By: Costas Bocelli — November 12, 2020
Did YOU Miss the Election Rally? Here’s What To Do Now…
Roosevelt beating Hoover in 1932.
That’s how far back you’d have to go to find a better performance in the stock market during a presidential election week than this one.
The S&P 500 gained +7.3% during this past election week.
And if you include the gains from Monday, when positive news on a Covid vaccine was announced, the large-cap index surged +8.5% over a six-day span, including a new all-time intraday high.
Now you’d think that’s great news for the average investors.
But get this…
Leading up to the election, investors were fleeing stocks and moving into bonds and cash.
According to Refinitiv Lipper Fund, equity funds had negative flows of -$11 billion in the week prior to the election.
Bond funds took in $2 billion in net new money.
And the rest of the investable cash was stuffed under the mattress.
In fact, investors have been leaving the stock market in droves leading up to the election.
In the month of October, -$25 billion in total flowed out of equity funds.
So this shows how nervous and unsettled investors were ahead of the election.
So what did Mr. Market do next?
He went to where the most pain could be inflicted.
And in this instance, it was UP…
…And, by A LOT!
As it turns out, the +7.3% gain in the S&P 500 was the second-best performance for any presidential week on record, only behind the 1932 election year.
Now here’s the thing…
Were you one of those investors that dumped stocks ahead of the election and moved to cash?
If so, you’re probably kicking yourself for missing out on those gains.
But I’m here to tell you… Don’t beat yourself up over it.
As an investor, you’re never going to make perfect decisions.
That’s simply not a realistic expectation.
But what we can do is try to take whatever new information has come to light and use it to guide in the next decision.
And here’s what we do know.
Demand has returned to the stock market, and in a huge way.
Earlier this week, Chris Rowe shared with you some of the strongest sectors emerging from the election rally.
In fact, Chris identified nine groups that are in possession of strong straits of technical strength using the Sector Prophets platform. If you missed Tuesday’s article or want to review it again, click here.
And one of those groups happens to be the Semiconductors.
This is a strong group, where big institutions are piling in.
Here’s the technical attributes for the Semiconductors courtesy of Sector Prophets…
(Click any image to enlarge)
When we view the attributes, they’re all shaded in blue. This tells us that all of them are in a positive position.
So, the Semiconductors are a favored group.
But here’s the thing…
They also went on a big run during the election week rally.
Investors who went to cash missed those big gains.
And now, you may have a hard time convincing yourself to buy-in after the huge advance. And I get that.
So why not try to buy it a lower, discounted price?
And if you can’t, how does earning a fat, double-digit return on all that investable cash -- the cash that right now is earning diddly squat?
We can do this using options!.
The technique I want to show you today involves selling out-of-the-money Put options on stocks and ETFs that you want to own but don't own yet.
And this strategy works really well for those that missed the rally and are eager to get back in.
Now, you might think that selling Put options is risky, or even dangerous.
But done the right way, selling Put options can be a highly effective strategy to buy high-quality stocks and ETFs at a meaningful discount, or to generate a high return on your investment cash.
How to BUY into the Semi’s... or Get Paid Trying
Here’s how it works...
Let’s say we’re interested in gaining bullish exposure to the Semiconductors.
One way to go about that is to buy a basket of stocks through the VanEck Vectors Semiconductor ETF (SMH).
Here you can see that the SMH surged to new all-time highs during the election week rally.
It’s pulled back a bit from those highs. But at $194 per share, it’s still UP more than 11% from where it was trading on October 30th just ahead of the election.
Those that want to get in, but at a lower price, can sell a put option and try to grab it at a discount.
And here’s the thing…
If you can’t buy it at a lower price, then you’ll get paid nicely just for trying.
So let’s say we’re interested in taking a 100 share position in SMH.
But we’re not keen to buy in right here after the big run up.
Instead, we’d like to own it at the level it was trading before the election rally – around $175 per share and in the vicinity of the 50-day moving average trend line.
We can’t turn back the clock to before the election. But we can do the next best thing.
But what we can do now is sell an out-of-the-money Put option and get paid to try.
So for every 100 shares of SMH you'd like to own, you’ll sell one Put option contract. (Since we're interested in a 100-share position, we don’t want to sell more than one Put option contract.)
You’ll also want to target a strike price at a level where you’d be happy to purchase the security should it be “put” to you.
You’ll also want to target a relatively nearby expiration date, typically less than 90 days away.
In this case, you could look to sell ONE December 177 strike Put option at $2.30.
By selling one Put option contract, you get to collect $230 in premium. That cash is yours to keep. It’s immediately credited to your account and the funds are usually available the following day.
In exchange for receiving that upfront cash, you’d be obligated to buy SMH at $177 per share between now and the December expiration, which is in 36 days.
Now, think about what we’ve just done…
We’re obligated to buy SMH at $177. Currently, it’s trading around $194 -- or about 10% higher.
And we got paid $230 in upfront cash.
Now, let’s say that SMH does indeed trade below $177 and we are “put” the 100 shares.
Well, in this scenario, we should be okay with that because our original intention was to gain bullish exposure to this fund -- and therefore to the Semiconductors.
The cost basis would actually be further reduced by the $230 in cash we pocketed. So factoring in the cash payment, you’d be buying into the position for $174.70 per share, and not at the current market price of $194.
That would represent a discounted price of 11% from where it’s currently trading.
Now, what if SMH doesn’t fall below $177 at expiration?
In that scenario, we won’t get to buy it at a discount, but we’ve generated $230 in cash.
Since we set aside $17,700 of the investable cash, that $230 premium we collected amounts to a 13% annualized return.
So don’t sweat it if you missed the election rally.
There are other ways to generate big returns and with less risk.
Got options? You should.
Until next time!