The recent setback in the stock market during the 2024 rally has caused concern among investors as major averages took a tumble. However, there are strategies available that offer portfolio protection and income to help mitigate the impact of such downturns.
One of the strategies recommended by financial planners is the use of trailing stop losses. This tactic allows investors to set trade orders to sell part of their position if a stock declines by a specified percentage rather than a set dollar price from its peak. By utilizing technical indicators like Fibonacci retracement levels, investors can determine when to trigger a sell order to safeguard against losses. While this strategy allows investors to continue participating in a stock’s upside potential, it also helps them resist the temptation to sell at an inopportune time.
Another option for investors looking to protect their portfolios is through cash-secured puts. This strategy involves writing put options and keeping enough cash to purchase the stock in case the put gets exercised. By collecting income from writing these options contracts, investors can generate income while potentially buying stocks at a lower price. However, the risk lies in missing out on potential upside if the stock rises sharply above the strike price. This strategy can be paired with covered calls to boost income and offset potential losses.
Covered Calls
Covered calls are a more advanced strategy that involves selling call options on stocks that investors already own. While this tactic can generate income through premiums, it may limit the upside potential of the stock. Investors must be prepared to part with the stock if the call option is exercised, potentially missing out on additional returns if the stock continues to rise. Working with a financial advisor who understands these options strategies can help investors navigate the complexities of these tactics and integrate them into their overall portfolio goals.
The recent setback in the stock market serves as a reminder of the importance of having strategies in place to protect and hedge against downturns. By employing tactics like trailing stop losses, cash-secured puts, and covered calls, investors can safeguard their portfolios while generating income, even in the face of market volatility. It is essential for investors to stay informed and seek guidance from financial advisors to ensure that these strategies align with their long-term financial goals.