You’re not the only one confused about the stock rally…
A stock market crash is happening. We don’t know, but it will certainly happen at some point. We may be at the beginning stages of it right now with the NASDAQ down more than 8% in the past week.
Some analysts believe we may retest the March 2020 lows, and there is plenty of uncertainty not getting priced into the current stock market.
Greed, the Fed, and promising tech companies stretched beyond reasonable valuations have fueled the stock market to dizzying heights.
Just because stock prices have gone up for a long time doesn’t mean they go up forever. It’s during overconfident moments like these when investors get burned the hardest in a crash.
It’s easy to talk about the Great Recession, the dot-com bubble, and other crashes with the hindsight of how they happened. It’s easy to say that it’s different this time.
But the “This this is different” rally cry was the same one used before all of the other crashes.
Eventually numbers matter, but right now they don’t. If you want to take advantage of the next stock market crash to build up your wealth, follow these 3 strategies.
Most people get scared of a crash headline and panic sell. They’ll sell at the bottom to avoid further losses only to see those investments rise back to their pre-crash levels.
It was only a few months ago when many stocks were 50% lower than what they currently are.
I believe you should never go to the sidelines as an investor. In an earlier article, I explained why I’ll continue investing regardless of the market.
In any market, there is an opportunity to make more money than you put in.
We’ve also been hearing about a stock market bubble for a few years. While the stock market’s growth under the context of a beat-up economy raises more bubble concerns, who can forget the Crash of 2016.
Even Trump called it “a big bubble” back in 2016.
This was years before the lockdown, economic fallout, and the 65% increase in the S&P 500 since the start of 2016.
I bring up these 2016 crash articles for one reason. Just because someone says we’re in a bubble doesn’t mean we’re in a bubble…and a bubble can last a long time. You can predict the bubble will eventually burst, but getting the timing wrong is the same thing as being wrong.
People who were afraid of a bubble bursting in 2016 missed out on all of those gains. People who sat out at the end of March missed out on the abnormal recovery.
As stocks continue to go up, the impending bubble burst will have a greater impact on stock prices.
If you have over 100 shares of a company, you can sell covered calls on that stock. A covered call requires you to set an exit price where you commit to selling the stock at that price. In exchange, you receive a premium.
With 100 shares of QQQ, you can easily make $100 each week from the covered call premiums. The covered call can allow you to exit your position at an attractive price. If the covered call expires before you hit your exit price, you can sell another covered call and continue collecting premium.
If you end up selling the 100 shares, you can either wait for the price to go down or sell a cash-secured put to collect an additional premium and eventually reclaim the 100 shares at the entry price you decide on.
While this strategy doesn’t protect you from downside, it does cushion the blow. I recently sold a covered call for Digital Turbine (Ticker: APPS) stock and received a $94 premium ($0.94/share for 100 shares). I paid $24.88 per share, but the $0.94/share premium brings my cost basis down to $23.94. If the September 18th $30 call expires worthless, I can do this all over again for an October 16th covered call to further cut down on the cost basis.
I can use all of these premiums to purchase additional shares, pay off expenses rather than selling shares to achieve that same goal, or save as cash for a rainy day.
The final way to make money during a stock market crash is to hedge your portfolio. While liquidating your portfolio and investing all of your money into short positions is the best way to invest right before the crash, that’s an extremely risky and unnecessary move.
If you make moves like those, you become prone to panic buying and selling which never ends well.
Rather than sell everything, start hedging your portfolio. You can start with a single stock in your portfolio.
Right now I have 5 shares of Big Commerce (Ticker: BIGC) in my portfolio. I see this company as a long-term winner and want to keep those 5 shares through thick and thin. If I stop investing in a company, it falls off my radar…and I don’t want that to happen with BIGC.
However, BIGC also had a massive run-up and is a recent IPO. I bought 1 BIGC put at the end of August set to expire a week and a half after BIGC’s earnings.
If BIGC’s stock goes down, the value of the put will go up. The put can reach a high enough price to pay off the initial investment of my 5 BIGC shares. If BIGC shares spike after earnings, the put will get decimated but my 5 BIGC shares will rise in value.
It only cost me $65 to buy the put (strike price of $60) to protect an initial investment that’s a tad under $600.
There are different ways to hedge such as shorting an index rather than buying a put, but I’m not a fan of shorting stocks. Shorting stocks presents the potential for unlimited losses while if you buy a put, you can only lose what you put into it.
A stock market crash isn’t a time to panic but rather a time to think differently. Not all of the strategies that worked well in a bull market will work well in a bear market. Some bear market strategies you haven’t thought of for a while can produce tremendous gains if utilized in the right way.
Even if you don’t believe a crash is coming, keep paying attention. This time it’s different…until it isn’t.