| Can We Make Money Selling Options in a Confirmed Bear Market? / New VideoThe Blue Collar Investor
Covered call writers and put sellers frequently inquire about generating positive cash flow when the market crashes or in confirmed bear markets as we had in 2008 (real estate crash) and in 2022 (COVID-related crash). Over the years, I have written about and produced videos detailing protective approaches we can execute in short-term bear markets. These have included using ITM call strikes, deep OTM put strikes, the PCP strategy, ultra-low risk Delta and (IV implied volatility) strategies among many others. In this article (does not apply to current market conditions), we will analyze one approach to making money in confirmed long-term bear markets using inverse ETFs.
What are Inverse exchange-traded funds (ETFs)?
These are securities that are constructed by using derivatives for the purpose of benefitting from the decline in the underlying benchmark. When the market goes down, these securities accelerate.
Inverse ETFs to consider
- PSQ: Short QQQ (Nasdaq-100)– Recently executed a 1-for-5 reverse stock split
- DOG: Short Dow 30 (DJIA)
- SH: Short S&P 500 (S&P 500)
- RWM: Short Russell 2000 (Russell 2000)
Inverse ETF Portfolio Setup
- Using a portfolio with $50k available and 4 ETFs
- 21-days to expiration
- Cash reserve guideline is $1k – $2k
- $48,670.00 will be spent to purchase the shares calculated
- A cash reserve of $1330.00 is available for potential exit strategy executions
Option-chain for PSQ on 4/1/2024
With PSQ trading at $8.76, the $9.00 OTM call strike generated a bid price of $0.05. Option-chains for DOG, RWM and SH were also researched.
Inverse ETFs: Initial Trade Calculations Using the BCI Trade Management Calculator (TMC)
- Pink cells: 19-days to contract expiration
- Yellow cells: Breakeven price points
- Brown cells: 19-day and annualized initial option returns
- Purple cells: Additional % upside potential returns
Inverse ETFs: Initial Portfolio Calculations Using the BCI Trade Management Calculator (TMC)
- 35 contracts sold
- $299.00 in option premium generated
- Additional $1330.00 in upside potential (share appreciation up to the OTM call strike)
- $48,670.00 invested in share purchases
- Flat 19-day return (no upside) of 0.61%, 11.72% annualized
- Total 19-day return with maximum upside is 3.35%, 64.36% annualized
Discussion
In confirmed long-term bear markets, we can turn to inverse ETFs to generate positive cash flow. Once these trades are entered, we immediately go into “position management mode” as we do when structuring our trades more conventionally.
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Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan!
My husband and I are so grateful we found you. Your books have truly shaped our financial foundation in terms of thoroughly understanding covered calls & cash secured puts – and giving us the confidence to take action on them!
I’ve read Stock Investing for Students twice. I’ll happily review Chapter 6 to put things in place for our daughter!
Wishing you the absolute best. Keep doing what you’re doing! You’re helping SO many people!
Cheers,
Cheryl & Ryan
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Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we potentially increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.
Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
Traditional covered call writing will also be discussed to demonstrate comparisons between the 2 strategy approaches.
Topics discussed
Summary
Brief review of covered call writing
Option basics
What is an option-chain?
Option selection
Calculating covered call returns: Real-Life examples
Portfolio overwriting defined
Basics of strike selection
Pros and cons of portfolio overwriting
Why early exercise is so rare
Rolling options
Role of dividends
Locating ex-dividend dates
How to avoid early exercise
Avoiding earnings reports
Practical applications: Delta, implied volatility, annualized returns
Real-life examples with calculations
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