I saw a headline last week warning that an analyst at a major Wall Street firm believes the S&P 500 is at risk of a 5%-10% decline. 

I have no doubt Deutsche Bank’s (NYSE: DB) David Bianco is correct. Down moves in the stock market actually come fairly often. One study found that a 5% correction occurs, on average, three times a year, while we see a 10% decline about once a year. 

The last 10% decline in the S&P 500 occurred about three and a half years ago in October 2011. So, are we overdue for a 10% correction?

That is a silly question. When I hear an analyst say, “We are overdue,” or “This bull market is long in the tooth,” I discount everything else they have to say. Markets don’t follow a schedule. They go up and down based on earnings and sentiment, among other factors. But prices never have and never will change direction just because the calendar changes.

#-ad_banner-#The better question to ask is: “What would I do if I knew a 10% correction was coming?”

I was in New York recently and had a chance to catch up with one my mentors, Ralph Acampora. Ralph’s name might be familiar to some readers. He was often seen on Louis Rukeyser’s “Wall Street Week,” which ran on PBS every Friday night from 1970 through the early 2000s. Ralph is one of the founders of the Market Technicians Association (MTA), a professional organization I belong to.

Ralph once explained to me why he doesn’t worry about the short term. He asked, “If you knew that a 10% correction was coming, would you sell a stock at $20 to buy it back at $18?”

Ralph believes, and I agree, that the answer for almost everyone should be, “No, I wouldn’t sell at $20 and buy back at $18.” There are costs associated with doing that — commissions, slippage on the two trades and possibly taxes. After expenses, the amount saved will be less than 10%, and although this trade would sidestep a correction, it actually carries a great deal of risk. 

If the correction doesn’t come, you would miss out on the upside. If the correction does come, would you actually buy back the stock at $18, or would you wait for an even better price? The risk of waiting is that the market could turn up and you would miss out on the gains. If you wait, you might never actually buy back in.

Ralph’s advice was simple: Ignore the small changes in the market and focus on your long-term strategy. This is advice that’s worth listening to since it’s the mindset that allowed Ralph to enjoy a successful 50-year career in the market.

I plan to follow Ralph’s advice and focus on my long-term strategy that has resulted in a perfect track record over the past two years and average annualized returns of 53% per trade.

The strategy: selling put options on high-quality stocks.

Before you throw in the towel and say, “Nope, not for me,” I want to tell you that one of my Income Trader subscribers — Brad C. from Memphis, Tenn. — made over $1 million last year following my recommendations. 

Selling puts can be an incredibly lucrative strategy — when done properly — and is likely less complicated than you think.

To show you what I mean, I want to walk through my latest recommendation, which could wind up yielding an annualized return of 142%.

On April 15, I issued a trade on generic drug manufacturer Lannett Company (NYSE: LCI), which my research showed offered an attractive combination of growth and value. Specifically, I recommended readers sell puts options with a $60 strike price that expired in May. 

Selling a put option obligates the option seller to purchase shares of the stock from the option buyer at the strike price if they are below that level when the option expires. In return for accepting this obligation, the seller collects an instant income payment, known as a premium.

From this point on, one of two things can happen:

If the stock is below the strike price at expiration, the put seller will purchase the shares at the option’s strike price. In this case, the premium generated lowers the cost basis on the position. 

Remember, this is a long-term-oriented strategy, so I only sell put options on stocks I want to own anyway at a strike price I find attractive. In this scenario, I take ownership of the shares at a discount.

While I’m happy to do this, this is not my typical outcome. Rather, about 90% of the time when expiration rolls around the stock is trading above the strike price of the put I selected and the income earned is pocketed with no further obligation.

Let’s get back to the LCI trade. 

Selling the LCI May 60 Puts generated immediate income of $145 (each contract controls 100 shares). This put obligates us to buy LCI at $60 a share if the stock trades for less than that on May 15, the last day these options can be traded.

Since there is a chance we may have to buy shares in May, and buying 100 shares of LCI at $60 each would cost $6,000, a typical broker will require a margin deposit of $1,200, which is 20% of the purchase price. If the put expires worthless, the $145 in income represents a 12.1% return over the margin deposit. 

Since this trade will only be open for 31 days, that works out to an annualized return on investment of 142%.

With returns like this, I don’t plan to lose any sleep over when the inevitable correction will hit. Instead, I’ll spend my time searching for more trades like this.

If you’re interested in getting my next recommendation or learning more about how I pick the right put options, follow this link.

This article was originally published on ProfitableTrading.com: Stop Worrying About a Correction and Do This​