Options premiums are currently at an all-time low, making options an appealing alternative to traditional stock investments. Rather than purchasing stocks outright in anticipation of a year-end rally, investors can opt for bullish call options. These options grant the holder the right to buy an asset at a pre-determined price within a specific timeframe. This strategy offers an attractive risk-reward balance for those who analyze probabilities and rewards.
If you have an affinity for mega-technology stocks but find the record-high prices unappealing, fear not. Consider allocating part of your funds towards Apple calls and the remainder towards short-term Treasuries, which provide an annual yield of approximately 5%.
Here's how it works: if the market continues its upward trajectory, the value of your options will increase significantly, bringing you substantial profits during the festive season. In contrast, if your prediction is incorrect and the market stagnates or declines, you will only lose what you initially invested in the options. Compared to incurring losses from purchasing stocks outright, this is a highly attractive proposition.
For instance, if Apple's stock reaches $210 or more by expiration, the $190 call option will be worth $20. At that point, you could sell the options and reap a handsome profit. You can then reassess the market conditions and decide on your next moves. If concerns about a potential recession in 2024 start surfacing around the time of the January expiration, you could even explore selling put options on Apple to position yourself to buy the stock at a lower price. (Put options provide the holder with the right to sell a specific asset at a predetermined price within a set time period.)
By utilizing options instead of stocks, you can navigate the market and manage risks more effectively. The current affordability of options adds an attractive layer of opportunity for investors seeking a distinct approach to their investment strategies.
The Apple stock-proxy trade can have an unfortunate ending, especially if the stock price takes a downturn. This is a common risk that comes with this strategy. If the stock fails to meet the strike price at expiration, the money invested in the calls will vanish.
Using options instead of stocks also sheds light on the misunderstood Cboe Volatility Index (VIX). Rather than being a gauge of investor sentiment, it should be seen as a representation of options prices.
Our belief remains unwavering: when the VIX is low, it's a sign to depart, and when it's high, it's an opportunity to buy. However, keep in mind that VIX sentiment signals are meaningful only when the VIX reaches extreme levels. In other cases, it serves as an indicator of whether there's a good deal on puts and calls in the options market.
Currently sitting at 14.16, the VIX indicates that options prices are relatively low. Over the past year, the VIX has fluctuated between 12.68 and 30.81—the so-called "fear gauge."
This is an extraordinary time for investors, and it's crucial to take note. If the market proves impervious to global events and continues its upward trajectory, this period will undoubtedly become a notable case study for investors to examine.
Our approach primarily focuses on options, which is particularly appealing to those who harbor concerns such as: a) questioning the rationality of buying stocks amidst global chaos, b) believing that the Federal Reserve will continue raising rates, c) considering it unwise to ignore high stock multiples, and d) recognizing that a younger generation of investors who lack experience may have built a wall of worry.
We must not forget that the federal government is at risk of a shutdown due to the ongoing instability within Congress and their inability to agree on funding operations.
Until these and other risks dissipate, it is important to appreciate the market's fluctuations, driven by both fear and greed.
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