Don’t Expect a Flash Crash Any Time Soon…
Wow, it’s been a turbulent week in the market!
I’m glad we finally made it to the weekend and I’m looking forward to taking some quiet time over the next couple of days to research all of the variables driving this market and the opportunities that are being created.
Given the return of volatility that we’ve seen in the market, I wanted to start off this week’s Q&A alert with a great question that Mark R. sent in. (I’m sure many of you have a similar question in the back of your mind…
Hi Zach, my question is: “Are we heading for another flash crash?”
Thanks for writing in Mark!
The “flash crash” that (I believe) Mark is asking about happened on May 6 of 2020. At 2:32 in the afternoon, markets started trading sharply lower and sold off sharply for the next 36 minutes.
Over that period, the Dow dropped about 9%, which would be about 2,300 points in today’s market terms. I’ll never forget watching the prices drop lower that day as the entire investment community scrambled to find answers for what was driving the action.
Ultimately, it turned out that some rogue computerized orders triggered the selloff, and as stocks dropped, more computerized trading kicked in. It took time for the “owners” of the computer programs to figure out what was happening and turn off the orders. But during that time, markets certainly felt out of control.
Since that time, the stock exchanges have set up circuit breaker rules that will shut down trading if giant moves happen in the market. We saw some of those “circuit breakers” kick in during the early stages of the coronavirus crisis.
I don’t think we’re going to see anything close to this type of “flash crash” action in the market anytime soon.
For one thing, trading programs have become more sophisticated and are not as vulnerable to this type of runaway action.
Also, these programs have incorporated the known fact that the Fed has a history of stepping in and rescuing investors if the market gets too far out of hand.
(We can debate if this is the right thing to do in another alert. But for now, that’s an important input for any trading program.)
Bottom line, we’re definitely seeing more volatility hitting the markets. And it is important to be using some of the strategies we’ve talked about this week to protect your wealth from this volatility. But I don’t think we’re going to see a flash crash like the one that occurred in 2010 again in our lifetime.
What About the Messages to NOT Buy 5G Stocks?
I’m still getting a lot of questions about my colleague Ray Blanco’s messages about not buying 5G stocks (until you see his presentation).
Here’s just one of the recent questions…
I have seen a lot of videos come through my inbox about not investing in 5G stocks. Instead they are trying to predict 15 G stocks to buy? What do you think about this? ~Jennifer A.
The videos that Jennifer is talking about are tied to an exciting new development that Ray Blanco and his tech team have picked up on.
Basically, Ray’s team has been researching what appears to be a secret project at Apple to beam internet directly from space to your devices. It’s a revolutionary new technology that could make investors a lot of money!
Here at The Daily Edge, we always try to bring you the best cutting edge research on new investment opportunities. So I’ve worked with Ray to make sure you get the information on Apple’s new technology. That way you can profit from a number of great opportunities that this market is giving us.
But Ray’s project doesn’t change the importance of 5G for today. After all, 5G is about much more than just getting internet on your phone.
And Ray’s message isn’t to stop investing in 5G all together. I’ve spoken with Ray personally and he’s still a believer in many great 5G opportunities.
His message was simply not to invest in any more 5G stocks until you got a chance to see what he and his team are working on. That way, you can decide how much to invest in each of the different areas that make sense to you.
I wrote a bit more about my conversation with Ray in a Daily Edge alert last week. You can check out that article here.
In the meantime, there are still plenty of great reasons to keep investing in the best 5G stocks — especially the ones that pay you lucrative dividends!
What About my INSG Position?
This question comes from one of our Income on Demand readers.
[Editor’s Note: Income on Demand is one of our premium newsletters focusing on pulling instant income payments from specific stocks in the market by using a special options strategy.]
I sold 2 Put contracts of $INSG with a strike price of $12.50, and an expiration date of next Friday, 19 June. $INSG is currently trading around $10, and is not likely to get back to $12.50, so it is likely those 2 contracts will be “put” to me next Friday? ~Thomas F.
Hi Thomas, I’m so glad to hear that you’re using our Income on Demand strategy to pull extra cash from the market!
To fill everyone else in, we collect income by selling put contracts for stocks that we would like to own. When you sell a put contract, you receive an up-front payment in exchange for your agreement to buy shares of stock at a certain price.
Yes, Thomas, if INSG is trading below $12.50 when the market closes next Friday, your broker will automatically buy shares in your account at that price. Remember, this is a great 5G stock that we want to own, and we’re buying at a price that is below the level where the stock was trading when we sold our put contracts.
Once you own the stock, I’ll send you instructions on how to sell a call contract for those shares of stock. That way, you can collect more income from this play.
And when you sell a call contract, you’re entering an agreement to sell your shares of stock at a certain price. That’s how we ultimately close out our income plays, freeing up cash for the next opportunity.
As a member of Income on Demand, you’ll receive step-by-step instructions on exactly how to proceed. So keep an eye on your inbox!
How Do You Pick Stocks for Selling Calls?
Many of you wrote to tell me that you enjoyed this article on getting cash from non-dividend stocks.
Cindy G. had a great question about which stocks are best for collecting this extra income.
Hi Zach, what’s the best way to choose a stock that would be good to sell call contracts on? Are there strategies for choosing the strike price?
Great question Cindy!
When it comes to which stocks I like to use, The first qualification is that the stock MUST be a company I would fell comfortable owning. After all, we’re entering an agreement to potentially purchase shares. So it’s gotta be a stock that I’ve done my research on and would invest in anyway.
Secondly, I like to pick stocks with a “reasonable” price point. For me, that means around $50 or less. This is because every option contract represents 100 shares. So if you sell one put contract on a stock trading for $50, you’ll need to set aside $5,000 in case you’re required to buy that stock.
You can see why high priced stocks like Tesla — which trades near $1,000 per share — could be problematic. Selling just one put contract would require you to set aside about $100,000 in your account. That’s a lot for any individual investor.
Finally, I look for put contracts that give me enough income. The more volatile a stock is, the higher the option price. But at the same time, stocks with more volatility often have more risk. So I look for balanced situations where the put prices are high enough to give me some great income, but where the stock isn’t so volatile that I wouldn’t feel comfortable owning it.
When it comes to which strike price to use, my personal preference is to use a strike price a bit below where the stock is currently trading. That way, if the stock continues trading where it is, we’ll get to keep the income and we won’t have to buy shares when the put contract expires.
At the same time, if the stock does pull back and we’re required to buy shares, I get to purchase at a discount price. (And of course I always get to keep the income I received when I first sold the put contract.)
Thanks for the question Cindy!
What Should I Do With My Company Stock?
Your fellow reader Larry R. wrote in with a question about one of his holdings…
I worked for Ford Motor Company (F) for 31 years and during that period I invested regularly in the employee stock plan. When I retired, about 17 years ago, I had roughly 4000 shares and the stock price was approx. $30.00 per share. I didn’t pay much attention to it until about a year ago. I was shocked to learn the stock had fallen into the $6.00 to $8.00 range. Do you think it will ever come back to life or should I sell it now and bite the bullet for the loss?
Hi Larry, I’m sorry to hear about your investment trading lower like this. Especially after you’ve given so much of your life to this iconic company.
I do want to make sure you understand that I can’t give out personalized investment advice. So I can’t tell you what you should do with your shares of Ford.
But for our entire Daily Edge family, this gives us a couple of great investment concepts to talk about.
First of all, I believe Ford is a company that will survive the coronavirus crisis and continue to stay in business. Still, the company is facing stiff competition and already had some serious business risks before the coronavirus crisis.
We cut Ford from our Lifetime Income Report portfolio this spring largely because the company cut its dividend. Since Ford has suspended the cash payments it sends out to investors, it no longer fits our criteria for Lifetime Income Report.
When I managed money at the hedge fund, we would often have customers who owned big blocks of stock from the companies they worked for.
Often, we would sell call contracts for these shares of stock.
Just like in the discussion above, when you sell a call contract, you’re entering an agreement to sell shares of stock. But you only sell the shares if the stock is trading above the agreed upon price when the call contracts expire.
By selling call contracts, our customers were able to generate income from the shares that they owned. And then they were eventually able to exit those shares at an agreed upon price that they were happy with.
A couple quick things to consider…
We would often sell call contracts for some of the shares — but not all of them. That way, if the stock continued to move higher, our clients would still participate in the gain.
Also, remember that every call contract represents 100 shares. I would only sell one call contract for every 100 shares of stock I own.
Thanks everyone for sending in your questions!
And let’s keep the conversation going. Send me an email any time at AskZach@StPaulResearch.com
I look forward to hearing from you!
Here’s to growing and protecting your wealth!