There is no doubt the S&P 500 (SPY) has been volatile over the past month or so.
In fact, we’ve seen historic drops and advances.
Vanguard founder Jack Bogle recently said:
“I have never seen a market this volatile to this extent in my career. Now, that’s only 66 years, so I shouldn’t make too much about it, but you’re right: I’ve seen two 50% declines, I’ve seen a 25% decline in one day and I’ve never seen anything like this before.”
Through all of the crazy volatility, the S&P 500 managed to push below its important long-term trend line: the 200-day moving average.
This type of volatility often occurs during bearish cycles.
It really doesn’t matter to me . . . I’m just enthused by the continued heightened levels of volatility as seen through the VIX.
And admittedly, I’m leaning a little more bearish these days . . . and the return in volatility has helped me to reap some really nice gains with a conservative strategy.
So far, we have seen cumulative gains of 220.2% in our Weekly Options Strategy using bear call spreads, 223% in our Iron Condors strategy and 269.1% in our bear calls strategy. All three have been the dominant strategies in 2018.
In addition, we have locked in 56 out of 62 winning trades for a win ratio of 90.3%. Our average gain per trade hovers around 12% . . . that’s right, 12%. That includes losing trades. So, think about it every time you place a trade . . . and that’s 62 times this year, you are averaging 12% for each and every trade. It might not sound like a large gain, but it adds up quickly.
Some of you are asking, “What’s a bear call spread?”
A bear call spread – or vertical call spread – is my trading strategy of choice in this market environment. It’s probably the most used trading strategy in my arsenal of options selling tools for a variety of reasons. Here are a few:
- I believe the market doesn’t crash higher; it crashes lower.
- The strategy allows me to have a margin of error just in case my directional assumptions are wrong.
- I can define my own risk/reward at order entry.
- Basically, I can choose my own probability of success on each and every trade I place.
A vertical call is a credit spread composed of a short call at a lower strike price and a long call at a higher strike price, thereby creating a credit or cash inflow. The nature of call pricing tells us that the higher-strike purchased call will cost less than the money collected from the lower-strike sold call.
The ideal outcome is for the underlying stock price to stay below the strike price of the sold call through option expiration.
Bear call spreads are not new to the world of investing. Unfortunately, not enough investors are aware of this sound options strategy which provides reasonable expectations for returns.