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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio

July 08, 2013 - Plan for the Next Big Thing

One of the hottest topics in technology this year has been 3D printing. The technology is nothing new, but what is new is that the 3D printers have come down in cost to a point where anyone can have one in their home.

A decent 3D printer can now be purchased for under $2,500, and over time that amount should continue dropping. With the technology now becoming affordable enough for everyone, it is understandable why it is getting so much attention in the stock market.

Adding more credit to the industry was the recent announcement out of Microsoft (MSFT) that it was adding support for 3D printers in its newest version of Windows. With Microsoft getting involved, it is clear that the company believes average consumers will start to buy 3D printers at faster rate.

The attention the industry is getting has resulted in increased volatility in the biggest companies in the sector, most of which are mid-cap stocks.

Whenever a new technology hits the market, like 3D printing, the companies that typically are the heaviest involved in the sector are mid-cap stocks. Because of this, it makes sense that playing a wide range of mid-cap stocks can help investors not only take advantage of current market trends, but also get a leg up on future changes in the market.

Consider 3D Systems (DDD), which is one of the leading makers of 3D printers. The stock has been trading sharply higher since 3D printing started getting so much attention in March, but its market cap still remains at just $4.9 billion. The other big leader in the industry is Stratasys Ltd. (SSYS), which has also seen big gains since March. The recent run up in the stock has seen its market cap increase, but it is still solidly in the mid-cap camp with a market cap of just $3.5 billion.

Both stocks have been strong in recent months, but both experienced selling pressure at the start of the year. Volatility has been high, but overall both have moved higher.

This is the type of volatility you can expect from mid-cap companies as their industries start to gain more attention, and a good reason to make sure you have some exposure in your portfolio to mid-cap stocks.

Take a look at SPDR S&P MidCap 400 (MDY). This exchange-traded fund is set up to track the performance of the S&P MicCap 400 Index, and contains a variety of mid-cap stocks in a wide range of industries.

The key to taking advantage of rapid changes in the market is to get into stocks that benefit the most before the trends develop. Mid-cap stocks are the best way to accomplish this, but since it is nearly impossible to guess what the next big thing will be, getting into a mid-cap ETF such as MDY is the perfect way to plan ahead and cover all your bases. The next big thing could come from any industry, so this mid-cap ETF is the perfect way to get ahead of the game.

Consider a September 189/195 bull put credit spread on MDY. In this trade, you would sell the September 195 puts, while buying the same number of September 189 puts for a credit of 60 cents. This trade has a target return of 11.1%, which is 52% on an annualized basis (for comparison purposes only). With MDY currently trading at $214.32, the trade has built in downside protection of 8.6%.

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