Insure Your Investment
You insure your home. You insure your life and the lives of yourloved ones. Why not insure your investments?With current market conditions tossing most portfolios around,it would make sense to protect your portfolio. After all, thework we do significantly lowers the risk of losing money in aninvestment we choose to get involved in. But we never completelyeliminate all the risk in the market. Buying a protective put will help protect your new stockpurchases in the market. This can be really helpful when youwant to buy a particular stock, but the overall bias in themarket is down. What is a put? A put is a contract that givesthe buyer the right to sell stock at a certain price and duringa defined period of time, up to the expiration of the contract.When you buy a stock, three possible events can occur. * Thestock can go up. * The stock can do nothing * The stock can godown.In two of the three scenarios above, you do NOT make money. Inone of the scenarios (where the stock goes down), you have asignificant chance to lose money. Let's focus on what happenswhen you lose money.At this point, I think it's prudent to draw a comparison. If youdrive a car, and your car is wrecked in an accident, you haveinsurance to put you back "whole" or close to it, again. A putworks in similar fashion. Suppose when you buy a stock at $80, you also buy a put thatexpires in 6 months, and you pay $3 for that contract. Much likeinsuring your car for the next 6 months. If nothing happens toyour car over the next 6 months, you won't get that insurancepremium returned to you, will you? You won't get itreturned...and in fact, you will usually pay another premium tocover your car for another 6 months. The purchase of the put means you can sell the stock at $80anytime before the contract expires. Even if the stock drops to$35, you have the right to sell at $80. If the stock goes along as planned, and goes up,congratulations, you've made money. The premium you paid for theput was for insurance for the six months. Just like the examplewith your auto insurance, that money will not be returned to you(it was the cost of coverage).If the stock does nothing, although you have not made any money,you know that your investment was covered in case of somethingnegative happening for the last six months.If the stock goes down, you have coverage, and you also havechoices. Remember what you own with a put is the right to sellthe stock, in this example, at $80, no matter what's the currentprice of the stock (whether it is $75, $45, or even $1). * Youcan sell the put in the open market for whatever is the currentvalue. * You can exercise the option and "put" the stock tosomeone at $80, no matter what the current price of the stock.If you decide to exercise the put, you have yet another set ofchoices. You can put the money in your pocket (remember that youeffectively sold the stock for $80). Or you can buy the stockback at the lower market price, if you like the stock and thinkit makes sense for you. If the stock has dropped a lot, youcould conceivably buy even more shares than you originallypurchased.This strategy isn't for everyone. And you shouldn't rely on thisarticle as complete and personalized investment advice for yoursituation. But if you are investing money that you care about,whether it is in a home, a car or a stock, you should take stepsto protect it. Which is why we should really talk.With the market on defense, it makes sense to have someprotection for some of your prized possessions. If you'd like tosee how you could get some coverage for the stocks you own,visit Mullooly Asset Management, at www.mullooly.net, or callus, toll free at 877-223-7300.I hear too many people say they're staying away from the stockmarket, because it is too risky and you can lose a great deal ofmoney. Without measuring or knowing the risk, or a game plan inplace, you are almost certain to lose money. In my next article,I'll share with you a strategy that can limit the amount ofmoney you lose in a stock, to a small amount. This approach cankeep you afloat in the market longer than trying your luck onbuying a single stock.
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