Never a More Perfect Time for Stock Replacement

From the day after the election was over, the market has gotten absolutely killed! The major problem is the specter of the Fiscal Cliff. The Fiscal Cliff encompasses several different topics surrounding taxes. The biggest concern that most investors have concerning the market and taxes is the Capital Gains Tax. With Obama winning the election, investors are expecting a rise in the Capital Gains Tax: investors are expecting and dreading that the discounted Capital Gains Tax will be eliminated and that Capital Gains will be taxed at the rate of ordinary income.

Because of this expectation, many people sold their stocks that had long term gains before the Capital Gains Tax Rate goes up. This is a large reason for the current selling and may continue for a bit. But, at some point, the uncertainty will be solved and the market will bounce back. When will it……..well that is unknown! But when it does it will probably be quick and aggressive. The problem is that everyone will have already sold out their stock positions and will miss the run back.

But not if they used stock replacement! When they sold out their stock, they could have purchased a call option to replace the stock they sold. This way, when the market does turn around and run back, you would be able to participate in the rally. I have not seen a situation in a long while where the stock replacement strategy was so useful and timely as right now!