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3 Tips for Dealing with Market Uncertainty

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Posted on MSN Money @ http://money.msn.com/how-to-invest/article.aspx?post=a478d072-8929-4a30-aa70-11d3722e1575

If you’ve been in the market over the last year, you’ve dealt with global uncertainty, European debt crisis, hard landing vs. a short landing in China and an U.S. presidential election. The market hates that evil word…uncertainty! It’s been an uphill battle even with the S&P 500 posting gains of 13% in 2012. For the retail trader, it’s been a tough market to pick stocks when the 2012 darling, Apple (AAPL +0.14%), took a brutal end-of-year sell-off.  

When the standard fundamentals and technical are overrun by sentiment, we have a market like we did last year. Choppy intra-day, and quarterly movements of stocks that have created a difficult market to trade individual, fundamentally sound equities. Let me suggest three ways to potentially improve trading for the small guy…

Look longer term. It may be tough to justify short-term losses for future gains. To be nimble is very hard due to the lack of ability and resources to correctly guess a direction for any period of time. When an investor can step back and purchase fundamentally sound companies at a cheap price, they are usually rewarded longer-term.

Make up some of the downward movement. Basic protective put or in-the-money covered call strategies are great ways to create returns as stocks move to the downside. The protective put acts as insurance on a stock position. You buy to open the right to sell your stock at a certain price for a certain period of time. The put position can make up significant amounts of the downside movement.

Insurance on equity positions gives your portfolio a hedge against the covered call strategy and helps investors receive a credit as they wait for equity positions to come back. An investor can sell to open a call and receive a credit into their accounts. They are now obligated to sell their stock at a certain price for a certain period of time. As a stock falls in value, the investor gets to keep the credit as the option expire.

Stick with what you know. If you are familiar with Apple (AAPL +0.14%) and the price movement, use your knowledge to your advantage. I would challenge anyone to find a better fundamentally sound company than Apple (AAPL +0.14%). Use the option strategies to make up some of the downward movement. When the next big thing comes out from Apple (AAPL +0.14%), you could be rewarded with another huge run-up.

Success comes when the account is closed, not on an individual trade basis. We all can get a big win or suffer some losses. Use the protective put and covered call to get paid when stocks suffer downside movements to lower you cost basis.

 

Disclosure:  I am long Apple (AAPL +0.14%) shares.

Kevin Hurley

OptionsANIMAL Instructor

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