How Stock Options Can Save Your Portfolio

Ken Trester — Tue, 06 May 2008 20:22:21 GMT

There are more ways to make and save money with options than you can shake a stick at... here what I mean....

Do you have fire insurance on your house... accident insurance on your car... health insurance?

I'm certain the answer is "yes" because you want to protect your most valuable properties from catastrophic loss. On the other hand I bet you do not have insurance on your stock portfolio.

Since last fall, stock investors have lost tens of thousands and more to the market decline. And it didn't need to happen. The good news is that you can STILL protect your stock portfolio using a little stock option insurance.

Save Your Stock Portfolio from a Fire

The easiest way to protect a stock portfolio from a market decline is to buy put options.

Over the years in the many lectures and presentations that I have made, I have warned investors always to hold some puts in their portfolio in order to protect their stock positions and mutual funds from unexpected market declines.

To underscore my message in my talks I've always used the bear market of 1973-1974, where many large mutual funds lost 80% of their value. Those warnings did not seem very believable to many investors until the bear market of 2000-2002 when many Nasdaq stocks dropped 90% in value and the disastrous attacks of September 11, 2001 sent the market into a nose dive.

This Market is in Chaos

Over the last few weeks the market has settled into a kind of trading range - but frankly all of us are worried that there is another shoe to drop and that could rob more from our stocks.

Because of unpredictable variables, described in chaos theory, we never know what other event could send the market or individual stocks, such as the airlines, into a tailspin.

Another terrorist attack, possibly on a greater magnitude, or a gigantic earthquake in a population center such as Southern California could see the market lose a quarter or more of its value.

Such events are not only possible but always looming just off the horizon. Although we hope never to see such events in our future, you should be prepared for uncertainties.

Consequently, a put portfolio is not only a good speculation, but also a good insurance policy to offset some of the risk of your portfolio.

As I said, you have insurance for your home, health, and your car. Why not buy insurance for your portfolio that took a lifetime to develop?

The Best Way to Self Insure

Most people have a tendency to buy too much insurance. You buy insurance for a potential disaster. You don't need total protection. You just need a safety net.

Buying cheap out-of-the-money puts can provide that net. Therefore, your put insurance will not be a big investment, just a very small percentage of your portfolio.

Nevertheless, when buying these puts, make sure they are undervalued and have a decent probability of profit.

Using puts is a rare opportunity where your insurance policy could actually generate a profit even if you don't see a disastrous decline.

Which Puts to Buy?

It's impossible for me to recommend the correct puts to each of you but here's how to do it on your own...

Puts used for your personal portfolio do not have to be the same as the stocks you own. For example if you own Ford and cannot find a good value General Motors puts will work just about as well. As a result, you can be a true bargain hunter.

You can also buy puts on the stocks you own, especially when a stock is vulnerable to a decline and you do not wish to sell the stock. Again, as I do with my Fast Options weekly recommendations, try to buy cheap out-of-the-money puts. They won't give full protection but will act like a deductible insurance policy, and for a small price you get a lot of reassurance.

Buying such puts may not be a good investment, but it will be when the market is in the depths of decline where you are ready to panic out of the market right at the wrong time.

A put portfolio will give you the reassurance that will enable you not only to sleep at night, but also to avoid panicking and selling your stock when you shouldn't, usually at a market bottom.

Newsletter Recommendations Closed for 2 and 3 Week Profits

Last Friday the Complete Option Report closed five profitable positions...

U.S. Natural Gas Fund Jul Call debit spread, 35% profit
Sysco Corp Aug Call debit spread, 44% profit

And these... additional Power Options closed May 2 after holding for three weeks

Corinthian Colleges Aug Call, 90% profit
Broadcom Aug Call, 136% profit
Fuel-tech Jun Call, 41% profit

You can get great and specific trading advice from Ken Trester. He's never had a losing year.

To subscribe at a discounted price click here: http://www.completeoptions.com/save_071214/COR-II-WEB-02-20-08.htm

The Options Report : Portfolio Insurance

How Stock Options Can Save Your Portfolio

Save Your Stock Portfolio from a Fire

This Market is in Chaos

The Best Way to Self Insure

Newsletter Recommendations Closed for 2 and 3 Week Profits