Markets Rise; Markets Fall
When
it comes to stock investing, one of the most accurate predictions remains:
"Markets have their ups and downs." Sometimes the bulls win and
sometimes the bears win.
One of the sad truths is that too many individual investors unload
their holdings after a significant decline, missing out when the decline ends a
a large rally ensues. Although good advice (If you are an individual
investor, do not try to time the market when investing for the long
term) is easy to come by, it is understandable that people become
frightened during market downturns.
When they lose enough, they sell everything, trying not to lose
their remaining assets.
Options to the Rescue
If
you have ever succumbed to that vicious trap, or if you are thinking about
dumping investments to provide more security for your remaining assets, please
reconsider.
Options -- the conservative and versatile
investment tool --
can help you avoid making decisions that result in a financial catastrophe.
If you are a long-term investor (short-term traders have a different
mindset and a different trading style) who occasionally thinks in terms of owning
safer investments that come with built-in insurance against a huge loss, then
options can be your salvation. But please understand: Options must be used
wisely to achieve the peace of mind that comes with safety.
Option Strategies for the
Bullish (but Frightened) Long-Term Investor
· Very aggressive technique that allows you to remain fully invested, but which protects the entire portfolio. NOTE: "Protects the
entire portfolio" does not mean that you will never lose money. Instead it
means: If you pay a premium -- just as with an insurance policy -- then all
losses become limited to a predetermined (and hopefully acceptable to you) sum.
In other words, a stock market tumble will result in a monetary loss, but your
portfolio will survive.
You can achieve these results by choosing either of the following plans:
You can achieve these results by choosing either of the following plans:
1.
Buy
put options. Either buy one out option for each 100 shares of stock in your
portfolio. Or buy enough put options on the S&P 500 Index (SPX) to cover
the majority of your loss when the market tumbles. This only works when your
portfolio is highly correlated with the index whose puts you buy.
2.
Replace
each 100 shares of stock with one longer-term, high Delta - in the-money, call
option. You can never lose more than the cost of the option, limiting losses.
The cost of this protection is the time premium (i.e., the part of the option
premium that exceeds the option's intrinsic
value) paid for your options
·
Limited protection method that cost zero out of
pocket cash (instead you to collect a cash payment), but which limit your
potential profits. That is no small sacrifice for the investor who is truly
bullish, but is very attractive to the investor who is looking for the market
to rise rise.
The best way to adopt this plan is is sell (write) one call option for each 100 shares of stock owned. This strategy is knows as covered call writing.
An equivalent strategy that can be applied when investing new cash into your market portfolio is the naked sale of put options. The risk/reward is the same as writing covered calls, when the strike price and expiration are identical.
The best way to adopt this plan is is sell (write) one call option for each 100 shares of stock owned. This strategy is knows as covered call writing.
An equivalent strategy that can be applied when investing new cash into your market portfolio is the naked sale of put options. The risk/reward is the same as writing covered calls, when the strike price and expiration are identical.
The bottom line for the intelligent investor is
that there are simple option strategies that can be used to accomplish two
things: First, you remain invested in the market, participating when markets
rally. Second, you have protection for all, or part, of your investment
portfolio -- just in case a bear market emerges.
No comments:
Post a Comment
Thank u For Reading Our blog For More Details Contact 9039542248