Getting Rich During Market Downturns

Market downturns are the best for long term investors, because it gives them a chance to add on to their even more undervalued positions - and all they then need to do is to simply hold their fundamentally good stocks at undervalued prices and make tons of money.

Notice the key words there - "fundamentally good stocks".

Later in this article, I am also going to share the very simple option strategy that I used during market downturns which allows me to break even faster on my investments.

What Are Fundamentally Good Stocks?

I won't discuss much about this because I discuss this in great detail in my 8-Point checklist and how to actually find them.

The reason why I only want to invest in stocks that pass my 8-point checklist is because I know that fundamentally good stocks will always tend to do well over the long term. It is seriously hard to lose money in the stock market that way. Well, unless you have a short term mindset...then yes, it is pretty easy for you to lose money.

Remember that every of my investing decision always start with fundamentals. I am not looking for some one-hit-wonders from Reddit. I am looking for consistent stable companies that I can confidently pour my entire net worth into these companies.

Think about it. Will you be confident to put your entire savings on a Reddit stock? I honestly doubt so. But with fundamentally good companies, I am able to do that - and that's how we can compound our net worth steadily.

Taking Advantage Of Fear Using Options

One of the reasons why I absolutely love market downturns is the increase of fear in the stock market.

You see, most retail investors are irrational and tend to get swayed by these market downturns. They will then start to google things like:

• "Why is stock XYZ down?"
• "Will the market recover"
• "Why the market is falling?"
• "Should I keep or sell stock XYZ?"

Sounds familiar? I know that so well, because I used to do those things as well. Eventually, I realised that all of these doesn't matter. For the exact same reason I have written above - a fundamentally good company will always tend to do well in the long term. (I hope that this is stuck in your head by now.)

But here's the reason why I LOVE it when other retail investors start googling these questions on Google. Because it means that I can smell fear in the stock market. People are afraid of the stock market downturns - and that's where you leverage on these fears.

So what do I do? I become their insurance provider and sell them insurance polices at crazy silly prices.

Yes - for those who are familiar, I sell put options on fundamentally good stocks at strike prices that I don't mind owning that at.

For example, just recently, I sold a put option on FB at a strike price of $340 and collected $310. 

Notice that I sold this put on 29 Sep 2021 and it expires on 1 Oct 21. In just 2 days, I collected $310 in option premium. That is a crazy amount of premium that is only available when people are FEARFUL in the stock market.

For those who are familiar with selling put options, this is probably your next question:

"Yes, you collect a lot of premium - but what if you get exercised?"

I keep repeating this time and time again to whoever who asked me this question. If your sell put option gets exercised, you SHOULD BE CELEBRATING!

You just got to buy 100 shares of a fundamentally good stocks at the price that you don't mind owning at! Why would you NOT celebrate?!

The key concept of selling put option is hardly understood by many. The option premium that you collect is nothing more than a consolation prize. The real money comes when you actually got exercised. And I had to learn this the hard way.

In the past, much like most people, I thought being exercised is a bad thing. Why? Because in my mind, I thought to myself, "I only want to collect the premium, I don't want the stocks."

But guess what - few years ago, I sold a put option on FB at $150 strike price and GOT EXERCISED. In the end, I eventually sell the 100 shares away for a small profit. If I held on to this fundamentally good stock - I would have easily made another $20,000 in profits.

So please, I'm begging you - don't be afraid of being exercised and owning a fundamentally good stock at a great price. That is actually where the big money is - but only if you are able to think long term.

One important note - I only advocate selling cash-secured put options. Please do not sell put options if you don't have the cash in your brokerage account to pay for the 100 shares. 

Getting Cash Flow From Existing Positions

Now, this is another simple option strategy that I used but only applies if you have 100 shares and the underlying stock is optionable. This is also why I only invest in stocks that have options.

(You can technically use this strategy even if you have less than 100 shares - but it is not something I recommend if you are inexperienced - so I won't share this.)

So what I do is I sell call options on my existing positions.

For example, I have 300 shares of BABA at an average price of around $186 and it has been tumbling down since I bought it 🙂 

This is not a stock recommendation by the way - but I believe it will do well over the long term. Why? The same reason I have been saying over and over again - it is a fundamentally good stock.

There are more steps involved to this - but here's the general concept.

So, instead of waiting - I sell call options on my 300 shares and keep collecting cash flow from my weekly call options. Every call option that I sell makes me around $40. Since I have 300 shares, I can sell 3 call options which brings me $120 every week. In a month, I will collect $480. And, in a year, I will collect $5,760.

This means that every single time I collect cash flow from selling call options, I am effectively reducing my breakeven price from my BABA shares. This is why I am not worried to continue holding my shares during a market downturn. The best part is that in a market downturn, I tend to collect more premium thanks to the fear in the stock market.

For those who are more experienced in options, this might be your next question.

"What if your sell call option gets exercised, you will lose your 300 shares."

That's a great question. But here's my question back to you - after being forced to sell the 300 shares, what is stopping you from buying all 300 shares back from the market?

For example, remember that my average price is at $186. I sell my call options at a strike price of $170. This means that if the call options get exercised, I will sell my 300 shares at a loss of (186-170)*300=$4,800. But this also means that I recovered my cash capital of $170 x 300 = $51,000.

For those who did not have conviction in the stock, they will take this $51,000 and invest elsewhere. But I would do things differently. If I believe that the stock is still undervalued, I would pour that $51,000 back into BABA.

In fact, I will sell 3 put options at $170, collecting even more premium - and hoping it will get exercised.

If it doesn't get exercised (this means the share price went up), I will continue selling put options over again and again, collecting even more option premium. This is how I keep collecting money. Remember - the option premium from selling put options is just the consolation prize, the big money comes when you actually gets exercised.

The above concept is rarely explained to anyone because it takes a lot of conviction in your investment decisions to actually do it. So, if you can execute this, it really do means you have conviction in your investments. And the only reason why I have conviction in my investments, it is because I only invest in fundamentally good stocks. 

The Bottom Line

The longer you invest, the more you will realise that fundamentals of your companies are the key to successfully long term investing. It is also what allows me to sell put options without being afraid that it will get exercised. Of course, I will advocate that you only sell cash-secured put options.

Market downturns are the best way to make money because there is so much fear in the stock market, it only make sense to take advantage of it. But you can only do so if you have a good concept of long term investing. Short-term mindset will only make you go broke - harsh words, but I write this because I care about you.

If you like to learn more, you might want to check out the webinar I have prepared. And yes, at the end - there will be an offer to join my course, but of course it is completely optional 🙂