by Tyler Craig | October 25, 2011 1:17 pm
The recent market breakout has been welcomed with much fanfare by bull lovers along with any others with a vested interest in higher stock prices. But, with the S&P 500 Index up almost 17% in a mere three weeks, some are wondering whether it is reckless to jump aboard the bull train at this stage.
Indeed, the fear of becoming the ill-fated “late to the party Charlie” is likely keeping many parked on the sidelines. While one may bask in the safety of the sidelines, such a course of action could also lead to missing out if the market continues to surge. The remedy lies in moderation.
Rather than going “all in” or staying “all out,” why not scale in by buying a portion of your position such as 1/2 or 1/3? Such an approach sets up what could be a win-win situation.
If the stock does in fact sell off over the coming days, you’ve been granted an opportunity to enter the remainder of your position at cheaper prices. On the other hand, if the stock continues to ramp up, you are at least participating to a certain extent with your partial position.
The same approach could be implemented with options. Whether you’re looking to purchase call options outright or jump into some type of spread, you could initiate a starter position and then wait a few days to see what type of reaction we see to the overstretched market.
The insurance industry has experienced a bevy of buying over the past few weeks with the likes of Prudential (NYSE:PRU), MetLife (NYSE:MET) and Allstate (NYSE:ALL), all vaulting to new two-month highs. While the relatively nascent strength may be the start of an intermediate uptrend, prices have gotten quite overbought in the short term.
This may be a perfect situation where the scaling in approach is warranted. Rather than going all-in at current prices, traders set on acquiring exposure to insurance stocks should scale in by initiating a partial position only. With these three stocks pulling back with the broader market today, this could be a great opportunity to enter the first part of your position at a discount.
At the time of this writing, Tyler Craig had no positions in any of the names mentioned.
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