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Yesterday was the 30th anniversary of the “Black Monday” stock market crash that sent the Dow Jones lower by over 22% on Oct. 19, 1987. I was trading at the time, and I still remember how that day and the weeks surrounding it played out.
Art Cashin, a frequent guest on CNBC who worked on the trading floor back then as well and is still Director of Floor Operations for UBS, once stated that the first thing he does when he enters a room is look for the exit sign so that he knows which way to head when things go bad. While that is great advice, everyone started heading for the exits at the same time on Black Monday, leading some traders to experience losses of 30% or more that completely wiped them out in some cases.
While these types of events are rare, I do believe that this sort of thing could happen again — even in the most optimistic of markets. Exchange-traded funds, for instance, can cause selling to beget more selling, and I think that’s somewhat dangerous for stocks.
The lesson I learned from Black Monday was that investors should always have some sort of protection in their portfolios, and it’s why I always attempt to maintain a balanced portfolio with both calls and puts.
This week, my indicators are giving bearish signals, which is significant because it is the first set of bearish readings I’ve seen since late August. Earnings are coming in pretty good, and there is some decent support under the major indices if they do start to turn lower, but stocks are still overextended.
For that reason, I am recommending a put option today.
Buy to open the DISH Network (DISH) Dec. 15th $45 Puts (DISH171215P00045000) at $1.10 or lower.
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