On April 2, 2014, the S&P 500 Index notched yet another all-time high, closing in on the 1900 mark (points, not the year). From the lows following the 2008-09 crash, the index has climbed by over 180%. It has exceeded the 2007 high by over 20% (in nominal terms).
Here is the chart of the S&P 500 as it stood on April 2, 2014:
Click to enlarge
In real (inflation-adjusted) terms, the index had exceeded the 2007 high, and was within a hair of exceeding the real all-time high, which was made in 2000.
The following chart, from multpl.com, shows the long-term inflation-adjusted chart for the index:
Click to enlarge
After a run like this, an increase of 180% from the 2009 lows, could the top be far away?
Well, yes, it could. Or not.
When the great bull market of 1982-2000 had come this far, it was just getting started. Anyone who got out after “only†180% missed most of a bull market that eventually saw over a 1200% gain.
So where are we now? Standing on the brink of a great crash, as in 2007? Or just in the warm-up stages of another epic bull, as in the 80’s?
I don’t know. Neither do you, nor does anyone else. There are excellent, nearly irrefutable arguments for both sides of that question. You hear them every day from all of the talking heads.
So, in practical terms, how can we continue to participate in further upside moves, while protecting ourselves in the event of a crash?
Here are a few alternatives using options:
- Hold long-term positions, and buy put options as insurance.
- Add covered calls to the long stock and puts, creating collars.
- Substitute bullish vertical spreads for the collars, reserving the excess cash.
- Convert most of a portfolio to cash. Use a small percentage to buy long-term call options to maintain exposure.
Let’s look at each one briefly today. In the future we’ll explore them in more detail.
1. Hold long-term positions, and buy put options as insurance.
