The stock market has been quite volatile lately. Take a look at the VIX (a highly used market volatility indicator) for the past month and you can see that that volatility has been increasing.
Today’s world is more complex than ever. We have the war in Ukraine, supply chain issues that are continually getting worse and growing inflation pains. I bonds are set to deliver over 9% yield over the next 6 months which is a record high in the past few decades. In fact, we recommend getting some exposure to I bonds if you don’t already.
All these different issues are making investors question where to put their money. Is there a safe spot anymore? Housing market has taken off already and is still red hot even with the interest rate hikes. But, is that sustainable and do you want to be the last one to buy a property at the highest price?
Different circumstances will warrant different responses to today’s turbulent market. If you are nearing retirement or are already retired, you hopefully are already in or moving toward more stable assets. That can include treasuries, triple a bonds, high dividend stocks, etc.
But what if you are young (20’s/30’s) and unsure as to what you should be doing in this market. Lucky for you, time is on your side and historically speaking the market does recover. The strategy we will be introducing today is the idea of using cash covered puts.
Cash covered puts are a great tool to leverage when you want to get into the market but are worried at buying in a too high of a price. Essentially the strike price that you choose on the put will be what you assume is the fair market value of a certain equity. Because you take the risk of buying the stock at the strike price when you sell a put, there is a premium involved. It’s basically like getting paid to buy something you would have already bought at the fair price you would assume the underlying equity to be worth.
We are currently hold cash covered puts on the large indices using ETFs such as VEA, VTI and VWO. You will probably notice that indices typically have a lower premium than individual stocks and that’s because the risk factor and volatility of an index is usually much lower than an individual stock. Investing in the market is tough right now but there are tools available to help. It may even be worth taking a look at our article about the wheel strategy because it is very beneficial in times like these.