Since the onset of the subprime crisis, short term rates have been at or near zero percent and stocks have been the only game in town.
However, the bull market in stocks appears to be ending and many of the wealthiest investors, including George Soros, are preparing for a complete economic collapse.
Many fear that the Fed and other world central bankers have exhausted the monetary tools necessary to stimulate the economy. Recent discussions have even turned to extreme measures that some refer to as “helicopter money.”
The fear is that if central bankers were to play this card and start “handing out free money,” rather than markets celebrating additional quantitative easing—which has been the response in the past—it could have the opposite effect and cause a panic that completely derails the global economy.
Even if central bankers were to suddenly take a more hawkish stance, there are countless other triggers that could send global markets into a tailspin. Including rising rates, crashing oil prices, or the widening spread between high-yield debt (junk bonds) and government bonds which historically have been an early warning of extreme stress in the underlying economy.
The fact that stocks have been flat for the last 18 months, and gold has been the top performing asset in 2016, could be signaling a major topping formation in stocks and a new bull market in gold, which has been gaining in popularity as a “chaos” hedge.
We agree that gold provides a form of financial insurance that every prudent investor should own, whether through an ETF, owning quality mining companies, or the physical metal itself.
But one market analyst believes using options in an unconventional, yet incredibly safe fashion, provides an even better form of financial insurance or hedge against a major economic downturn and is the single most important strategy to protect your wealth and generate income during the coming collapse.
Of course investors can always move to cash and wait for lower valuations as a way to protect their savings during a bear market. Unfortunately, many elderly investors can’t afford to move to cash because they rely on the dividend income to pay current expenses.
But this same analyst says using options as a form of financial insurance solves that problem too. Not only do options allow investors to hedge quality dividend paying stocks from falling in value, which eliminates the need to sell altogether, they also provide investors with the opportunity to earn between 1.5% and 3% per month in passive income while keeping the bulk of your wealth sitting safely in cash.
Annualized those returns work out to be 18% to 36% and trounce the 8% to 10% stocks have historically earned. In fact, over the last 2 years this analyst’s approach has outperformed the S&P 500 more than 5 to 1, without exposing savings to an overvalued stock market and huge systemic risk.
Furthermore, options can be an excellent way to speculate on crashing stocks during turbulent economic conditions and can turn a small portfolio into a rather large windfall.
Hedge fund managers John Paulson and Andrew Lahde both used put options during the 2008 financial panic to speculate on a crashing mortgage and real estate market, and multiplied their wealth nearly ten-fold.
Of course options eventually expire worthless, and investors need to be careful not to over leverage themselves when speculating. Preservation of capital and safety should always be the primary focus when trading options.
And most investors should stick with strategies geared around generating monthly income and protecting their savings, and only use options to speculate under certain market conditions, and only with a small percent of their total savings.
According to this 25 year market veteran, when used properly, options can be a much safer and more lucrative way to create wealth than buying stocks outright, especially during uncertain economic times.
With his permission I’ve reposted his presentation here.