How a Market Crash Can Make You a Millionaire

By: Chuck Hughes

The following is an excerpt from Chuck Hughes’ Market Volatility Profit Secrets

It could start with a terrorist attack or the collapse of a major bank or government-sponsored entity like Fannie Mae.  Investors panic and start to sell from the opening bell.

By mid-morning, the NYSE has broken all records for volume as prices continue a downward spiral.  Shortly after noon, hedge funds and money center banks start snapping up shares at what appears to be bargain prices.

But the respite is short lived.  The selling continues and then intensifies as mutual funds dump stocks to meet redemption demands.

What started as a frenzy turns to a panic in the final hour of trading as investors rush to dump everything from blue chips to speculative small caps.  The Dow ends the day down a wealth-shattering 3,289 points as investors lick their wounds and worry that this is just the start of something much bigger and more destabilizing than anything the country has ever seen.

For most investors it's the ultimate nightmare…But not for you… In fact, such a scenario could open the door to undreamed of riches.  The key is to make use of the incredible leverage and limited risk of options.

The MVP Option Strategy allows you to make gigantic profits using a small amount of capital when prices rise.  There's another strategy that could allow you to make more – much more – when prices fall.

This scenario may seem unlikely or remote but let's not forget that after the terrorist attacks of 9/11 and the ensuing bear market, the broad-based S&P 500 Stock Index lost 50% of its value.  Then NASDAQ 100 Index lost a crushing 76% of its value.  In the event of a national crisis the last thing you want to worry about is your (and your family's) financial security.  Defending your portfolio and increasing your net worth at the same time can be accomplished by using what I call the 'Ideal Investment'.

'The Ideal Investment'

In my experience I have found option investing to be the most versatile and profitable way to invest today.  You may think investing in options is too risky or too complicated but I am going to ask you to put aside all preconceived notions or opinions on option investing for a minute and let me demonstrate the benefits of option investing.  When you purchase options there is no limit on your profit potential and at the same time your risk is limited to the purchase price of the option making options the 'ideal' investment.  Many of you may be unfamiliar with option investing but you are about to learn that option investing provides big profit potential with limited risk.

Call Options

Buying a call option is a bullish strategy.  If you buy a call option, the value of the call option will increase as the price of the underlying stock increases.  Conversely, if the price of the underlying stock decreases then the value of the call option also decreases.

Value of Call Option Increases as the Price of Underlying Stock Increases

Once a call option is purchased it can be sold at any time prior to option expiration.  When you purchase a call option the most you can lose is the purchase price of the option or premium regardless of how far the underlying stock drops in price.

Risk Is Limited to Purchase Price of Option

A major advantage of option purchases is 'truncated risk' whereby your loss is limited to your initial investment yet your profit potential is not limited.

Profit Potential of Call Option Purchases

The table below lists actual call option prices in the Column labeled 'Option Price'.  In order to demonstrate the profit potential of call option purchases let's assume we purchase the call options at the listed prices.  The initial investment to purchase the call options for each example ranges between $250 and $625 with an average initial investment of $497.  Five to six months later this $497 initial investment grows to an average of $20,459 based on current prices which demonstrates the tremendous profit potential of option investing.  Remember we are using actual option prices in our assumptions of the buy price and the current price.  Let's take a closer look at the first example in the table which is Genentech a biotech company. 

In this example, we will assume that 8 of the Genentech September 60-Strike call options were purchased.  Purchasing the 60-Strike call option gives you the right to purchase 100 shares of Genentech stock at 60.00.  The purchase price for this option was $75 per contract on March 14th so the total cost to purchase 8 of the 60-Strike options was $600 plus commission (8 X $75 - $600).  One call option normally covers one hundred shares of stock so the 8 Genentech options controlled 800 shares of Genentech stock.  Today is August 1st and the Genentech stock has moved up in price to 91.09.  As a result of the price increase in Genentech stock, the value of the 60-Strike option increased to 31.50 points or $3,150.  The total value for the 8 options purchased for $600 increased to $25,000 (8 X $3,150 = $25,200).  In this example our initial $600 investment grows to $25,200 resulting in a $24,600 open trade profit.  Remember that our total risk to achieve this $24,600 profit was only $600 so I think you can start to understand why I think options are the ideal investment!

$497 Grows to $20,459 on Average

Options Work Just as Well in a Down Market

Another way to harness the tremendous leverage available with option investing would be to purchase index or sector put options on your stock portfolio.  Buying an index put option can help protect your stocks in the event of a price decline.  For example, if you own large cap stocks buying an S&P 500 Index put options can help protect your large cap stocks in the event of a price decline.  The value of the put option will increase as the price of the S&P 500 Index declines.  If you own a portfolio of tech stocks, buying a NDSDAQ 100 Index put option can help protect your tech stocks in the event of a price decline in the tech sector.  Buying index put options on your stock is the equivalent of purchasing “insurance” to help protect the value of your stocks.