Blue Senate = RED Markets?
Welcome to the Rude Awakening for January 6, 2021…
As you know, there is a lot of news driving the markets right now.
First, the breakouts of a new strain of the virus that’s even MORE contagious, causing a new wave of lockdowns across Europe and the UK.
And even more timely for today, the nearly concluded Georgia runoffs are looking like we’ll have a Dem-controlled Senate, which likely means more stimulus but would also mean more taxes in the near future.
It remains to be seen how a Dem-controlled Senate will affect markets in the near and long term, but for today, the three major indices are trending red across the board.
Because of these pressures weighing markets down, we are seeing a continued topping effect.
So, like I mentioned yesterday, I want to focus on some downside hedging strategies…
There are many ways to create protection and downside profits as a trader. And if you need a review on options, make sure to check out Your Options 101 video from last week.
For now, let’s focus on one very simple and effective way…
This method is called a “Collar” because you’re essentially putting a collar around a stock.
Basically, you use options on an underlying security to purchase stock and cap losses, all in one trade.
The coolest part about it? You can do this hedge for no cost.
In the video, I go through everything you need to know about the concept, and show you a real life example of how to set it all up.
But, for your Investopedia definition:
A collar, commonly known as a hedge wrapper, is an options strategy implemented to protect against large losses, but it also limits large gains. An investor creates a collar position by purchasing an out-of-the-money put option while simultaneously writing an out-of-the-money call option. The put protects the trader in case the price of the stock drops. Writing the call produces income (which ideally should offset the cost of buying the put) and allows the trader to profit on the stock up to the strike price of the call, but not higher.
Have a great trading day.
See you tomorrow to discuss how today’s trading session ends up…
Editor, Rude Awakening