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theoptionplayer (< 20)

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How to Protect Stock Gains

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August 09, 2012 – Comments (2) | RELATED TICKERS: SDS , ^GSPC , SPY

Market Summary

Most of the major stock indexes are within shouting distance of their four-year highs mostly due to real or perceived Fed intervention. The mood amongst investors is skeptical related to the stock market going very much higher. Keep in mind that most of the major indexes have already recorded close to double digit gains already this year, which is above historical averages for an entire year of gains and well above recent yearly results. It appears that without further Fed stimulus a majority of investors and stock market pundits express doubts about whether the recent bullish stock move has 'legs". As such, most smart investors are looking for an opportunity to protect their gains in case the market turns down like it did to the last two summers.

 Investor Analysis

The S&P 500 Index daily chart indicates that stocks are stalling out at recent highs and prices may be ready to head lower.

 

Possible Strategy

Investors who want to trade on a downside price move are considering a simple strategy to profit from the S&P 500's possible move lower. For example, buying a SDS ETF (Exchange Traded Fund) September expiration call option – SDS (NYSEArca: SDS) seeks daily investment results, before fees and expenses, that correspond to twice the inverse (-2x) of the daily performance of the S&P 500 Index – in other word this ETF profits when stock prices drop.  Purchasing the September $15 strike price SDS call would only cost $.45 per share (based on yesterday's close, but would generate gains the further stock price drop and the SDS moves above $15 anytime prior to September 21st. For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/

 

 By Gregory Clay

 

2 Comments – Post Your Own

#1) On June 29, 2013 at 4:06 AM, TMFDukenewkirk (77.89) wrote:

Or, you could do as I have and many other Fools, I'm sure, and stay fully invested and make tremendous gains over the following year, even greatly outpacing the continuing excellent gains of the index that never stalled itself. See, I simply no longer buy the notion that anyone out there can reliably predict what the market or economy will do in the short term especially. Personal experience over many years is what I trust. True, euphoria often propels stock beyond justifiable valuations but the great companies you invest in during times of euphoria don't tend to give up those gains completely when the market does turn when we 'least' expect it. You're very often still missing out on the positive gap between when you cleverly backed off equities and when you finally decided to hop back in, usually after missing out on the new upswing as well.

 Holding and buying through the Great Recession also flies in the face of the above advice but couldn't have worked out better. There are many great investors that spend little time hedging on the basis of market timing.

 

 

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#2) On August 07, 2014 at 10:03 AM, rboudbee01 (< 20) wrote:

If I liked or had any confidence in options, it would make sense to bet on a panic and keep buying such etf about once a week from now to 6-7 weeks from now.

 But I've never been impressed by options in any form. I'd rather buy companies I believe in, long term.

 

 

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