Look, I'm sure you saw it as clearly as I did: Stocks rallied a blistering 72% between the March 2020 lows and the end of 2020. There's no two ways about it.
But you also saw the S&P 500 dip around 2.8% this past Monday and Tuesday - that's the worst yearly start in 20 years or so. We turned negative again on Friday, because of a disappointing jobs report and the reality that additional stimulus might not be a walk in the park after all.
I'm not saying it's time to worry - far from it.
But... I wouldn't put all my eggs in that basket. As the past few sessions showed, an environment like this is the perfect time to pick up a little just-in-case "insurance" for your portfolio.
With stocks as strong as they are, generally, these trades are inexpensive. I like an inexpensive trade anyway, but when it offers peace of mind and protection, too, that's the cherry on top...
How Underperformers Can Deliver When Stocks Stumble
Now, we've talked about buying puts on the exchange-traded funds that track the S&P 500 and the Dow, like SPDR S&P 500 Trust ETF (NYSEArca: SPY), SPDR Dow Jones Industrial Average Trust ETF (NYSEArca: DIA), and even the Nasdaq, with the Invesco QQQ Trust (NASDAQ: QQQ). It's usually a good idea to have some of those trades rolling, because, though you'll pay to make them, they can pay off when markets go down. They'll not only hedge your losses, but they can pay you double- and triple-digit profits on top of that.
YOUR BROKER PROBABLY DOESN'T KNOW about the best trading strategy for 2021 (up 906% in only five months). Learn more...
These trade on two sectors that are underperforming the market - by a lot - and can do the same thing for less money.
Oil is a great one, for instance. For obvious reasons, the world's oil demand was upside down in 2020; it's still upside down in 2021. It's not trading in the negative, like it did on that crazy day in April 2020, but it's still way down in the lower end of its historic range, and should be that way for at least the first two quarters, if not longer. The Select Sector SPDR Energy Trust ETF (NYSEArca: XLE) tracks the energy sector, with a particularly heavy weight in oil stocks.
Commercial real estate is another sector that's taken a pounding over the last year - unlike the booming housing sector. Shopping malls and office buildings have emptied out all over the world, but it's been especially rough here in the United States.
EERIE: Nearly every time Bitcoin goes up, a small class of little-known cryptos jump even higher; 142% in 12 days... 330% in 82 days... 273% in 14 days. One rocketed 1,900% higher in just 62 days. Details on this chart...
The Select Sector SPDR Real Estate Trust ETF (NYSEArca: XLRE) is loaded with under-performing real estate investment trust (REIT) shares right now, along with exposure to other struggling real estate segments.
Now, there's one easy, inexpensive way to trade both of these - they should pay off even if the market doesn't fall much further, but if it does fall more... well, that's even better for these moves.
I like a "30-90" at-the-money put option for both of these, meaning puts expiring between 30 and 90 days from now, to give the trade some time to run. The XLE March 19, 2021 $42 puts can be had for a little less than $3 each now, but if XLE drops much further, those prices will be a distant memory, and you'll be raking it in. The XLRE Feb. 19, 2021 $36 puts are even cheaper right now, at around $1.25 each, or $125 for 100. You can roll these trades over, too, and put some on regularly. If the market does tank, you'll be sitting pretty; but if it doesn't, these underperformers will still put cash in your pocket.
Puts move higher when stocks move lower, but I've seen an interesting cryptocurrency phenomenon where, when Bitcoin moves higher, these smaller cryptos can jump even more - 142% in 12 days... 330% in 82 days... 273% in 14 days. One rocketed 1,900% higher in just 62 days. With Bitcoin soaring past $40,000 this week, the next couple of days could be pretty interesting here. Take a look at this chart...
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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.