We have a big week ahead.
Most notably, Wall Street is on pins and needles ahead of the Dec. 15 trade deadline.
President Trump last week said a trade deal with China may not come until after the 2020 election.
That means a new wave of tariffs on Chinese goods could be ushered in soon.
Some economists believe it will hurt consumers the most.
But that’s not all that’s cooking this week…
The Fed is also in the spotlight— and while rates aren’t expected to change, Fed Chair Jerome Powell’s speeches have been known to spark market tantrums.
But… what if I told you there’s a way to INSURE your stock investments?
And still speculate without all the risk?
Let me teach you how using options during times of market uncertainty can help you sleep better at night.
You’ve probably heard me or other Wall Street veterans talk about “hedging” before — but what is it?
Despite its name, it has absolutely nothing to do with gardening (though I do love that almost as much as trading stocks and options).
In the simplest term, hedging = insuring your investment to protect profits or limit potential losses.
Protect Your Shares With Put Options
If you’re scared about a market downturn, one way to guard against huge stock losses is with protective puts.
For instance, let’s say you bought 100 shares of Stock XYZ for $50 a few years ago — that’s a $5,000 investment, right?
Now, XYZ stock is trading at $100, meaning you’ve doubled your investment to $10,000. Baller!
However, with a black cloud of U.S.-China trade uncertainty looming, you’re worried about XYZ stock taking a big hit.
What do you do?
- Sell the shares at $100 apiece, taking profits off the table.
- Keep your shares and buy PROTECTIVE PUT OPTIONS to lock in gains.
But WTF are protective puts?
A put option gives the buyer the right — not the obligation — to sell 100 shares at a predetermined price (the strike price) within the option’s lifetime.
It’s essentially a contract saying you can unload your shares at a set price, should they decline.
Now, let’s take a look at three scenarios:
- Stock XYZ rallies to $110
- Stock XYZ stays at $100
- Stock XYZ falls to $90
Had you held your shares and XYZ rallied, good for you! You’re up another $1,000!
Had XYZ stayed at $100, you’re no worse for wear.
But what if it fell to $90? The investment that was worth $10,000 is only worth $9,000.
On the flip side, let’s say you’d bought a protective put on XYZ.
Specifically, you purchased a 97.50-strike put for 60 cents, or $60 (since one option controls 100 shares of XYZ).
Had XYZ rallied to $110, yeah, you’re out $60 from the protective put, but your shares are still worth $11,000! And you get to hold on to them!
If the shares stagnated at $100 — again, you’re only out $60, and you still own the shares.
Now, had XYZ dropped to $90 on an unfavorable trade headline, you could exercise your protective put and sell your shares for $97.50 each!
That means instead of being down 10%, you’re down just 3.5%.
So, just like all other forms of insurance, you don’t want disaster to strike, but want to be prepared if it does.
Minimizing Risk With the Credit Spread
Part of the reason I love trading vertical credit spreads in Weekly Windfalls is due to the limited risk.
When I find a stock I want to trade, I’ll sell an option that aligns with potential support (a put option) or resistance (a call option).
But if that’s all I did, I’d be considered naked.
No, not that kind of naked — get your mind out of the gutter!
“Naked” as in — EXPOSED. To a LOT of risk.
So, in order to protect my investment, I put on a simultaneous options trade — this time buying instead of selling.
This insures that my losses are minimal, should the stock move against me.
For instance, last Friday I alerted my premium Weekly Windfalls subscribers that Roku (ROKU) stock looked like a prime candidate for a BEAR CALL SPREAD.
The stock was facing off against big gap resistance, and sat out the late-week rally.
I sold the weekly 12/13 150-strike call, expecting ROKU to stay beneath $150 in the short term.
Then, to HEDGE my position, I bought the weekly 12/13 155-strike call.
The bought call protected my bearish position, should ROKU shares skyrocket above $155.
The SAME DAY, I booked $3,000 in profits on my ROKU trade, so thankfully I didn’t need that cushion.
But you know what? I sure felt a lot better knowing my hedge was in place.
And guess what? My Weekly Windfalls premium subscribers had a HUGE, nearly PERFECT week!