Three Ways to Hedge Your Portfolio in This “House of Cards” Market

The S&P 500 has skyrocketed 49% over the past four months, and the Nasdaq just set an all-time high of 11,069 on July 13, surging 63% over the same period.

This is after both indices crashed 35% and 30% respectively this past February and March on the dawning of the coronavirus pandemic.

With these massive bounce backs in the market, it’s clear that traders are greedily buying stock – but there are several factors that we need to take a look at that show that the economy is telling a different story…

  • The U.S. unemployment rate has surged to 11.1%.
  • Over 10,000 U.S. retail stores have closed in 2020.
  • Bankruptcies are spiking, including from big names like Hertz Global Holdings Inc. (NYSE: HTZ) and JC Penney Company Inc (NYSE: JCP).
  • The U.S.-China trade relationship is deteriorating.
  • The Federal government is taking on huge amounts of stimulus package debt.
  • The presidential election is three months away.
  • Coronavirus cases are rising.

Any one of these conditions has the potential to tank the market, and investors are asking one big question: “Can it last?”

With the catalysts above, this market high will be short-lived.

(That’s why fast-cash strategies are so important right now – and this trading technique is producing some of the quickest profit opportunities I’ve ever seen.)

Now, even if the market does crash, you don’t have to say goodbye to your hard-earned cash. I have three strategies you can use to weather out the storm that’s brewing…

And you can make money while you use them.

Here are three strategies to hedge your portfolio before the market tanks again…

Options: The Key to Protecting Your Investments in an Unpredictable Market

This “house of cards” market will inevitably come down within the next few months, particularly as we approach the presidential election. There are just too many negative catalysts that may very well get worse before they get better.

Now, as much as I like to think I know everything, the truth is that no one can see into the future. So, how are you supposed to protect yourself against a potential crash?

That I do know the answer to…

Use trading strategies that can double your money instead of purchasing the stock outright to reduce your risk in the event of a sudden correction.

  1. Let’s take Amazon.com, Inc. (NASDAQ: AMZN), for example. You want in on this stock that has been on a tear this year – up 65% since January. Well, 100 shares of stock would cost you $314,000. That’s a big expense, and the way AMZN moves, you could lose a lot in a hurry should the stock plummet.

Instead, you could buy a long call spread, which could dramatically reduce your entry cost, and in turn, your risk.

Above, you can see how this AMZN spread breaks down. It will cost you only $900 to control 100 shares of AMZN. Buying the September 18, 2020 $217-$266 call spread has the potential to double your money with less than a 1% move to the upside.

Here are my entry rules for long call spreads on bullish stocks:

  1. Now, another play you can use would be to hedge those stock positions with a collar strategy.

Had you bought 100 shares of Tesla Inc (NASDAQ: TSLA) at $1,120 on July 1, 2020, you’d be sitting on approximately $46,800 of profit today, and your position would be worth $112,000.

Now, it’s easy to protect this position and continue to profit if TSLA rises from here using this collar strategy.

A collar is constructed as follows:

  • Buy a 60-90 day OTM put to protect your stock
  • Sell a 60-90 day OTM call to pay for your put

Currently, you can buy a September 18, 2020 $1,580 Put for $239 that will protect TSLA at $1,580.

That’s just $23,900 to protect 100 shares of TSLA for two months.

But get this – you don’t have to front that cash on your own. You can cover the insurance cost by selling a September 18, 2020 Call for $239, completely paying for the insurance.

The rights and obligations break down like this:

Sep18 $1,580 Long Put → Right to Sell TSLA at $1,580

Sep18 $1,600 Short Call → Obligation to Sell TSLA at $1,600

Collars can also be thought of as a covered call with a protective put.

Now, here’s the best part. Remember that $46,800 of TSLA profit you’re hypothetically sitting on? With this collar, you’ve locked in $46,000 of it and positioned to profit even more.

Should TSLA plummet, your call will expire worthless and your put will increase in value, offsetting losses in the stock.

  1. One last play to consider is hedging the overall market with inexpensive OTM puts or put spreads on a market index ETF, like the SPDR S&P 500 ETF (NYSE: SPY).

For example, you could buy the following three-month long put spread on the SPY for $170.

Should the SPY fall to recent levels, you could make up to $830 – or a 488% return on your investment.

Now, there are plenty of ways to make low-risk trades that protect your investments, but these three strategies are the best to play in the current market.

But there’s also a way to jump in while the market continues its rise that could have you pocketing cash every day the market is open.

In fact, this group of readers had the chance to take home six sets of profits in just one day last week!

See, you don’t have to wait months, weeks, or even days for a trade to profit. With this strategy, it only takes a few hours – and believe me when I say that this is the fastest cash I’ve seen in my 30-plus years of trading.

To learn more, just click here.

Whatever you believe, it’s certainly prudent to hedge and protect in case one or more of these looming market catalysts comes swooping in.

Talk soon,

Tom Gentile

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