By Steven M. Sears
Volatility is your friend.
Rather than heeding the advice of panic merchants who always have something bad to say about the markets, stay calm and get to work whenever stocks post a semi-meaningful decline. This is important to remember as stocks plunge in reaction to fears of a renewed trade war between the U.S. and China.
During market maelstroms, pusillanimous pundits note that the Cboe Volatility Index, or VIX, has spiked higher as if it's a harbinger of the apocalypse. The commentariat appears to have no idea that the VIX almost always moves in the opposite direction of stocks, particularly around unexpected declines.
Rather than allowing others to scare you when stocks decline and the VIX spikes, condition yourself to consider broad-market weakness as an opportunity to profit from the fear of other investors. Disciplined investors must always have a long-term plan to help guide their decision-making when others are panicking and selling.
The short-term realities of the market might be scary -- and yes, stocks might fall more -- but over time, the U.S. stock market is one of the world's greatest wealth creation engines. This is why investors should always have a list of stocks that they want to buy, or that they want to own more of.
The simplest approach is buying those stocks when prices are lower. But if you want to get paid to buy stocks, a straightforward options trading strategy is useful.
By selling put options, which increase in value when stock prices decline, disciplined investors monetize the market mob's fear. In return for selling puts to panicked stock investors who want to hedge stocks, put sellers position to buy stocks at lower prices. (Puts give holders the right to sell an underlying asset at a designated price and time.)
Don't go all in at once. Divide your investible amount into thirds or quarters, and invest at different prices, each one lower than the previous one. This is called "legging into" a position.
The strategy is simple, and though it is often best used during a sharp market decline, it works in all environments.
Take Oracle. With the technology company's stock at $299, a bullish investor could sell the November $280 put. If the stock is above the put strike at expiration, investors keep the put premium. If the stock is below the put strike at expiration, investors must buy the stock at the put strike price.
The risk: The stock falls far below the put strike price, which could happen. In that event, few put sellers will feel good about buying the stock at the higher price, but that can be handled by selling another put to potentially build a position at an even lower price. Such is the way of strategic investing.
We have advocated the merits of this strategy for so long that we have seen it become one of the options market's most popular trades. But sharp declines, as just occurred over a potential China trade fight, keep many investors from thinking clearly.
Fear makes people irrational.
At the same time, "panicans," to use a word minted by the president, create opportunities for those who understand that the time to buy good stocks is during bad times when they are declining. Too many investors do the opposite.
Berkshire Hathaway CEO Warren Buffett, the great investor, likes to say that people should be fearful when others are greedy and greedy when others are fearful.
Buffett is likely the most quoted, least imitated investor ever. What he says is difficult for most people to do, but this put-selling strategy lets investors do what he advocates.
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(END) Dow Jones Newswires
October 17, 2025 21:30 ET (01:30 GMT)
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