On Tuesday, both the blue-chip DOW and broadly-based S&P 500 touched all-time record highs. Is it time now to jump in or be cautious? The emotion of greed is again a major factor to consider when trading this market. My feeling is with this rally reaching record heights, we’re seeing another opportunity to take some profits given that we could see some profit taking in the upcoming sessions due to the overbought conditions.
Given the uncertainty of the rally, you want to make sure you don’t leave yourself exposed to overbought selling should markets continue to rise. If you own stocks or index securities that made some decent gains, you might be wondering what to do.
Let’s say you own a basket of technology stocks that have moved in line with or better than the overall markets. A good strategy would be to take some profits. At the same time, you do not want to miss out on any potential gains that may occur as we move into what may be decent earnings in the upcoming third and fourth quarters. You could also buy some put options to hedge against downside moves.
Another strategy that you may want to consider is to take some profits off the table and then use some of the profits to buy index call options — a bullish play on a stock index.
First, take some profits on your basket of stocks. Second, buy some index calls so that you will continue to partake in any potential upside moves in the markets.
The best thing about options is the leverage involved. For a fraction of the value of the index, you can trade the index and take advantage of the gains. In this way, you can take some profits and sleep well at night. At the same time, you would benefit should stock markets continue to rise. You can also play index call options on the NASDAQ, S&P 500, Russell 2000, or DOW. There are also numerous other index options you can buy depending on what you want to trade.
Should the market continue to rally, you would benefit from the index calls. But if the market falls, you would have realized some profits and only lose the premium you paid for the index call option. In my view, it is a win-win situation for you.