There are few truths in the market, but this is one: It's better to buy fear than sell because of it. Yet it often takes only a few erratic days, or big swings in key stocks, for investors to forget it.

We've seen evidence of that in the past few weeks as artificial-intelligence hyperscaler stocks like Microsoft and Meta Platforms, chip stocks like Micron Technology, and other momentum darlings have been unusually volatile.

The price volatility could worsen if next Wednesday's hyperscaler earnings and the Federal Reserve's rate-setting committee meeting solidify hedge fund concerns that momentum trading is due for a break.

If the fund managers are right -- and positioning shows they have been selling such hot stocks -- watch out. The current historic levels of margin debt could trigger a panic if brokerage firms are forced to sell stocks to cover the loans they made.

That margin debt is undergirding the battle royale that has been brewing beneath the market surface for weeks: Many hedge funds have soured on momentum trading, but individual investors have not.

These two groups normally move together as they both like trading the same stocks. The recent divergence suggests hedge funds may be waiting to hammer stocks lower if next week's news is dour, which would spark margin selling and weaponize the fear that is now lingering like a heavy fog.

As we regularly advocate, investors should have a list of stocks they want to own, or buy more of, during declines.

The simplest way to do that is using "good till cancel" limit orders, which instruct a broker to buy a stock at or below a set price. For example, if you want to own Merck because of its new cholesterol pill, a GTC limit order of $115 lets you buy the stock, currently at $126.27, at that lower price.

We argue that it's better to get paid to do that in the options market. By selling a put option on any stock you want to buy, you get paid to do so via the put premium for agreeing to buy the stock at a lower price. We have advocated this for so long that it has become one of the most popular strategies.

With Merck, sell the August $120 put for about $2.30. This creates an effective purchase price of $117.70 (strike less put premium). If the stock is above $120 at expiration, you keep the put premium.

Since investor sentiment and corporate earnings are difficult to forecast -- fear could spark a big decline, but strong earnings could continue to support equity prices -- it's worth considering a twist on this strategy.

To position for a decline, or a rally, sell two puts with the same strike price and expiration, and buy a call option with a higher strike price but the same expiration.

Take Goldman Sachs Group, itself a master of volatility and fear. With the stock at $1,085.56, sell two September $1,020 puts for a total of about $62, and buy a September $1,095 call for about $54. If the stock is at $1,195 at expiration, the call is worth $100. The risk: The stock falls far below $1,095.

The ideal time to implement the trade is during a big decline, when put prices are inflated with fear premiums, so you make more selling them, and call premiums -- which momentum trading has made expensive -- are more normally priced.

Monetizing fear is not without risk. It's a lot like running into a burning building, but if you sit tight and watch the show instead, you run the risk of missing out on the biggest gains.

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July 22, 2026 01:30 ET (05:30 GMT)

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