Hello, Penny Hawk traders!
I’ll be LIVE at 9:30 a.m. ET today for another Long & Short of Itsession, where I’ll do a deep dive into how the Russia-Ukraine conflict is moving money – and how we might trade it.
And if my broadcaster Brandon has anything lippy to say about it, well…
I’m kidding, of course – everyone loves Brandon!
In fact, Brandon is my on-air crypto consigliere, so I’m excited to talk about Block (SQ) (formerly known as Square) and Coinbase (COIN) ahead of their earnings releases tonight.
Plus, we’ll dive into my Top 5 Options on Stocks Under $10!
I’m extra excited about today’s list, because not one but TWO of the stocks are new to the sub-$10 universe.
We’re seeing more and more stocks enter this realm amid the market volatility, so I see a lot of opportunities for my Penny Nation family on the horizon.
Just last night, for instance, popular names like Nektar Therapeutics (NKTR), Opendoor Technologies (OPEN), and TG Therapeutics (TGTX) were among the equities with at least 1 million in volume that dropped into single-digit territory.
I’ll also touch on the importance of hedging at 9:30 a.m. ET today, as well as the exchanged-traded fund (ETF) I’m trading to protect my tech investments.
If you can’t watch me this morning in real-time, though, don’t worry – you can always catch my replays here, and I’m going to break down this important “trading insurance” strategy for you in today’s Penny Hawk newsletter.
Considering the market turmoil we’ve witnessed lately, not to mention the full-blown bear market on the horizon, you’re gonna want to take notes.
2 Ways to Hedge
I know many of you are relatively new to the world of trading, having come over on the Good Ship Reddit boat during the meme craze.
But even if you’ve been trading a few years now, you’ve never really experienced a TRUE bear market, which most technicians define as 20% from all-time highs.
Because outside of the massive sell-off around the start of the Covid crisis in early 2020, which wound up being relatively short-lived, stocks have essentially been headed higher for over a decade now.
Weekly chart of SPX since 2019 – courtesy of StockCharts
But let me tell you – I’ve been trading for a FEW decades now, and the bear market is in the air, which is why I recently released my Bear Market Survival Guide.
Even before the S&P 500 Index (SPX) fell into “correction” territory – defined as a 10% drop from all-time highs (so we’re already halfway to a formal bear market!) – earlier this week, I’d been warning Penny Nation members to be prepared.
Now, when I say “be prepared for a bear market,” that doesn’t mean liquidate your assets and hide your money in various cookie jars.
It doesn’t even mean stop placing bullish bets altogether, because with the right guidance, strategies, and stocks in your toolbelt, there are still pockets of strength to be found.
However, just as you would protect any other major investment or large purchase – like a home, car, or boat – it’s wise to pick up “portfolio insurance” during times of market volatility.
That’s called hedging your bets.
There are a few different ways to hedge, depending on the position you’re trying to protect and your personal comfort level, but for the sake of simplicity, we’ll go over two.
Buying protective puts is how many traders insure their long stock positions.
While a “vanilla” put buyer is looking to profit from a stock’s decline, a protective put buyer is looking to guard against one.
The trader will buy put options at a strike price at which they’d be comfortable selling their shares, should the stock move lower than that strike before expiration.
In the worst-case scenario, the stock could plummet all the way to $0 – but the protective put buyer could exercise their right to unload their shares at the strike price, limiting their losses or even locking in gains.
In the best-case scenario, the stock would move higher, allowing the trader’s shares to appreciate in value and the protective puts to expire worthless. Sure, the trader would be out the initial premium paid for the puts – which represents the maximum risk – but that’s a small price to pay to sleep better at night.
The other hedging strategy – and one I discussed in yesterday’s Long & Short of It session – is using index ETF puts to protect against a broader downturn (as opposed to against a single stock’s drop).
For example, back in December, I bought to open June-dated $360-strike put options on the Invesco QQQ Trust (QQQ) – which is an ETF based on the Nasdaq-100 Index (NDX) – as a hedge.
The Nasdaq-100 is comprised of some of the biggest tech stocks in the world, including your FAANG favorites and behemoths like Microsoft (MSFT), so the QQQ has tech exposure by default.
While I wasn’t necessarily hoping tech stocks would tank amid a Russia-Ukraine standoff in 2022, the QQQ put options in my back pocket gave me comfort to start the year.
Because I knew that if the bear market I suspected DID become a reality, the potential gains from the QQQ put moving into the money before expiration would help offset – if not totally negate – any bullish positions I had open.
And boy am I glad I hedged, as QQQ is about 30 points south of my $360 strike, as of this writing:
Daily chart of QQQ since October 2021 – courtesy of StockCharts
That’s all for now, but make sure to join me at 9:30 a.m. ET RIGHT HERE, where we’ll dive into ways to trade Russia, my top 5 option ideas, and a whole lot more! And if you’re a Penny Nation member, we’ll get into all the juicy trade talk in our private 10:30 a.m. ET session…
See you in the room,
February 24 2022