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It’s Time to Add Some Portfolio Insurance

The recent attack has increased volatility

While the S&P 500 closed at a new all-time high on Thursday, there was some big news after the close that erased all of those gains in the futures market.

Last night, the Pentagon confirmed that it carried out a drone strike that killed Iran’s top military commander as well as several other Iranian officials who were planning attacks on Americans in the region.

Five-Minute Chart of S&P 500 Futures (ES1!) — Chart Source: TradingView

As you can see in the five-minute chart of the S&P 500 futures above, the market started to tumble as soon as the news broke. At its lowest point this morning, the index was down 1.74% from its all-time high.

Daily Chart of S&P 500 Futures (ES1!) — Chart Source: TradingView

Now take a look at the daily chart of the same index above. You can see that the overnight drop has erased all of the gains over the past two days.

While it certainly looks scary on the five-minute chart, the daily chart shows that the intermediate-term bullish trend is still holding up. In fact, this looks very similar to the mild pullback we saw at the start of December.

In the short term, however, we are seeing some serious volatility.

Daily Chart of S&P 500 Volatility Index (VIX) — Chart Source: TradingView

This is apparent in the S&P 500 Volatility Index (VIX), which is currently up about 25% from yesterday’s close.

As the S&P 500 closed at a brand new all-time high yesterday, the VIX had fallen through its 50-day moving average to close at its lows under 12.50.

But as you can see, the VIX rocketed right back up to the 16 level. While it has come down slightly from those highs, it is still above 15 and both of its major moving averages.

In this type of market environment, I think investors would be wise to add some extra “insurance” bets to their portfolios in the form of put options.

One stock that is a good candidate for a short-term bearish position is Kura Oncology, Inc. (NASDAQ:KURA).

As you can see in the chart above, KURA has been falling since July’s peak around $21.50 per share.

Since then, it fell right through its 50-day moving average (red line) and later its 200-day moving average (blue line) without skipping a beat.

As many of you know, moving averages can be long term or short term in nature. Traders typically look at 50-day and 200-day moving averages for clues about market direction, as they help to smooth out the day-to-day volatility in the market.

It moved back up to test the underside of its 200-day moving average back in December, but it failed to break through and has been heading lower ever since.

Although the geopolitical news I mentioned above won’t directly affect KURA, the weakness in the overall market is likely to cause some broad-based selling that could last for a few days.

With that in mind, I think KURA could revisit its lows from last October near $12.60 per share.

I’ve set my strike price just below that level and have given this trade plenty of time to play out. Here’s my recommendation:

Buy to open the Kura Oncology, Inc. (KURA) April 17th $12.50 Puts (KURA200417P00012500) at $1.35 or lower.

InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/its-time-to-add-some-portfolio-insurance/.

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