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The S&P 500 has skyrocketed 46% over the past four months, and the Nasdaq hit an all-time closing high of 10,767 on July 20, surging 56% over the same period.
Thanks to mobile investing, more and more people are getting in on the big stock-buying party. If you're following along with us, I'm sure you're taking down winners, too.
Now, I'm the last guy that who'd want to spoil a good party - especially one where we're raking it in hand over fist.
So, rather than harp on the obvious systemic risks which we all know are out there, I'm going to show you an inexpensive way to protect those bull-market profits and, even better, pocket more when the market makes its inevitable turn.
Because your profits don't have to take a hit just because a bull market has. There's an added benefit to hedging when the markets are close to highs, too: Protection is ridiculously cheap.
"Insuring" Your Profits
We've got to acknowledge that, despite $3 trillion (and counting) in stimulus, the market likely will tank again before we come out the other side of the coronavirus pandemic. It's probably inevitable.
If you're buying and selling stocks, you've probably made profits in the mid double-digits by now; if you're trading, it's likely you've doubled your money many times over. (There's a fast-cash strategy I know of that's produced some of the quickest profit opportunities I've ever seen.)
So, just like you'd insure your house or your car, it's smart to spend just a little to make sure your profits are safe and sound when shares crash.
There are three strategies here - two for individual stocks you might own, and one for entire indexes.
Now, one way to do it is to "rent" stocks for pennies on the dollar instead of owning them outright. It's far cheaper.
Let's take Amazon.com Inc. (NASDAQ: AMZN), for example. You want in on this stock that has been on a tear this year - up 65% since January. Well, 100 shares of stock would cost you $314,000. That's a big expense, and the way AMZN moves, you could lose a lot in a hurry should the stock plummet.
Instead, you could buy a long call spread, which could dramatically reduce your entry cost, and in turn, your risk.
Above, you can see how this AMZN spread breaks down. It will cost you only $900 to control 100 shares of Amazon. Buying the Sept. 18, 2020 $217-$266 call spread has the potential to double your money with less than a 1% move to the upside.
Here are my entry rules for long call spreads on bullish stocks:
Now, another play you can use would be to hedge those stock positions with a collar strategy.
Had you bought 100 shares of Tesla Inc. (NASDAQ: TSLA) at $1,120 on July 1, 2020, you'd be sitting on approximately $46,800 of profit today, and your position would be worth $112,000.
Now, it's easy to protect this position and continue to profit if TSLA rises from here using this collar strategy.
A collar is constructed like so:
- Buy a 60-90 day OTM put to protect your stock.
- Sell a 60-90 day OTM call to pay for your put.
Currently, you can buy a TSLA Sept. 18, 2020 $1,580 put for $239 that will protect TSLA at $1,580.
That's just $23,900 to protect 100 shares of TSLA for two months.
Now, $23,900 is a lot of money, particularly when things are so crazy. But here's the beautiful part: You don't have to front that cash on your own!
You can cover the "insurance" cost by selling a TSLA Sept. 18, 2020 call for $239, completely paying for the insurance.
The rights and obligations break down like this:
- The TSLA Sept. 18, 2020 $1,580 long put gives you the right to sell TSLA at $1,580.
- The TSLA Sept. 18, 2020 $1,600 short call gives you the obligation to Sell TSLA at $1,600.
Collars can also be thought of as a covered call with a protective put.
It gets better: Remember that $46,800 of TSLA profit you're hypothetically sitting on? With this collar, you've locked in $46,000 of it and positioned to profit even more.
Should TSLA plummet, your call will expire worthless, and your put will increase in value, offsetting losses in the stock.
There's one last move to make - this is where you can hedge the overall market with inexpensive OTM puts or put spreads on a market index exchange-traded fund (ETF), like the SPDR S&P 500 ETF (NYSEArca: SPY).
For example, you could buy the following three-month long put spread on the SPY for $170.
Should the SPY fall to recent levels, you could make up to $830 - or a 488% return on your investment, all while less prudent folks are losing their shirts.
Now, there are plenty of ways to make low-risk trades that protect your investments, but these three strategies are the best to play in the current market.
You Don't Have to Wait for Markets to Turn
But there's also a way to jump in while the market continues its rise that could have you pocketing cash every day the market is open.
In fact, this group of readers had the chance to take home six sets of profits in just one day last week!
It can be fast: With this strategy, it only takes a few hours - and believe me when I say that this is the fastest cash I've seen in my 30-plus years of trading.
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.