Guest post by Chris Douthit, OptionStrategiesInsider.com
My nephew's new thing is to tell people that they're a noob…
If you're unfamiliar with a noob, it's slang for a person who is inexperienced in a particular area, someone who would be considered a beginner or rookie.
This had me thinking, every investor at one point in their career is a noob, and as we grow in experience, making mistakes along the way, we begin to have a better understanding of markets and how they work.
Some people never get there, they lose money and think investing doesn't work or will never work for them and give up. Others a push forward, and will hopefully learn one of the most important investing lessons there is… Don't follow the "herd."
Most new investors typically don't have the stomach for investing, it's something they develop over time. When things get tough new investors usually give in to their fears and follow the herd. On the other hand, experienced investors ignore the herd and take advantage of market fears allowing them to swoop in and capture profits.
Most of us like to think that we're the type of investor who takes advantage of an opportunity, the fact is, not following the herd is a lot easier said than done. The best time to buy stocks is after they have been beaten up, but ironically few people are willing to pull the trigger at this time. There's a reason the stock has been beaten up, and most investors are usually scared to jump in when volatility is upon us. Instead, they wait until the stock is trading higher, and much of the profits of already evaporated.
I've seen it time and time again. Back in 2009, I started buying property and encouraged everyone I knew to do the same. Most people told me I was crazy, but as it turned out, those who took my advice made a killing.
Experience has taught me fear is a good indicator, but not a sign to exit the market, but instead to use my head to think logically about the current price levels and where they should go in the future. This is not a new philosophy; legendary investor Warren Buffett has made a career of taking advantage of massive opportunity to buy stocks when everybody else is fearful.
Today there is still a lot of money sitting on the sideline because people are too scared to buy stocks. With coronavirus cases spiking and with the last economic meltdown fresh in our memory, being fearful makes a lot of sense. It's especially scary with the stock market closing in on all-time highs along with the uncertainty of the presidential election looming in November.
However, the economy is still at the beginning stages of its recovery…
So, I need to ask myself, what is the herd doing? The herd is fearful about what can go wrong over the next several months. They are using options to buy insurance on their portfolio, and they are continuing to keep their money on the sideline.
When there is a significant demand for protection, the price of that protection increases, here investors continue to pay more and more for that protection. This gives investors willing to take the other side of that trade far larger than normal returns.
For example, let's say investors own the iShares Trust US Industrial ETF (IYJ), but they feel nervous about the future of the economy. They could use the options market to buy insurance on their asset for about $250. However, that same insurance policy would've cost them $120 one year ago.
That means the insurance policy has more than doubled in the last year! And this is for the same policy, the only difference is how fearful people are today, which has led to a massive increase in price versus just one year ago.
The point is, investors haven't been this fearful since the financial crisis. As a result, they don't have the stomach to make smart investment decisions, but instead, that fear is making them follow the herd. Just like in 2009, when I was recommending people should buy property, I am recommending they don't follow the herd today.
For investors who already own stocks, it's the perfect opportunity to take advantage of the fear by implementing the right option strategies for this market. For those who already own stocks and want to monetize their current asset, the covered call strategy is a favorite among many investors.
However, for investors who really want to put in the time to understand the market and the stocks within them, the iron condor strategy is a perfect fit allowing investors to capture profits on both sides of the market.
The window to capture elevated price levels due to market fear won't last forever, these are once in a decade opportunities. Those who want to take advantage of these opportunities alongside us just need to go to OptionStrategiesInsider.com to learn more.