While Europe will always matter to US investors, I don’t believe that Europe can stop the recovery occurring here in the US. While that continent is an important trading partner with us, it’s not as important as it once was. It might slow our recovery, but it will feel like a bump in the road – not a detour.
The recent European news is just an excuse by institutional money managers to take some profit off the table. We just finished the best first quarter for the S&P 500 in decades. Profit taking does make some sense for anyone that has a need for the cash, or for an institutional money manager that wants to protect some nice gains.
However, if you don’t have a need for cash, we at my firm believe the market still trades at a discount. So, an idea for you to consider: Find the stocks or ETFs that you have been thinking about owning, and look to take advantage if this sell-off continues. You could get in at an even lower price.
An options technique we like to use to get into the position at an even lower price: sell a slightly out-of-the-money put option. If you sell a slightly out-of-the-money (OTM) put in a near-month, you will collect premium and will get triggered in to owning the stock at the lower strike price if the market keeps going down. Your basis for owning the stock becomes the strike price minus the premium you got paid. And if you don’t get executed in to the stock, you collected the premium and it is all profit.
One other thing to consider: Maybe think about buying an even deeper OTM put for an expiration about six months out. This will protect you in case you do get executed in to owning the stock and the stock falls deeper because the market falls more. Rule No. 1 of buy and hedge is hedge every investment. By owning the put, you have your protection. And you will have bought your protection at a lower price than the case where you get assigned to buy the stock.
For more from Wayne Ferbert, go to Buy & Hedge ETF Strategies.
No positions in stocks mentioned.
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