Making money on the way down: How retail investors can play the markets both ways

Retail investors are ecstatic with the above average returns in the financial markets this year. With the volatility index near all-time lows for the majority of 2017, it’s safe to say that a market correction never phased investor sentiment. Despite these abnormal returns, what goes up will eventually come down.

When Wall Street spots an exciting trend, smart money funds companies to create financial products around that trend. The insiders give their closest business partners a chance to get in early and eventually retail investors can get involved at inflated levels. But as investment platforms and technology improves, many investors are opting to buy and sell stocks for themselves.

Financial media has glorified a “trading” strategy that makes day-trading stocks seem like a simple way to a six-figure income. While it certainly can be done, this particular strategy isn’t realistic for investors with a full-time job. Simply buying stocks can also be extremely capital intensive, with mega cap stocks like Amazon and Google trading well above $500. So what can the average investor do?

warrenDespite popular belief, the derivatives market can be a great way to get involved in the financial markets. Options specifically allow you to profit when a stock goes up, down, or even trades within a particular price range. The “Oracle of Omaha”, Warren Buffet, has been a long time advocate of the buy and hold strategy. But what many investors fail to realize is that Warren Buffet also implements a put selling strategy with significant size in the markets. By selling a put, you immediately receive a credit and profit if the stock is above your put strike price at expiration. Time is also in your favor with options because the option buyer needs the stock to increase or decrease in value quicker than the option’s theta decay. Similarly, by selling a call option, you can profit as the stock decreases in value. This is all possible at a fraction of the cost that borrowing stock requires in order to go short or buying shares in order to go long.

Options also give the option seller a statistical edge because they have the opportunity to profit three different ways rather than two. There is no get rich quick “holy grail” when it comes to the financial markets, but the ability to put the odds in your favor can lead to significant returns and it keeps investors engaged with their hard earned money. Instead of paying someone to index your money for a fee, why not try and take ownership of your own financial future?

 

 

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