The Weekend Edition is pulled from the daily Stansberry Digest.
Insurance companies make a living off of fear...
Think about when you're most likely to pay for flood insurance...
Most people buy it right after a flood hits their town. The floodwater probably damaged a lot of their property... And now, they don't want to lose anything else.
These folks are terrified that another flood could strike at any time – causing even more devastation. They weren't properly prepared the first time around... which leads them to rush out to buy flood insurance the next day.
But remember, the entire town just had a flood. And the floodwater destroyed the properties of families all across town... So now half the neighborhood wants to buy flood insurance as well.
With so much demand, the local insurer can raise the price it charges for the insurance.
And the thing is... the first flood is still fresh in everyone's minds. So they'll pay the higher premiums without another thought. They'll just hand over their credit cards or cut checks.
That's because they're driven by fear.
As you can imagine, the insurance companies can make a small fortune in these disaster situations. They get to collect massive premiums from their policyholders' fears of the future... even though the town may or may not experience another flood in the coming months.
It's a beautiful business.
Today, I want you to be the insurance company...
You see, many investors remain scared right now.
The financial markets experienced their own "flood" back in March, plunging more than 30% in about a month... and some people are still trying to recover from it. The massive losses in a short span have these folks worried about a second market flood in the months ahead.
The truth is, no one knows what will happen next.
I'm sure you've heard the word "unprecedented" at least 100 times in recent months, but it's true... We've never experienced a crisis like the COVID-19 pandemic before. We've never seen a global shutdown of this magnitude. As a result, we've never seen uncertainty like this.
And as regular readers know, investors hate uncertainty.
The good news is... because no one truly knows what's going on in the markets, it has created one of the best moneymaking opportunities in more than a decade.
I'm not talking about buying bitcoin, commodities, or whatever hot stock tip millennials are chasing today. The opportunity I'm going to share with you is something every investor should take advantage of... assuming you like to make safe, steady money.
You see, today is the greatest time in more than a decade to sell portfolio insurance to nervous investors. As the "insurance company," you can make a killing as uncertainty reigns.
Over the past couple of months, I've heard from all types of investors...
I've heard from market bulls telling me that stocks would make record highs before Christmas. I've also heard from market bears saying that the major indexes would test their March lows... and that the bear market is far from over.
Yes, we've seen massive stimulus efforts, as well as signs in the real world that the economy is improving. But the fact is, we still have an unemployment rate that's greater than 10%.
The stock market is acting like things are already back to normal, while the economy is simply making progress on a recovery.
And since the markets have already regained much of their losses from the pandemic, stocks aren't the bargain they once were. One small hiccup could send them tumbling.
I wish I were writing to you today with a better sense of where the market will head next... But I simply can't make predictions with any level of certainty. No one can. Too many unknowns exist. We could see a plethora of different outcomes for the rest of 2020.
But we haven't even discussed another major event this year...
The November presidential election.
I won't get into which candidate I think will win between Republican incumbent Donald Trump and presumptive Democratic challenger Joe Biden. But as we've seen throughout history, election years almost always come with heightened uncertainty.
And that brings me to the main point I want to make today...
Fear and uncertainty are here to stay – at least for the next few months.
So many unexpected developments could occur... with the virus, with the reopening of the economy, with the stock market, and with the presidential election in November.
I couldn't be more excited, though.
Now is not the time to be fearful. Instead, it's time to act like an insurance company in the days after a flood hits your town... capitalizing on the fears of others.
Investors are lining up to buy portfolio protection...
The portfolio protection they're buying is something called a "put option." A put option acts like a form of insurance because it can limit your losses in a market crash.
For example, if you buy a put option on Apple (AAPL) and the iPhone maker's stock crashes, the put option will allow you to possibly sell your stock for more than it trades for after the sell-off. Because you insured your shares with a put, you can reduce your losses.
Investors have been buying put options to insure their portfolios for decades. And like when a flood strikes a town, this type of portfolio insurance is in high demand in times of crisis.
Given everything that has happened so far in 2020, investors want to make sure they have portfolio protection right now. And put prices have soared as a result...
Below, you'll see the CBOE Volatility Index ("VIX") – or what many folks call the market's "fear gauge." When the VIX is up, investors are fearful and pay more for put options. When the VIX is low, investors don't feel the need to buy insurance, and put options are cheap.
As you can see, during the recession of 2008 and 2009, investors desperately wanted portfolio protection. They were willing to pay big premiums for it.
As fear crept into investors' minds with the COVID-19 pandemic and the ensuing global shutdown, the VIX soared higher. It briefly surged to an all-time high of more than 80 in March, just before the market bottomed.
And even though the market has rallied nearly 40% off its bottom, you can see in the chart above that fear in the market remains at a historically high level. The VIX has been hanging around 30 for the past month, which is still higher than its long-term average of around 19.
As I said earlier, fear and uncertainty will continue to dominate the headlines over the next couple of months. That means the markets will remain volatile... And in turn, folks will keep paying a lot of money for portfolio protection.
So again, I want you to be the insurance company today...
I can't overstate how rare of an opportunity we, as "insurers," have right now. It's truly a once-in-a-decade opportunity to sell portfolio protection to scared investors...
I'll give you an example...
Let's say that in June 2019, you were worried about beverage giant PepsiCo (PEP) falling. At the time, you could have bought put protection for your PEP shares for $144. (The specific put was selling for $1.44... and each put covers 100 shares.)
Let's fast-forward to July 2020... If you wanted to buy the exact same put option to protect your PEP shares today – after all the volatility in recent months – it would cost about $400.
This is the exact same put option with exactly the same terms as the one you could have bought in 2019. But because folks are so scared of another flood – a broader market downturn – today, you now must pay 178% more for the same protection as a year ago.
With that in mind... would you rather be the put buyer or the put seller in this example?
Of course you would rather be the one selling the insurance...
Selling put options in today's market is one of the most profitable strategies you will find. Nervous investors are willing to pay a lot to protect themselves in case the next flood strikes... and that means bigger-than-normal premium payments for insurance sellers.
Now, you might be wondering what will happen if the market does crash...
Normally, an insurance company must pay out claims when disaster strikes. And sometimes, if the disaster is really bad, the insurance company can lose money.
But when you sell a put option, the worst thing that can happen is that you are forced to buy shares of the company you sold insurance on. And oftentimes, thanks to the premium you received, you'll own shares for much less than they're currently trading.
That's why you should only sell put options on stocks that you want to own. That way, even if the stock drops, you really can't lose... You'll collect a massive upfront premium payment, and in the worst-case scenario, you'll buy shares of a stock you love for a discount.
In this case, it's a win-win for the "insurance company."
The premium payments you can get in today's uncertain market can boost your income in a big way...
If you know what you're doing with options, you can make hundreds of dollars – or even thousands – in extra income each month.
So if you've never thought about selling options before, I urge you to consider it today... This is truly a once-in-a-decade opportunity.
Good investing,
Jeff Havenstein
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