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What You Should Do While You Are Waiting For A Market Crash

Here's Where We Sit:

spx

Since the low in 2009, the markets are nearly a triple.

And to be honest...

We've gone nowhere for well over a year.

(With two pretty big corrections in between.)

What's more...

It's been years since we've seen a cyclical bear market.

And it's been years since we've seen a proper recession.

The risks out of China, high yield debt markets, and what the Fed will do next... these are all potential catalysts that could bring further weakness into the markets.

I have a question for you:

Are you truly prepared for what will happen next?

It's not just about expecting downside... are you OK with missing out on any potential returns if you're wrong?

Why It's Amazing To Be A Retail Investor

The beauty of all this is... you don't have any mandate that says you have to own stocks.

Or that you have to own 100% stocks.

And it's not even an all or nothing play. You can easily scale out of some investments and still have skin in the game.

The Catch-22

The biggest risk that permabears rarely talk about is the missed opportunity cost.

Think about all the ugly catalysts we've seen since 2009...

the debt ceiling...

the Eurozone falling apart...

the other shoe to drop in commercial real estate...

It's always going to look ugly out there.

Yet if you've been on the sidelines this whole time, you've missed out on massive upside in the markets, along with returns coming from any dividends that you take in.

The Passive Way to Fix This

As I said before, nobody is forcing you to be 100% invested in stocks.

Let me take an example...

I ran a study a while back that showed the performance of a 60/40 portfolio.

60% S&P 500

40% TLT (long term bonds)

With rebalancing done at regular intervals.

It's not a super optimized portfolio, yet what I found was that after the market crash in 2008...

It was back at its "high water mark" in only 9 months.

Diversification really works.

A No Yield Market

The problem that I'm seeing right now is the inability to find good risk-adjusted returns.

Because treasury yields are so low, it's difficult to get any kind of decent return without being forced into riskier trades.

Yet there's another way...

Potentially a more profitable way...

To keep getting returns while keeping your risk low.

A New Path

There's an asset class that is becoming increasingly popular...

Volatility.

By trading in this asset class, you can potentially get much larger returns than you would in the market without having a ton of risk involved.

I'd like to show you a simple volatility trading strategy known as an iron condor:

This trade makes money if volatility is overpriced in the market.

(And 80% of the time, it is!)

The best part about this trading strategy?

You're only in the market for a month or two at most.

Which means you can get in and out without having to worry about the next market collapse around the corner!

How nice would that be?

How to Get Started With Iron Condor Trading

Iron condors are a complex option spread.

At first it can be overwhelming if you don't know what you're doing.

Wouldn't it be nice if you knew exactly...

- when to enter a trade?

- what option strikes to use?

- exactly how to adjust the trade?

- when to exit for profits?

At IWO, we've worked with thousands of traders on their path to successfuly trading options.

With working closely with clients, we know how difficult it can be starting up.

Because of this, we've launched the IncomeLab, our brand new iron condor trading service.

With this service, you'll get iron condor trading alerts that show you exactly when to enter and exit the trades.

We did a "stealth launch" in 2015, and here's how we did:

returns

Up 60%, not bad.

Get Started for $1

As an introductory offer and to get you trading iron condors as soon as possible...

We've created a "bootstrap" deal.

The membership for IncomeLab is $99 per month.

Yet we know the concern you must have when sending that kind of money out.

With this deal, you only pay $1 for the first month.

That way, we can prove the service and you can potentially reinvest just a small amount of your returns into the cost of the service.

Deal?

To learn more and become a member, simply click the button below.

Claim Your $1 Trial Now

How TWTR Stock Will Play Out Over The Next 5 Years

From it's 2013 high of 74, TWTR is now a $15 stock.

twtr

In this analysis piece, I'll be focusing more on the lizard-brain side of things.

Where the power of the narrative matters more than valuations.

The "turnaround" story has been going on for a year or two now, and I think we're approaching the desparation phase of the company.

I believe that this story will play out exactly like Yahoo did over the past several years.

The Yahoo Analog

Here's the basic timeline of what happened to Yahoo...

2007 - The original founder of Yahoo comes back and serves as CEO. It doesn't go so well... not necessarily his fault but just an overall lack of direction and talent suck out of the company.

It's driftwood.

2008 - Microsoft makes a bid for yahoo at a pretty nice price, but it falls through. Some view this is as an overall failure.

And then the market crashes.

In 2009 Yang steps down and Carol Bartz becomes the CEO. Nothing really happens over two years and investors are impatient. Carol Bartz leaves in 2011.

In 2012 they cycle through another CEO and finally land with Marissa Mayer.

This is where things get interesting.

During this whole time, over in China, a company named Alibaba has been growing. And growing. And growing.

Alibaba's CEO, Jack Ma, is friends with Jerry Yang... and it just so happens that Yahoo owns a sizeable stake of Alibaba.

Investors start to realize this.

And they buy YHOO stock as a proxy for Alibaba.

Over the next two years, YHOO's stock runs from 15 up to 50.

Sure, you could say that the fundamentals at Yahoo are improving but the way it's being traded... it's just a proxy in anticipation of the Alibaba IPO.

Once the IPO hype of Alibaba fades, so does YHOO stock.

And that's where we are now.

Here's the chart:

yhoo

Twitter Mad-Lib

All I'm going to do here is take the exact same narrative and talk about what will happen at TWTR.

I'm breaking out the crystal ball.

July 2015 - The oroginal founder of twitter comes back and serves as CEO. It doesn't go so well... not necessarily his fault but just an overall lack of direction and talent suck out fo the company.

It's driftwood.

October 2016 - Microsoft makes a bid for twitter at a pretty nice price, but it falls through. Some view this as an overall falure. [Note: any MSFT bid for TWTR is not public knowledge, but I have a feeling that it did take place and is non-public information]

And then the market crashes. [Eh, it kinda did... just not 2008]

In late 2016, Jack Dorsey will step down and someone from outside the company. Probably a woman. Nothing really happens over a year or two and investors are impatient. That CEO will leave, an interim CEO will come in for a few months.

In March of 2017 they land another CEO.

This is where things get interesting.

During this whole time, an old app called "Periscope" was spun off into its own company, and twitter owns a sizeable stake.

Periscope made a pivot into live sports, cleaned up their product, and now have content that rivals youtube and cable providers. The timing could have been better but they're starting to accelerate.

Investors start to realize this.

And they buy TWTR stock as a proxy for Periscope.

Over the next two years, TWTR stock runs from $9 to $30.

Sure, you could say that the fundamentals at Yahoo are improving but the way it's being traded... it's just a proxy for the Periscope IPO.

Once the IPO hype of Periscope fades, so does TWTR stock.

That's where we will be headed into 2018.

This is the analog chart:

twtr-after

Markets Are Fractal

That's about as far out as my crystal ball goes, and obviously it's more of a game than a reasonable investment strategy... but it's close.

Will this narrative take exactly 18 months? Eh, could be longer, could be shorter.

If anything, this exercise will help you understand that the psychology of investors and others involved in "the game" is fractal in nature, and stock prices have a tendency to reflect that.

The best way to play it is through covered calls. Odds are the stock will be in "CEO Hell" for at least a year... so selling puts and calls against common will allow you to get your basis down into the single digits.

The Biggest Risk In Iron Condor Trading

Iron condor trading is an incredibly profitable option trading strategy, especially for beginning traders.

Yet if you don't know how to manage your risk, you can end up getting blown out on a trade.

That's when the honeymoon phase is over.

Some traders adapt and overcome, getting over that hump and becoming even more profitable with iron condors.

For others, that's when they move on to another strategy.

(Hopefully you're in the first group!)

To be honest, it doesn't matter how many times I tell you this, it'll take that one trade where you get knocked around a little...

... that's when you'll start to pay attention.

Let's step through some of the huge pitfalls when it comes to the risk in iron condors.

Get the FREE Iron Condor Toolkit

Don't Look at Iron Condor Expiration Outcomes

I know it's tempting to eyeball this chart:

ic-structure

And say to yourself:

"Oh as long as the market doesn't selloff 10% or rally another 5% then I'll be profiable."

Or maybe you say:

"Hey the probability of profit (PoP) is really high so this trade will be a layup!"

That's bad voodoo. You're just asking for the market to prove you wrong.

I won't lie to you... if you come into the market at the right time, those first few trades will feel great as the profits roll in.

But then something stupid happens.

We can blame China, or the Fed, or the Oil markets. Whatever.

And if you were planning on doing a "set and forget" strategy with this iron condor, you're gonna get smoked.

The Real Risk In Iron Condors

Believe it or not, iron condors are incredibly forgiving to the downside.

The premiums available on out of the money puts allow you to have more "wiggle room" in case the market sells off.

It's the upside risk where you get in trouble.

When you start off an iron condor trade, it's not a market neutral trade.

It's actually net short.

iron condor risk graph

That means if you put it on and the market rips to the upside, you'll start the trade in a drawdown.

No bueno.

How You Can Manage Iron Condor Risk

No matter what you do it's crucial that you have a plan before you enter the trade.

Ideally you make it as systematic as possible so you know at what point you will adjust the trade.

Here are a couple considerations:

Enter Iron Condors In Overbought Markets

This may seem counterintuitive but it works.

When the market is ripping higher it's actually a pretty good time to enter a new iron condor.

That's because the odds of reversion is higher, and the net short actually benefits your trade.

Also, there will still be plenty of premium on the put side because of option skew.

Unbalance Your Iron Condor

If you're concerned about the upside, just don't go full risk on the call spread.

Then, if the market continues to rip, you can add to the call spread at a much better basis.

Have an Adjustment Plan in Place

If the directional exposure becomes to great, you can simply use iron condor adjustments to work your position back down to a better risk/reward equation.

Remember, no matter what you need to have a plan. Iron condors are a dynamic risk strategy and if you can manage that risk, the profits will come flowing in.

Get the FREE Iron Condor Toolkit

 

Does The Market Selloff With A Low VIX?

Like clockwork.

You get a selloff to shake enough people out and buy puts...

And once enough investors are hedged to the teeth or moved to cash, the market starts to rip.

From there, the early shorts get smoked, and then those who were in cash start to feel the FOMO (fear of missing out).

At some point, investors will stop buying puts, which leads to a low VIX reading.

The mainstream idea is that a low VIX means that there is a ton of complacency.

And that complacency means too many people are long the market.

And that the market is going to selloff.

The question I have for you is:

Are you sure about that?

The Baseline Data

The chart below shows us a distribution of the 20 day returns of the S&P 500.

So you take a day, look a month in the past, and look at the change.

20-day

As you can see, it's a nice big bell curve.

If you really want to nerd out, it's called a lognormal distribution.

What the SPX Does In a Low VIX

Here's where it gets fun.

We can compare the previous bell curve against a new set of data.

Basically, look for instances where the VIX is under 15 and then see what the returns are 20 days later.

Here's what we get:

20-day-low-vix

If you're squinting your eyes to see the difference, here are some hard numbers:

Baseline (All SPX Data)

  • Average: 0.49%
  • Standard Deviation: 4.6%
  • % Under 5%: 10%

If VIX < 15

  • Average: 0.33%
  • Standard Deviation: 2.3%
  • % Under 5%: 2.1%

How The Market Actually Trades

Simply put, if you're looking for some kind of market collapse because the VIX is under 15... you're going to be disappointed.

Over this entire sample, there have only been 25 instances in which the market sold off over 5% after the VIX was under this level.

You'll also see that both the average return and standard deviation are lower.

This makes sense. The largest rips higher happen after deeply oversold readings so you should expect a grind.

And with the standard deviation so low, it means that price movement will continue to compress.

If you're looking for a move lower, you better wait until we get some actual confirmation before you load up on the puts.

How to Trade A Low VIX

If you want one simple option strategy that profits in this kind of trading environment, you'll want to view this free video report I put together. 

I'll personally step you through a set of trading strategies that consistently outperform the market, and one strategy that works great when the VIX is low.

You'll also have the opportunity to get a premium trading course from me so you can build out a profitable trading system of your own.

Click Here To Watch

Four Charts You Need to See Right Now

Over the past few days I’ve been talking about the live class that I’m doing this weekend.

I’d like to pull back the curtain a bit more and show you what I’ve been working on.

When you deal with options, profit comes not just through price but also through time.

That means backtesting looks a little different when you’re trying to find a winning strategy.

When you’re taking an investing approach, you want to find a way to own stocks at the best prices possible, without missing on too much upside.

That’s where this phrase comes to mind:

“Simple, but not easy.”

I’ve been hard at work developing models that give investors the results they desire without having to second guess themselves.

Here’s what I mean…

This is a chart that shows the 10 week returns distribution on a well known stock:

distr-1

And here are the distributions when I look for a very specific signal.

distr-2

See the difference?

The downside on the second chart has a lower frequency. This is where it makes sense to get bullish.

That’s where your edge is as an investor.

How about these two charts:

The first is from the S&P 500 when a certain signal triggers:

spx-dist-1

Pretty ugly, right?

That’s a lot of downside action.

However…

Here is what the returns on the S&P 500 look like when that signal reverses:

spx-dist-2

The lesson here is to use the signal not as an obvious buy point, but instead to slowly scale in because once that signal flips, the downside is done.

Here’s where it gets fun…

If you can combine backtesting with key option strategies, you’ve got a formula for massive success in your investing career.

Pretty cool, right?

If you want to get the training and the backtests this Saturday, all you need to do is sign up using the button below.

JOIN THE CLASS HERE

I look forward to seeing you at the training!