• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Discretionary

How to Protect Yourself From the Vicious Market Rotation

If we continue to see volatility, then I'll consider some out-of-the-money put sales.
By TIMOTHY COLLINS
Nov 30, 2017 | 12:00 PM EST
Stocks quotes in this article: AGN, CMG, F, TSLA, GM, DLPH

It's almost as if some traders have never experienced an aggressive rotation before Wednesday. Pullbacks in the market have been few and far between over the past half-dozen years. Rotations, while more common, have been methodical. Slow-roasted brew, rather than instant coffee.

But when we do have one of those instant rotations, it kind of smacks you in the face. Instant may mean hours or a few days, but the moves are sharp, volume is high, and in the grand scheme of time, it really is instant. It also often means the baby gets thrown out with the bathwater, for whatever sector or group is being sold.

If this drop has caused you to lose sleep at night, then either you've completely forgotten anything before 2012 or you may be new to trading. Speaking from experience, yesterday was a blip, and if it caused you heartburn or a sleepless night, then you need to dial back your risk pronto.

Most of the FAANGs closed three days deep into a drop. Those not are two-days deep. That is not the optimal time to initiate a short position. Shorting is challenging enough, but shorting-in-the-hole is a recipe for emotional disaster. For those long and losing sleep, now is the time to at least consider a collar or some put protection.

It's time to justify puts, since it is almost equivalent to shorting-in-the-hole. You do need to be able to sleep at night, and a simple put protection does limit upside beyond the put premium. I'm still of the notion of sitting on my hands for tech names another day or two while the volatility shakes out.

If we continue to see volatility, then I'll consider some out-of-the-money put sales on names I'd be willing to own. Otherwise, I'd take a different approach, especially if my portfolio were predominantly momentum, tech, or cash.

What I would consider here, especially if you find yourself overweight FAANG or technology/momentum names, is diversify into some bottom feeders. I outlined Allergen (AGN) along with Jim Cramer on Mad Money this past Tuesday evening as one of my favorite beaten-down names.

I still think it can be bought right here, either stock or in-the-money calls, possibly $160s or $165 calls expiring in March. Either way, the close over $175 yesterday, along with two solid upgrades and a clear bottom at $168 on the stock, has me optimistic. The risk versus return is enticing, and any correlation to technology and momentum names is spurious.

If you can get past the heartburn of eating and owning Chipotle Mexican Grill (CMG) , the push to $300 Wednesday on the news of the CEO's departure is a positive. Shares have pushed into the huge earnings gap from last month, and should have little resistance back to $320. The risk-reward here isn't as enticing as AGN, as the downside stop is about equal in size to the initial upside target; however, I do think we could see more activist involvement with CMG.

Although CMG isn't "cheap" by definition, sentiment is about as negative as it can get with a company, and yet they are still posting decent numbers. With a large 20% short interest, any hints of a turnaround, activist, or buyout could squeeze shares all the way to $400. Once CMG clears $320, resistance is soft for the next 20-25%. Again, I favor shares here, but for option traders, the March $285 calls provide a similar capital risk to where I'd place my stop on 100 long shares.

The upside is the call eliminates gap risk, but the time value of the call makes up more than 50% of the option price. The decay is very small for the next few weeks, so there is little cost in using the option as a long proxy versus using shares.

Ford (F) , with its nearly 5% dividend along with a strong move yesterday, has set itself up well for both income investors and momentum traders. The stock looks poised to continue a massive turnaround and push into the $14 area over the first half of 2018. Low interest rates continue to funnel money into new cars, rather than old car repairs, and as the driverless car race expands outward, it appears as if every automaker will have a hand in it.

This means we should continue to see money roll away from Tesla (TSLA) and into names like Ford and General Motors (GM) , but it is Ford with the best setup here. Speaking of driverless cars, don't sleep on Delphi Automotive's (DLPH) spinoff Aptiv. It's still a name I believe is worth owning, for the slightly more aggressive investor.

Those looking for balance and yield should scoop up Ford shares. I would consider using the dividends from Ford to buy calls in Aptiv. This would be one method of funneling old-school auto money into the evolution of autos.

This commentary originally appeared on Real Money Pro at 10:00 on Nov. 30. Click here to learn about this dynamic market information service for active traders.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Tim Collins was long DLPH, although positions may change at any time.

TAGS: Investing | U.S. Equity | Consumer Discretionary | Healthcare | Consumer Staples | Industrials | Technology | Markets | How-to | Options | Short-selling | Stocks

More from Consumer Discretionary

Logitech Could Decline Further From Here

Bruce Kamich
Jan 20, 2021 8:50 AM EST

A stock that declines in the face of what appears to be bullish news tells us something.

Boot Barn Gets a Quant Upgrade: Do the Charts Fit?

Bruce Kamich
Jan 19, 2021 1:53 PM EST

Here's our latest analysis and trading strategy for the shares.

Signet Jewelers May Retest the Breakout From Its Base Pattern

Bruce Kamich
Jan 15, 2021 8:09 AM EST

There is a risk of a pullback to the top of the base pattern or down to the $30 area.

Norwegian Cruise Lines Fights to Survive

Jonathan Heller
Jan 13, 2021 11:00 AM EST

The markets appear to be looking forward for the cruise industry.

Coca-Cola Could Turn Lower as the Bullish Fizz Is Escaping

Bruce Kamich
Jan 6, 2021 9:15 AM EST

Price momentum often weakens before a turn lower.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I'll discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login