A Strategy to Protect Your Investments
You may likely have money invested in various instruments that include stocks. Whether a 401(k) or IRA, you have the ability to adjust your investments to best match your risk tolerance. With recent moves in the stock market, I’d like to bring to your attention an approach you can use to protect your investments.
The stock market has been in a sharp uptrend in recent months and in the throes of a nine-year bull market since 2008. After the November Presidential election, stocks rallied significantly, with the Dow Jones Index moving from roughly 18,000 to just over 21,000, or 16.7%. The Dow Jones futures peaked in early March, then trended lower through the end of April. The index then rallied back by mid-May, yet failed to move into new highs. This week, as uncertainty surrounds the Trump administration, stock prices are breaking, moving below key support at the 40 and 50-day moving averages and trading as low as 20,474. While you should expect gyrations in stock prices, it is possible that a long-term high will be established soon.
Due in part to low interest rates, money has been looking for a place to invest for years, and continually seems to focus on the valuations of stocks. This has helped propel prices higher, and provide solid returns for investors. Talk of a tax cut from the Trump administration has also been supportive to the U.S. stocks. Yet, the stock market is not much different than any other market. Like all markets that move up, there will likely be days (or periods) when they move down. After such a significant and historic recovery since 2008, it may be time to consider protecting these gains. It you have a stock portfolio, consider purchasing Mini Dow put options. By purchasing a put, you can establish a floor for the index. In addition, we like the idea of selling call options above the market to help finance puts.
The months available to trade are March, July, September, and December. Focus on using the September contract, as back months can lack liquidity. The value of each tick on the Mini Dow futures is $5.00. If the index futures is at 20,900 and drops to 20,400, this equals $2,500 change in value. In this scenario, if you purchased a put for 200 points, this move would cost you $1,000. The value of the contract itself will depend on where the index is trading. For example: at 21,000, the value of a contract would be $105,000. If you wanted protection on a stock portfolio valued at $210,000 you would need two puts.
As with any hedging tool, it is important to understand the rewards and risks. Discuss this alternative with your advisor to learn more about its use, and how it may work for you.
If you have questions or comments contact Top Farmer at 1-800-TOPFARM, ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.