My job as a trader is to be aware of the news, but not be consumed by it. As legendary mutual fund manager Peter Lynch once said, “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”
The news can be daunting, but bigger picture the indexes are near all-time highs and many leading stocks are reporting spectacular earnings and breaking out to the upside. So if I wanted to ignore the news headlines, and bet on the market and these growth stocks moving higher, how might I get inexpensive upside exposure?
One way is to buy Call Options on the Nasdaq ETF (QQQ). Trades have unlimited upside potential, just like a stock purchase, but at a fraction of the cost. And if you’re really worried, you could hedge by buying puts to protect against a market decline.
Because I can’t possibly know what you have in your portfolio, I’ll base the strategy on the SPDR S&P 500 ETF (SPY), which corresponds to the price and yield performance of the S&P 500 Index.
The truest hedge if you owned 1,000 shares of the SPY would be to buy 10 puts against it. If the SPY were to drop below your puts’ strike price, you could simply exercise your puts, and you would be out of your entire stock position. The upside to this strategy is that you do not cap your potential profit if the SPY price continues to rise.
For instance, you could buy 10 puts for $10.
If the SPY were to drop below price, you would exercise your puts, and you would be taken out of your SPY stock position. However, you have to pay $10, or $10,000, for this insurance. But with the CBOE Volatility Index (VIX) at historically low levels, this insurance is extremely cheap based on historical prices.
Despite the talking heads on TV constantly focusing on the negatives, and social media posts breathlessly forecasting the end of the world, the resiliency of the stock market and leading stocks tells me that while we should be aware of the headlines, now is not the time to panic.
Maybe the market wobbles of the past several months aren’t an early sign of the apocalypse, buy a buying opportunity.