Worried About A Pullback? Do This Instead...

Amber Hestla's picture

Tuesday, November 19, 2019 - 12:00am

by Amber Hestla

While there are no sure things in the stock market, there is one thing that's almost certain: After stocks go up, bears start calling for a correction.

I know what you're probably thinking... But what if they're right? 

I get it. Psychologically, it can be daunting to buy stocks when there are rumblings. 

In times like these, I am reminded of something one my mentors, Ralph Acampora, said. 


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Louis Rukeyser,
Host of Wall Street Week

Louis Rukeyser photo

Ralph was often seen on Louis Rukeyser's "Wall Street Week," which ran on PBS every Friday night from 1970 through the early 2000s. Ralph is also one of the founders of the Market Technicians Association (MTA), a professional organization I belong to.

Ralph explained to me why he doesn't worry about the short term by asking, "If you knew that a 10% correction was coming, would you sell a stock at $20 to buy it back at $18?"

The answer for almost everyone should be, "No, I wouldn't sell at $20 and buy back at $18." There are costs associated with doing that -- commissions, slippage on the two trades and possibly taxes. After expenses, the amount saved will be less than 10%, and although this trade would sidestep a correction, it carries a great deal of risk. 

If the correction doesn't come, you would miss out on the upside. If the correction does come, would you actually buy the stock back at $18, or would you wait for an even better price? The risk of waiting is that the market could turn up and you would miss out on the gains. 

Ralph's advice was simple: Ignore the small changes in the market and focus on your long-term strategy.

This mindset that allowed Ralph to enjoy a successful 50-year career in the market. It's also the same advice that's helped me build a 90.5% win rate since 2013. And traders who followed every single one of my Income Trader recommendations in 2018 could have made about $20,650 in extra income -- or even more.

Here's How It Works...

I achieved this win rate by selling put options on high-quality stocks. And before you throw in the towel and say, "Nope, not for me," just know that selling puts can be an incredibly lucrative strategy -- when done properly -- and is likely less complicated than you think.

Here's how they work...

Put options give the buyer the right to sell 100 shares of stock at a predetermined price. This is known as an "exercise price" or "strike price". The investor selling the put promises to buy the shares if the buyer exercises their right to sell the stock anytime until the expiration date of the contract. Put options are only exercised when the stock price is "in the money," i.e., below the exercise price.

In exchange for their promise to buy the stock later for more than the market price, put sellers are paid a premium by the put buyer. 

The good news is that any investor can sell puts. This strategy can be used with any stock that has options available, which generally includes all large-cap stocks, many mid-cap stocks, and a number of ETFs. 

Traders can use puts to enter long-term positions in stocks. The premium allows them to generate income while waiting for a pullback in a stock they want to own. If the put is exercised, they will be buyers at a price they believe represents a fair value for the stock. (This is why I recommend this strategy only for stocks you you'd like to buy if they fall to your price.)

Traders can also sell puts as an income strategy. With this approach, they repeatedly sell short-term puts that will expire in less than three months and have a low probability of being exercised. When an option expires worthless, the seller keeps the premium as their profit. (Options pricing models can be used to determine the probability of exercise.) 

Why You Should Consider Trying It...

If you think about it, selling put options is like a way of setting "buy" orders at a limit price -- and getting paid to do it. This makes it as close as you can get to a win-win when it comes to investing. Selling puts can work in any market. But if you're especially worried about a pullback, then put options are ideal. 

Think about it... If you buy a quality stock at a lower price, you're setting yourself up for future gains. And whether you actually get the opportunity to do so or not, you're getting paid. (In fact, most puts expire worthless.) 

The best part? Once you learn, it takes only a few minutes per week to make these trades. That's a small time investment considering the extra income to free you from relying only on Social Security, your savings, or even your job. It could give you the free time and wealth you need to pursue a new hobby or live on your own terms. 

So if doubling or even tripling your income stream sounds appealing to you, then I'd like to invite you to learn more about how my Income Trader strategy works. You'll also have the chance to join me and my readers and get access to the award-winning indicator I've personally developed to help identify these trades. To learn more, go here.

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.