Getting Out While Staying In

January 28, 2014
By Vlad Karpel

Is the long anticipated Correction upon us? Is the Bull run over, at least for now? Are you tempted just to get to cash and be safe? Maybe, maybe not.  One thing is certain, the only thing worse than buying at the top is selling at the bottom. And you’d sure hate to get out only to see the market roar back and resume the uptrend.

Well, here’s a way that you can lower your exposure to equities, perhaps even take some profits, and still stay in the game.

We all know that put options help insure against a move lower. Call options can also be used to insure against a move higher. And no, I don’t mean calls as a hedge against a short stock or futures position. We’ll leave that to the professionals.

What you can do is dramatically lessen or even liquidate your stock portfolio and at the same time buy calls in the S&P 500 ETF (SPY).

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At this writing, with SPY at 179 (equivalent to the S&P 500 at 1790), you can buy the March 183 all at 2. 183 is only 2.25% higher than we are now. So if you sell your stocks you’ll only miss the next two and a quarter percent move higher before your long call kicks in.

And if you have in fact sold before the sell off really kicks in then that $2 investment was money well spent.

Either way, calls are not just a way to speculate on a move higher (although they can be), they are also share the insurance properties of put options.

Yet another tribute to the great flexibility of exchange traded options.

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