Last week we saw some really aggressive moves to the upside in many of our core holdings - even the largest blue chip mega cap companies that very rarely have strong upward moves in short period of times.
General Electric (GE): +5.0% within 4 trading sessions
Johnson & Johnson (JNJ): +6.5% within 4 trading sessions
Exxon Mobil (XOM): +4.0% within 4 trading sessions
McDonald's (MCD): +4.5% within 4 trading sessions
Each of these stocks are within our core portfolio, as well as millions of other investors, both individual and institutional alike. These are very big moves for such large cap stocks and those who own it are looking at a yearly return in the neighborhood of over 200% gains if continued over 52 weeks, but of course it will not be sustainable.
We do not want to just sell the shares since we receive very strong dividends regularly from each, but we do want to lock in the nice spurt of capital appreciation in the short term, given the market uncertainty that we will more than likely face in the coming weeks.
My Hedge Suggestion
Buying in the money put options of short duration could help lock in the profits made from the short-term rally of last week. I urge everyone to take a look at the option charts of the stocks you want to protect some of those gains in and consider buying those in the money puts with a July expiration.
The good news is that there are plenty of put options for you to choose from in each of the stocks I mentioned here, and more than likely in almost any blue chip mega cap stock you might hold.
Consider this as a short-term insurance policy that will cost you a small percentage of the profits you have already made, and if the share prices dip, the put options will rise, negating the drop in share price to almost a wash. You get to keep the stock as well and not miss any dividends as well.
You can also pay for the puts by selling covered calls in each position. You might not cover all the costs, but by going out an additional 30 days and using a strike price about 5% above current levels, you could offset more than half of the costs incurred by buying the put protection.
Hedge funds do this all the time everyday in both directions. As an individual investor, you can implement this basic strategy and lock in some gains you already have in your pocket. You might even make a few bucks at the same time! Take a peek at this. You just might thank me next week!