It just seems like there is no stopping this stock market. The economy stinks. Q1 retail numbers were abysmal. Q1 GDP was -2.9%. The national debt continues to explode. Obamacare is forcing businesses to cut employee hours. Wages are stagnant while inflation moves higher.
However, “Don’t fight the tape” is one of the most famous Wall Street sayings, and that’s the truth. When the market has momentum in a given direction, it is difficult to play the opposite side of that trade. Shorts can get wiped out when the market keeps moving higher. Longs can get slaughtered if the bears tear their eyes out.
The Dow Jones Industrial Average’s one- and three-year average total returns have been 14.2% and 13.1%. The S&P 500’s one- and three-year average total returns have been 22.9% and 16.1%. These are pretty amazing returns, and if you think there’s more to come — but want to hedge your bets somewhat — naked puts are for you.
My strategy: Sell naked puts against index ETFs for each of the three big indices. If the market moves higher, you’ll have collected the premium and made some money without exposing yourself to the risk of intraday fluctuations. If the ETF gets put to you, you’ve hedged your actual entry point thanks to the premium you’ve collected. (Just remember, you have to have the funds available to purchase any ETFs should those funds get put to you.)
Take a look.