Papale on Steps to Reduce Market Nervousness

By Steve Papale

Getting ready for the big game. This is probably the biggest party weekend of the year. Even my kids are on board – wondering what’s on the menu. So due to the logistics and planning around the Super Bowl menu I will keep the comments short today. The line on the game as of now? Pats a slight favorite. And remember the market tie in – when the AFC wins look for the market to turn down this year, vice versa if the NFC wins. But I never pay attention to indicators.

As always there is dialog about the direction of the market. Some say we are due for a correction or something bigger and others say things are just fine thank you – onward and upward. I guess that’s what makes a market. Well I have never been much for predictions. Maybe it’s because of my background as an economist or simply because so many are wrong. I tend to focus on managing positions rather than market direction.

That said, for some investors or traders who are bit nervous, there are a couple of things you can do to sleep better at night. First, make sure your asset allocation is appropriate. Very important. This is the best risk management tool you can use. Next, utilize stops on stock positions. Using GTC stops on all or part of your positions can help limit losses. In the case of gap moves though, the stock may blow through your stop price causing you to get out at a worse price than expected, so be aware of the risks.

Finally, utilize a collar or puts alone to provide ultimate protection of stocks or ETF’s. The strike price of the put will provide a hard downside limit and selling a call will help pay for the cost of the put. Don’t forget that by selling the call you limit your upside participation in the stock up to the strike price of the call. Normally, the call and put are placed in the same month, but you can mix and match them too. Most stick to the first couple of months.

Finally talk to your broker if you are unfamiliar with how to place these trades in your platform or the capital requirements needed. It will save time and stress later. And don’t forget to enjoy the game this weekend.

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