Be prepared for potential volatility during Trump's inauguration and the critical weeks ahead. Chances are, many investors are considering selling ahead of that.
There are two main lines of thought for investors as they await Donald Trump's return to the White House. One is something like exercising more and eating healthier, while the other is to overindulge and get a prescription for Ozempic.
In life and in the markets, reality is measured against expectations. Negative surprises trigger downward volatility, while positive surprises make us feel more pleasant.
It’s no secret that the prospect of a second Trump presidency has sent the stock market into a bullish frenzy. Investors big and small are as excited as kids on Christmas morning. However, governing is often different than campaigning, and this risk deserves more attention.
Prepare for potential volatility around Trump's inauguration and his key early term. It is highly likely that many investors are considering selling before all of this happens.
If you are borrowing funds on margin or have not yet cashed out on those profitable positions, consider locking in some profits. Celebrate your victories. You won. Be prepared to readjust your positions as Trump's 2.0 policies become a reality.
Some amateur investors are convinced that stocks and cryptocurrencies will continue to rise due to Trump's election. They might be right, but they seem very frustrated when told that 'a sustained bull market does not exist.'
The election of a billionaire real estate tycoon is a unique event. Trump embodies the transformative power of the market. He is likely to become one of the most investor-friendly presidents in American history. The gap between his campaign rhetoric and actual governance, if any, is likely to be very small or even non-existent.
Investors are currently facing heavy expenditure pressures. The holidays are approaching, and quarter tax bills are also expected to come due. Everyone needs extra cash. In light of this, consider a simple trade to monetize this advantage while the market is still buoyed by Trump's 'halo.'
Sell a covered put option on a stock or ETF with a lower purchase price that expires within a week. The timing of this strategy reflects the expectation that the 'Trump rally' will last until the inauguration on January 20. After that, as policy details emerge, this trade may need to be readjusted.
Here is an operational example of the 'Christmas Trump trade,' using the strong-performing Alphabet (GOOGL.O) stock as an example: When Alphabet's stock price is $195.42, sell a put option that expires on December 20 with a strike price of $192.50, which could yield about $1.55 in premium. If the stock price is above $192.50 at expiration, the investor will keep this premium income. (A put option gives the holder the right to sell an asset at a specified price at a specific time.)
The risk of selling put options is that the stock may drop below the strike price before expiration. If this happens, roll the put option to the next week's expiration date to avoid being assigned while collecting more premium.
It doesn't matter even if the stock remains weak. Remember, you sell put options because you are willing to buy the stock at the original strike price. If the current stock price is close to the purchase price you previously chose, stay calm and continue trading.
This strategy will work if you can continuously generate income by rolling out put options weekly. If the stock price remains weak and you eventually have to buy the stock, you can sell call options to generate additional income. (A call option gives the holder the right to buy an asset at a specified price at a specific time.) Ultimately, the stock price may stabilize and rebound, at which point you can look for opportunities to lock in profits by raising the strike price.
This strategy has a simple premise: stay away from those 'inappropriate stocks and options.' Only sell put options on stocks you are willing to hold and avoid controversial stocks. Use the strategy of selling put options to earn from the options market to buy quality stocks. Although this approach requires some extra effort, it is a strategy worth trying to increase returns without significantly increasing risk.
Article forwarded from: Jin Shi Data