It's the holiday season, and the markets are setting all-time highs for the longest bull run in history!
Typically, a bull run like this would have investors swimming in profit. But trade wars and impeachment news are dominating the headlines, and high risk is threatening to keep people on the sidelines.
We may be just a tweet away from a major market correction, but that doesn't mean you have to get out now and run for the hills. Instead, it's time to protect your profits... and maybe even increase them while you're at it.
The last thing you want to experience is a major loss in your portfolio while you're sipping the holiday eggnog.
Here's an easy way to insure your stocks for free - and even a credit - just in time for the holidays...
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Guard Yourself with This Holiday Hedging Strategy
It's no secret that it doesn't take much to move this market. Anyone who has been keeping up with the news over the past six months knows that all it takes is a tweet or a CNBC announcement to cause a major market jump - or fall.
We've seen the markets tank on U.S.-China trade war tweets, only to skyrocket just a few days later on the next tweet. Although the trade war appears to be moving toward a peaceful resolution, no one really knows what's coming next - and how it will affect the market.
But the trade war isn't the only worry bouncing around investors' minds. Impeachment proceedings are still going on in the background, and although they have yet to significantly move the market, they certainly could as more developments occur.
Now, all of this headline-worthy news comes at a time when the markets are breaking records, meaning there's a boatload of profits at stake.
This market is a pressure cooker waiting to blow, and a correction could occur at any time. But a smart trader always has an eye on risk, ready to hedge themselves when necessary.
What does "hedge" mean, exactly? Similar to hedges around a farmer's field protecting the crops from wind, a stock hedge is protection from loss.
Well, now it's time to revisit that strategy just in time for the holidays!
Let's say you own 100 shares of the biggest social media company in the world, Facebook Inc. (NASDAQ: FB), currently trading around $200. You bought Facebook at $150 - so, for 100 shares, you paid $15,000. Today, those shares would cost $20,000 - so you're sitting on a nice $5,000 profit.
But it's the holidays now. No one has time to sit on their computer all day, watching FB move and waiting for a headline that could hammer that $5,000 profit down to nothing.
Fortunately, there's an easy solution...
Using options, you can lock yourself in with a free 30-day insurance policy. All you need to do is construct the following collar:
Simply buy a put and sell a call with the same expiration date and strike price.
The long Jan. 17, 2020 $200 put is your insurance. If FB tanks, you can always sell it for $200 (or sell the put, which will offset the loss in the stock).
The short Jan. 17, 2020 $200 call pays for your insurance - and then some. In fact, you'll actually receive a net credit of $0.35 per share.
That's right, you get paid to insure your stock!
Now, if the stock goes up, you don't get to play there. You've given up rights for your stock over $200. If FB goes up, you can keep the stock by buying back your calls for more than you sold them for, offsetting the gain in the stock. In terms of value, you end up right where you started.
But, hey - you get to relax for 30 days and enjoy the holiday season. You can go gift shopping, stay a little late at your company's holiday party, and spend more time with your friends and family without having to worry about your portfolio. You'll even get dividends if they happen to occur during the life of your collar.
At the expiration of your collar, simply reverse the order and close it down. So, you'll buy back the call and sell the put. For our collar above, the closing order would be:
Depending upon where your stock price is at expiration, the net of this will either be a debit or a credit that equals the move in your stock. In other words, the net value in your account will be the same as when you initiated the collar, minus slippage.
If the stock rises, you may wish to close the collar at a debit roughly the magnitude of the stock move, allowing you to participate in further upside.
Now, your stock must have options for this to work. If your stock doesn't have options, you may wish to consider a market hedge using options on the S&P 500 ETF (NYSE: SPY). Simply buying 30-60 day out-of-the-money SPY puts will provide some relief for your portfolio if the markets correct.
For now, you have peace of mind that your portfolio's protected so you can enjoy the rest of your holiday season!
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.