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This Once-in-a-Lifetime Trade Is Open This Week Only

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, October 15, 2008

Today is Wednesday, October 15, 2008. This information will be worthless in less than a week. Act on it now... or never. Let me explain why you should be in such a hurry...

You're on a deep-sea fishing boat. The sun is out, there's almost no breeze, and the ocean's surface is so glassy you can see your reflection in the water.

You notice a cloud in the distance. It grows and blackens, and it starts to rain. It gets windy and the waves pick up. Now the whole sky is black, and there's a gale blowing. White caps cover the ocean, and waves throw spray over the bow.

The gale becomes a hurricane. Wave heights hit 60 feet. Over the radio, you hear a containership has lost some containers overboard. The hurricane intensifies. Now it's a category five and wind speeds are setting new records at NOAA...

The largest wave ever recorded by scientific instruments was 100 feet high off the coast of Scotland. Your fishing boat is riding over 100-foot waves every few minutes. The rogue waves are as high as 150 feet.

 

More news comes over the radio. A passenger ship has sunk. Everyone onboard is presumed drowned. Five oil tankers and three massive iron-ore ships have also sunk. The coast guard is doing everything it can. But no one knows what resources it has... or how effective these resources will be in this gargantuan storm.

So here's the question. Would you prefer to bet on the damage to the shipping industry... or would you prefer to bet on next month's weather being better than it is right now?

I don't know how many ships are going down in the hurricane. But when I see 150-foot waves and oil tankers sinking, I know the weather can't get any worse. The certain bet is that the storm will pass, the sun will shine, and the waves will calm down.

This is the situation we have in the stock market right now. It's a category five hurricane. Last week was the worst week for stocks in the history of American capitalism. The storm has sunk our largest institutions and damaged dozens more.

It's hard to know how many stocks will founder in the end. So I don't want to make a call on the stock market. To make an easy profit in this crisis, I recommend you bet on an improvement in stock-market weather.

The VIX index measures the volatility in the S&P 500. The VIX is an index... like the Dow Jones or the S&P... except it measures the price of option contracts traded on stocks in the S&P. When the VIX is low, it means there's good weather in the stock market. Market movements are small, investors are calm, and the business news is boring. When the VIX is high, it means there's a storm in the stock market. Option sellers are charging high prices to write option contracts. They need the extra premium to compensate them for the risk of huge fluctuations.

Take a look at the chart below. When there's good weather in the stock market, the VIX trades between 10 and 15... like we saw in the mid-1990s. When the hurricane season comes around, the VIX trades between 25 and 40. Its average over the last 18 years is 22.39.

Volatility Index - New Methodology

The VIX set an all-time high at 44.28 in August 1998 when Russia defaulted. Last week, the VIX shocked traders by first breaking 50 and then rising all the way to 75 by Friday afternoon. It was like finding a 300-foot rogue wave in the Mediterranean Sea.

To profit from this crisis, all you have to do is bet that the VIX falls.

It's easy to bet on a decline in the VIX. Most discount brokers offer options on the VIX. My favorite strategy is selling put options on stocks I'd love to own. When volatility is high, option sellers collect large option premiums. If my options get exercised, I get my favorite stocks at a big discount to today's price. If not, I simply collect a few dollars in income and try it again.

You should only attempt these trades if you have a solid understanding of the options market... or you trust your broker to help you set up options trades. Tell him or her that you want to "short the VIX."

No one knows how much damage this crash will do to our economy... but it's certain the weather will improve. I advise you to move fast. Stock-market storms disappear as quickly as they come. Next week, the sun will probably be shining again.

Good investing,

Tom




Market Notes


IT'S A BEAR MARKET IN VEGAS

For most of the past three months, one of the market's few safe havens has been "the basics"... companies like Johnson & Johnson, Procter & Gamble, and Kraft. The thinking here goes, "Folks gotta shave, brush their teeth, and eat."

From a few laughable sources, we've heard claims that gambling would also hold up well in a weak economy. The thinking here goes, "Folks will try to win back what they've lost."

Today's chart will put this claim mercifully to rest. It's a two-year look at America's largest publicly traded casino operator, Wynn Resorts. Along with fellow gambling giants Las Vegas Sands and MGM, Wynn's fortunes, earnings, and shares are plummeting. The stock is down 62% from its high.

The decline of Las Vegas is a lot like the decline of Wall Street. Both have crumbled due to a mixture of drunken speculation and wild overbuilding. And both places are filled with whores who will do anything for money. We'll take shares of Johnson & Johnson! 


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