How to protect your gains from a successful AI rally with hedging strategies

The stock market continues to reach new all-time highs, with the three major U.S. indices breaking records once again this week. The Federal Reserve’s announcement of potential rate cuts in 2024 has fueled a strong rally, particularly in the semiconductor sector led by companies like Nvidia, Broadcom, and AMD.

While the market seems unstoppable, there are always risks to consider. As an experienced trader, I believe it’s important to have insurance in place in case chip stocks take a short-term breather or reverse some of this rally. That’s why I’m looking to establish a protective trade to hedge against potential downside.

One strategy I’m considering is buying a put spread on the iShares Semiconductor ETF (SOXX). By purchasing the April regular expiration $220 put and selling the April regular expiration $205 put, I can create a debit spread that will cost $3.35 per spread. This trade allows me to protect my exposure to the semiconductor space while also providing some downside protection in case of a pullback.

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It’s important to note that this trade is speculative in nature and comes with defined risks. However, having insurance in place can help offset potential losses and provide peace of mind in a volatile market environment.

DISCLOSURES: (Long SOXX, Long this put spread) Please remember that the information provided here is for informational purposes only and should not be considered as financial, investment, tax, or legal advice. Before making any financial decisions, it’s important to consult with a professional advisor who can assess your individual circumstances and provide tailored recommendations. Click here for the full disclaimer.

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