September 2–8, in three days of vicious trading, the tech-heavy Nasdaq fell 10% from its all-time high. The market overall—as represented by the S&P 500—lost almost 7%.
As Frank told listeners in yesterday’s Wall Street Unplugged, we’re not seeing gradual pullbacks in this market—we’re seeing corrections of 7–10% in days.
The relative calm of the past few months is over. The market has conquered its pre-COVID highs, and traders have gains to protect.
Even considering the highly unusual nature of this market—awash with liquidity and full of new challenges—any big multi-month rally can easily translate into larger volatility and significant market mood swings. And this volatility is likely to continue for the foreseeable future.
So I recently shared a lesser-known strategy with my Moneyflow Trader readers… one that has multiple uses for active option traders. It can smooth volatility… extend the life of the trade if it goes against you… or allow you to take some profits off the table, while keeping exposure to a stock, sector, or index.
This technique is called a “roll trade.” And I recommend it when you want to stay in the game with high-conviction trades, but are faced with option expirations… a large gain… or a looming loss.
In Moneyflow Trader, we used a roll trade recently to book a large gain in silver… and to add more leverage to the position.
On June 16, I recommended an iShares Silver ETF (SLV) call option. (If you’ve been following my work for a while, you know I believe investors should own precious metals in this market.)
From July 1–August 10, silver soared almost 60%… and we were sitting on a 200%-plus gain on this call trade.
The thing is, sharp moves higher tend to lead to price corrections. So gains like this—made in a very short time span, and despite all the fundamental reasons in the world—are vulnerable to pullbacks.
So to protect our gains—and reposition ourselves for a more leveraged play—I recommended a two-part roll trade:
- First, we sold our SLV call (and collected a triple-digit profit).
- Next, we reinvested part of these gains, or “rolled them over,” into another position, with a higher strike price.
The 60% move in silver, while vulnerable to pullbacks, showed investors that the metal, long considered gold’s younger, less-promising, brother, is finally gaining steam. And a higher strike price on our new SLV option ($30 instead of $21) would allow us more leverage on this new trade.
Sure enough, on the day I released this roll trade recommendation (August 11), silver wobbled and fell hard.
And then it fell even harder.
All within a few hours of trading.
By the day’s close, silver had dropped 13.6%. So we ended up booking “only” 220% gains on the closed leg of the SLV trade.
When the daily action in the price of an underlying stock is volatile, this kind of drop-off is to be expected… The bulls will trample themselves looking for an exit from a 50%-plus rally.
So although a sharp correction in silver was likely, I felt strongly that it would bounce back quickly. (I’ll talk more about the bull market in silver in future commentary.)
By rolling the existing SLV call into another, rather than just selling it, we achieved two major goals:
- We booked the gains (in case what looked like a correction in silver turned out to be the top).
- We reinvested some of the gains and increased our position leverage (by selling our in-the-money call and reinvesting into an out-of-the-money call).
The options market can move very fast. If you miss the best price in a trade, it’s par for the course. And keep in mind—if you’re rolling a trade into another, selling a position at a higher profit means buying a new position at a higher price. If you’re selling for a lesser profit, that translates into a lower entry price, setting yourself up for bigger gains in the future.
You may think option trading sounds complicated—that it’s the domain of Wall Street traders. But, just like stock investing, it shouldn’t belong to the elite. Not with today’s technology… and not with the wealth of information and advice now available.
Once you get the hang of it, you’ll find it surprisingly easy. And once you experience the profit potential, you’ll wish you’d tried it sooner…
You can start small. But, as you’ve seen today, adding options to your investing arsenal can help you navigate difficult markets… juice your portfolio returns… and even weather inevitable volatility.
P.S. We’ve closed 7 triple-digit gains in Moneyflow Trader this year… And we’ve no plans to stop there…
If you’ve never traded options before, learn how simple—yet powerful—the Moneyflow Trader strategy is. It’s designed to protect you from the market’s downside… while helping you profit from its upside.
