Is last week’s stock market weakness the start of a bearish trend? Probably not. Margins remain strong, and Black Friday seemed to suggest that the US consumer was no longer on life support.

Seasonality likely played a role as well. Stock markets tend to sell off in November only to rally again before year-end. And one argue that this time, the sell-off was exacerbated by broader geo-political events.

Barring something catastrophic, global growth trends (higher in emerging markets, lower in developed ones) are not likely to be derailed.

Still, there are risks. Defaults or near defaults in the eurozone (50-50), the debate surrounding the Bush tax cuts (they will likely be extended), weighing any meaningful benefits from QE 2 (little to none), and questions as to whether China can get North Korea to take a time out (very likely).

If you have profitable positions and would rather not take the risk, you might consider a stock replacement strategy. That’s where investors sell their profitable stock positions, and replace them with call options that expire next year.

For example, the S&P/TSX Composite Index has a year-to-date gain of 9.8% as of Friday’s close. The S&P 500 Composite is ahead by 6.2% (in Canadian dollars) year to date.

With the S&P/TSX 60 Index Fund (TSX: XIU; $18.58), sell the shares and buy the XIU February 18.50 calls at 65 cents or better. With the iShares S&P 500 Composite Index Fund CAD Hedged (TSX: XSP; $13.69), take your profit and buy the XSP February 13 calls at $1.00 or less.

A well-thought-out stock replacement strategy can limit your risk and still allow you to participate to the upside. Perhaps, the best of both worlds in the current environment.