option, still more than a month from expiry. That gives the contract outstanding time value and intrinsic (in the money) value.
Right now, though the long term is unknown, and near-term market movements have been less surprising. And part of what makes the stock market so scary right now is what makes options so profitable. Stocks taking big swings over short periods of time.
But this might be the best options strategy to profit without exposing yourself to too much risk.
Your Coronavirus Options Trading Strategy
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
We're nearing greater uncertainty in the markets as the coronavirus approaches full pandemic mode. So we want to look at puts on stocks with a little more left to lose, maybe closer to the 60-day offing than the 90-day.
We recommended an oil option, Marathon Oil Corp. (NYSE: MRO), April 17, $10, shortly after Tom Gentile's Carnival prediction. That made investors more than 339% profit in the last few weeks as the stock lost more than half its value.
But since we're almost a month out from expiration, the option has little time value left.
Also, the put option can't add much more intrinsic value over the next few months, because the stock can't get much closer to zero after losing 73% since the beginning of the year.
To better your chances going forward, you could look at a put option with an expiration date around 60 days. Make sure it's not so far out of the money that it can't cross over in that short amount of time.
Exxon Mobil Corp. (NYSE: XOM) fits the criteria.
Right now, Exxon trades at $43. But the oil industry is really suffering from a price war between OPEC and Russia. Until they resolve it with more talks, it's looking bleak.
Yesterday was oil's worst day since 1991, a 24% plunge. But it may have further to go. Come July, we might see airlines cutting their fuel expenditures due to lower travel demand.
So it could work in your favor to buy a $35 put option for $2.12, expiring May 15.
You know the fuel market is tanking. And you can already see that the Exxon Mobil stock fell about 30% in the last month.
All it needs to do is lose another 10% over March to possibly double your money on this option.
And the current OPEC-Russia price war could make this happen.
Of course, you have to be prepared to take on some risk when making a decision like this. But trading puts is probably the lowest-risk options strategy around.
The most you have to lose is $212 per contract, what you paid in the premium.
However, if you buy the put and end up wanting to exercise at expiry, there's a good chance you'll make money selling the stock, too.
For example, if the stock drops to $35 before May 15, that's $800 ($8 per share, 100 shares) profit.
Stay tuned for more options trades to battle against coronavirus worries. And most importantly, don't panic.
Action to Take: While fear of coronavirus evolves, oil stock will continue to drop in the short run. Look for out-of-the-money options contracts with reasonable time value. Exxon Mobil Corp. (NYSE: XOM) is one of these. If it loses 10% between now and May, the May 15 put option at $35 could more than double your money.
See The Power of Cannabis Options at Work
Cannabis options have only been around for a little over a year... but they're proving to be a powerful wealth-building tool in this market sector. And America's No. 1 Pattern Trader sat down with some of the brightest minds in cannabis to discuss this dynamite opportunity... along with three of the top trends in cannabis that could help you start building life-changing wealth right now. Get access to this event here.
Follow Money Morning on Facebook and Twitter.
About the Author
Browse Mike's articles |
Mike Stenger, Associate Editor forMoney Morningat Money Map Press,graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.
… Read full bio
