Traders Believe in the Spirit of the Season

‘Tis the season and traders are buying: large-caps ($SPX), small-caps ($RUT), and tech ($NDX)- oh my!

I said I am buying on weakness and selling into strength. So you might ask how would you define strength? If a stock moves 20-25 percent in one to three days, that is considered strength. I would either sell 50 percent of my holdings or I would look to write calls against the stock that I own. If you do not own 100 shares of a stock, maybe only 50 shares, I would be selling call credit spreads. The rationale behind this is when stocks tend to get extended quickly, they tend to get volatile. Buying more stock is hard to stomach at those levels.

We are in the business of increasing yield, so credit strategies allow you to do just that. You increase the yield component while not overextending the capital risk by buying more stock at high price levels.

I also would be looking to add volatility exposure. You could do this by buying calls in the VXX or the VIX. Particularly if the VIX index starts to dip below 14. This will be a nice offset if we have some sort of pullback in the new year.

We are going into a shortened trading week so shore up your risk. See you next time at the Corner!