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Can the 'Smart Money' Outsmart This Market?
We make option trades by following what we call the "smart money," the funds and institutions that are throwing big amounts of cash down on the bets they're making that an option is going to take off when the stock soars or stumbles, as they expect it to.
When we see these gigantic moves taking place, without the headlines or other catalysts that would typically precede (and therefore explain) this type of activity, we start calling the actual traders on the floors of the option exchanges to get their professional opinion about the truth behind the trades.
And if it truly looks like something "they" know is something the public isn't privy to, that's when we find ourselves with some potentially explosive options trading opportunities.
But in this volatile trading environment, where practically every move seems to be an extraordinary – and certainly inexplicable – one, the smart money is being careful. It's still active, but its bets are presently less telling than "usual."
Going forward, we expect the market to normalize at higher average volatility levels. When that happens, the smart money will become more active and discernible again as fear subsides, and we will track it and trade on it as we have in the past.
But for now, there are other ways to stay in the game.
Given the tremendous change in the trading landscape during the past month, the smart money has been selling volatility rather than making strong directional bets recently. We are right there with them and putting up profitable trades again.
Here's how you can make those profitable plays, too.
Making the 'Big Money' in this Market
"What happens next?" is the big question on both individual and professional investors' minds.
While it's impossible to name a truly foolproof strategy to making money in any type of market, the days of having a substantial window of opportunity in which to jump in on (or, out of) trades are gone … and they're not due to come back for a while, if they ever do.
However, the good news is we don't have to fully and accurately answer the long-term questions to make money in this market.
What we do know is that, without question, option volatility is still very elevated. In turn, so are option premiums, which means we must be careful not to overpay to enter option trades and to be sure to bank the biggest profits possible. So, we will continue buying low and selling high.
This is why it is important to have an options trading account -- sure, you can buy stocks and even call options at low prices and sell them when they appreciate significantly. But there's more to "buying low and selling high" that you're missing out on if you aren't "Selling to Open" calls and puts.
You may be doing this already by "selling covered calls" against the stocks you hold long as a way to juice up your returns when share values are flatlining or pulling back. In a word, when you sell a call against your shares, you collect premium upfront and look for the option to decrease in value.
If the option expires worthless, then you get to keep your premium and sell more calls against your stock next month, and the month after that. Or if the option still has some value left at expiration, you can "Sell to Close" your calls for a lower value at any time during the life of the contract, and still keep some (if not most) of the money you took in when you initiated the trade.
You don't have to own the underlying stock to sell calls and puts, but because there is risk involved, you will need to be approved for a margin account and Level 3 trading status. Check with your online brokerage before doing any of these strategies, but once you see the payoff that selling volatility can make, you'll soon see how selling volatility can bring new life to your portfolio while the market sorts itself out!| 1 | 2 | 3 | 4 | 5 | 6 | 7 | print version |
