Is now a good time to get back in?
Investing in the stock market has been anything but boring over the last six months. In February and March, we experienced one of the biggest drops any of us has experienced and that was followed by a faster-than-expected rebound in April and beyond. And now, it looks like the market is taking a breather as it has largely been tracking sideways for the last month. So, is now a good time to jump in? Lets have a look with Aviva stock.
Well, I don’t have a crystal ball I’m afraid, but I can show you a technique that allows you to make some instant money and potentially buy shares with a decent downside buffer. So, if the market takes off again you’ll pocket a decent payout and if it does pullback, you won’t lose money unless it drops almost 11%.
Sound too good to be true? Let me show you an example of using a cash-secured put to achieve exactly this with Aviva stock.
I pulled these numbers straight from the web yesterday, so it is a current position, but to be clear, I’m not making any trading recommendation.
First up let’s have a look at a chart for Aviva. As you can see, it’s making a steady recovery since the crash and is definitely on investor’s radars with ‘buy’ ratings from a number of analysts. The dividend was canned in the middle of the crisis, but the business is doing pretty well. It’s generally anticipated that the payout will be reinstated in the near future.
So, of course, we could just dive in and buy Aviva stock at 282.6p per share and keep our fingers crossed that there are no further drop in the share price.
Or, we could be smart and sell a September 260p cash-secured put instead.
That would obligate us to buy 1,000 Aviva stock for 260p per share if the price traded below that level by the 18th September. Remember, that is over 22p lower than where they are currently trading at.
And, in return for taking on that obligation, we would immediately be paid 8p per Aviva share (£80 in total) that is ours to keep whatever happens. That equates to a 15.8% annualised yield on the money we must tie up.
So, just to reiterate, we would be paid £80 right off the bat for entering into an agreement to buy Aviva shares for over 22p lower than the price they are currently trading at. Or, not at all.
If the shares are above that level on 18th September, our obligation is lifted, and we keep the £80 and simply look for another opportunity. And if they have fallen below that level then we get to pick up Aviva shares for 260p.
But what about the downside protection I mentioned?
Well, the shares would have to fall all the way to 252p before we started to lose money. That’s 10.8% below the price they are currently changing hands for.
Now, I don’t know about you but that strikes me as a far safer way to enter this market than simply buying Aviva stock outright.
We teach this technique and a whole lot more on the FIRE Revolution programme.
Third Friday Ltd are not regulated by the Financial Conduct Authority and the FIRE Revolution training programme is purely educational in nature. Under no circumstances do we provide any financial trading or investment advice. Any examples used are for educational purposes only and should never be construed as advice. We accept no responsibility for any investment losses you may incur. Please consult a financial advisor or other qualified professional if you are in any doubt as to the suitability of the strategies we teach.