How to Generate Income While Profiting from a Crash
I first started learning about investing in stocks in order to receive a stream of dividend income. At one point I was looking for shares of something that was “bearish” but that would still give me a regular dividend in a bull market. I found some bearish ETFs that would have their price shoot up in the event of a crash, but they did not yield any dividends. At another point I heard of something called the VIX which would shoot up during a crash, but I found out you can’t buy shares of VIX. I finally found a strategy that would regularly give me income during a bull market and shoot up in value during a crash. This is an options strategy call the back-put spread.
The back-put spread strategy is really only effective if you use a broker with a “per contract” commission rather than a “per trade” commission. This strategy involves taking a short put position near the money and buying several put options further out of the money. In my case I use the SPY which is an S&P 500 ETF. Let’s say the SPY is at $200 per share. I could sell a put option at the $195 strike price and buy several put options further out of the money. The value of put options increase when the price of the shares go down.
The way I do it is to use put options at three different strike prices. Let’s say I short a put at $195, buy a put at $192, and buy five more puts at $180, all of which will expire in two weeks. In this case the $195 put is what is used to generate the income if the stock market stays up. The $192 put I bought would be used to limit my risk to $300 since it would be a $3 wide credit put spread at this point. The five options at the $180 strike price is where the value would shoot up if the stock market crashed. As long as I can establish this strategy for a credit I can keep earning money during a bull market. The risk in the back-put spread strategy would be if the market goes down by a little, or not quick enough. In this case, if the shares of SPY go under $192 but not under $180 then I would lose up to $300. As long as you feel confident that your gains will exceed your losses on average this is a good strategy to use. I personally find that I make better decisions when I have some put-back spread positions. This is because it scratches the itch of the possibility of a huge gain in a short time, it makes it easier to stick to my strategy and I don’t have the urge to make stupid bets on a large price move.