Monday was a wake-up and a shake-up for many investors. The major stock market indexes took a quick drop. And that drop was big.
Of course, Tuesday and Wednesday saw the stock market bouncing back and then some.
And as we wrote in yesterday’s Traders Daily Direction, the three new stocks on this week’s current Watch List are all in positive – or very positive – territory.
Now, a bounce back or trades bringing back good stocks from selloffs won’t always happen after a market drop.
This is why we have plans for you to deploy a defensive strategy when it is time to hedge and protect your own portfolio.
This plan utilizes an option strategy that we’ll present in a moment.
But first, to get yourself up to speed with options and how they work to hedge or for other strategies for greater profits, I highly recommend you read our special report: How to 10X Your Stock Surge Gains.
The Option to Protect
Now, as we opened today’s issue, you need to be ready for bigger falls in stock prices.
And you need a playbook with a plan that you can deploy if and when needed.
Now, here’s how to protect your portfolio…
The market has been rough periodically over the last weeks.
Stocks have fallen on fears of a second wave of coronavirus. And many investors are worried that a selloff is coming.
The solution? Buy insurance.
We insure our cars, our homes, our health, our businesses… Why not insure our portfolio?
It’s easier than you think. Let me explain…
Put Option to Protect
Buying a put option allows you to profit when the underlying stock goes down in price.
The easiest way to protect a stock portfolio is to buy put options on the S&P 500 index.
This way, if the value of your stocks goes down, your put options will increase in value and offset the stock losses.
The trick is timing your purchase and buying a “policy” when rates are low.
And to get the timing right, you need to know about the S&P 500 Volatility Index (VIX).
When the VIX is high, the market is seen as riskier. Because of this elevated volatility, put options (what we are buying to protect our portfolio) will cost more.
When the VIX is low, they cost less.
Right now, it is relatively low… especially compared to what we have seen over the last year and a half.
So put options are cheap right now. Here is the current example:
To protect your portfolio for the next three months, you could buy the SPY October 15th $389 strike put option.. SPY is the ticker for the very liquid SPDR S&P 500 Index ETF.
Tuesday, these were trading for $8.18 apiece.
By Wednesday morning, they were down to $5.00.
In other words, “insurance rates” came down 38%.
This is why you want to be thinking about protecting your portfolio when the market is calm, not in the middle of a panic.
The October $389 puts cost $5.00, or $500 per contract (each put represents 100 shares of SPY).
And each contract will protect roughly $50,000 worth of stock.
A $250,000 portfolio would need five contracts. For a $500,000 portfolio, I would buy 10.
So, the cost to insure your portfolio through October is roughly 1%. That’s your risk.
If stocks rise, you will lose the 1% you paid for the insurance.
But if the market takes a dive, the puts will go up. Your “insurance” will pay out and offset your losses.
It might end up being the best 1% you ever spent.
Another Option to Profit
As I have been discussing in Traders Daily Direction, I am ramping up my insider stock buying research that is part of my Stock Surge Indicator (SSI).
Yesterday, I did a live coaching event that was all about insider buying and how it works to find stocks that are set to rally higher and stronger.
For those of you that joined me, I enjoyed your participation and I know that we covered some profitable ground.
I have developed a new product that we’ve recently launched here at Traders Agency called Insider Edge.
It’s all about one of my common-sense tools that finds stocks with big surges in the works that are tipped off by insiders’ buying their own shares.
To get the full rundown on how to profit by buying stocks that insiders are buying right now and learn more about Insider Edge at Traders Agency, click here right now.