To navigate the potential risks and volatility ahead, it’s prudent to consider downside protection through October. The current administration’s emphasis on securing domestic energy, materials, and regaining semiconductor production market share suggests that this rally will not follow a straightforward upward trajectory. In light of this, we have incorporated several robust names into our portfolio, which I share weekly on CNBC Pro. While I recently reduced my position in BMNR, I am maintaining my investments in Vertiv (VRT), MP Materials (MP), Rocket Lab (RKLB), and Bloom Energy (BE). I see significant upside potential in these stocks, as well as in future additions to our portfolio.
In our “fast money” Active Opportunities account, which includes leaders in the AI build-out and is particularly sensitive to market fluctuations, we need to implement hedges on the Nasdaq-100 ETF (QQQ). Ideally, this “insurance” trade will not be necessary, and we will close it at a loss. This strategy allows us to preserve our favorable cost basis on the aforementioned positions, bringing us closer to long-term capital gains status while avoiding the challenging task of timing the market before a selloff and re-entering before a new uptrend.
The key to the sustained rally since April has been the 50-day moving average, indicated by the dotted blue line. We saw a test of this average on September 2, followed by a quick bounce and rally to new highs. However, concerns arise if we test the 50-day moving average again and fail to hold. In such a scenario, we could drop to the critical breakout zone of $537-$541 for 2024-2025, which aligns with a rising 200-day moving average. A rapid deterioration in Chinese trade talks could trigger this decline, but I don’t anticipate that happening. Nevertheless, I want to have hedges in place.
The setup chart shows a zoomed-in daily view with the 50-day moving average just below us at $585. I plan to structure a put spread that activates protection if we break below the 50-day moving average at $580. There’s an August double bottom that offers initial support at $560, which serves as a solid downside target. I’m looking at the October 31 options to buy the $580 strike put and sell the $560 strike put. This $20 spread, costing $3.20 ($320), offers a maximum profit of $1,680 per spread. If you were to purchase 10 spreads for a total cost of $3,200, your maximum profit would be $16,800. Adjust the number of spreads based on your portfolio size.
If we do reach $560, we will consider closing that hedge and establishing another to protect down to the $540 zone. However, I believe the odds favor the AI-fueled bull market continuing to reach new highs as we approach the end of the year. Exciting times lie ahead!
– Todd Gordon, Founder of Inside Edge Capital, LLC
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DISCLOSURES: Gordon owns QQQ put spreads personally and in his wealth management company, Inside Edge Capital. All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the views of CNBC, NBC Universal, their parent company, or affiliates. This content is for informational purposes only and does not constitute financial, investment, tax, or legal advice. Before making any financial decisions, consider seeking advice from your own financial or investment advisor.
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