Author: Chris Hood
This rally has me concerned.
It was most likely an overreaction to the recent CPI, PPI, and manufacturing data reports. Any sign of hope can excite the bulls when all news has been horrible.
Not to mention, hedge funds suffered this year.
It could be a bit of aggressive trading by the managers of these funds. Poor performance means no bonuses, so many went full risk-on.
What makes me a bit nervous is the present market’s similarity to the crash of 2008.
Many of you probably weren’t even trading back then, but these massive rallies give me cold chills.
Maybe the market has bottomed. But, given the downtrend of the weekly and monthly charts, that seems unlikely.
The market can do strange things. However, history often does repeat itself, and I think this bear market is far from over.
So what am I doing to protect myself?
Let’s discuss a strategy that lets you take advantage of the upside while minimizing risk.
It’s called a married (or protective) put.
Unlike other options strategies, the married put is a defensive play. The main goal isn’t to make money but to protect a long stock position against sudden drops in price.
Despite the market’s recent bull run, there’s a high likelihood of a downside reversal.
So rather than buying calls, I’ve been buying long stock.
Stock shares eliminate theta decay in my long positions should the market chop around for several weeks.
I buy a long put on the stock that’s slightly ITM to accompany that position.
To completely protect the stock, I’ll need one put for every 100 in my account.
If the trade is structured correctly, any downside movement in the share price will increase the put’s value to offset losses on the stock.
Should I want to keep my shares, I can sell the put for a profit.
The gains on the put should offset all (or at least most of) the losses on the long stock. Every dollar earned this way decreases the position’s cost per share.
If the stock price goes up, I’ll lose money on the put, but the gains on the stock offset a good portion of these losses.
I can reset the position by rolling the put up to a higher strike.
If you’re holding stock positions in uncertain markets, this is a way to ensure or de-risk them.
Married puts do have the drawback of being capital intensive.
Buying 100 shares plus a put isn’t cheap. However, if you have the capital or already own the shares, I recommend you learn more about this strategy.
Your focus now should be on defense rather than chasing huge gains.
As I tell my clients regularly in Trade Command’s live trading room:
“During bear market uncertainty, you must shift your focus from winning to preventing losses. A risk-management mindset will make you win more by losing less.”
Keep this in the front of your mind over the coming months.
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