Trade Truce Deadline Strategy: Now Is the Time to Buy Puts to Hedge Portfolio

TD Ameritrade trading strategy expert breaks down what retail investors did in February and what they should do after the trade truce deadline March 1.
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As the broader market has surged to start 2019, retail investors have taken some risk off the table of late ahead of the March 1 trade truce deadline between the U.S. and China. 

That's according to TD Ameritrade Trading Strategy Manager Shawn Cruz. 

Before we dive into those details, President Trump said he'll delay further tariffs on Chinese goods that will begin March 1. This sent the market even higher, with the S&P 500 now up 12.07% year-to-date and the Dow Jones Industrial Average up 12.32% on the year. 

"A little bit of profit-taking" was heavily in the mix for some retail investors, said Cruz. The iShares PHLX Semiconductor ETF (SOXX) - Get Report is up 20.59% year-to-date, for example. Many investors have bought up chip stocks on speculation that the U.S. and China could reach an agreement in which China would resume buying more semiconductor equipment from U.S. - based chip makers, which include Nvidia Corp. (NVDA) - Get Report , Advanced Micro Devices Inc. (AMD) - Get Report and Intel Corp. Intel Corp. (INTC) - Get Report

Cruz said clients rotated into defensive sectors like healthcare.

On the trade sensitive stocks, retail investors took a "wait and see approach of what's going to happen with these trade talks." 

Looking forward, most do not expect trade relations to completely resolve soon, and there could be volatility ahead. "Now hedging costs are incredibly low, so if you do want to go out there and , say, buy puts to hedge your portfolio, the cost of hedging is incredibly cheap right now with the VIX {volatility index} at these low levels," Cruz said. Simply put, there hasn't been much volatility as stocks have risen, which means demand for puts have been low, making it cheap to buy those contracts now. 

See more about why Nvidia may be able to deliver on its guidance here.