Will Innovation Kill Inflation? Plus: How To Put The Odds In Your Favor…

Pop quiz… What do Jack Dorsey, Cathie Wood, and Elon Musk have in common?

No, this isn’t a setup for a joke.

A couple of weeks ago, I was scanning Twitter and came across an interesting discussion between these three people surrounding the topic of inflation.

This is one of the reasons why I love “Fintwit” – or financial Twitter. On any given day, you may see a bold, outrageous claim from an anonymous Reddit trader, and on another, you may see an engaging discussion among three of the most prominent voices in the tech world.

It all started when Dorsey, CEO of Twitter, shared his thoughts:

That’s where Cathie Wood, founder and CEO of Ark Invest, decided to weigh in:

Enter Elon Musk, the world’s richest man:

As if an online exchange between these three wasn’t interesting enough, here’s something to chew on…

When Wood refers to the velocity of money, she’s referring to the frequency at which dollars are used to purchase domestically- produced goods and services. In other words, how many times does a dollar change hands within a given amount of time?

If I buy a car from you, and then you use that money to pay for a new deck on your house, and then your contractor uses that to buy a boat, then that’s typically seen as a sign of a healthy economy.

There’s just one problem. According to the Federal Reserve Bank of St. Louis, the velocity of money has done nothing but decrease since the financial crisis of 2008.

Source: St. Louis Fed

In a follow-up thread of tweets, Wood proceeded to explain why she thinks that is and how she believes the long-term pressures of rapid technological innovation will be deflationary. You can read her full reasoning here, but it essentially boils down to this…

Wood said that since the financial crisis, many companies took a short-term focus by taking on debt to finance buyback and dividends while offering “increasingly obsolete” goods at discounted prices. That’s been good for consumers, but what came at the expense of that is… you guessed it… innovation.

That set the table for “creative destruction,” because a new wave of companies has come to the forefront of the market. As Wood argues, they’ve innovated in substantial ways that will not only change the way we live our lives and offer stellar returns for long-term shareholders, but could keep a lid on inflation – and even drive prices down further in the long run.

The Bottom Line

Cathie Wood is the least recognizable name of this group, so you may not be familiar with her. She made her name with Ark by launching a series of ETFs around different areas of innovation. In 2020, her flagship Ark Innovation ETF (Amex: ARKK) returned nearly 150%. Wood is a fixture on outlets like CNBC, and she draws a lot of polarized opinions. But one thing is for sure, when she speaks, people listen.

There’s more to her argument, and I haven’t done it full justice. But it’s certainly worth checking out if you’re interested. Bottom line, it’s interesting food for thought as we talk about the inflation we’re seeing right now vs. what things will look like down the road. We may have to pick back up on this thread in the weeks to come…

Switching gears, last week I interviewed my colleague Amber Hestla to get her thoughts on the market. And today, I’m handing the reins to her to share more about how her strategy of using put options to generate income not only puts the odds in your favor — but could be your ticket to earning more income than you ever thought possible…

Put The Odds In Your Favor With This Low-Risk Strategy…

amberNo matter how you define risk in specific terms, the concept of risk always involves losses. High risk is associated with a greater-than-average possibility of loss.

By that definition, selling options could be one of the lowest risk strategies an investor can use.

Options have a reputation for being high-risk. Investors are often told that “80% of options traders lose money.”

Let me be clear: I’ve never been able to find a report that validates that number.

Why Selling Options Is Better Than Buying

Think of options as an investment where there will be an equal number of winning and losing positions. This is simply a result of the way options are designed. Whenever an option is bought, someone else must be selling. On one side of the trade will be a winner while the other party will face a loss.

Options give the buyer the right to buy or sell 100 shares of a stock or an ETF at a predetermined price (known as the exercise price) before a specific date. Because they have an expiration date, on that date the option buyer will have either a gain or a loss and the trade is over either way.

There are only two possible outcomes, and if the buyer wins, then the options seller must have a loss. Conversely, when the options buyer loses, the seller wins.

Studies (and experience) show that the options buyer does not have a 50/50 chance of winning. They actually have a very high probability of losing. A study done using Chicago Mercantile Exchange (CME) data showed 83% of all options on stock indexes expired worthless.

Now, remember… There is a winner on the other side of every losing options trade. So if the options buyer loses on 83% of these options that means the sellers win that often.

I know that may sound a little simplistic, but in principle, this tilts the odds in our favor.

Now, stick with me, because we can tilt the odds even more in our favor slightly more by looking at whether call or put selling would be more profitable.

Remember, a call option gives the buyer the right to buy the underlying stock and a put option gives the buyer the right to sell the underlying stock. So call buyers profit when prices go up, while put buyers profit when prices decline.

CME data showed that 60% of calls expired worthless while 94% of puts expired worthless. This data shows that selling puts has a high probability of success.

An Example Of How To Nab A Quick 4.7% Return

When you sell a put, you will generally sell it at an exercise price that is below the current market price. Unless the price of the underlying stock or ETF falls below the exercise price, the put will expire worthless.

To minimize the risks of put selling, you should only sell put options on stocks or ETFs that you would like to own. For example, let’s say we’re looking at the SPDR S&P 500 ETF (NYSE: SPY).

Right now, SPY is trading at $468. You’d be interested in buying it on a 10% pullback, so you could sell a put at $421 that expires in one to two months and earn income while waiting to buy at your desired price. Alternatively, you may feel the the chances of the market falling 10% in the next couple of months is low — and if so, you’d be a buyer.

The caveat, of course, is that if SPY falls more than 10% you will still have to buy it at $421.

Buying 100 shares of SPY at $421 each would cost $42,100. To initiate this trade, your broker will likely require you to deposit a percentage of that obligation in your account, like a down payment on a house. This is called a “margin requirement.” It usually runs about 20% of the amount it would cost you to buy the shares. This trade would require a margin deposit of $8,420 (20% of $42,100).

Based on prices for the Jan-21 $421 puts, traders could expect to receive about $400 in premium for making the trade. That’s about 4.7% return on your money in a little over two months. And once this trade expires, you could repeat a similar trade again…

Closing Thoughts

I believe one reason the success rate for put sellers is so high is because the market is dominated by professionals. They know the fair value of the puts they are willing to sell and take trades only when the time is right. Individual investors can easily profit from selling puts just like the professionals, but this strategy requires doing some homework.

An SPY put with an exercise price of $450, for example, will have a higher price than a put with an exercise price of $400, but the higher strike price is more likely to be exercised. It is a good idea to use puts that are at least 10% below the current market price to earn a high amount of income and help ensure you only buy the underlying stock or ETF at a bargain. But that also depends on other factors, such as volatility, options premiums, the time period for the trade, and more.

The point is, trading options could be a way to increase your income by hundreds or even thousands of dollars every month. But you need to know the ropes before making trades. That’s where my premium Income Trader service comes in…

Each week since February 2013, I have provided my subscribers with low-risk put selling opportunities. And so far, more than 90% of my trades have been winners.

I recently sat down with my publisher for a tell-all interview to explain how it all works.

You can go here to check it out now.