Two thoughts are paramount as investors await Donald Trump’s return to the White House. One is tantamount to exercising more and eating better. The other is to embrace gluttony and get an Ozempic prescription.
Let me explain. In life and markets, reality is measured against expectations. Negative surprises spark downside volatility. Positive surprises make us happier.
The specter of Trump’s second presidential term has, as everyone knows, sent the stock market into bullish overdrive. Investors big and small are excited like kids on Christmas morning. Alas, governing is often different than campaigning, and that risk deserves more consideration than it has received.
Prepare for potential volatility leading into Trump’s inauguration and during his crucial first weeks in office. Chances are that many investors are contemplating selling before that happens.
If you have borrowed money on margin or haven’t taken profits on positions with big profits, consider securing some gains. Take a victory lap. You’ve won. Prepare to reset your positions when the policies of Trump 2.0 are poised to become reality.
This call to cautiousness was sparked by a series of recent conversations with amateur investors. They were convinced stocks and cryptocurrencies would keep trading higher due to Trump. They may be right—though they were annoyed to hear that perpetual bullish motion doesn’t exist.
Now to argue the opposite.
The election of a billionaire real estate tycoon is a singular event. Trump personifies the transformative power of markets. He is likely to be one of the most pro-investor presidents in the nation’s history. The gap, if any, between what he said on the campaign trail and how he rules is likely to be small to nonexistent.
Investors are facing heavy expenses. The holidays are upon us. Estimated quarterly tax bills will soon be due. Everyone could use some extra cash. Given that, consider a simple trade to further monetize the market’s Trump halo—while you still can.
Sell cash-secured put options that expire in a week on a stock or exchange-traded fund that you are willing to buy at lower prices. The timing reflects expectations that Trumpalooza lasts into the Jan. 20 inauguration. Afterward, the trade might be recast as policy details emerge.
Here’s how the Santa Trump Trade works, using highflying Alphabet
+1.06% stock as an example. With Alphabet at $195.42, sell the December $192.50 put that expires Dec. 20 for about $1.55. If the stock is above $192.50 at expiration, investors keep the premium. (Puts give holders the right to sell an asset at a set price and time.)
The risk to selling puts is that the stock falls below the strike price before expiration. Should that happen, roll the put to the next week’s expiration to avoid assignment and collect more money.
The stock may still stay weak, but that shouldn’t matter. Remember, the put was sold because you were willing to buy the stock at the initial strike price. If the stock is now trading around your previously chosen purchase price, stay calm and trade on.
If you can keep generating income by rolling the put from week to week, the strategy works. If the stock remains weak and you must buy it, sell calls to generate more income. (Calls give holders the right to buy an asset at a set price and time.) At some point, the stock price will likely stabilize and rally, and you can look for opportunities to secure gains by rolling to higher strikes.
The approach has a simple caveat: Stay away from the Island of Misfit Stocks and Options. Only sell puts on stocks you want to own. Avoid controversies. Use the put-selling strategy to get paid by the options market to buy quality stocks. The approach requires some extra effort, but enhancing returns without dramatically increasing risk is a worthwhile endeavor.
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