Here’s How to Take Advantage of the Debt Crisis From A to Z.

Everyone understands that if Congress does not allow the US government to borrow additional money, the global financial markets will crash. Yet, investors appear to have trust in Congress and President Joe Biden.

If there was an actual reason to be concerned about political leaders’ inability to do the right thing for America, stock prices would not have remained comparatively high, and options volatility would not have been abnormally low. They are, though.

The Cboe Volatility Index, or VIX, is at 18, implying that the S&P 500 index will move around 1% up or down daily over the next 30 days. The VIX should be trading at 30 or higher due to fear of a massive financial collapse.

Of course, anyone who finds comfort in high-level market readings is either drugged or insane. At this point in economic history, all that can be said with any degree of assurance is that the stock market is always correct on price but has a terrible sense of timing. The same may be said about option volatility.

Furthermore, the great Warren Buffett, a paragon of patience with a track record of converting turmoil into money, is said to be content with sitting in cash. Many readers concur. They recently extolled the virtues of generating 4% or more on their cash without incurring a market debt crisis. After all, the historical yearly return on the stock market has been roughly 9%.

Nonetheless, we realize that there are individuals among us who like monetizing chaos before it occurs. After all, the debt-ceiling talks began late Tuesday, and there is still a lot of work to be done because the US government might run out of money by June 1. The SPDR S&P Regional Banking exchange-traded fund (KRE) remains an attractive avenue for extreme investors to try to bearishly play the debt-ceiling situation, which may hit economically vulnerable bank stocks on the front lines of the US economy.

We recommended a KRE put-option spread in early April when the ETF was trading at $42.46. We recommended purchasing the September $40 put and selling the September $30 put for around $2.20. As the ETF has declined to around $37, the spread is now worth roughly $4.20, a 91% rise in about a month. (Puts allow investors the option to sell an underlying asset at a predetermined price within a certain time frame.)

Investors who wish to profit from the KRE strategy or start a fresh position might consider purchasing the ETF’s July $35 put and selling the July $25 put. If it is worth $25 when it expires, the spread is worth up to $8 ($10 spread minus $2 premium). When the ETF was about $37, the spread cost roughly $2.40.

According to a recent Federal Reserve poll of senior loan officers, credit conditions are tightening, and loan demand is waning, which will impact bank earnings.

Patient investors might just wait and watch Washington’s political leaders. There will very certainly be a lot of brinkmanship, which might result in micro bursts of volatility.

If equities fall due to the debt crisis issue, consider selling options on blue-chip stocks that you can hold for three to five years. If equities rise due to the crisis settlement, consider selling bullish call options on your stocks to boost gains.

Both strategies aim to commercialize fear and greed. The tactics show a desire to be compensated by the options market just for committing to invest in blue-chip companies for the long term. As we have previously stated, the stock market in the United States is the world’s reserve currency. Yes, there is danger in holding stocks, but investors have several choices for dealing with it.