While we all love to see a market hitting new highs as has been the case recently, we cannot forget one mantra: What goes up, does come down, states Bob Lang of Explosive Options.
That is not necessarily a warning of bad things to come, but certainly the stock market has rallied sharply during the first half of 2021. We have yet to see any fierce type of pullback, the kind that scares the living daylights out of us.
Of course, there is little to fear right now—which is a bit bothersome. Corrections can/will happen without warning. They usually happen when most everyone is leaning to the bullish side, similar to what we currently see. Think of a boat loaded with passengers to one side and ready to tilt everyone over the side into the water. That's the feeling I have right now.
Again, I'm not all that bearish here, just being cautious. I'm a huge fan of taking on some insurance by using put options, but alternatively taking risk off the table by selling positions is also a good regular habit. Taking profits or ridding your portfolio of underperforming stocks is something we all should do to keep our investments fresh.
But if you were going to consider taking out some portfolio insurance, how would you approach it? Very simply, add some index put options. These are very easy and liquid instruments. And fortunately, with volatility so low (currently in the 16% range) the cost of these puts is quite inexpensive. When the CBOE SPX Volatility Index (VIX) is low it is implying cheap options all around, both puts and calls.
The demand for protection is low and there is little interest in buying puts. Why is that so? The market does not “expect” to see a large move, so herein lies the issue. Take out protection BEFORE some disaster strikes, not while it's happening. If your neighbor's roof is on fire, it looks as it might get to your place and you DON'T have fire insurance, would you be on the phone to your agent asking for a quick policy?
You might, but they may laugh and hang up on you. Too late for that. So, add some put insurance today, lighten up, and sit back. You'll probably sleep a little better.
Learn more about Bob Lang at ExplosiveOptions.net.