Now Is the Time to Focus on Risk

The start of autumn is often marked by a new school year and accompanying family routines. Naturally, the stress from changes to schedules combined with the recent rise in cases of COVID-19 around the world has many people anxious about what lies ahead.

At this point in time, it could prove prudent to make adjustments to asset allocation in order to adequately protect against sudden shifts in volatility. In this article, we will look at a niche risk-focused fund and try to determine why this type of fund could be an interesting candidate for investors over the weeks and months ahead.

Aptus Defined Risk ETF (DRSK)

For many active traders, portfolio composition can comprise 100% equities. While many traders may have an internal desire to reduce portfolio risk, this shift can often feel daunting, and action is therefore never taken. For this group, it could be beneficial to know that there are niche exchange-traded products such as the Aptus Defined Risk ETF (DRSK). More specifically, the managers of the DRSK ETF seek to provide traders with exposure to an actively managed strategy that seeks income and growth through a hybrid fixed income and equity approach.

As you can see from the chart below, the price of the fund has been trading within a defined channel pattern. Several bounces off the support from the 50-day moving average and the lower trendline suggest that the bulls are in control of the momentum and that prices could be poised to head higher over the weeks ahead. From a risk management perspective, stop-loss orders will most likely be placed below one of the levels of support in order to protect against a shift in underlying market fundamentals.

Apple Inc. (AAPL)

Through a mix of corporate bonds and long-term equity options, the managers of the DRSK ETF limit the downside of the fund while also maintaining the upside potential by utilizing leveraged products such as long-term equity options. One of the holdings that could be of specific interest to traders is the December call option on Apple Inc. (AAPL) with a strike price of $120.

Looking at the chart below, you can see that Apple stock is trading near the support of two influential trendlines and its 50-day moving average. A bounce from these support levels is what many traders are looking for, and that could be ideal for option positions such as the one held in the DRSK ETF. This type of upside potential makes funds such as DRSK intriguing because the bulk of the capital is protected in asset classes such as corporate bonds, while positions such as the one mentioned could provide the alpha-like returns that many traders are accustomed to chasing.

American Tower Corporation (AMT)

Another equity option position within the DRSK portfolio that could capture the attention of active traders over the weeks ahead is a January 2021 call option on American Tower Corporation (AMT) with a strike price of $260. As you can see rom the chart below, an ascending triangle pattern has been forming on the American Tower stock chart in recent months.

Many traders will likely use the recent bounce from the 200-day moving average as a sign of a move higher. As confirmation, the bullisfh crossover between the moving average convergence divergence (MACD) and its signal line, shown by the blue circle, will likely be used to suggest that short-term targets will be placed near the upper trendline just above $270. A break above the resistance of the pattern would likely lead to traders adjusting target prices to $320, which is equal to the entry point plus the height of the pattern.

The Bottom Line

As risk tolerance across the world changes with updated information and new routines, many traders are looking to adjust the allocation of their portfolios. As discussed above, risk-focused ETFs such as DRSK could be an ideal way for many traders to increase exposure to asset classes such as corporate bonds while also maintaining upside potential through the use of long-term equity options.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.