The Fed put is back—and you can use it to profit handsomely.
Here’s how to do it…
Traders and investors buy puts when they want protection from the market or a stock going down.
At the most macro of levels, these same people look to outside forces—in this case, the Federal Reserve—for protection against the market going down too much.
Everyone on Wall Street called that protection the “Fed put.”
Over the past few months, the Fed’s balance sheet slowly shrank, and in December they raised rates. Fed Chair Janet Yellen said there could be as many as four more rate increases in 2016.
The Fed put was gone, and the market took on a foul mood.
Dr. Yellen recently said the world economy is slowing, which could impact the U.S. economy. The number of Fed rate increases is data dependent, so there could be fewer than were discussed in December.
The Fed put is partially back in place.
What to do?
Trade it. Not the indexes, but grossly undervalued stocks that are impacted by low rates.
In the past, Wall Street saw rising rates as good for banks. They now see them as bad for banks.
Translation: Look to bank stocks; they are on sale.
The name I like the most is…
Bank of America (NYSE:BAC)
The company lags the sector in dividend payouts (something it will remedy), but it reported solid fourth-quarter earnings.
The stock is down from $18.48, has put in a bottom around $12, and is now moving up.
How to trade it? Sell a $12.50 put for February.
As I write this, that put would place you a dime in the money and you would get $0.40 or $40 per contract for it.
You see, you are actually buying the shares (if you’re put the shares) for $12.10; that’s a significant discount to the current market price.
If the stock moves up after the put expires, you sell another one—and, if need be, another one—until you catch the stock.
Once you do that, you’ll have lowered your cost basis and will own the shares at a discount to the market.
Then you turn around and sell a call.
And so it goes…