The “Insurance” Strategy I Use To Protect My Money From A Selloff
I want to show you one of the most interesting charts in the market right now. It’s a chart of the SPDR S&P 500 ETF (NYSE: SPY) and Invesco S&P 500 Equal Weight ETF (NYSE: RSP).
As you can see, SPY is in a short-term downtrend while RSP is near new highs.
Why is that so interesting? Because both ETFs hold the exact same stocks. To understand what’s going on here, allow me to explain…
The difference between the two is in the weighting of those stocks. SPY holds stocks in the same weight that they are in the S&P 500 index. RSP equally weights each stock.
The three largest holdings in SPY are Apple, Microsoft, and Amazon. They account for more than 15% of the ETF. The top holdings include other tech names like Facebook and Tesla. These stocks led the bull market but are now losing favor with investors.
An index of the market leaders fell more than 16% from its highs. That index, the NYSE FANG+ Index, is shown below. The FAANG stocks, as many of you know, are Facebook, Amazon, Apple, Netflix, and Google.
A few months ago, investors were buying FAANG stocks. Everyone seemed to believe that they were what we like to jokingly call “one-decision” stocks… the kind of stock where all an investor needs to do is make the “one decision” to buy. (No “sell” decision necessary since the investor assumes the stock will only go up.)
But now, many FAANG investors are having their faith tested. If they end up capitulating and selling, which seems increasingly likely as prices fall, the broad market selloff could accelerate.
This is one of the reasons I remain focused on the short term. And one of the ways I’m doing that involves a way to get paid extra income from stocks I already own.
I’ll give you an example…
How I’m Collecting “Insurance” Payments
Over at my premium newsletter, Maximum Income, we sold a covered call on Altria Group, Inc. (NYSE: MO). The company, which is involves in everything from cigarettes to wine, is a well-known favorite among income investors.
Currently, the stock yields about 7%. But with the trade we made, we don’t have to wait a full year to get paid. In fact, we got paid instantly.
How did we do this? Well, we essentially got paid to sell this stock at a higher price. That may sound strange to some of you, so let me break it down. Because once you understand how it works, including how easy it is and how much you can get paid, it will change the way you think about earning income in the market.
I set a price at which I’m willing to sell a stock, usually enough to give me a good profit to where it’s currently trading. After all, who doesn’t like that? Then I go to my broker and tell them to connect me to someone that’s willing to buy shares of Altria at the price I’m willing to sell it. Then, we make a deal. Keep in mind, this deal is all done through my brokerage account through a simple set of instructions.
The deal went something like this… First, I set my price. In Altria’s case, I was willing to sell shares at $50 — a slight premium to the recent price. And like most deals, there’s an expiration to my arrangement. In this case my offer is good until April 16 — about 36 days from when I made the offer.
In return, the buyer pays me cash to seal the deal. Think of it like an earnest payment. You may be asking yourself why I might want to do this. For the same reason we pay for auto or home insurance. Just in case.
Only in this case, I am acting as the insurance company. Although I wouldn’t mind it if Altria soared higher, I don’t think the stock will climb that high in the next 36 days. So I’m willing to risk potentially missing out on that upside in order to collect an upfront premium.
That way, if a broad-market selloff happens, that income will protect me on the downside. (Think of it as lowering your cost basis.)
If the stock does go past $50 in the next month, I’ll sell the stock, but I get to keep the cash I collected. If the stock doesn’t climb to that price, I simply keep my payment and move on. And I can make a trade like this again and again…
Action To Take
This is why I’m focused on shorter-term strategies like this right now. Yes, it’s true that in most cases if we have to sell, we won’t collect as much income as we could’ve if we had simply held the stock for a year and collected all the dividends. But we also won’t be stuck holding the stock if a broad market selloff happens.
On the flip side, we may never have to sell — in which case we can make trades like this throughout the year and collect the dividends.
Making “insurance” trades like this offers the kind of risk-reward profile that should be highly appealing in this market right now.
So if you’d like to learn more about collecting “insurance” payments like this, go here now.