Last week, I gave all my premium members – the Penny Nation and Night Trader crew – their first chance to hedge themselves for the weeks and months to come.
With the market turning increasingly bearish, everyone should look to protect their portfolios now.
And while I’m all in on trading small caps even in the “worst” of times…
There comes a moment when we need to look at the big picture and seize our opportunities to the fullest.
That’s why even though our latest action to take was a lot more expensive than most Penny Nation trades, I figured it was incredibly important for me to share with members – and now my Penny Hawks.
It could yield a lot for us down the line…
Which is exactly what I plan on talking about today on The Long and Short of It at 9:30 a.m. (ET).
We’ll cover all the stocks that just joined the Bear Market Club and how to avoid “over-loved” positions that could drop at any moment.
And you may know already from reading my Bear Market Survival Guide, but a really good hedge does the following…
- Protects your overall net worth by gaining in value if your other holdings fall
- Generates additional cash that you can turn around and invest when stocks are way down
And because of that, I prefer to take advantage of exchange-traded funds (ETFs) to do my hedging.
ETFs: Shorting vs. Put Buying
There is one core reason I’d much rather buy long-term put options on an ETF than go out and short one.
As traders, what is the No. 1 thing you look to avoid when possible?
I don’t care how stinkin’ rich you are, if you’re given two paths that theoretically could lead to the same result, I’d bet 10 out of 10 times you’ll pick the safer route.
Shorting positions outright carries a lot of risk; if the underlying shares begin to rocket higher, you’d then be on the hook to repurchase those shares at a less-than-favorable price.
Initiating a long put position on an ETF is like shorting a whole collection of stocks without taking on the risk of a short seller.
And in a bear market it can be all kinds of lucrative.
Why expensive ETF options when all I want to do is trade value stocks?
Think of an ETF put option as an insurance policy – while we’re busy adding plenty of low-cost, high-reward trades, the hedge is there to protect you in the worst-case scenario.
I told my Night Traders and Penny Nation crew that I don’t enjoy looking at the markets like this – nobody does.
But when there is such high risk of a bearish race to the downside, we want to make sure we have “alpha” trades in place to capture the full flavor spectrum of this market pie.
And right now, the specific ETF I bought puts on with my premium members is like the Hoover Dam of the market…
It’s holding a LOT of pressure right now, and the cracks in the dam could result in a flood of market selling.
If that happens, the ETF put options we bought should soar in value, helping to offset losses from any long positions we have on… and maybe even MAKE us money.
I’m not writing any of this to scare you.
While many longer-term investor may feel the burn of a market downswing, traders like us have a great opportunity to thrive.
And that’s exactly what I intend to achieve with Penny Nation in the weeks ahead…
Be sure to check your inbox for our next edition of the Penny Hawk, and get in the room at 9:30 a.m. ET for our LIVE trading session!
Quantitative Specialist, Penny Hawk
March 07 2022