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Timing Stocks, Hedging Against Dips, Bear Markets Is Tricky

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  • The pros are nervous about the markets, which are fairly priced, if not overbought. There are lots of stocks correcting. Some are over sold.
  • The Nasdaq has been strong, but who knows? Be prepared.
  • Selling covered calls and cash secured puts while holding a lot of cash is a good hedge against a dip or bear market.

By Donald E. L. Johnson


Binary Tree Analytics has an interesting article, How to Prepare Yourself for A Market Sell-Off.

As I noted yesterday, QQQ has been on a bullish run while DIA and SPY were lower yesterday. The markets are looking lower this morning. Nobody can predict what politicians will do and how their mistakes will affect the markets.

Morgan Stanley Cuts U.S. Stocks to Underweight AS Wall Street Gets Nervous: At The Open.

As a very (not terribly) old long-time trader of covered calls and cash secured puts, I'm 60% in cash and have been for years.

Being in a big cash position and selling covered calls and cash secured puts is my way of hedging against a sharp and unexpected drop in the markets. I can handle "dips", but a real bear market will be a challenge regardless of my trading strategies.

I recently blogged on How I Pick Stocks For Sales of Covered Calls, Cash Secured puts.

Yes, as a technicals and fundamentals trader, I've timed the markets. Early in 2007 I sold most equities and waited a couple of years to get back in. I owned enough stock to do some covered calls trades, but that was it, and I came out of the Great Recession whole.

But. And this is a big but. I never really got back in the market. So I've missed the post crash rally in many ways.

Yet, I'm fine because I trade for target income, not to beat the market or other traders. I make enough from options premiums, dividends and capital gains to preserve capital and cover our rather spendthrift ways.

This takes a lot of work. But, hey, I'm retired. I need something I like to do to keep the brain working, and ending every month with some income is kinda ego boosting.

Stocks and markets are fairly valued. A few are over bought. Many equities are correcting. They offer buying opportunities, especially if you are an active trader of covered calls and cash secured puts and are willing to pay income taxes on short-term capital gains. I'd rater pay taxes than not.

I'm not trading as actively as I was earlier this year during the strong surge in stock prices. I'm selling puts more than covered calls. When I buy a stock and sell a covered call, I do so with the hope and expectation the stock will give me a small capital gain. I like having my calls exercised.

Often, at the same time I buy a stock and sell a call, I also sell cash secured puts on the same stock. That gives me a 15% to 25% annualized cushion or hedge against a sharp draw down (price drop).

A lot of traders are using some version of my strategy. They're doing very well because they've invested in learning how to invest, speculate and trade. And they work at it, often with the help of services that specialize in advising on trading options and stocks.

I don't think any financial advisor can do a better job of timing, trading or hedging the market than an experienced and hard working do-it-yourself speculator can.

Analyst's Disclosure: I/we have a beneficial long position in the shares of CAT either through stock ownership, options, or other derivatives.

Beware. I'm an active private speculator who trades covered calls and sells puts on stocks for my accounts. I am not a professional analyst nor a financial advisor. I don't take and won't take responsibility for how other people trade. This article is for educational purposes only. I reserve the right to trade any of the listed stocks at any time. I own the following Dow stocks: BA, CAT, CVS, DOW, JNJ, VZ and WBA. I hold covered calls and cash secured puts on several of them.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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