The January effect has turned into a February hangover.
Pick your poison: geopolitical tensions with China and Russia, tepid earnings, overheating inflation and the Fed’s inability to stop it…
The stock market has looked weak over the last several weeks, with some strategists calling January’s rise a classic dead-cat bounce.
If the headlines out of Wall Street this week made you want to strap on a helmet and buckle up – you’re not alone.
It is hard to be thrilled about the markets when you hear things like:
- Intel cutting its dividend by 66% – a sheer sign of desperation.
- Shares of Domino’s and Home Depot tanked after releasing earnings citing inflation as a main cause.
- Meta CEO Mark Zuckerberg announced he would be cutting thousands of jobs, after he said there would be no more layoffs and firing 13% of the company’s workforce in November.
One thing’s for certain, now is not the time to be getting aggressive.
In fact, capital preservation should be at the top of your mind.
Now, we’re not implying you dump your stocks, load up on canned goods and look for a place to live off the grid.
Not at all.
But we do want you to be smart with your investments – and protect your capital because you’ve worked hard to get it.
Don’t Let January Effect Hangover Turn Winners Into Losers
Red-hot analyst Mark Skousen delivered his sixth win in a row for his TNT Trader subscribers, closing out a position in Visa Inc. (NYSE: V).
Mark believes in letting winning trades run.
However, he doesn’t believe in turning winners into losers. That’s why he recommended raising the stop on Visa as the trade started working.
Raising the stop saved investors this week despite the sharp sell-off in Visa, allowing them to lock in a gain of nearly 8%.
And with market uncertainty returning, you’ve got to look for ways to protect your hard-earned investment capital.
While it’s never fun to get stopped out of a position, at least it doesn’t sting like watching a winner turn into a loser.
Learn the Mechanics of a Stop Loss to Avoid January Effect Hangover
A stop loss is a type of order that traders can use to limit their potential losses in a trade.
The order can be executed through your broker or online platform to automatically close you out of a position once it reaches a certain price level, known as the stop price.
For example, let’s say you’re long in shares of a stock at $90, which has risen to $100. You still believe there is more upside but don’t want to turn this winner into a loser.
One thought might be to set a stop loss at $95. If the stock dips and trades at $95, the stop loss will be triggered, and you will be closed out on the next print.
Where you set your stop losses should be determined by the volatility in the stock and how much of your gains you want to keep.
One common mistake inexperienced investors make is setting their stops too tight. For example, stocks like Tesla (TSLA) can experience significant intraday volatility. You can easily get stopped if you set it too tightly.
Here is a strategy you can implement that acts like a stop but is more suitable for volatile stocks.
Earn Income While You Hedge
Hedge your investments by selling out-the-money calls in stocks you’re long.
This strategy is called a “covered write” that Bryan Perry routinely goes to in his Premium Income Pro trading service.
Earlier this month, Bryan recommended buying Delta Air Lines (DAL) at $39.38. At the same time, he recommended selling the DAL March $43 calls expiring on March 17 for $1.00 per contract.
Since his initial recommendation, DAL has dipped to $37.53 as of Thursday’s closing price. If you bought 100 shares, you would be down $185. However, $43 calls sold for $1.00 are now worth $0.05. In other words, you’d be up $95 on those and only down $90 on the entire trade.
One could buy back the $43 calls and establish a new position by selling calls at a different strike price or options expiration to collect a juicier premium.
Options Strategies Designed To Protect Profits
Using stops can be tricky if you’re trading a volatile stock like Tesla. Another alternative is buying a protective put to accompany your long stock position.
Let’s say you’re a long-term investor of Tesla, and thanks to Mark Skousen’s Fast Money Alert recommendation, you’re long from around $125.
You go out into the options market and see the TSLA $180 puts expiring on April 21 are trading for $11.65 per contract. If you buy that contract, it would cost you approximately $1,165, plus commissions.
While the options aren’t cheap, they may be a better way to play it than a stop, given the volatility of the stock. The put protects to $168.35. We get that by subtracting the strike price and the contract price.
In other words, if the stock were to dip below $168.35, you wouldn’t lose more money.
Now, if you think paying $11.65 per contract is too rich, you also sell calls against your long stock. For example, selling the TSLA $250 calls for $7.50, expiring on April 21.
This would bring down your cost to just $4.15, and you would be protected from $175.85 and downward.
This strategy is called a protective collar.
Sometimes you can mess around with the strike prices and get collars for very cheap or at no cost.
As you inventory your portfolio, think about what strategies you can implement to protect your gains or save you from further losses.
Our team of experts at Eagle Financial is here to give you the best insights on the markets. But everyone’s risk tolerance is different.
Don’t wait for disaster to strike.
Think about ways you can protect your capital as we embark on a bumpy ride.
IN CASE YOU MISSED IT
Bryan Perry doesn’t only hit it out of the park on his options trades. He’s also a high-yield dividend expert – and he has just recommended a play that pays out a whopping 25% annual yield. You can read Bryan’s latest research here. But don’t wait… you’ll need to get in soon to collect the next big payout.
