I've been getting flooded with emails and my phone has been ringing non-stop from clients wondering if now is the time to pull the plug on their portfolio and move to cash.
It's a fair concern. Nobody likes to wake up and see red across their entire portfolio. It can be a gut wrenching feeling, but selling everything now could turn out to be a huge mistake.
Last month, I shared a seasonal chart of the volatility index, or VIX, with readers of my premium options service, Income Multiplier. I talked about how August to October has historically been the most volatile for the S&P 500. That is turning out to be true again this year.
If history is any guide, this most recent spike in volatility can be a good thing. Corrections -- and even bear markets -- are normal events in a healthy market.
American Funds conducted a study of the market's ups and downs from 1900 to 2014. It found that a 10% decline in the stock market occurred on average once every 13 months. What the study also found is that when the market does correct, it usually doesn't last very long. The average amount of time it took for the market to recover from a correction was 115 days, or less than four months.
What this research demonstrates is that corrections are not to be feared. They are a natural component of a healthy market and should be used as an opportunity to buy low.
The options strategy my readers and I use in Income Multiplier is one of the best ways to capitalize on a correction for two reasons:
1) We never buy shares until after they have already fallen at least 10%.
With Income Multiplier, we sell put options that are at least 10% out-of-the-money. What this means in layman's terms is that we don't buy shares until after they have already fallen at least 10%. Our recent trade in Microsoft (Nasdaq MSFT) is a good example. Our strike price of $43 is 12.5% below the 52-week high of $49.16. We've still got a few months until this trade expires. But if we do buy shares, we'll be purchasing them well below the recent high.
2) This is the best time in the last three years to sell puts.
The second reason options are a great way to capitalize on a correction is because of the VIX. When the S&P 500 falls, the so-called Fear Gauge spikes. And when the VIX spikes, put sellers generate larger premiums.
The VIX recently spiked to its highest level in three years. What that means for us is that put sellers now have an opportunity to generate the highest premiums in the past three years.
In short, we're sitting on a golden opportunity right now to get paid by some of the best stocks on the market. And we can repeat the process again and again.
Take Verizon Communications (NYSE: VZ) for example.
Its current 5% yield ranks as one of the best dividends in the S&P 500 -- well above the index's average yield of 2%.
I also consider Verizon to be one of the safest dividends in the S&P 500. Verizon's business is not particularly sensitive to economic cycles. Even if the economy falls into a recession, very few people will cancel or change their mobile service. That's why Verizon was just one of a few S&P 500 companies able to grow its dividend through the financial crisis in 2008 and 2009.
But as robust and reliable as Verizon's dividend is, there's a chance to do even better. By using put options, my readers and I plan to triple its 5% yield, or at the very least buy the company at a significant discount.
Based on our recent trade, if shares move higher, we'll make an annualized return of about 17.2%. If they fall, we'll have an opportunity to buy at a 9% discount to recent prices.
But to do this, you must sell put options. Now this may sound scary, or even risky, but let me dispel that myth. Once you understand how they work, options are simple. Plus, they can be a great source of income. That's why my staff and I recently put together a Put Options 101 guide for new subscribers to my service.
Selling the particular Verizon puts I recommended creates two benefits. The first is that it will generate at least $40 for every put sold. That goes straight to your brokerage account -- instant income that beats waiting around for a dividend check, if you ask me.
And the best part is, you can repeat this strategy over and over to generate income on stocks you truly believe in. Verizon is a great example of this.
The Verizon trade I suggested to my Income Multiplier readers recently is actually the third time we've used options to get paid with this stock. Last fall we captured a 5.4% return on capital in just 34 days -- an annualized gain of 58.3% -- and earlier this year we captured a 2.2% return in 84 days -- an annualized gain of 9.7%.
Income investors could easily just buy Verizon and collect its dividend payment, but this strategy allows you to generate more money in a shorter amount of time.
Unfortunately, it is too late for readers to get in on my most recent Verizon trade. But I recommend similar income-generating opportunities like this each week.