Stock Market Predictions

What Does the Future Hold?

Stock Market Crystal Ball
Stock Market Forecast. Pixabay.com

When holiday time rolls around and the new year is rapidly approaching, the "experts" predictions of stock market performance abound.

I encourage readers to ignore those predictions because no one truly knows what the future holds. Sure, it is possible to consider current market conditions and to extrapolate those conditions into the future. However, the market is not much more likely to continue along its current trend than it is to replace that trend by something quite different.

 

My advice is to maintain a steady course when investing. In other words, if you have a consistent investing style and if that style has produced satisfactory results, do not abandon ship just because one prognosticator makes an especially intelligent-sounding bearish (or bullish) case.

Using Options

If you are long (i.e., invested in stocks), I hope you recognize that you can use stock options to mitigate part of the risk that comes with stock ownership. To do that, you can write covered calls or sell cash-secured naked puts. These two strategies limit your potential gains, but in return for giving up on the possibility of earning a bonanza, they offer more frequent profits and reduce fluctuations in the value of your holdings.

If you invest by using options instead of stocks, your best bet is to trade bullish or bearish vertical spreads. Sure, it is tempting to buy options outright instead of using spreads because of the possibility of a very high percentage return (e.g., tripling your investment) in a short time.

However, trying to accomplish that is akin to gambling -- and is definitely not investing.

If you feel that you must own options, then my recommendation is to own high-Delta, in-the-money, call or put options. Otherwise, the options bought decay too quickly (high Theta). Another way to say this is: the options have too little intrinsic value and too much time value.

 

Note to New Option Traders

There are many sources for obtaining an "option" education. They run the gamut from excellent to terrible. If you elect to pay for lessons, be certain to correspond with some former students to get some objective opinions.

Regardless of whether you are self-taught (greats books and free webinars are available) or take lessons, please avoid allowing others to make option trading recommendations for your account. There is one very good reason for that: The risk involved when trading options will vary greatly. Some trades are relatively safe. In other words, the chances of earning a profit are very high, but that profit potential is quite small. Whether that smallish return suits you and your investment needs is a very personal decision.

Other strategies involve much greater risk, but the potential rewards -- when the trade works as expected -- are very attractive.

The person recommending these trades does not know you or your investing style. He/she has no idea of whether you are young or retirement age. He/she does not understand your tolerance for risk. To put it simply, that person cannot recommend trades that are suitable for you. 

When trading options, learn how and when to use specific strategies, and then make your own investment decisions.

If you do work with someone who recommends specific trades, please verify past performance by looking at an audited track record and then only pick the trades that seem right to you. Do not blindly follow all recommendations.